India’s central bank unveiled rules that may lure more overseas investors into the nation’s booming startups.
The Reserve Bank of India allowed overseas investors to sell their stakes in Indian startups to local companies, potentially giving foreign venture capital funds an easier exit route. The regulator also allowed startups to file reports over the Internet, and eased rules governing share transfer transactions, according to a statement posted on RBI’s website.
More options for venture capital funds to profit from their investments or exit struggling companies will lure more overseas investors into Asia’s third-largest economy that’s experiencing an Internet startup boom. Governor Raghuram Rajan’s move follows Prime Minister Narendra Modi’s decision to set up a Rs10,000 crore ($1.5 billion) fund to encourage startup businesses and government pledges to offer tax breaks.
“This was a big pain point for foreign VC’s in India,” said Anil Joshi, founder of Unicorn India Ventures. “If they are able to ease out that one problem, certainly it will attract a lot of overseas VC money.”
The burgeoning industry in India has lured billions of dollars and raised questions about whether valuations are becoming stretched. Much of the money is coming from foreign investors such as SoftBank Group Corp. and Tiger Global Management LLC.
Under existing rules, shares held by foreign investors are subject to more restrictions than those held by locals.
“This is a reasonably good package,” said Harish Visweswara, a partner at consultant Grant Thornton India LLP. Most of the changes involve “procedural simplifications which would make life easier for entrepreneurs and investors.”
A lack of tax breaks has also curbed the involvement of local investors and encouraged entrepreneurs to domicile their companies in countries that offer lower levies.
In the past decade, most of India’s best performing Internet startups have chosen to establish themselves in countries such as Singapore, even though all of their business is in India. E-commerce companies including Flipkart.com, online grocer Grofers.com and customer analytics platform Mobikon Asia Pte. are examples of startups from India that have relocated their parent entities to Singapore.