What are the key elements and the cautions one needs to keep in mind while investing in Indian startups? One’s investment path needs to be well planned if wanting to get the most rewards. In addition to the traditional investment strategies, one must also investigate unusual investment options such as investment in Indian startups.
How to invest in Indian startups
The startup ecosystem in India is booming and flourishing, and Nationals, as well as NRIs, are looking for opportunities to do investment in Indian startups. But before starting investment in Indian Startups, Investors must keep a note of the following:
- Research and Identify Potential Startups: To look at startup databases, crowdfunding platforms, accelerator and incubator programs, and media articles for information about startups.[1]
- Evaluate the Startup: By use of various tools and resources such as investor reports, financial statements, pitch decks, and due diligence reports to evaluate the startup.
- Decide on the Investment Amount: After evaluating the startup, decide on the investment amount based on the risk appetite, investment goals, and the startup's funding requirements.
- Complete Legal Formalities: For an NRI, there is a need to get a PAN card, open an NRE or NRO account, and obtain the Foreign Investment Promotion Board (FIPB) approval, if required.[2]
- Invest in the Startup: Once the legal formalities are completed, they may be eligible to invest in the startup through various channels such as angel investing, venture capital funds, equity crowd funding, or accelerators and incubators.
- Monitor the Investment: It's important to monitor the investment and stay updated on the startup's progress.
Perks of investing in Indian Startups
Investing in Indian startups can serve to be one of the most profitable decisions. Individuals investing in Indian startups, open the prospect of obtaining several benefits such as:
- Unrestricted Growth: When a startup is in its early stages, it can be difficult to determine its growth potential. However, a startup that has a strong business plan and a carefully crafted market-capturing strategy might distinguish out from other businesses in its industry. A startup's central idea will go a long way if it is innovative and appealing.
- Association with the Government: Startups enlisted with the Indian Government’s Startup India scheme benefit from numerous exemptions and enjoy other additional benefits. Naturally, these advantages encourage investors to have more faith in their startup investments. The government actively supports early-stage entrepreneurs in partnership with private investors. An investor may also benefit from government benefits like tax law exemptions as they contribute to the expansion of cutting-edge businesses by making investment in Indian startups.[3]
- Investment diversification: An investor may diversify the investment portfolio with startup investments. Every startup develops an intriguing and unique concept that makes the process of market disruption easier. As a result, investing in various companies allows investors to diversify their portfolios.
Risks to keep in mind while investing in Indian Startups
- Success rate: A significant danger of losing investment may exist in case a company fails within the first few years of business. Thus, an investor should have an eye to look for a higher success rate.
- Regulated environment: The Indian startup arena is still developing and prone to unpredictability. This might cause some hindrance for businesses and involve risks of initiatives being delayed or even abandoned.
- Liquidity risk: Investing in a company is a long-term commitment, it may be challenging to sell the shares quickly or transfer them readily until the next round of funding or exit opportunity.
Legal assistance requirement for investing in Indian startups
Investing in Indian startups involves legal requirements as listed below:
- PAN Card: A PAN card is a unique identification number that is required for all financial transactions in India.
- NRE/NRO Account: For NRIs, NRIs need to open an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account to invest in Indian startups. An NRE account is a repatriable account, which means that the funds can be repatriated outside India. An NRO account is a non-repatriable account, which means that the funds cannot be repatriated outside India.
- Foreign Investment Promotion Board (FIPB) Approval: NRIs need to obtain the FIPB approval if they are investing in sectors that require government approval. The FIPB is a government agency that approves foreign investments in India.
- Compliance with FEMA Regulations: NRIs need to comply with the regulations of the Foreign Exchange Management Act (FEMA) while investing in Indian startups. FEMA regulates foreign exchange transactions in India.
- Compliance with SEBI Regulations: NRIs need to comply with the regulations of the Securities and Exchange Board of India (SEBI) while investing in Indian startups. SEBI regulates the securities market in India.
Key considerations for investing in Indian Startups
- Self-Certification: Startups are permitted to self-certify their compliance with six labour regulations and three environmental legislations for a period of three to five years following the date of incorporation.
- Income Tax Exemption: Three-year income tax exemption is available to startups that were formed on or after April 1, 2016. Out of the first ten years following incorporation, the recognised startups that receive an Inter-Ministerial Board Certificate are exempt from income tax for a period of three years in a row.
- Faster Exit for Startups: Startups have been designated as "fast track firms" by the Ministry of Corporate Affairs, allowing them to cease operations in 90 days as opposed to 180 days for regular enterprises.[4]
Conclusion
Investment in India for NRIs in startups has become seamless owing to the various policy reforms and tax benefits provided by the Indian Government. It is however very essential to keep note of the risks and legal considerations for investing in Indian Startups. It is advisable to seek the guidance of a financial advisor, lawyer or investment professional before making any investment decisions so as to align with all the applicable Indian laws and regulations related to investing in Indian startups.
FAQs
Can foreigners invest in Indian startups?
Yes, if certain requirements and limitations are met. Foreigners may invest in Indian startups. Foreign Direct Investment (FDI), which is governed by the Foreign Exchange Management Act and the Reserve Bank of India (RBI), is the most common approach for foreign investors to invest in startups in India (FEMA).
Why Should You Invest in Indian Startups?
For investors, investing in Indian startups offers a lucrative opportunity for a number of reasons:
1. Rapidly growing startup ecosystem
2. Huge market potential
3. Skilled workforce
4. Government support
5. Low investment costs
6. High potential returns
What are 4 common investment mistakes?
1. Failing to diversify:
2. Chasing trends and fads
3. Timing the market
4. Emotional investing
[1] https://www.startupindia.gov.in/content/sih/en/funding.html
[2] https://www.mea.gov.in/images/pdf/OIFCPublicaiton2011HomewardBound.pdf
[3] https://www.startupindia.gov.in/content/sih/en/about-startup-india-initiative.html
[4]https://pib.gov.in/PressReleseDetail.aspx?PRID=1738170
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