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Startup fund to get Rs 3,000 crore financing boost

Rs 16,680-crore funding commitments secured from long-term partners likely to accelerate fund deployment.

, ET Bureau|
Mar 14, 2019, 07.26 AM IST
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The fund of funds makes downstream investments in venture capital and alternate investment funds that in turn invest in startups.
NEW DELHI: India's flagship startup fund is set to get into high gear after a slow start with Rs 3,000 crore in financing lined up, said people with knowledge of the matter. Apart from this, funding commitments from long-term partners are being secured to the tune of Rs 16,680 crore, which can help accelerate deployment to startups.

“Disbursements have taken off,” said an official with knowledge of the fund’s activity.

The government also expects recent changes to further fuel funding requirements. It recently widened the definition of startups, making more entities eligible under the framework.

Prime Minister Narendra Modi had, in January 2016, announced the establishment of a Rs 10,000 crore fund under Small Industries Development Bank of India (Sidbi). The fund of funds makes downstream investments in venture capital and alternative investment funds that in turn invest in startups.

These VC funds have managed to raise commitments of over Rs 9,000 crore and the final close could be as much as Rs 16,680 crore, said the people cited above. They have investments in 240 entities, which created 28,500 jobs, the latest government data showed.

Fostering startups was identified by the government as a key focus area and it has taken several steps in this regard. The government sees startups engendering economic activity, wealth creation and employment generation. It has made several changes to the startup framework to make it easier for entrepreneurs to set up businesses. These are aimed at ensuring that those funding startups will be shielded from the so-called angel tax after many investors received notices from income tax authorities.

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A firm can be a categorised as a startup even if its turnover for any of the financial years since its incorporation hasn’t exceeded Rs 100 crore, up from the limit of Rs 25 crore. The definition also covers entities that have been in operation for up to 10 years from the date of incorporation or registration instead of the current seven years. The government feels funding to startups will pick up pace with more clarity on the angel tax issue.

Section 56(2)(vii)(b) of the Income Tax Act provides that if a closely held company issues its shares at a price that exceeds fair market value, the difference will be taxed as income from other sources.

This provision, touted as an anti abuse measure, was introduced by former finance minister Pranab Mukherjee in 2012. It was dubbed the angel tax after several startups received notices under Section 56(2)(vii)(b). The government has been seeking to ensure that bona fide startups and investors are not swept up under this section.
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