Legal Discussions: Impact of this Budget on technology startups and angel funding

At this Budget, the Finance Minister has announced two significant measures to boost entrepreneurial activity and to help build up a stronger ecosystem for enterpreneurs.

Firstly, this Budget provides that corporate funds provided to technology incubators located within government-approved academic institutes will qualify as expenditure towards corporate social responsibility (CSR). It is expected that increased direct funding is likely to achieve greater efficiency by way of cut down of costs and time and will provide greater incentive to incubators to nurture ready and commercially viable ideas. Companies in turn will be able to show this expenditure against the proposed mandatory CSR expenditure once the new Companies Bill becomes law.

Secondly, the Budget declared that market regulator SEBI will prescribe requirements for ‘angel investor pools’ by which they can be recognised as Category I AIF venture capital funds. Details will be known only later. Currently, SEBI Regulations define Category I AIF Fund as a pooled fund which

 “invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified

With increased angel investment activity, these measures may encourage angel investors to seek category I AIF registration and boost angel activity.

The Budget declares that Venture Capital Companies (VCC) and Venture Capital Funds (VCF) registered with SEBI after 21 May 2012 would also enjoy passthrough status subject to compliance of the following conditions:

- No investment has been made in an associate VCU;

- At least two-thirds of its investible funds are being invested in     unlisted equity shares or equity linked instruments; and

- Units of trust set up as AIF or shares of a company set up as AIF are not listed on a stock exchange.

Under the 'pass through status', the taxes on a qualified business are passed through to owners of a business and not to external investors. 

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