India’s startup ecosystem has been making waves on the global stage, attracting attention from investors around the world, including Non-Resident Indians (NRIs). As the country continues to witness the emergence of innovative startups across various sectors, NRIs are presented with enticing opportunities to invest in these ventures.
However, like any investment, investing in Indian startups comes with its own set of opportunities and risks. Let’s explore how NRIs can invest in Indian startups and the important factors they should consider.
How Can NRIs Invest in Indian Startups?
Investing in Indian startups as an NRI can be a rewarding endeavour. Here are some avenues through which NRIs can participate in the Indian startup ecosystem:
1) Angel Investing in India:
Angel investing involves providing funding to early-stage startups in exchange for equity or a small stake in the company. These startups are often at a very nascent stage, having tested their product or service with limited success and requiring capital to expand their operations. While the risk associated with angel investing is high, it can yield substantial rewards if the startup succeeds.
Becoming an angel investor in India often relies on connections and networking within the startup ecosystem. Many startups actively seek investments from established angel investors, and being a part of such a network can provide NRIs with access to a pool of investment opportunities. Additionally, professionally managed angel investment networks offer Funds-as-a-Service, providing multiple avenues for NRI investors to explore.
2) Seed Funding:
Seed funding is typically the next stage in a startup’s growth, where the business has demonstrated some success or market potential. In this round, startups may seek larger investments while offering a smaller percentage of equity. Many angel investing platforms also offer opportunities for NRI investors to participate in seed funding rounds.
3) Alternative Investment Funds (AIFs):
Alternative Investment Funds are specialized investment vehicles that focus on alternative investment categories, including hedge funds, angel funds, venture capital (VC) funds, infrastructure funds, and social venture funds. These funds pool investments from multiple investors but are not open to the general public due to the high-risk nature and complex structure of such investments. NRIs with a high-risk appetite and significant investable funds can consider participating in AIFs.
The Securities and Exchange Board of India (SEBI) has categorised AIFs into three categories. Among these, Category 1 AIFs are particularly relevant to NRIs as they invest in registered startups and high-growth potential businesses. These funds can be further divided into:
- Venture Capital Funds: Focusing on new-age businesses requiring early-stage financing.
- Angel Funds: Investing in startups while bringing expertise, technical knowledge, and capital.
- Infrastructure Funds: Investing in startups within the infrastructure sector, such as railways, construction, airports, and ports.
- Social Venture Funds: Supporting organisations and businesses with a strong social impact.
Things NRIs Should Keep in Mind When Investing in Indian Startups
While the opportunities in India’s startup ecosystem are exciting, NRIs should be mindful of certain factors when considering investments:
1) Investment Ceilings:
The Reserve Bank of India (RBI) has established investment ceilings for NRIs in Indian startups. These limits vary depending on the sector, with total NRI investments typically capped at either 10% or 24% of the total paid-up capital of the company. Additionally, individual NRI investments cannot exceed 5% of the total paid-up capital.
2) Repatriation Considerations:
NRIs can invest in Indian startups through NRO (Non-Resident Ordinary), NRE (Non-Resident External), and FCNR (Foreign Currency Non-Resident) bank accounts. Investments made through NRO accounts are non-repatriable, meaning the capital and earnings (dividends and capital gains) cannot be taken out of India. In contrast, investments made through NRE or FCNR accounts are repatriable, allowing both the investment and earnings to be repatriated abroad.
3) Types of Securities:
Investments made by NRIs in startups are considered Foreign Direct Investment (FDI) if they involve acquiring specific types of securities, including equity shares with voting rights, fully and mandatorily convertible preference shares, and fully and mandatorily convertible debentures.
4) Pricing Guidelines:
The RBI’s Pricing Guidelines mandate that the acquisition price of FDI instruments in a startup for NRIs must adhere to specific criteria. For example, equity shares must be priced based on the Fair Value determined by a SEBI-registered Category –Merchant Banker or a Chartered Accountant using the Discounted Free Cash Flow (DCF) method. Pricing guidelines also apply to other types of securities.
Tax Implications for NRIs Investing in Indian Startups:
NRIs investing in Indian startups should be aware of the tax implications associated with their investments. The tax rates for capital gains vary based on the type of asset and the investment duration:
- Short-term capital gains (investments held for less than 24 months) are subject to a tax rate of 15% for NRIs with a valid PAN Card. Without a valid PAN Card, the tax rate increases to 30%.
- Long-term capital gains (investments held for more than 24 months) are taxed at 10% for NRIs with a valid PAN Card. Without a valid PAN Card, the tax rate is 20%.
Investing in Indian startups can be a lucrative venture for NRIs looking to diversify their investment portfolios and tap into the country’s thriving entrepreneurial ecosystem. However, NRIS must approach startup investments with caution, considering the associated risks and regulatory nuances. Diversification and adherence to investment ceilings are key strategies to mitigate risk. Additionally, understanding tax implications and complying with the relevant regulations are essential for optimising financial outcomes.
While the startup landscape in India offers significant potential for high returns, NRIS need to balance their investment portfolios and consult with financial planners to create a well-diversified and risk-appropriate investment strategy. With careful planning and due diligence, NRIs can harness the opportunities presented by India’s dynamic startup ecosystem while managing potential risks effectively.
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