by Evelyn Fok
BENGALURU: Indians are warming up to invest rupees in venture capital funds that have sustained almost entirely on foreign capital until now, a shift that could get further impetus if industry think tank iSpirt's suggestion of providing tax exemptions to domestic investors is accepted. Rupee funds make up for less than 5% of the equity venture investments in India, and for a good reason.
"Indian rupee investors do not get (capital gains) tax exemptions like foreign ones do, which holds them back from bringing in their funds," said Sharad Sharma, co-founder of iSpirt. In a recent policy note to the stock market regulator Sebi, the think tank recommended that rupee investors be offered tax exemptions in high-risk categories such as angel investor funds and seed funds. "For rupee investors, the technology-investment space is a great opportunity," said Sudhir Sethi, founder and MD of IDG Ventures, which raised $175 million comprising both rupee and dollar funds in November 2014.
"The Indian family offices wish to diversify from traditional investment opportunities as long as there are professional fund managers with a good track-record." A few thousand miles away in China, renminbi (Chinese currency) funds that are predominantly channelled by the state, account for over half of startup equity venture investments. Raising local funds is seen as a prerequisite to flourish in an environment known as a "graveyard for foreign companies", as demonstrated by recent entrants like LinkedIn and Evernote.
"Evernote took investment from a Chinese venture capitalist who could help set things up," said Gang Lu, founder of startup media platform TechNode, China's answer to TechCrunch, who cites government freebies such as property and cash to local venturebacked companies. "Foreign companies coming into China without any support from local venture capitalists does not work," he said.
In India, though, entrepreneurs do not get an extra advantage from local venture capitalists, according to Samir Kumar, MD of Inventus Advisors, who has led investments across Asia with Taiwan-based Acer Technology Ventures. "Both foreign and local companies can hold their own here as long as they have a local team with a strong understanding of the local landscape," he said.
Karthik Reddy of Blume Ventures, which raised Rs 100 crore from 70 investors, said, "It gives you evidence that you are making wealth within the country - almost none of the wealth you see created belongs to any Indian investor."
Yet, industry executives say the growing participation of rupee funds will bolster India's position as an investment destination on the global startup landscape, bringing in more foreign capital as well as local institutional funds.
"This builds confidence in the international investor - if Indian investors do not invest in India, why would they come to India?" said Sethi of IDG, who met with over 100 family offices in the country to explain the ventureasset class and persuaded them to invest. "As rupee investors get returns, we will find more investors coming into what will become a very important pool of capital."
Kumar of Inventus added, "With clearer regulations and more educated financial institutions, there will be more high-risk capital available in India."