The Standing Committee on Finance (Chair: Mr. Jayant Sinha) submitted its report on ‘Financing the Startup Ecosystem’ on September 9, 2020. A startup ecosystem consists of startup accelerators, venture capitalists, private investors, entrepreneurs, government, corporations, mentors and the media.
The Committee recommended changes in taxation and other regulation to broaden avenues for investment in startups and improve domestic investor participation. Key observations and recommendations include:
Scaling up unicorns: Unicorns are startups that are valued at over one billion dollars. The Committee noted that capital raised by unicorns mainly comes from foreign sources such as US and China.
To encourage domestic capital, the Committee recommended expanding the Small Industries Development Bank of India (SIDBI) Fund-of-Funds to help disburse more funds to startups. SIDBI Fund-of-Funds is a fund that invests in other funds such as alternative investment funds (AIFs). AIFs pool private funds for investment in startups and other companies.
Abolition of long-term capital gains tax: The Committee recommended that tax on long-term capital gains should be abolished for two years on investments in startups made through collective investment vehicles (CIVs).
After the two-year period, the Securities Transaction Tax (STT) may be applied to CIVs (instead of long-term capital gains tax) to ensure revenue neutrality for the government. STT is a tax imposed on purchase and sale of securities and is currently applicable for listed securities. CIVs are entities (such as angel funds and AIFs) that allow individuals to pool their funds for investment.
Asset management services not be subject to GST: Foreign investment in startups can be made through AIFs incorporated in India or non-AIFs which are domiciled outside India. Both AIFs and non-AIFs employ fund managers that provide asset management services. Management services provided to non-AIFs is considered as export and non-AIFs are not charged GST.
Whereas AIFs are liable to pay GST. The Committee noted that this creates an incentive for investors to offshore funds resulting in poor growth of asset management industry in India. It was recommended that to ensure parity, management services to foreign investors, whether pooled onshore (AIFs) or offshore (non-AIFs) should be considered as export so they can claim GST exemption.
Mobilisation of domestic institutional funds: The Committee observed that large pools of domestic capital available with pension funds, provident funds, banks and insurance companies are not being channelised as investment into alternate asset classes (such as AIFs, private equity, venture capital funds).
The Committee recommended that (i) pension funds should be allowed to invest in unlisted AIFs and the requirement of minimum AIF corpus size of Rs 100 crore be removed, (ii) major banks should be allowed to float fund-of-funds and be allowed to invest in Category-III AIFs (AIFs that employ complex trading strategies such as hedge funds) and (iii) insurance companies should be allowed to invest in fund-of-funds floated by Insurance Regulatory and Development Authority and directly in VC/PE funds and a higher exposure limit should be permitted for the same. Insurance companies are allowed to invest between 3% to 5% of their investment funds in AIFs.
Listing of AIFs: In order to enable AIFs to access a permanent source of capital, it was recommended that they should be allowed to list on capital markets.
Expansion of sectors for FVCI: The Committee recommended that foreign venture capital investors (FVCI) be allowed to invest in all the sectors where foreign direct investment (FDI) is allowed. Currently, FVCIs are allowed to hold equity in unlisted Indian companies engaged in a limited number of sectors such as biotechnology, IT related to hardware and software and infrastructure sector, among others.
Expanding financing sources for startups: The Committee noted that companies may be classified as non-banking finance companies (NBFCs) if more than 50% of their assets or revenues are derived from startups. It was recommended that companies should be allowed to invest in startups without being classified as NBFCs.
Incentive for long-term capital: The Finance Act, 2020, excludes from calculation of total income, income from investment in the infrastructure sector, made before March 31, 2024, held for at least three years. It was recommended that this exclusion be allowed for long-term capital in all sectors.
Rationalisation of pricing guidelines: The Committee noted that there are challenges in compliance requirements on investment by AIFs. There are regulations that govern the price at which shares can be issued (pricing guidelines).
These guidelines are prescribed under various laws and regulations by Securities and Exchange Board of India (SEBI), Income Tax Act, Companies Act and Foreign Exchange Management Act (FEMA). The Committee recommended that these guidelines should be made more consistent to provide a simple framework. An expert committee may be set up to provide pricing guidelines to government authorities.
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Context:
Scientists have warned India of another virus — cat que virus — largely reported in China and having the potential to cause disease in India.
The presence of this virus in culex mosquitoes and pigs has been reported in China and Vietnam.
What is Cat Que virus?
It is one of the arthropod-borne viruses (arboviruses).
Spread:
Its natural host is a mosquito.
Domestic pigs are the primary mammalian host of CQV.
Why India is more vulnerable?
Availability of vector, primary mammalian host (swine) and confirmation of CQV from jungle myna.
Besides, National Institute of Virology (NIV), Pune researchers have found antibodies for the virus in two out of the 883 human serum samples which were taken from various Indian states, indicating that people at some point contracted the virus.
Effects on Humans:
It can cause febrile illnesses, meningitis and paediatric encephalitis in humans.
Context:
DAP 2020, which will govern the procurement of defence equipment from the capital budget, was recently unveiled.
The new policy will supersede the Defence Procurement Procedure of 2016 from October 1.
Highlights of the new policy:
Reservations for Indigenous firms:
The policy reserves several procurement categories for indigenous firms.
DAP 2020 defines an “Indian vendor” as a company that is owned and controlled by resident Indian citizens, with foreign direct investment (FDI) not more than 49 per cent.
New Buy (Global–Manufacture in India) category:
This stipulates indigenisation of at least 50 per cent of the overall contract value of a foreign purchase bought with the intention of subsequently building it in India with technology transfer.
Meeting the difficult indigenisation requirement would force the vendor to build the equipment in India, rather than supply most of it ready-built from abroad.
Greater indigenous content:
It promotes greater indigenous content in arms and equipment of the military procures, including equipment manufactured in India under licence. In most acquisition categories, DAP-2020 stipulates 10 per cent higher indigenisation than DPP 2016.
Measuring indigenous content:
Indigenous content will now be calculated on ‘Base Contract Price’, that is Total Contract Price, less taxes and duties.
Import embargo list:
The “import embargo list” of 101 items that the government promulgated last month has been specifically incorporated into DAP 2020. (An embargo is a government order that restricts commerce with a specified country or the exchange of specific goods.)
Offset liability:
The government has decided not to have an offset clause in procurement of defence equipment if the deal is done through inter-government agreement (IGA), government-to-government or an ab initio single vendor.
The offset clause requires a foreign vendor to invest a part of the contract value in India.
Why in News?
Chief Justice of India (CJI) Sharad A. Bobde has questioned the infallibility of a land acquisition judgment delivered by a Constitution Bench, led by his former colleague, Justice Arun Mishra, saying the verdict had left things “unsaid”.
Important observations made by CJI:
The order gifted the government “laxity” in several aspects, which even Parliament did not bother to provide under the Act of 2013.
The verdict did not specify for how long the government could possess a land acquired without paying compensation.
Background:
In March this year, the Supreme Court Constitution Bench had reaffirmed the February 2018 ruling on Section 24 on land acquisition compensation awards in the Indore Development Authority case.
What’s the issue?
The judgment of the Constitution Bench was interpreting Section 24 (2) of the 2013 Act, which dealt with payment of compensation for land acquired by the government.
It said acquisition would not lapse as long as the government earmarked the compensation money by paying it into the treasury. In short, the money need not actually reach the farmer or the landowner.
Acquisition would also not lapse just because the farmer refused the compensation and claimed higher.
Similarly, there was no lapse in acquisition if the compensation had been paid but possession not taken of the land.
When would it lapse then?
The judgment had declared that acquisition would only lapse if the government had neither taken possession nor paid the compensation due to the landowner for five or more years prior to January 1, 2014.
Context:
Because of economic woes created by the COVID-19 pandemic, the Reserve Bank has decided to extend by six months the enhanced borrowing facility provided to banks to meet the shortage of liquidity till March 31, 2021.
These measures include:
Borrowing limit for scheduled banks under the marginal standing facility (MSF) scheme was increased from 2% to 3% of their net demand and time liabilities (NDTL) with effect from March 27, 2020.
Implications:
This dispensation provides increased access to funds to the extent of ₹1.49 lakh crore, and also qualifies as high-quality liquid assets (HQLA) for the liquidity coverage ratio (LCR).
What is MSF?
Under the MSF, banks can borrow overnight at their discretion by dipping into the statutory liquidity ratio (SLR).
It is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely.
This scheme was launched by RBI while reforming the monetary policy in 2011-12.
It is a penal rate at which banks can borrow money from RBI when they are completely exhausted of all borrowing assistance.
Key terms:
Net Demand and Time Liabilities (NDTL):
NDTL refers to the total demand and time liabilities (deposits) of the public that are held by the banks with other banks.
The high-quality liquid assets include only those with a high potential to be converted easily and quickly into cash.
Context:
Three Apple Inc.’s top contract manufacturers are planning to invest a total of almost $900 million in India in the next five years to tap into a new production-linked incentive plan.
About the PLI scheme:
Notified on April 1 as a part of the National Policy on Electronics.
It proposes a financial incentive to boost domestic manufacturing and attract large investments in the electronics value chain.
Key features of the scheme:
The scheme shall extend an incentive of 4% to 6% on incremental sales (over base year) of goods manufactured in India and covered under target segments, to eligible companies, for a period of five (5) years with financial year (FY) 2019-20 considered as the base year for calculation of incentives.
The Scheme will be implemented through a Nodal Agency which shall act as a Project Management Agency (PMA) and be responsible for providing secretarial, managerial and implementation support and carrying out other responsibilities as assigned by MeitY from time to time.
Eligibility:
According to the scheme, companies that make mobile phones which sell for Rs 15,000 or more will get an incentive of up to 6 per cent on incremental sales of all such mobile phones made in India.
In the same category, companies which are owned by Indian nationals and make such mobile phones, the incentive has been kept at Rs 200 crore for the next four years.
What kind of investments will be considered?
All electronic manufacturing companies which are either Indian or have a registered unit in India will be eligible to apply for the scheme.
These companies can either create a new unit or seek incentives for their existing units from one or more locations in India.
However, all investment done by companies on land and buildings for the project will not be considered for any incentives or determine eligibility of the scheme.
Why in News?
Ministry of Road Transport and Highways has allowed use of H-CNG (18% mix of hydrogen) in CNG engines.
A notification for amendments to the Central Motor Vehicles Rules 1989, for inclusion of H-CNG as an automotive fuel has already been published.
Background:
The Bureau of Indian Standards (BIS) has also developed specifications (IS 17314:2019) of Hydrogen enriched Compressed Natural Gas (H-CNG) for automotive purposes, as a fuel.
What is HCNG?
The blending of hydrogen with CNG provides a blended gas termed as HCNG.
It can be used in place of gasoline, diesel fuel and propane (C3H8) / LPG and its combustion produces fewer undesirable gases.
Advantages of HCNG:
HCNG reduces emissions of CO up to 70%.
Enables up to 5 % savings in fuel.
First step towards future Hydrogen economy.
Engines can be calibrated to release lower amounts of NO.
Engines need minimum modification to run on HCNG.
Ideal fuel for high load applications and heavy-duty vehicles.
Better performance due to higher Octane rating of H2.
Disadvantages of using HCNG:
Determining the most optimized H2/ NG (Natural Gas) ratio.
It requires new infrastructures for preparing HCNG.
Many steps need to be taken for commercializing it at a large scale.
Current cost of H2 is more than the cost of Natural Gas. So, HCNG’s cost is more than CNG.
Why in News?
A special court has declared three people fugitive economic offenders (FEO) in the Sterling Biotech case on the Enforcement Directorate’s (ED) request.
What’s the issue?
The ED is conducting the money laundering probe based on two FIRs registered by the CBI against Sterling Biotech and others in October 2017. In one case, the agencies have alleged routing of undisclosed funds belonging to unknown Income-Tax Department officials, while the second case pertains to bank loan defaults of ₹8,100 crore.
Who is a Fugitive Economic Offender?
A person can be named an offender under the Fugitive Economic Offenders Act, 2018, if there is an arrest warrant against him or her for involvement in economic offences involving at least Rs. 100 crore or more and has fled from India to escape legal action.
The procedure:
The investigating agencies have to file an application in a Special Court under the Prevention of Money-Laundering Act, 2002 containing details of the properties to be confiscated, and any information about the person’s whereabouts.
The Special Court will issue a notice for the person to appear at a specified place and date at least six weeks from the issue of notice.
Proceedings will be terminated if the person appears. If not the person would be declared as a Fugitive Economic Offender based on the evidence filed by the investigating agencies.
The person who is declared as a Fugitive Economic Offender can challenge the proclamation in the High Court within 30 days of such declaration according to the Fugitive Economic Offenders Act, 2018.
It is headed by the Defence Minister.
Functions: The DAC is responsible to give policy guidelines to acquisitions, based on long-term procurement plans. It also clears all acquisitions, which includes both imported and those produced indigenously or under a foreign license.
It was formed, after the Group of Ministers recommendations on ‘Reforming the National Security System’, in 2001, post Kargil War (1999).
About UMANG:
UMANG (Unified Mobile Application for New-age Governance) is developed by Ministry of Electronics and Information Technology (MeitY) and National e-Governance Division (NeGD) to drive Mobile Governance in India.
UMANG provides a single platform for all Indian Citizens to access pan India e-Gov services ranging from Central to Local Government bodies and other citizen centric services.
Ultra-Violet Imaging Telescope:
UVIT is a remarkable 3-in-1 imaging telescope simultaneously observing in the visible, the near-ultraviolet (NUV), and the far-ultraviolet (FUV) spectrum.
It is one of the five payloads onboard India’s first multi-wavelength astronomical observatory AstroSat.
Its superior spatial resolution capability has enabled astronomers to probe star formation in galaxies as well as resolve the cores of star clusters (3 times better than the last NASA mission, GALEX).
Observations from UVIT has recently led to the discovery of a galaxy located at a distance of about 10 billion light-years from Earth and emitting extreme ultraviolet radiation that can ionize the intergalactic medium.