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Union budget 2023: Pre-budget expectations for unlisted market, IPO ecosystem

The Union Budget 2023–2024 will be presented in Parliament on February 1, 2023, by Finance Minister Nirmala Sitharaman. The Economic Survey of India will be presented by the finance minister on January 31. Based on an exclusive interview with Manish Khanna, Co-Founder of Unlisted Assets, here are a few expectations expressed by him for the start-up ecosystem and unlisted market.

1. Union budget 2023 expectation for the start-up ecosystem and unlisted market?

For start-ups to claim an exemption or deduction under the Income-tax Act, it is expected that a single window clearance is made available and they do not need registration with multiple authorities to claim tax incentives.

We anticipate some generalized reductions in start-up taxes with no GST until annual revenue of Rs. 10 crores. This will assist SMEs in strengthening the economy.

Start-ups are eligible for a 100% tax credit for three consecutive years following their ten years of establishment. Usually, new companies are not highly profitable in their first ten years. Therefore, instead of three years, this eligibility should be extended to 15 years and for a block of 5 years instead of 3 years.

In the unlisted market, there has been a considerable increase in the participation of retail and institutional investors including ESOP holders which has created a demand for the creation of liquidity protocol around the ecosystem of unlisted shares in India. At times, it is very difficult for investors to take an exit and liquidate their investments. Though some of the platforms have come up to provide monetization opportunities for investors and employees in unlisted companies including pre-IPO and start-up companies where it is tough to get liquidity pooled against unlisted shares/ESOP of those companies, in the 2023 budget, a tax relief or a boost can be given to such platforms for their promotion and growth.

2. What initiatives should the government take to scale up PE and VC investments in start-ups?

A parity in the LTCG tax rate for both the listed and unlisted markets can boost PE and VC investments in start-up ecosystem in India and there could be huge participation of retail investors in the same way we have seen in listed space. Tax arbitrage should not be a decision-maker for investments to be made by any institutional or retail investors.

The current regulations aim to make investments in Indian start-ups easy, but the equal focus should be given to exits, and taking capital out should also be easy.

In the 2023 budget, an emphasis and boost should be given to such upcoming fin-tech start-ups which can assist PE and VC funds to invest as well as exit from their investments.

3. Your views on bringing parity in capital gains on listed and unlisted equities

Currently, unlisted stock held for longer than 24 months is subject to a higher LTCG tax than listed equity shares held for a full year. Unlisted stock investments are subject to a 20% LTCG tax, while listed stock investments are subject to a 10% tax.

The unlisted market is comparatively less liquid. As a result, there is more patient capital that is invested in unlisted companies. The sector wants the government to address the fact that unlisted stocks are taxed twice the rate of listed shares as this disparity negatively impacts start-up investments in India.

Family offices and alternative investment funds (AIFs) choose to invest in listed companies despite the lower expected rate of return since the LTCG tax on listed shares is only half as high as that on unlisted stocks.

In the 2023 budget, a parity is expected in the taxation of listed and unlisted capital gains which in turn will boost the growth of start-ups and new-age businesses.

4. What initiative should the government take in the upcoming budget for the fintech industry/ investment tech platforms?

The fintech industry is one of the fastest-growing segments within the technology space. The industry is growing rapidly due to changing trends in technology, and the market is seeing growth in digital payments. The sector expects more assistance from the government for better partnerships within the financial ecosystem with all financial institutions including Banks to strengthen the current model. RBI can put in place appropriate regulations to control the Fintech Sector. This will increase transparency for businesses in the fintech sector and undoubtedly help regulate it.

Additionally, in order to give exit to stakeholders of Pre IPO and start-up companies, a boost should be given by the government to such fintech platforms which assist in providing a liquidity ecosystem to early-stage investors.

5. Any change in regulations you are expecting in the upcoming budget for ESOP holders of unlisted companies?

ESOPs are a way to boost employee productivity and attract talent in many listed and unlisted companies. The ESOP holders expect the tax levy on the sale of shares and not on the exercise of ESOP which is not the liquidity event for employees of unlisted companies, unlike employees of listed companies. At the time of exercise, employees don’t have the ready cash to pay tax which could at times be more than their salaries amount, resulting in either leaving the ESOP unexercised or landing into a debt fiasco. A modification in ESOP taxation for unlisted companies is expected in Budget 2023.

6. Are you expecting any new guidelines imposed on IPOs by SEBI in this upcoming budget?

Sebi is likely to mandate companies to provide a relatively detailed explanation of how they price their IPOs, compare pricing to pre-IPO share sales, and disclose all the presentations made to pre-IPO investors. The regulator may also ask companies to provide key performance indicators (KPIs) in their offer documents. This will bring about more transparency to the investors and boost ivestors investors confidence into those companies.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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