Forex rules trip Indian angels looking to fund global startups

By Team Startupcity  |  Wednesday, 07 December 2022, 09:11 IST

Forex rules trip Indian angels looking to fund global startups
Indian angel investors putting money in foreign startups are facing compliance challenges under the new foreign exchange rules, as authorised banks are insisting that such investments should only come through the overseas direct investment (ODI) window.
Until now, Indian individuals were making overseas investments under the Liberalised Remittance Scheme, which comes with minimal compliance requirements. Under the foreign exchange rules notified by the government in August, investment into foreign companies can only be done through the ODI route or under the newly introduced overseas portfolio investment (OPI) programme.
While the OPI route comes with easier regulations, it permits investments only in foreign listed companies. Hence angel investors are unable to use this route as most startups are unlisted. Industry wants the OPI route to cover unlisted securities as well.
“The ODI route makes sense when investments are made by corporate investors, as the ticket size of the investments justifies the compliance costs. The OPI route makes sense when securities are listed,” said Vivek Iyer, partner, Grant Thornton Bharat. He also suggested that “it would be worthwhile for the government to consider some amount of liberalisation under the ODI route, keeping in mind the angel investors”.
Investors are required to furnish several documents to the Reserve Bank of India if they use the ODI route. These include the valuation report of the foreign company in which the investment is to be made, along with statutory audit reports. According to market participants, the target companies are typically reluctant to share all such information with the angels who normally buy only small stakes in companies often below 10%.
“The OPI regulations, in the current form, deprive Indian investors in investing in promising new-age startups located outside India, and in a way closes the doors for individual Indian investments in future unicorns,” said Amit Agarwal, partner, Nangia Anderson. “It would thus be a welcome step if the current OPI regulations are rationalised to allow certain class of mature individual investors to invest in unlisted securities outside India.”
It is a common practice among top angel investors to invest in foreign startups. Also, some of the Indian startups have an overseas holding structure — the parent company is incorporated overseas while the day-to-day operations are carried out by an Indian subsidiary. Even while investing money into such startups, angel investors would have to make an ODI investment under the rules.
“There was an expectation that the new regime would define the parameters of portfolio investment in a way that it would apply for unlisted companies as well,” said Moin Ladha, partner at Khaitan & Co. “We are hopeful that this would be clarified by way of the FAQs expected on the new ODI regime.”
A senior executive at a leading private equity fund told ET that the issue was being faced by all kinds of angel investments including the syndicate investments, where multiple angel investors pool money and invest in a startup. “In such investments, the syndicate creates roll-up vehicles (RUV) and dealer banks have been taking a stance that even money into an RUV would have to go through ODI route,” the executive said. “We have already expressed over concerns with the regulators regarding difficulties being posted by the new foreign exchange rules,” he added.

CURRENT ISSUE

BEST STARTUPS TO WORK FOR

siliconindia