Corporate affairs ministry questions premium paid by investors in startups

It has issued notices to more than 2,000 startups that have raised money since 2013.
Corporate affairs ministry questions premium paid by investors in startups
Corporate affairs ministry questions premium paid by investors in startups
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After the income tax department, The Ministry of Corporate Affairs (MCA) is raising doubts on how startups are valued for investment purposes.  A letter seeking the details and a backgrounder has been sent to around 2000 startups across the country by MCA.

According to an Economic Times report, some of the questions included in this communication include if the startups have obtained any kind of permissions from the government agencies or if any exemptions have been sought/issued. MCA has also raised its concerns on startups that raise funds at a certain level of valuation and the value drops later.

This is not the first time this issue has been brought up. There is an ongoing tussle at various levels on investments made by angel investors in startups and why it should not impose tax on these investments. Many startups have appealed against the Income Tax department in different forums like the Appellate Tribunal and Income Tax.

At the centre of this issue are two major factors. One is the way the startups’ valuations are arrived at. It is a complicated method and a lot of factors like the demand for the product or service, the capability and background of the promoters and a several such are taken into consideration. The other factor is the valuation going down from the level at which an earlier round of funding was done. This is the issue the IT department was concerned about and this is the issue the MCA is also now asking.

The premium being paid by some investors in a few startups is another item of concern raised in the letter issued by MCA. As of now, the Ministry appears to be just seeking information and there is no attempt at finding lacunae or issuing show cause notices. Possibly, the government is in the process of finalizing a long-term policy for startups and the officials themselves are trying to understand how the whole ecosystem works.

The investment by private equity (PE) investors and the rate they pay to pick up shares in startups as opposed to what the angel investors or venture capitalists pay is yet another angle the MCA wants to know, as to how it plays out.

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