Budget gives impetus to family offices, HNIs for more start-up investments

The central government's decision to cap the surcharge on the long-term capital gains (LTCG) from shares of unlisted companies at 15 per cent is expected to boost investor confidence in start-up funding and promote the use of employee stock options (ESOPs) by early-stage firms to attract talents. 

"The long-term capital gains on listed equity shares, units etc. are liable to maximum surcharge of 15 per cent, while the other long term capital gains are subjected to a graded surcharge which goes up to 37 per cent. I propose to cap the surcharge on long term capital gains arising on transfer of any type of assets at 15 per cent," Finance Minister Nirmala Sitharaman announced in her Budget speech. 

The announcement addresses a long-standing demand of start-ups and venture capital investors as it removes the unbalanced taxation norms to bring parity between capital gains from unlisted and listed shares. The move is expected to offer much comfort to retail investors including high networth individuals (HNIs) and family offices that are increasingly warming up to the idea of start-up funding. 

"The Budget has addressed in some measure the long standing issue of bringing parity in capital gains tax across listed and unlisted equities. Surcharge on Long Term Capital Gains on any assets to be capped at 15% will galvanise family offices, UHNIs to allocate more capital to this asset class and thus lead to the unlocking of a larger pool of domestic capital for startups," Nimesh Kampani, co-founder and CEO, trica, said. 

The move works in favour of early-stage investors and founders who seek liquidity in the long term. Ankit Prasad, founder and CEO, Bobble.AI, said capping the surcharge applicable LTCG to 15 per cent should help founders and angel investors save about 4 per cent on overall return. "We appreciate this move as it encourages angel investors by providing them with the much-needed incentive to invest more. Though, I must say that the LTCG is still very high for Indian resident founders, which has been a major reason for successful Indian founders to become non-resident (typically moving to Singapore or UK) after reaching certain valuation levels," he said. 

Sachin Agrawal, co-founder and COO of Bizongo said the move will propel more investments from venture capitalists and HNIs and promote the use of ESOP by new-age companies for retaining and rewarding employees.

Compensating employees with ESOP has gained significant momentum over the last few years among start-ups to attract and retain top talents. According to a report by Nasscom and Zinnov, there has been a ~ 6-7 x growth in ESOP buyback in 2021. Start-ups bought back over $400 million worth of employee stocks during the year and over 10,000 employees participated in the buy-back. 

 "The start-up ecosystem has been playing a significant role in job creation and nurturing highly skilled tech talent. Interestingly, in the last 18 months ESOPs have become mainstream and a great way of rewarding talent. However, the concern still remains of ESOPs being taxed twice, i.e. when exercised and when sold. The capping on LTCG gives some relief to those employees selling exercised options, but wider reforms are still needed," Kampani of trica said. 

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