Why HNW investors are rushing to invest in startups & unlisted

In 2008, India's startup journey began. Nearly a decade later, India is the third largest startup ecosystem after the United States and China, with more than 60K enterprises, which will attract global capital to India. As capital flows increase, more ventures, funding, exits, and wealth creation will occur. As investors wake up and scent the coffee, there is a long-term opportunity for all parties involved. Institutional investors, such as pension funds, have predominantly invested in this asset class, primarily through later-stage private equity and venture capital funds. However, the landscape is undergoing rapid change. Angel investors, syndicates, micro-VC funds, and angel networks play a significant role, particularly in the foundation rounds of early-stage companies. So why the unexpected interest and increased activity? Some reasons include: - SEBI has evolved alongside the industry and, through AIF regulations, makes it simpler for angel/accredited investors to invest in DPIIT-approved startups. - Large corporations such as Tata, Reliance, and others have begun investing in and acquiring scaled firms. For example, the investments made by Tata Digital in Cultfit, 1mg, and Bigbasket. - Numerous successful IPOs of technology firms, such as Zomato, Paytm, PolicyBazaar, and Nykaa, have contributed to increased primary market activity. According to Goldman Sachs, over 150 private companies could go public within the next three to four years, making India's public market the fifth-largest market capitalization. As more tech companies go public through an initial public offering (IPO), the new-economy sectors such as e-commerce, internet, and media could have a larger presence in Indian equity indices. There are approximately 100 unicorns (companies valued at $1 billion or more) in India, many of which are not publicly traded. - There has been an increase in secondary transactions for many pre-IPO companies that offer sizable lots on the private market. They are typically distributed by wealth management firms to UHNI clients and provide shareholders with liquidity before an IPO. These are typically vested ESOPs sold by employees or early angel investors. - Global companies have increased their M&A activity in India and are acquiring reputable technology firms to enter the Indian market or gain a global competitive edge. - Some traditional private equity funds have begun considering investments in tech firms, thereby increasing ecosystem activity. In addition, ESOPs and exits have also created significant wealth for employees and founders. This wealth returns to the ecosystem as employees and founders become limited partners in venture capital funds or angel investors in startups. - Additionally, traditional family offices have begun to increase their allocation to this asset class. They are now more diversified and more inclined to place larger bets. Their motivations for investing are outsized returns uncorrelated with the stock market, the opportunity to provide strategic inputs to firms, keeping abreast of the newest technological trends, and exploring business adjacencies. But is it deserving of the acclaim ? - With 100 unicorns, India ranks third, behind the United States (396) and China (277). In less than a year, 2021 added 34 new unicorns, shattering all previous records. This is nearly equivalent to the number of unicorns added to India over the past decade. In addition to paper returns, actual cash departures have begun to occur. - We are heralding in a new era of 'Tech-empowered India.' We will only grow in size and importance from here on out. As in the United States, venture capital as an alternative asset class is poised favourably, and most early-stage micro-VC funds should outperform public market indices. The time is now to invest in India. - Private Investing in startups for HNI and Family offices Do You Invest In Unlisted Stocks? The Procedure And Tax Compliances Are Listed Below - Unlisted shares and shares of unlisted startups have garnered investors' attention recently. But should you follow the trend indiscriminately and invest in them? Herein are the specifics - The emergence of numerous retail-oriented online platforms for investing in unlisted shares has made it easier for many retail investors to invest in them. The entire procedure and compliance for purchasing unlisted shares before ipo typically take T+3 days. The shares are restricted for six months after listing. However, there are no restrictions on the sale of shares before listing," he adds. What Is The Method? - The shareholder agreements are signed, and the buyer is given the share certificates. A startup investment takes an average of 50 to 60 days to complete. - In addition to this procedure, one may purchase shares in a pre-IPO round. Before launching an initial public offering (IPO) on the market, most corporations sell shares in pre-IPO rounds. The pre-IPO session conducting company is in contact with several brokerage firms that offer a specialised set-up for retail investors. Numerous fintech companies perform these backend processes for a fee, and retail investors can also use them to purchase unlisted shares. - Check the following compliance requirements before investing in unlisted shares. Both the transferor and transferee or anyone acting on their behalf, must sign a Form SH-4 instrument of transfer of securities. - Additionally, one must purchase a stamp of the appropriate value and affix it and obtain two witnesses who will attest to the buyer and vendor of the shares signing the execution instrument. Within sixty days of the execution of the instrument, both the executed instrument and the share transfer certificate must be sent to the company. If no share transfer certificate is available, a letter of allotment of securities will suffice. - Also, an application is made by the transferor alone and pertains to partially paid shares. In that case, the transfer shall only be registered if the company gives the transferee notice of the application in Form SH-5 and the transferee gives no objection within two weeks. - Determining the fair value of unlisted shares when purchasing or selling them is essential. If you purchase unlisted shares for less than their fair value, the difference between the fair value and the purchase price will be taxed as income in your hands. - The fair value of an unlisted equity share is effectively determined by subtracting all liabilities from the company's total assets and dividing the result by the number of outstanding shares. Any immovable property owned by the business must be valued at market price. According to the most recent audited financial statement - According to section 50CA of the Income-tax Act of 1961, this price differential between the share and its fair value will be added to the seller's income. How are gains from unlisted stock sales taxed? - If you trade in unlisted shares, the same taxation regulations that apply to listed shares will apply to you. In contrast, no security transaction tax (STT) is required for unlisted shares. - A non-listed share held for more than 24 months is considered a long-term capital asset. In such a scenario, the vendor will be taxed at 20% of the indexed cost of acquiring unlisted shares. . Should You Invest in Unlisted Stocks? - Before listing the unlisted shares, there are a few considerations to consider. - Unlisted companies disclose their financial information to the Ministry of Corporate Affairs (MCA), which can be accessed for a nominal fee. - Liquidity: The market for unlisted shares is specialised, and the opportunities provided by a stock exchange for listed shares are unavailable for unlisted shares. Conclusion Investing in startups is an even more specialised market than investing in public equity. Professional advice should be taken before investing in startups.