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What is Angel Investment?

What is Angel Investment?

Relevance

  • GS 3 || Economy || Structure of the Indian Economy || Parallel Economy

 Why in News?

  • Black Money is turning up into White one via Angel Investments into the Startups of India so their taxation should be amended.

Angel Investor

  • Angel Investors is an affluent Individual who provides capital for business In exchange of the endowed capital startup owner has to provide convertible debt or ownership equity.

 Issue with Angel Investments

  • Money laundering – Black money of several investors are being invested into some startups and they are the owners of the black money are getting ownership equity in the startups, converting that into white money.
  • In the year 2012, in Union Budget, Anti-Money laundering provision was introduced in order to curb this money laundering.
  • Taxation will be applicable on angel money when any closely held company issues shares to domestic investors. Closely Held company– that has only limited number of shareholders.
  • If the shares are issued at higher than the ‘fair market price’, then it will also be taxable.
  • The excess amount will be entitled as income from other sources and will be levied at 30%, under the Section 56(2) of Indian Income Tax, 1961.
  • Fair Market Value – done through book value or discounted cash flow method. After calculating this fair market value, an assessment would be done by the assessing officer.
  • Book Value of any company= total assets – intangible assets and liabilities
  • Discounted Cash Flow: Valuation method used to estimate the value of an investment based on its future cash flows.

 Concerns

  • Under the discounted cash flow method it is based on future cash flows. Accounting Income arises only when business uses its capital to create products which ease the profit.
  • First, Business should have a capital and this capital has to be deployed effectively for production/service. Either of them (Service/Production) will yield profit to the business.

 Valuation of Book Value

  • This issue is left to the venture and the investors.
  • Taxation on Angle Investment – promotes startups is cost of concerns. If the domestic investors are levied some taxations, it may jeopardize the investments in the economy.

 Government Response

  • CBDT (Central Board of Direct Taxes) recently granted some relief from this taxation from the startups. But, this relied will only be given if they comply with the rules and conditions notified in the DIPP (Department of Industrial Policy & Promotion) and also for the angle investors.
  • In case of the starup the DIPP put maximum cap of paid-up capital and the share capital at 10 crore. In case of Angel Investors, a minimum average return income of 25 Lakhs for the preceding three financial years (or) a minimum net worth of 2 crore as on the last date of preceding FY. Startup must also be registered by the DIPP. This eligibility should be followed by a specific by the IMB (Inter-Ministerial Board of Certification).

 Qualifying Conditions

  • For Startup – Startups will have to get the recognition from the DIPP and they must get approval from DIPP.
  • Approval from IMB –Startup companies are supposed to get approval from IMB (Inter-Ministerial Board of Certification) and IMB will issue shares without triggering the angel tax provisions.
  • Also along with the applications to the IMB, it must be accompanied by a fair valuation certificate from a merchant banker.

 Contrary Arguments

  • Capital threshold – Set at 10 crore for the startup which may only benefit only a small fraction of Startups and only those startups who are involved in the capital intensive business. They might have capital more than 10crore. So Startups which are focused on capital intensive business will not affected or benefitted from these provisions.
  • Small Investments – Small investors will also be not benefitted from these provisions.
  • Administrative Hurdles – Startups usually find lots of impediments from several administrative hurdles. Approval from the DIPP and then getting approval from the IMB then getting it with the merchant banker, they all pose a grunt task of time lag of the startups.
  • Past Investments – Unregistered startups who have already raised their angel investments, will not be benefitted out of these recommendations which may pose disputes with their prolonged investments but are not registered.

 Additional Info

DIPP – Dept. of Industrial Policy and Promotion

  • in 1995,
  • Reconstituted in the year 2000 with the merger of Department of Industrial Development.
  • Works under the Ministry of Commerce and Industry.
  • Along with the several responsibilities, DIPP is the nodal Department in Government of India for coordinating and implementing programs with United Nations Industrial Development Organization (UNIDO) in India
  •  IMB – Inter-Ministerial Board The board comprises of the following members:
  • Additional Secretary, Department of Industrial Policy and Promotion, Convener
  • Representative of Ministry of Corporate Affairs, Member
  • Representative of Ministry of Electronics and Information Technology, Member
  • Representative of Department of Biotechnology, Member
  • Representative of Department of Science & Technology, Member
  • Representative of Central Board of Direct Taxes, Member
  • Representative of Reserve Bank of India, Member
  • Representative of Securities and Exchange Board of India, Member