The Indian startup industry continues to draw money from many sources, with the majority of investments coming through foreign investment.
In the same way there is a rising trend of foreign capital being introduced into the Indian startup industry primarily through the venture capital route and private equity routes. The principal sources of this are individuals investors as well as HNIs and family offices, although the involvement of institutional capital has been lower.
In this context there is a rising demand for an increase in participation of the capital of the country in the Indian startup scene that are mostly new-age technologically driven companies.
Gopal Srinivasan who is the founder and Chief Operating Officer of TVS Capital Funds, is a strong advocate of a greater participation of capital from the country into Indian companies, as he believes India stands to gain in a variety of ways.
In a discussion of the profits generated through investment in the Indian startup industry, Gopal Srinivasan, in an interview with Business Headers says, Retaining profit is a concern for national security.
edited excerpts of the interview:
Can you give us an overview of the Indian private capital market in India?
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Gopal Srinivasan (GS):One needs to look at the alternative investment funds (AIF) information for the country, as provided by SEBI, in which the Category II of the fund was at 5.6 lakh crore as of the close of June 2022. It was at Rs 3.9 lakh crore one year prior to. My estimation is that around 20% of this amount originates from Indian capital. This could be between 50 and 60,000 crore. It is evident that this isn’t an unfavorable amount, but the issue is, will it rise up to around 1 lakh crore or 1.5 million crore?
One must look at how the public markets been performing over the past year. Foreign institutions (FIIs) were pulling out, while domestic institutional investors as well as retail investors were safeguarding the market. It’s the exact situation that will emerge through private investment. We must reach the amount of Rs 1 lakh crore or 1.5 crore in the near future.
What are the pools of capital domestically that need to be released?
Clearly, it is likely to occur from pension, insurance and retail. These three pools are not being utilized that must be opened up. In India the biggest success story is that of the SIDBI funds of the fund for startups that has produced the 40 fund management managers that are at the seed level, however they also require additional growth funds since just venture funds aren’t enough.
In the insurance fund The amount that is allocated to private capital is extremely small at 1-1.5 percent. This must be increased by three times. In the case of pension funds, the general rules have been set however, there are specific operating procedures that must be followed to designate individual administrators to oversee the fund’s work.
Retail is another important participant and there isn’t any reason why they shouldn’t participate in the VC-PE market and also set up a fund of fund form of structure, which can be controlled by regulations of mutual funds. The opening of these pools could give us an aatmanirbharon capital.
Additionally, we need to change the regulations for the structure of fund administration in order to ensure that India is a desirable investment destination. The main focus is on the indirect and direct tax structure as well as Securities regulation Act. The government has set up an expert panel to study these issues.
How can the startup ecosystem benefit from the increased participation from capital that is sourced in the United States?
Google Scholar:The benefits can be evaluated from a quantitative viewpoint as well as the more subtle aspect. In the second, Limited Partners (LPs) from India will have a more accurate perception of how managers are judged, in contrast to those who are on the other side, with regard to being more in touch with the market, making better decisions and so on.
Additionally the fund managers are more likely to be able to access the money since the business is just as much about the opportunity than it does fund managers. When the business, economy and talent are able to work together it is a greater chance.
The more difficult or quantifiable aspect is the one about how much of the profit could be exported , and what percentage should remain in India. For instance, between $20 and $25 billion is invested in India each year, and the returns are around 12 percent. That means that one could be expecting an income of around $25 billion over about six or eight years. The ability to keep this profit is the issue that is of security.
The government could also set aside the funds to pursue other strategic purposes in areas that may not always draw private capital, and could be rewarded.
What’s the function of capital from abroad?
There is no need to invest in 100% domestic capital because there is plenty of meritocracy within foreign capital. They also are accompanied by a number of high-quality factors that is value-added. There are some outstanding foreign funds that create immense value and the government is able to require them to incorporate Indian capital. Why can’t we demand some of the top PE funds or VCs to get about 30 percent of their funds coming from Indian LPs?
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How do I help India boost direct investment of capital from the country into start-ups?
Google Scholar:Direct investments happen largely through angel investors who are related to the business. Family offices are founded by individuals who are typically entrepreneurs themselves and have an extremely high level of confidence in investing in the early stages of startups. But, in the long time, whether they’ll generate higher return than funds managers remains a major concern.
They generally perform poorly. A lot of them are choosing the hybrid option that allows them to make direct investments and also co-invest into other fund. If access to funds is a problem for a lot of the family offices access to competent managers is also an issue.
How do you connect the risks of investing in startups as well as a prudent domestic capital?
This requires an approach to portfolio diversification as nobody knows the outcome of the investment decisions. The VC is a shrewd person, and is an LP, and they’ll act in a way that they are focused on the overall return of the portfolio. You must establish a clear strategy for diversification.