Investing in start-ups as an NRI

Investing in start-ups as an NRI

 Introduction

India's start-up ecosystem has been gaining worldwide recognition, drawing the interest of investors from around the globe, including Non-Resident Indians (NRIs). As numerous innovative start-ups continue to emerge in various sectors, NRIs have the chance to invest in these ventures. However, investing in Indian start-ups, like any other investment, carries both opportunities and risks.

Investing in Indian start-ups can be a rewarding endeavour for NRIs due to their potential for growth, innovation, and societal impact. Some of the major reasons to invest in India are:

·         High Returns: Investing in start-ups can be a lucrative long-term strategy as these businesses have the potential to grow rapidly and disrupt the market. For example, if an NRI had invested just ₹1 lakh in Flipkart in 2009, they could have made ₹60 crores in 2020 when the e-commerce giant was acquired by Walmart. Similarly, if an NRI had invested just ₹1 lakh in OYO in 2013, they could have made ₹50 crores in 2021 when the hospitality start-ups were valued at $9 billion. Likewise, if an NRI had invested ₹1 lakh in Swiggy in 2014, they could have easily made ₹30 crores in 2021 when the food delivery start-up was valued at $5.5 billion.

·         Social Impact: Investing in Indian start-ups presents NRIs with an opportunity to make a positive contribution to the social and economic development of the country. Many Indian start-ups are dedicated to solving real-world problems and are having a positive impact on society and the environment. For instance, VCI Chemicals is a speciality chemical start-up that aims to reduce the Middle East market's dependency on Chinese imports. Proxgy is a deep-tech IoT start-up that offers smart protective wearables, helmets, safety products and solutions for various industries. It also provides video conferencing, video search, video augmentation, and video intelligence services. Urban Tots is a toy manufacturing start-up that falls under the PLI scheme introduced by the Indian Government and is working on the China+1 theme. It produces non-toxic-based raw material toys, electronic toys, role-play toys, and metallic toys. It sells these toys in modern retail outlets and direct retail outlets all over India and overseas.

·         Diversification: Investing in Indian start-ups can be a smart strategy for NRIs (Non-Resident Indians) looking to diversify their portfolio and reduce their exposure to market fluctuations. By investing in different sectors such as e-commerce, manufacturing, hospitality, food delivery, education, healthcare, fintech, and more, NRIs can spread their risk and increase their chances of success. Additionally, investing in Indian start-ups can help NRIs tap into the emerging markets and consumer segments in India, which have a massive potential for growth and innovation.

Avenues to Invest in Private Markets

Private markets provide Non-Resident Indians (NRIs) with a chance to invest in businesses with high-growth potential that are not available to the general public. However, private markets come with higher risk and lower liquidity compared to public markets, and investors are required to conduct more due diligence and research before investing. Some of the ways to invest in private markets include:

·         Start-ups: Start-ups are companies that are in the early stages of development and are working on innovative products or services, often using technology to disrupt existing markets. NRIs have the opportunity to invest in these companies and support emerging entrepreneurs. However, start-ups have a high failure rate and may take a long time to generate returns. For instance, Planify provides data and analysis for various start-ups, including Proxgy, a deep-tech IoT start-up that offers smart protective wearables, helmets, safety products, and solutions for various industries.

·         Pre-IPOs: Pre-IPOs refer to companies that are getting ready to go public and list their shares on a stock exchange. Investing in pre-IPOs can provide NRIs with a chance to invest in established and profitable businesses at a discounted price before they become publicly available. However, pre-IPOs usually have a high valuation and may be subject to regulatory and market uncertainties.

·         SMEs: Small and Medium Enterprises (SMEs) are businesses that operate in different sectors and industries, often catering to specific markets and customers. Investing in SMEs could be a good opportunity for Non-Resident Indians (NRIs) as these businesses have a proven track record of stability and growth potential. However, SMEs face operational challenges and competition due to their low visibility. For instance, Planify provides data and analysis services to various SMEs, including VCI Chemicals - a speciality chemical start-up that produces coal tar pitch, a crucial ingredient for the aluminium industry.

·         Unicorns: Unicorns are privately held companies that are valued at more than $1 billion, primarily due to their innovative business models and large customer base. NRIs can invest in unicorns to support industry leaders and pioneers in their respective sectors. However, unicorns tend to have high valuations and may face challenges with scalability and profitability.

How to Invest in Indian Start-ups?

Investing in Indian start-ups as an NRI can be done through various avenues, such as:

·         Platform: Online platforms offer NRIs the opportunity to explore and invest in various instruments in India's private markets, such as start-ups, pre-IPOs, unicorns, and MSMEs. These platforms provide NRIs with access to reliable and curated investment opportunities, along with professional guidance, support, and services. For instance, Planify is a platform that offers stock market data and analysis for start-ups, pre-IPOs, unicorns, and MSMEs. Planify also connects investors with entrepreneurs to facilitate hassle-free equity fundraising and angel investing. Moreover, Planify provides Funds-as-a-Service, allowing NRIs to invest in Alternative Investment Funds (AIFs) and Venture Funds in India. These funds are regulated and tax-efficient investment vehicles that invest in start-ups and other private companies.

·         Angel Investing: Angel investing can be a profitable venture, but it also involves high risk. In India, becoming an angel investor often requires building a network within the start-up ecosystem. Many start-ups seek investments from established angel investors, and being part of such a network can provide NRIs with access to investment opportunities. Professionally managed angel investment networks offer Funds-as-a-Service, which provide multiple avenues for NRI investors to explore.

·         Venture Capital Funds: Venture capital funds are investment vehicles that pool money from multiple investors to invest in a portfolio of start-ups. In return for a significant stake in the company and a board seat, these funds provide NRIs with access to high-growth potential start-ups, as well as professional management, due diligence, and mentorship.

·         Direct investment: This option enables NRIs to directly invest in Indian start-ups without any middlemen or networks. NRIs can browse and connect with start-ups that align with their interests and preferences, and negotiate the terms and conditions of their investments. Direct investment allows NRIs to have greater control and flexibility over their investments, as well as lower costs and fees. However, direct investing also requires NRIs to conduct more research, due diligence, and legal compliance as they must comply with the regulatory and tax implications of investing in India.

What to Consider Before Investing in Indian Start-ups?

When considering investments in India's start-up ecosystem, NRIs should be aware of certain factors.

·         Investment Ceilings: The RBI has established investment ceilings for NRIs in Indian start-ups, varying by sector and investment type. NRIs can invest up to 100% of paid-up capital under the automatic route, but limits apply to print media and broadcasting start-ups.

·         Taxation: Investing in Indian start-ups can come with tax liabilities for NRIs. The taxes can be paid either in India or in the country where the investor resides, depending on various factors such as the type of investment, holding period, source of income and tax residency status. The tax rate and liability can vary based on these factors. However, NRIs can reduce their tax burden by claiming the benefits of the Double Taxation Avoidance Agreement (DTAA) that India has with their country of residence.

·         Repatriation: NRIs can repatriate their funds from investments in Indian start-ups through the NRE or NRO account. The NRE account allows free repatriation without any limit or tax deduction, while the NRO account has a limit of $1 million per financial year and a 30% tax deduction at source. Repatriation is subject to FEMA 1999 and RBI guidelines.

Conclusion

Investing in Indian start-ups can be a profitable and rewarding opportunity for NRIs. It allows them to participate in India's economic growth, innovation, and social impact. However, NRIs must exercise caution and diligence in their investment decisions, as they involve high risk and uncertainty. Before investing in any start-up, NRIs should conduct thorough research, analysis, and due diligence, and seek advice from professional advisors, such as financial planners, tax consultants, and legal experts, to understand the implications and consequences of their investments. NRIs should also stay updated with the latest trends, developments, and regulations in the Indian start-up ecosystem, and leverage the various platforms and networks available to them to discover and invest in promising start-ups.