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The 2021 Budget: A Big Boost for M and A, PE or VC Industry and Start-ups

The 2021 Budget: A Big Boost for M and A, PE or VC Industry and Start-ups

As the country preps up to enter a post COVID era, the entire focus shifts towards policies that can help to boost the economy. With this in mind, the 2021 Budget re-emphasized and focussed on privatization, digitalisation, and disinvestment to attract FDI, and funds for the start-up ecosystem. Let’s take peek into some of these aspects this month’s write-up.

Privatisation and an Increase in FDI limits

Privatization of two Public Sector Banks and one General Insurance company; and increasing the permissible FDI limit from 49 to 74% in the insurance sector allows for foreign ownership. With control and safeguards, such measure will give rise to a lot of deal activity.

Setting up Asset Reconstruction Company (ARC)

In order to resolve the issue of distressed assets, a central Asset Reconstruction Company (ARC) will be set up, which will smoothen the process of restructuring stressed assets. The ARC scheme is essentially an approach to lift the burden off the banks and the banking system to ease the capital-intensive sectors. A lot of expertise that will be required in such restructuring will come from the M&A industry, thereby boosting both employment in these sectors as well as the firms that operate in this space.

Need of Local Capital along with Foreign Capital

A considerable amount of local capital remains locked up in insurance and pension funds in the country. One of the world’s largest sovereign wealth funds is the Norway Government Pension Fund which has made considerable investments into the technology ecosystem globally. In a scenario where Indian regulations get eased, there will be increased availability of local capital for project finance bonds and initiatives like the DFI. This will also enable private sector companies to participate and boost capital formation. Therefore, Corporate India’s participation at such a time is crucial.

New Investment Opportunities

This budget reveals a clear shift in policy with respect to investments in the energy sector, especially that of oil and natural gas pipelines and storage. This is an industry which globally attracts large pools of capital from Sovereign Wealth Funds and the likes. The clear advantage of opening up this sector is to help global majors diversify their risk profile on Indian investments. The seven PPP projects, the major ports, dedicated Freight Corridor projects, they all will attract interest from both the strategic and financial investors.

Start-Up Initiatives

Conscious leeway has been provided for the incorporation of One Person Companies (OPCs) that directly benefits Start-ups and Innovators. An OPC allows an entrepreneur to expand without any constraints on paid-up capital and turnover, and also allowing their conversion into some other form of business at any time. Lowering the residence limit for an Indian citizen to set up an OPC and also allowing non-resident Indian to set up OPCs in India will encourage more businesses to be set-up in the country thereby providing for more employment opportunities. To promote the development of more start-ups in the region, the budget proposes that the qualifying period for the tax holiday for start-ups be expanded by one more year. The qualifying period of seeking Capital Gains Tax (CGT) will also be stretched by a period of one more year under this new budget.

It is quite evident that the above measures will boost M&A and Fundraising, which in turn will fuel ecosystem growth. A transparent strategy, sourcing the correct deal and sound diligence is crucial at every step of the process while setting up a new business or while pivoting. Advisory firms that operate in the Mergers and Acquisitions (M&A) space, Strategy and the Venture Capital/ Private Equity space will therefore get a boost in business opportunities.

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