NR Narayana Murthy bats for tax sops on ESOPs at startups

making themselves redundant as soon as they can.
making themselves redundant as soon as they can.
Infosys co-founder N R Narayana Murthy is an investor in startups, through his vehicle Catamaran Ventures. He also headed of a 21-member Sebi panel that recently recommended a slew of reforms to make startups more attractive to investors and employees.

Murthy is hopeful that a majority of these recommendations will be accepted by the government and be included in the budget. Excerpts from an exclusive interview with TOI:

How do you view the startup movement in India?

Startups have a tremendous impact on the economic growth rate and prosperity of any country . In 2015, as against the $2 billion that IPO companies raised, we received about $20 billion as VC and private equity funding, a growth of 60% over 2014.

The job growth rate in startups was 8.7% last year, as against 2.3% in public companies.So, India stands to gain if we make things easy for entrepreneurs and investors.

What do you see as your most important recommendations to Sebi?

We have recommended that ESOPs (employee stock option plans) that startups provide to key employees should not be taxed at the time of vesting and they should be taxed when there is a liquidity event (like and IPO or an acquisition). That will encourage more people to join startups.

We have also recommended that we need a level-playing field in terms of capital gains taxation between VC/PE funding and the secondary markets. We have said we have to enhance the domestic funding for VC/PE.

Today, out of the total funding, only 10% comes from the domestic markets and 90% comes from outside India. In places like the US, it is the reverse. For this to change, we have recommended that some of the monies in provident funds and insurance companies be allowed to be invested as venture capital in startups.

Funding activity has come down. Are investors now looking at profitability as an important metric?

Not really. There are fields where investors know they have to wait. In e-commerce, we have seen in the US and India that companies make losses for quite a few years before they break even.

On the other hand, in certain other areas, companies can become cash positive in a shorter period. I don't think there is one rule for all investment.

What do you make of valuations, especially in areas like e-commerce?

Valuation is the result of an agreed price between a seller and a buyer. That is a price that the buyer finds value in and the seller feels happy about. Therefore, who am I to say this is high or low? It's the market that has determined it. So I'm not that much concerned about those valuations.

The people who have voted with their money, they would have done proper due diligence and would have satisfied themselves that there would be adequate returns.

As an investor in startups, what do you focus on?

We believe that the only way the problem of poverty can be solved in India is through creation of jobs and entrepreneurs create jobs. We help entrepreneurs in their early stages.This is the stage that is most important but funds are lacking in India in this stage.

A lot of the global VCs focus much more on later stage investments. We look for entrepreneurs who demonstrate three attributes -competence, character and commitment. We want these entrepreneurs to be able to express the differentiated business value of their idea in a simple sentence, not a complex sentence and not a compound sentence.

For us old-timers, entrepreneurship is all about deferred gratification -that means hard work, sacrifice, being away from loved ones, taking a small salary , austerity , all in the hope that tomorrow it will bring a fortune. Such a mindset requires a good value system.


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