MCA seeks details of valuations, high premium paid to investors from startups

The Ministry of Corporate Affairs (MCA) has issued notices to over 2000 startups that have raised investment in the last five years.

The ministry has questioned investors premium and valuations at which they raised money. It is also seeking details on whether these startups have asked for exemptions under any government scheme, according to the issued notice.

MCA had begun issuing notices one and a half months ago. These notices are not like Income Tax notices which revolve around taxation and penalties. Instead, this is to check how startups are following the procedure and responding to MCA queries satisfactorily.

It is also trying to assess the volatile nature of the valuation of the startups. It has asked startups to explain how the share premium was calculated and details of the fund-raising transactions. According to people close to this development, MCA believes in valuing startups on the basis of last round of investment.

The development comes after a year of IT department raised similar procedure to know whether startups are paying taxes and their valuations are well in line. It had also questioned fund raised from angel investors. This led to 50 per cent downfall in angel funding.

Startups had filed a petition through change.org against Angel Tax demanded by the income tax department.

Many startup entrepreneurs including former Infosys board member and prominent angel investor Mohandas Pai had voiced his concerns over exorbitant taxation levied on angel funding.

At present, funds from angels are taxed at over 30 per cent if it is more than the fair market value (FMV).

Meanwhile, the govt last year had announced many startup supportive policies including the profit generated by start-ups will not be taxable for the first three years. The government cut the patent fees for startups by 80 per cent and claimed to have improved ease of doing business.

On the ground, though, there is a lot to be done when it comes to make India a top nation for startups and ease of doing business.