For too long, India’s start-up ecosystem has heavily depended on growth capital from venture funds based in the developed markets or low-tax regimes overseas. But a recent report in this newspaper, based on data from Venture Intelligence, suggests that this is now changing. India-domiciled VC (venture capital) funds, the data showed, topped the table in terms of number of deals inked in 2024, with the five most active VCs hailing from India.
North American and European firms took a backseat. India-domiciled VCs, now 255 in number accounted for 60 per cent of the total number of VCs, while US-based ones accounted for 19 per cent. India-domiciled VCs are growing in number due to a variety of reasons. Successful Indian entrepreneurs and professionals have charted forays into start-up funding with VC funds such as Rainmatter, Z Nation Lab and Blume Ventures. Scions of business families have also turned active start-up investors via family offices and angel networks. At the same time, there is also a trend of global private equity giants such as Sequoia Capital and Matrix Partners — which earlier ran their India operations from overseas —spinning off their Indian arms into separate entities (Peak XV and DevC), in a bid to give their local outfits greater autonomy. The GIFT City has managed to woo foreign funds to relocate by offering a liberal foreign exchange regime with concessions on income tax, GST and Securities Transaction Tax.
The onshoring of VCs brings several benefits. One, India-domiciled funds are likely to prove a less volatile source of capital for local enterprises. Two, venture capital investing is a high-risk affair, and local management teams will be better placed to identify winning ideas than remote teams stationed overseas. Given the thriving start-up ecosystem, deal-making also requires quick turnaround times, which is easier with decentralised decision-making. Three, the onshoring of the VC ecosystem can also create high-paying local jobs in fund management and ancillary services such as fund accounting, investment banking and office leasing.
While the trend of VC funds onshoring is a healthy one, a lot more may need to be done to help it along. Though Budget 2025-26 smoothed the way for alternative investment funds (AIFs) by clarifying that their income would be taxed as capital gains and not business income, loose ends remain. With this change set to take effect only from April 1, 2026, AIFs seem unsure if their legacy investments will still suffer business taxation. Other aspects such as GST levy on performance fees, also require clarity. More important, while more venture firms are choosing to locate their offices and management teams in India, a chunk of their capital continues to be sourced from overseas investors. To truly derisk, these funds must have greater access to domestic capital from high net-worth investors and institutions. This may require the Securities Exchange Board of India (SEBI) to raise the bar on AIF regulations.
