India startup reforms: tax, M&A, FEMA

On the legal and regulatory front, there have been several interesting developments, a few of which are:

(1) Removal of “angel tax” with effect from 1 April 2025. This development while widely discussed over the year has allowed freedom of valuation and pricing and also enabled structures to solve for potential down-rounds and to give effect to anti-dilution and similar rights. This coupled with a tax holiday extension for eligible startups would allow financial relief when companies move towards growth stage.

(2) Fast-track mergers. Greater flexibility for fast-track mergers with a view to promote the ease of doing business.

(3) Increased trend to redomicile Indian-founded entities in India. There has been a fair amount of interest in exploring (as well as completed transactions) “reverse flipping” where the parent company has moved to India instead of having a foreign parent and an Indian operating subsidiary.

(4) Amendment of regulations for angel funds. The Securities and Exchange Board of India amended the regulations pertaining to angel funds by mandating fundraising only from accredited investors (as specified under the regulations). Additionally, the minimum investment from an angel fund has been reduced, which should allow for greater investments in early-stage companies.

(5) Increased exits for investors allowing for further capital to be deployed. With increased exits both in the public markets and via M&As, there has been an increased availability of capital for funds to redeploy into Indian companies.

India tech funding: Easing regulations 2026

Forecast and wish list for the year ahead.

Given the rapid growth in technology, there is often a blurring of regulations. Defence tech is an area of interest for entrepreneurs and investors alike but the technology aspect of the sector is often subject to regulations around defence including FDI restrictions which may have the unintended effect of stifling innovation due to regulatory bottlenecks in fundraising. Further clarity on regulation of technology-enabled sectors, which assist other sectors would be welcome. AI and Deeptech are likely to see continued interest as well as follow-on and later stage rounds in companies that have raised their first institutional investment in 2025.

Ideally, one would like to see simplification of the early-stage investment ecosystem with a view to reach the US-style NVCA model to enable transaction speed. There can be some incremental steps that can be taken including further easing up of the SAFE notes/convertible notes route of investment and allowing for a registered startup to having other business verticals in the form of subsidiaries and joint ventures.

At the end of 2026, one will hopefully look back as a year where innovation has been incentivised, funding has been eased and transactions are faster to execute.

This article was originally published in India Business Law Journal on 16 April 2026 Written by: Manav Nagaraj, Partner. Click here for original article

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