From Incubation to IPO: How IIT Madras Incubators are Paving the Path to Self-Sufficiency

Imagine a young startup with innovative ideas but struggling to find its footing. This is where incubators step in, providing not just infrastructure but a launchpad for success.

What is an incubator?

An incubator is an organization or program designed to support early-stage startups and entrepreneurs by providing them with the resources, mentorship, and infrastructure needed to grow and succeed.

Key Functions of an Incubator:

• Mentorship & Guidance
• Office Space & Infrastructure
• Funding & Investment
• Networking Opportunities
• Business Services
• Skill Development

Tax exemption status of Incubators

As per Section 2(15) of the Income Tax Act, 1961 (‘the Act’), charitable purpose inter-alia includes education and advancement of any other object of general public utility.

An incubator promoting education, technology, and entrepreneurship can fit into the "education" or "general public utility" categories.

Hence, an incubator can be registered as a charitable institution under Section 12A (now Section 12AB) of the Act and by applying its income as provided in section 11 of the Act and can claim its tax exemption status.

Ather Energy Limited (Ather)

Ather was founded by Tarun Sanjay Mehta and Swapnil Babanlal Jain (IIT Madras alumni’s) in 2013, with a focus on product and technology development in India in order to build an electric two-wheeler ecosystem.

Ather is into design and development of electric two wheeler’s, battery packs, charging infrastructure, associated software and accessories.

Valuation of Ather

According to media speculation, Ather is planning to launch an Initial Public Offering (IPO) with an estimated valuation of approximately $2.4 billion. At a conversion rate of INR 81 per USD, this roughly translates to a valuation of INR 19,440 Crore.

When the valuation as on Feb 21,2024 of Ola Electric Mobility Limited is at INR 26,862 Crore, the valuation of Ather at INR 19,440 Crore is well aligned.

This translates to an issue price of roughly INR 648 per share with a total of 30,00,04,072 shares outstanding post the conversion of Compulsorily Convertible Preference Shares (CCPS) [INR 19,440 Crore / 30,00,04,072 shares].

The story of Ather and IIT Madras

IITM Incubation Cell and Business Incubator operated by the Indian Institute of Technology Madras leveraged academic research and student talent and is about to make realization of about INR 100 Cores.

1) IITM Incubation Cell

a) The initial allotment:
Pursuant to the incubation agreement and the graduation agreement on October 20, 2014, 526 equity shares of Ather were allotted to IIM Incubation Cell for the assistance in the form of physical infrastructure, mentorship and support.

b) Subdivision:
The shares were subdivided in a 1:10 ratio, resulting in 5,260 shares of ₹1 face value each.

c) Bonus Issue:
On June 22, 2024, a bonus issue in the ratio of 260:1 was announced, increasing the holding to 13,67,600 shares.

d) Valuation of the holdings:
At the valuation of ₹648 per share (based on a $2 billion valuation at an INR/USD rate of 81), the total value of IITM Incubation Cell's holdings is INR 88,82,40,420 ~ INR 88.80 Crore [13,67,600 shares × 648 INR / share] 

2) IITMS Rural Technology

a) Loan Conversion:
A loan and accrued interest totaling of INR 15,40,428 payable to IITMS Rural Technology were converted into 71 CCPS - Series Seed - One CCPS on October 20,2014.

b) Conversion Ratio of the CCPS:

The conversion ratio was 261 equity shares for every 1 preference share, resulting in 18,531 equity shares [71 CCPS × 261]

c) Subdivision:

The Series Seed - One CCPS face value was subdivided from ₹370 to ₹37, resulting in 710 Series Seed - One CCPS [71 CCPS × 10]

d) Conversion to equity shares:
Before filing the Red Herring Prospectus, the 710 Series Seed - One CCPS will be converted to 1,85,310 equity shares. [710*261=1,85,310]

e) Valuation of Holding:
At the IPO valuation of ₹648 per share, the total value of IITMS Rural Technology’s holdings would be INR 11,98,95,570 ~ INR 11.98 Crore [1,85,310 shares × 648 INR/share]

Income tax Implications

Both IITM Incubation Cell and IITMS Rural Technology and Business Incubator are registered under section 12A of the Act and section 11 of the Act provides tax exemptions to charitable and not-for-profit institutions.

IIT Incubation Cell

IITMS Rural Technology and Business Incubator

Since both IITM Incubation Cell and IITMS Rural Technology and Business Incubator are exempt from paying tax on their gains, they can retain the full amount of INR 100.78 Crore [INR 88.80 Crore + INR 11.98 Crore].

This liquidity can be strategically deployed to:

1. Expand incubation programs whereby more startups can be supported, increasing the ecosystem's innovation capacity.
2. Upgrade facilities by investing in infrastructure, research labs, or technology tools to enhance incubation services.

The above deployment shall be considered as application of income under section 11 of the Act.

Investment in equity shares of incubatee by an incubator

As mentioned above, these Incubators are registered under section 12A of the Income Tax Act, 1961 (‘the Act’) and are eligible for tax exemption under section 11 of the Act. 

Section 11 of the Act mandates that at least 85% of a charitable institution’s annual income to be applied towards its charitable objectives. The rest 15% of income even if it is unspent is allowed to be accumulated and is not to be taxed under the Act.

Additionally, in the event where there is any unspent amount out of the 85% of income which is to be mandatorily spent, section 11 of the Act allows carry forward of such unspent income to 5 subsequent years by investing or depositing through various options outlined in section 11(5) of the Act read with Rule 17C of Income Tax Rules, 1962 (‘the Rules’).

Rule 17C has been tailored to provide benefits to these incubators because Rule 17C (vi) provides that investment in equity shares of incubates by incubators shall be accepted as compliance of section 11(5).

Hence, if in any year an incubator is unable to spend 85% of its total income as prescribed in section 11 of the Act, it can invest the unspent portion in equity shares of the incubatee and this shall be treated as sufficient compliance of section 11 of the Act.

Consequently, these incubators can allocate 100% of their income toward supporting startups through grants, resource provisioning, and early-stage investments—thereby ensuring that all earnings are directed toward their objectives without incurring any tax liabilities.

Conclusion

Incubators cannot always rely solely on donations for sustainability. Through harnessing academic talent and optimizing their tax-exempt status, the IIT Madras incubators have showcased an effective approach to achieving self-sufficiency

Sources

DRHP of Ather Energy Limited