The founder notes that a tax arbitrage gap between dividends and capital gains incentivizes startup founders and investors in India to chase high-valuation, low-profit growth, rather than prioritize profitability.

Kamath argues that unprofitable growth is valued far more highly in the current IPO boom, while profitable, steady-growth companies fetch noticeably lower exit multiples.

He explains that, due to the tax setup, dividends carry an effective tax around 52% while capital gains are taxed at roughly 14.95%, creating a strong incentive to pursue growth over profitability.

This dynamic is reinforced by a market environment where CEOs and investors push for exit-ready businesses, often with losses, because IPOs are a primary exit route in India and M&A options are limited.

Kamath warns that the policy setup has possibly gone too far, risking fragile businesses that struggle in downturns if profitability remains elusive.

There is a structural issue: as startups age, VC-led pressure to exit grows, and with few M&A options in India, IPOs become the default exit mechanism.

Once a business runs at losses, achieving sustainable profitability becomes difficult, making IPOs a common route for exits in the Indian ecosystem.

The model relies heavily on spending for user acquisition and marketing funded by VC cash, with R&D in India lagging at about 0.7% of GDP.

This setup makes profit-led, sustainable growth less attractive and could undermine long-term resilience if market conditions deteriorate.

The growth-at-all-costs approach can raise competition barriers for disciplined, profitable players and contribute to a broader pattern of unprofitable growth.

The discussion references the broader Indian IPO environment and notes profitability as seen in Lenskart as part of the context for valuation and exit dynamics.

Kamath reiterates that tax arbitrage drives unprofitable growth and makes resilience harder during downturns, given India’s limited M&A options and IPO-centric exits.