A Mixed Goodie bag

Rashmi Guptey
28th January 2016

The Indian Startup ecosystem has attracted over USD 5.5 Bn of PE/VC in 2015 alone and is the third largest Startup base worldwide. It’s heartening to see the Government take notice and launch the “Startup India Standup India” initiative.

The Indian Startup ecosystem has attracted over USD 5.5 Bn of PE/VC in 2015 alone and India emerged as the top destination for FDI as compared to China and USA. India has the third largest Startup base worldwide and is the youngest “Startup nation” in the world with around 72 per cent of the founders less than 35 years old.

With such vibrant start-up potential, we were eagerly waiting for some dramatic reforms and incentives from the Government to boost the potential of these youthful and energetic companies wanting to make a difference to the Indian Economy at an economic and social level.  It’s heartening to see the Government take notice and launch the “Startup India Standup India” initiative.

Before I jump into what this initiative has to offer what intrigues me about the Action plan of this initiative is the way it is written. It’s not a “Stereotypical” government policy document. It’s different! The way it is written is an attempt to match the zeal of start-ups. The Action Plan is simple, straight forward and energetic, just like any young Indian Startup would envisage it’s own functioning to be. The Government has tried to respond to the entrepreneurial passion with a new -never heard before tone!

The Lawyer in me says- “Let’s dissect this” but the Indian in me says “How Refreshing!”

Having said that, let’s try and see what this Goodie bag called “Start up India Stand up India” has to offer.

What is the goal? 

To build a strong eco-system for nurturing innovation and Startups in the country that will drive sustainable economic growth and generate large scale employment opportunities. The Action Plan is divided across 3 areas: a) Simplification and Hand holding b) Funding Support and Incentives and c) Industry-Academia Partnership and Incubation.

So if it is all so rosy, why are some experts complaining?

I do think that incentives/plans and framework set up for collaborative efforts are commendable. A lot of thought and expert evaluation seems to have gone in to the Action Plan. The problem areas are very pertinent to the industry and reflect the Governments resolve to make life of start ups simple is worth applauding. However, there are still some areas that have not been addressed or thought through.

A few instances are below:

  • The definition of a “Startup” itself has some challenges. Emphasis on key differentiation and commercialisation means that these benefits won’t be available to all Startups but only those that works towards IP creation and innovative solutions. An Annual Turnover of 25 Crores could work against some Startups who start doing very well but still need some of these rebates. What qualifies as products or services or processes with no or limited incremental value for customers or workflow could be a matter of debate.
  • The requirement to obtain certification from the Inter-Ministerial Board  to qualify as a Startup will increase bureaucratic interaction, thereby causing delays for Startups
  • India has not been able to have seamless interfaces across regulatory bodies for a while now so I am not sure  how the ambitious plan to have a mobile app and single point interface would work and be implemented ?
  • Capital gains exemption are great for Investors in Startups but they  come with a rider of reinvesting the gain in Government Notified Fund of Funds somewhat akin to the capital gains exemption to Indian residents who are required to re-invest gains in infrastructure bonds to get exemption.
  • Incentives for attracting foreign participation in Startups (equity and debt) are not addressed. Eg: exchange control issues that deter/prohibit foreign investors from investing in, or lending to, Indian Startups have not been touched upon.
  • Direct tax incentives for 3 years since inception sound great on paper and also sound like a tremendous incentive but most start-ups burn cash in the first 3 years. Indirect tax incentives from service tax, VAT would be greater appreciated and required – with a possible tax break for the profit making start-ups as well. Eg: VAT is a major issue for ecommerce companies in Karnataka and UP. These issues need to be ironed out
  •  I am not too enthused about the Government investing in Startups as a Fund of Funds, those in the Industry know that investing in Startup is about deploying high-risk capital for high returns, understanding business execution challenges and is best left to those in the business of investing i.e. angel investors, venture capitalists, and private equity funds who have the appetite for this game. The size of the deployable Funds of Funds that the Government wants to set up does not seem substantial when compared to the quantum of foreign funds raised by Startups over just last one year.

How and when do Startups benefit?

The Startup Action Plan is barely a week old, some of these initiatives will be implemented by April 2016 and the time lines some others are yet to be notified.  For now- it would be a good idea for upcoming start-ups to analyse their products and innovation standard to meet the defined criteria. It may be a good idea to map their business decisions to maximise the benefits of this initiative.  Existing start-ups on the other hand may want to consider how and what out of this initiative could apply to them or what incrementally could be lobbied for as an Industry.

All in all; Startup India Stand Up India stands for New age Indian companies and the dream that we Indians are living. Let’s hope that through good execution that dream becomes a reality!

Who or What qualifies as a start-up?

A 'Startup' has been defined as an Indian entity (i.e., private limited company, registered partnership firm, or limited liability partnership not more than 5 years old; the annual turnover (as defined in the Companies Act, 2013) of which has not exceeded INR 25 Crores in any previous financial year and which is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;

An entity formed as a result of splitting up or reconstruction of an existing business will not be recognised as a Startup

The mere act of developing products or services or processes which do not have potential for commercialization; or undifferentiated products or services or processes; or  products or services or processes with no or limited incremental value for customers or workflow would not be covered under this definition.

To be considered eligible, the Startup should be:

  • supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator established in a post-graduate college in India; or
  • supported by an incubator which is funded (in relation to the project) from Government of India as part of any specified scheme to promote innovation; or supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an  Incubator recognized by Government of India.
  •  be funded by an Incubation Fund/Angel Fund/ Private Equity Fund/Accelerator/Angel Network duly registered with SEBI* that endorses innovative nature of the business; or
  •  be funded by Government of India as part of any specified scheme to promote innovation;or
  •  have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.

What benefits/incentivesdoes a Startup get under this Action Plan? 

    • Mobile App and Portal for all business needs and information exchange among various stakeholders:

a)     Effective April 2016, the Government has promised on-the-go accessibility through a Mobile App for registering Startups with relevant agencies of the Government and backend integration with Ministry of Corporate Affairs and Registrar of Firms for seamless information. The App shall also have a tracking facility.

b)     Filing for compliances and obtaining information on various clearances/ approvals/ registrations will be one stop.

c)     Collaborating with various partners (including venture funds, incubators, academia mentors, etc) in the Startup ecosystem will be possible through the App. 

  • Compliance Regime based on Self-Certification:Simplification of compliances with respect to specified Labour Laws and Environmental laws. Startups shall be allowed to self-certify compliance (through the Startup mobile app) for 9 labour laws and some environment laws. Removal of tedious labour laws inspections unless thought necessary.
  • Income tax holiday period: Exemption from payment of income tax for a period of 3 years, subject to non-distribution of dividend by the Startup. This is to facilitate the growth of Startups, and assist them in meeting their working capital requirements during the initial years of operations.
  • Tax exemption on capital gains: To promote investments into Startups, the Government has announced an exemption from payment of capital gains tax, if the capital gains are invested in the Startup fund to be set up by the Government. Further, the existing capital gains tax exemption for investments by individuals in newly formed micro, small and medium enterprises in the manufacturing sector will be extended to Startups. The existing exemption available to venture capital funds, in relation to taxation of investments made above FMV, has been extended to incubators investing in Startups.
  • Fast-tracking Patent Applications: Patent applications submitted by Startups will be fast-tracked for examination and disposal, so that they can realize the value of their intellectual property at the earliest. Startups will be provided an 80% rebate of the filing fees. A panel of facilitators shall be provided to assist in the filing of intellectual property related filings. This scheme is launched initially on a pilot basis for 1 year, and further steps will be taken by the Government at a later stage.
  • Relaxed Norms of Public Procurement for Startups: At present, Central Government, State Government and PSUs have to mandatorily procure at least 20% from the Micro Small and Medium Enterprise (MSME). In order to promote Startups, Government shall exempt Startups (in the manufacturing sector) from the criteria of “prior experience/ turnover” without any relaxation in quality standards or technical parameters.
  • Faster Winding up/Exit for Startups: Startups with simple debt structures may be wound up within a period of 90 days from making of an application for winding up on a fast track basis. An insolvency professional shall be appointed for winding up formalities..
  • Funding Support through a Fund of Funds with a Corpus of INR 10,000 crore: In order to provide funding support to Startups, Government will set up a fund with an initial corpus of INR 2,500 crore and a total corpus of INR 10,000 crore over a period 4 years (i.e. INR 2,500 crore per year) . The Fund will be in the nature of Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds.
  • Credit Guarantee Fund: A Credit guarantee mechanism through National CreditGuarantee Trust Company (NCGTC)/ SIDBI is being envisaged with a budgetary Corpus of INR 500 crore per year for the next four years. Raising debt is a big challenge for Startups.

What kind of support is envisaged for fostering of entrepreneurship and Innovation?

The Action Plan aims  to accelerate growth of Startups in sectors other than technology such as agriculture, manufacturing, social sector, healthcare, education, etc. across India, including tier 2 and 3 cities, and other semi-urban and rural areas which is commendable and reinforces the the balanced approach taken by the  Government.

As quoted in the Action Plan “A pivotal component for growth of Startups is regular communication and collaboration within the Startup community, both national as well international. An effective Startup ecosystem can’t be created by the Startups alone. It is dependent on active participation of academia, investors, industry and other stakeholders. 

The following initiatives are planned to meet the above mentioned objective of fruitful collaborations

  •   Organizing Startup Fests for Showcasing Innovation and  Providing a Collaboration Platform
  •   Launch of Atal Innovation Mission (AIM) with Self-Employment and Talent Utilization (SETU) Program
  •   Harnessing Private Sector Expertise for Incubator Setup
  •   Building Innovation Centres at National Institutes
  •   Setting up of 7 New Research Parks Modeled on the Research Park Setup at IIT Madras
  •   Promoting Startups in the Biotechnology Sector
  •   Launching of Innovation Focused Programs for Students
  •   Annual Incubator Grand Challenge.