What a year 2016 is turning out to be from the viewpoint of India’s Startup ecosystem! The year got off to a ‘Big-Bang’ start with the Prime Minister outlining the Startup India Action Plan, indicative of the significance his government has ascribed to startups as job creators and growth stimulators. With angel and venture capital investments recording the highest ever jump to cross a new milestone in the previous year, 2016 was all set to be the year to usher in more ‘unicorns’ with access to a torrent of investor funds and to celebrate the spirit of entrepreneurship through government led initiatives like ‘Startup India’ and ‘Digital India’ with an objective to make the country the startup capital of the world.
All the hoopla at Delhi’s Vigyan Bhawan on 16th January notwithstanding, the four months that followed have been characterized by a fairly tepid Union Budget for startups in general and tech startups in particular; investors tightening their purse strings limiting the torrent of easy money to a trickle; celebrated unicorns being marked down in their valuations and news stories of ecommerce and foodtech startups either scaling down operations or serving pink slips to their employees en masse.
While opinion pieces have been written dime a dozen across multitude media channels cogitating about whether or not the bubble in the world’s third largest startup ecosystem has burst, the focus of this article is to moot and analyze the role played by the government in bolstering this ecosystem.
Startup India – What Works, What Doesn’t
Defining a “Startup”- Too narrow in scope?
While the upshot of the initiative led to conjuring up a definition of a ‘startup’, the words “an entity working towards innovation, development of new products, or services driven by technology or intellectual property” restricts the scope to technology powered or internet run businesses and excludes those brick and mortar enterprises and social ventures with an offline business model. Small and Medium enterprises (SMEs) employ over 120 million people across India and including new ventures in this space under the aegis of startups would have been most prudent.
Regulatory Compliance – Too Cursory?
With an objective to improve the ease of doing business, launching the Mobile App and Portal to facilitate a single window registration of startups, stakeholder collaboration, self-certification for labor and environmental compliance are only too cosmetic. The real pain point however lies in the ambiguity of statutes that govern day to day operations which merit simplification.
The Companies Act of 2013 is a case in point which poses a challenge for companies to manage their daily business. The fund raising process, for instance, has been over-complicated and the penalties have been increased dramatically having a detrimental effect by scaring many entrepreneurs away. Regulations pertinent to the Reserve Bank of India (RBI), Labor laws as well as processes mandated by the Ministry of Corporate Affairs (MCA) need to be simplified. Once done, the government will have to perform a fine balancing act by giving these statutes enough teeth to deter any scope for fraudulent activities.
Tax benefits – The Devil lies in the Interpretation?
While everyone was rejoicing on the announcement of the 3 year income-tax exemption, the mixed signals being sent with respect to tapering off tax incentives (around SEZs, R&D etc.) and the stalling of GST (Goods and Services Tax) in Parliament are the actual pain points for startups on an operational basis. Unpredictability like the classic Vodafone retrospective taxation case is where discretion to tax assessment officers got misused, needs to be kept in check. Corporate Tax rate in India which stands at 34.61% today and is one of the highest in the world needs to transition to a more ‘Competitive Taxation’ regime if the dream of India becoming a startup hub needs to materialize. These will help stem the ‘Startup drain’ of enterprises like Grofers, Flipkart and MakeMyTrip shifting shop out of India.
Fund raising – What’s there to incentivize investors?
Creating an efficient startup funding eco-system is the need of the hour. The establishment of a Rs. 10,000 crore Fund of Funds participating in the capital of SEBI registered VC funds is indeed a positive step, but in addition to incentivizing VC investing, angel and seed investors too must be given tax benefits. This is critical to the startup ecosystem.
India is the only country where share premium is taxed. While it was meant to be removed in the Union Budget of 2016, this is still a thorn in the flesh inhibiting investments in Indian startups.
Faster Exits – Nothing again for Investors?
‘Fail, but fail fast’ is the motto for any startup. The government has taken cognizance of this by fastracking the winding up of a startup satisfying the specified conditions of the Insolvency and Bankruptcy Bill 2015 in 90 days. However, the Economic Survey of India 2015-16 has observed that exit options for risk capital investors backing home-grown ventures have remained bleak. Exits for investors via IPOs have been few and far between and this can be attributed to difficult listing rules and the lack of profitability. This explains why some Indian companies choose to list in foreign bourses.
Legal support – Fast-tracking ‘Non-existent’ patents?
Nearly 2.46 lakh patent applications and 5.32 lakh trademark registrations are pending with the government due to shortage of manpower. A rebate of 80% on patent filing fees is too miniscule a benefit. The government could have instead chosen to match the startup’s R&D expenditure which will have a greater effect on enhancing its innovation quotient. The pilot Startup Intellectual Property Protection (SIPP) scheme in facilitating the filing of Patents, Trademarks and Designs and the government paying for ‘facilitators’ offering end-to-end advisory are will amount to nothing unless we have a strong Intellectual Property Rights (IPR) legislation in place that make legal contracts enforceable. IP created in India is not defensible in foreign markets.
Human Resources – Missing from the picture?
Besides the announcement of setting up 31 business incubators across IIMs, NITs and IITs, the action plan hasn’t touched upon skilling startups with the right human resources. It is a grim reality that India’s education system focuses on offering degrees without really trying to produce good skilled people. According to Aspiring Minds National Employability Report, only 20% of the 150,000 engineering students who graduated in 2015 were considered employable while an Assocham study noted that only 7% of B-School graduates were considered employable. This is not only because of the oft mentioned lack of soft skills, but is largely attributed to an industry disconnect in the syllabus – something which the government needs to focus on.
2016 has been a year where startups and investors alike have come to terms with the reality of ‘Conserve and Grow’ and going back to the drawing board to improve their bottomlines. With the right policy fillips in place, startups in India will be able to achieve a lot more. The thrust on innovation Smaller countries like Chile, and Turkey have made an attempt to improve their startup eco-system by attracting foreign entrepreneurs. India still has to go a long way in truly ‘Standing up and be counted’ as a startup destination.