Modi Government's Policies Impacting Investments In Start-ups
What role 'should' governments play in building up the startup culture? Should these be given special privileges?
In May 2012, during a trip to London to attend a two-day conference on Venture Capital one got an opportunity to listen to Cabinet Ministers and other political bigwigs exhorting the attendees to invest in start-ups in UK and extolling the virtues of Venture Capital. A thought had crossed the mind then - if India would ever see such a day - and whether our leadership would recognise the value of start-ups and early stage investors in shaping the future of the economy. Just 3 short years later, India announced its intentions with "Start-up India Stand-up India" in August 2015.
The charisma of tech start-ups lies in their genesis - technology being the harbinger of change and the catalyst in an economy. Extant industry does innovation and change too, and at a rather large scale. But what the startups do is not so much as bring about an incremental change, as change the way the world operates. While innovation in candle technology will give you better candles with more light, a light bulb changes the way the world works. While extant large industry will help maintain life as we know it, startups will take us to a better world - hence the need for any society, culture or economy to feed and grow its startup culture.
Startups play multiple roles. Large start-ups including the likes of Reliance Jio and Tesla Motors make the industry players push boundaries to re-invent. Technology enabled start-ups like Uber, Airbnb and Ola improve the use of idle resources. And E-commerce majors and Digital Payment players like Amazon, Flipkart and PayTM enhance convenience.
What role 'should' governments play in building up the startup culture? Should these be given special privileges? The answer is a resounding yes. Startups epitomize the adventure seeking value of a culture. They thrive on changing the status quo. They are the perpetually dissatisfied souls, the itinerant mendicants in search of the higher life form. History has shown that cultures that have not inculcated the value of adventure in their ethos have withered and died. The strongest, the fastest, and the mighty all fade away. The ones who survive and thrive are the ones who lead change. Startups lead that change. And it is the sovereign responsibility of government to protect the future of its citizens by ensuring a vibrant startup culture.
Startups require funding. Whether it was the sea fairing merchants of the Spanish and British empires or the travelers on the silk route - they were all provided aid and support by their governments. The current Indian government has taken steps by initiating a few systemic changes. It has improved access to long-term capital with a few important measures.
It has allowed Non-Resident Indians (NRIs), Foreign Nationals to invest freely in SEBI registered Alternate Investment Funds (AIFs). In a first, this government has set up the "India Aspiration Fund" of Rs 2,000 crore. The fund has had a multiplier effect on funding of domestic funds and start-ups. Organisations are contributing to this corpus with LIC recently joining the fund as a "Limited Partner (LP)" with a Capital Commitment of Rs.200 crores.
Another relevant move has been the tax exemption conceptualised on capital gain on investing in government led Fund of Funds. We see this as an exceptional initiative that can potentially encourage individual and corporate investors to invest in start-ups in addition to the option of RBI bonds or house property.
In what may be considered early steps towards future developments, the government has taken measures to encourage domestic fund management for supporting local innovations and solutions. AIF is considered domestic capital as long as the Manager and the Sponsor to the AIF is Indian even if funds have been raised from overseas. By now providing clarity on taxation of AIFs - with pass-through benefits, nil withholding tax on funds received from Double Tax Treaty Agreement nations, and treatment of carry-forward of losses - the government has provided strong clues of future intent.
We believe that the most important step in bringing about concerted change is educating the stakeholders. In this direction too, the government is making decision makers at every level realize the role of start-ups and venture capital with the empowering of Shri Jayant Sinha, Minister of State for Finance, and Shri Amitabh Kant, Secretary, Department of Industrial Policy & Promotion (DIPP). They have built on the existing framework of SEBI regulations that had paved the way for Alternative Investments in start-ups, offering them access to capital via listing of small businesses on institutional platform and by allowing insurance companies to invest in alternative assets like venture capital.
The word start-up itself has been defined for the first time for the purpose of passing tax exemption. The 3 years in a 5-year window tax exemption structure shall give relief on the working capital which would have otherwise got blocked in TDS/income tax of the start-ups. This is a huge saving of cash flow from the start up perspective which will enable them to gallop ahead.
In another significant change, the possibility for start-ups to participate in government led businesses, is very refreshing and opens up opportunities of a different dimension. Relaxation of norms for public procurement from start-ups in the manufacturing sector enables growth of Micro, Small & Medium Enterprises (MSMEs) as now they do not have to worry about tangential eligibility conditions such as "prior experience" or "prior turnover". Self-certification is another step towards building trust with businesses.
The biggest challenge however, lies in ease of doing business. The challenge for any government is to create a balance between facilitation and control. And so far control seems to be the clear winner. There is still a long way to go where a nurturant eco-system is created, attracting the best minds and supporting idea creation and implementation. That there is no dearth of creativity at all levels is evident with the activities of HoneyBee bringing to light the innovations in rural India and Industry champions like Tim Cook of Apple acknowledging the capabilities of the Indian mind.
To better utilize dormant capital, there is a strong case for unlocking domestic capital pool from pension funds and charitable institutions. Bringing taxation on returns from start-ups at par with listed securities would be another boost to the eco-system. The Govt. can eliminate the risk of angel tax or start-up tax under section 56 (2)(viib) on equity investments at a premium in start-upland promote on-shore fund management in India to attract fund managers from private equity and venture capital industry.
Startup action itself is in the startup phase. Technology today provides the edge in a globally competitive market place. Action is required not only at an industry level but also in schools and colleges, in curriculum and pedagogy, and in the way we see life. A societal change from seeking stability to seeking challenges is already visible with large number of highly qualified individuals turning away from the well established socially acceptable professions of Engineers, Doctors and Civil servants to entrepreneurs, innovative farmers, and change agents. The government should build on its first steps and harness the growing desire in Indian citizen to be the best in the world. If Virat Kohli can set hitherto unimaginable benchmarks for batting in the IPL why should India lag behind US, UK, Israel and Singapore in startup Best Practices?
With inputs from Sanjay Pande, Director and Fund Manager, YourNest
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.