"The action plan has not been written down in stone. The government, for the first time, has created an enabling environment for startups" - Venkatesh Shukla, president, TiE Silicon Valley
Last September, when Prime Minister Narendra Modi told American CEOs that India treated every company equally, a comment by Venkatesh Shukla caught his attention. Alluding to startups and bigger companies, the president of TiE Silicon Valley, a group of India-origin entrepreneurs in California, said a 6-year-old and a 30-year-old could not be treated equally. Modi agreed and asked NITI Aayog CEO Amitabh Kant to set up meetings with this group.
The plan to connect with startups was not on Modi’s US itinerary. But, as Silicon Valley was famous for startups, Shukla said Modi should visit some of them. Discussions followed, and led to the unveiling of the Startup India action plan at Vigyan Bhavan in Delhi on January 16.
“If there’s a strong wind blowing, some might want to shut the window. Others will want to put up a windmill or launch their sails on the seas,” said Modi, describing the enterprising spirit of startups in his speech at San Jose, California in September.
A member of TiE Silicon Valley said Modi was deeply impressed with the number of jobs startups had created in Silicon Valley. He wanted the same to be replicated in India and to bring back Indian-origin entrepreneurs who had left because of policy hurdles.
Also, for Modi, who had, as Gujarat chief minister, supported large corporates, it was time to woo smaller businesses, especially when many were growing faster than conglomerates.
Sacrificing their precious weekend, hundreds of startup bigwigs, including Uber cofounder Travis Kalanick and SoftBank founder Masayoshi Son, came to be part of the historic event in Delhi. Also, in a departure from history, ministers and bureaucrats were speaking in one voice, rolling out the red carpet for startups.
Founders and investors have given thumbs up to the initiative, lauding Modi’s vision. “The fact that startup as a term has entered the government’s jargon is in itself very unique in India,” said B.J Arun, a member of TiE Silicon Valley. “The prime minister has brought entrepreneurship into the mainstream, allowing more young people to start on their own.”
Startups have welcomed the government's willingness to listen to them, rather than setting arbitrary policies. “They have given a message that they are there for us,” said Shailesh Jain, cofounder of mirraw.com, an online fashion store.
The most exciting measures are the government’s plans to register companies through an app and a compliance regime based on self-certification, which would ease regulatory burden. The government also promised an easier patent regime for new companies, a Rs10,000 crore fund that will invest in other venture capital funds over four years and a credit guarantee fund of Rs2,000 crore.
But, despite a series of reform measures and an inspiring speech by Modi, some startups feel that the policy lacks a lot of desirables. “They have been able to build a perception but when it comes to addressing pain points, the policy is not that effective,” said Sujayath Ali, CEO of voonik.com, an e-commerce fashion platform. “Forex payments, for example, are a huge issue. A lot of paperwork needs to be done whenever we have to pay or receive money in foreign exchange. But there is no word on this.”
iSPIRT, a software product advocacy think-tank, said it was closely associated with the government during the preparation of the action plan and had put together a list of 34 irritants that needed to be resolved. Of these, eight were resolved on January 16, action was promised on 15 and 11 were left high and dry.
“No doubt the action plan has provided various important exemptions and incentives to startups. However, the key question is whether it adequately addresses the irritants. In our view, the answer is no,” said iSPIRT in a blog post.
A major issue flagged by entrepreneurs before the event was the exit of startups such as Flipkart, Grofers and Freshdesk to Singapore. The reason being a friendly tax regime and clarity on regulations.
Sadly, even with the action plan, these gaps have not been plugged. For instance, there is no clarity on whether foreign direct investment is allowed in e-commerce, or on the definition of a marketplace. Apparently, six of eight unicorns (startups valued at $1 billion or more) have domiciled in Singapore or the US. In 2014, 54 per cent of all new-age startups raising money chose to domicile outside India.
EXPERTS BELIEVE THAT a lot of the points are sugar-coated but with hardly anything inside. Take the move to exempt startups from income tax. “There would hardly be any startups that generate taxable income in first three years,” said Sanjay Anandaram, partner at Seedfund, a venture capital fund. “In the initial stage, monetisation happens very slowly. So, the step does not make much sense. Instead, why not exempt startups from all taxes for five years. This startup action policy flatters only to deceive.”
Similarly, the move to fast-track closure of failed startups is expected to be only on paper. Unless Parliament passes the Bankruptcy Bill, which has a long way to go, the ease of failing and starting again is a distant dream.
And, even as Finance Minister Arun Jaitley called the startup policy a break from the licence raj, the action plan adds one more layer. To seek exemptions and qualify for government funding, the startups will have to appear before an inter-ministerial board. “The eligibility criteria prescribed under the definition of startup seem onerous and subjective, and the requirement to obtain certification from the board will increase bureaucratic interaction, thereby causing delays,” said Rajiv Khaitan, partner at the law firm Khaitan & Co.
Khaitan said the government did not mention anything about attracting foreign money in startups. Ease of stock market listing also seems to be missing from the guidelines. And, the Rs10,000 crore fund is also not new. The Modi government’s first budget in July 2014 proposed to set up a Rs10,000 crore fund to act as a catalyst by way of providing equity to startups.
Ali, however, said the government should not fund companies as “it opens doors for subjectivity and corruption.” This year's budget is expected to clarify some of these points.
“This [action plan] has not been written down in stone,” said Shukla. “There will be ongoing consultations. What is interesting is that government, for the first time, has created an enabling environment for startups.”