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PM Modi’s Startup Action Plan 2016: A few hits and a few misses

Anirudh Suri

Anirudh Suri

On Saturday, I attended the #StartupIndia event, which is being dubbed as arguably “the best and biggest startup focused event organised by any government in the world.” More importantly, #StartupIndia, organised under the leadership of the indomitable Amitabh Kant, saw the launch of the Startup Action Plan (SAP) for India by Prime Minister Narendra Modi. Compared to some other Startup Action Plans drafted up by other countries or cities (Canada, Sydney, Amsterdam, etc.), India’s SAP is definitely a lot more ambitious and comprehensive.

My overall assessment of SAP is that it represents a great start, but that much more needs to be done, and the success of these initiatives will ultimately depend on their execution. It is important to review the specifics of SAP to evaluate it properly. So here goes:

Definition, eligibility and certification of startups:

Startups were defined in the SAP as entities incorporated in India with a turnover of less than Rs 25 crore (roughly $4million) in any preceding financial year working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property. To be certified as a startup and considered eligible for these benefits, there are some additional rules. The startup needs to be “recommended” by a Government of India (GOI) recognised or funded incubator, accelerator or fund. Amongst funds, only those duly registered with SEBI, would be able to “recommend” the startups. While this system of recommendation does help ensure that abuse is prevented, it does also seem to be restrictive in the sense that many foreign investors in startups or even angel investors are often not registered with SEBI and might not fall within the ambit of the institutional framework defined by the SAP. License raj should not start to creep in here.

Verdict: The definition is well thought-out, but the eligibility and certification criteria could have been less restrictive.

Simplification and handholding:

Under this umbrella, SAP lays out a) a self-certification regime for labour and environmental laws; b) a Startup India Hub; c) a mobile app and portal for applications for approval; d) legal support and fast tracking of patent applications at lower, subsidised costs; e) relaxed norms for startups to be eligible for public procurement contracts; and f) faster exits (i.e., shutting down) for startups.

The self-certification regime could have been extended to other compliances as well beyond labour and environmental laws. These two particular certifications do not hit most product-based startups.

It is not clear what form the Startup India Hub will take, but it wouldn’t hurt to have a platform that can link the multiple players in the ecosystem, as long as it does not start to duplicate the efforts of industry bodies such as NASSCOM for startups.

The legal support and fast tracking of patent applications is a positive move, but it could have been extended to trademark applications as well. Many of the entrepreneurs at the event complained that it took them over 18–24 months just to get a trademark approved. (I have two trademark applications still pending two–three years after I submitted the applications.)

The relaxed norms for startups to be eligible for public procurement contracts are a very good move. Many startups, with great technology solutions, are often unable to bid for these procurement contracts given their lack of “experience” or high enough turnover. Removing these barriers will make it likely for the government itself to become a key anchor customer for many startups.

Finally, by making it easy for startups to shut down, the government has made it easier for entrepreneurs and investors to re-allocate capital and other resources to more productive avenues instead of being stuck with unnecessary compliance costs.

Verdict: Good start, more needs to be done.

Funding support and incentives:

Several significant points were mentioned here, including the Rs 10,000 crore ($1.5 billion) fund-of-funds, a Rs 2,000 crore ($300 million) credit guarantee fund, tax exemption for capital gains being invested into startups, income tax exemption for startups for three years, and tax exemption for investments above fair market value.

The Rs 10,000 crore fund-of-funds had already been announced earlier by the government; so this wasn’t anything new. As per my understanding, SIDBI is administering this fund-of-funds and is typically investing 10–25 per cent of the total funds raised by any domestic venture capital fund (AIF). This will obviously be a boost for the Indian domestic VC industry.

The credit guarantee fund will serve as a boost for startups looking to do projects at a larger scale, without having to necessarily allocate their own funds for credit guarantees.

The tax exemptions given to those who invest their capital gains into startups through VC funds/ AIFs will augment funds available for startup-focused funds—again a good thing.

The income tax exemption for three years will only affect a small sliver of startups that actually make profits in the first three years. Most large, fast growing startups typically invest significantly in growth in the first few years, and hence do not see any profits. So this provision would not help the majority of startups. It would have been much more path breaking if the government had given startups exemption from other taxes that do hit them such as Service Tax, VAT/CST, etc.

Verdict: Very good start again, a few more relevant exemptions could be given.

Industry-academia partnership and incubation:

Startup Fests, The Atal Innovation Mission to promote entrepreneurship and innovation, 70 new incubators and startup centres across the country, seven new research parks, a bio-tech equity fund and 50 new bio-incubators, and National Grand Challenges for student innovation and incubated ventures were the key initiatives highlighted here.

In any major startup ecosystem around the world, the partnership between industry and academia is a major component. So I was glad to see the emphasis on this aspect. However, in India typically this partnership has not borne fruit the way it might have in countries such as the US or even Israel. The quality of research at these educational institutions, with the exception of select institutions, remains sub-par. This also means that if executed well, these initiatives have the opportunity to also have the most lasting impact on the culture of entrepreneurship in India. So this will definitely require the most attention and the best people from academia, industry and government to champion these linkages, while also engaging in long term efforts to improve the quality of research and instruction at these institutions. Moreover, a better system for commercialising this research is needed — that has been critical in ensuring that universities and corporates are aligned.

Verdict: Great plans, but execution is especially critical and tough here.

Omissions: So what was left out?

Other tax benefits: More relevant tax benefits could have been offered to investors who are helping promote this sector. Most professional tech investors and angel investors lose money on several startups even if they make significant gains on one. On those capital gains, the government would do well to provide parity with capital gains accrued on the capital markets. This would further help in making venture capital a more attractive asset class for domestic Indian investors.

Core tech skills development: Not enough emphasis was placed on increasing the quality of coding skills amongst the youth. While we have more engineers graduating every year from Indian engineering colleges (than any other country with the exception of maybe China), the average quality of their coding skills upon graduation remains sub-par. More targeted efforts (such as promoting more practical skills, better and more PhD programmes to train better teachers, etc.) to raise the standard here would significantly help in creating innovative startups out of India (and fewer copycats).

Mobile and internet infrastructure: The other thing that the government can really help is on the mobile and tech infrastructure front. Until data speeds and internet access remain limited, the mobile tech sector in India specifically will continue to remain constrained. While we talk of India as being a massive domestic market, the reality is that only about a quarter of Indians have reliable access to the internet at best. Net neutrality was left out (to be sure, that’s a topic for deeper policy debate), but along with it was left out a clear plan to bring the next 500 million Indians online. This is something that the government should not necessarily leave up to only private sector players, whether Indian or global.

Exits and IPOs: I believe that the biggest concern for investors in the technology space is around exits, and specifically around the ease of IPOs for technology startups. Startups and their investors obviously want some of the norms to be relaxed for them. Easier exits and more liquidity events will mean more capital will get allocated to this asset class. Last year, SEBI had announced relaxation of some norms and on Saturday, Minister of State for Finance Jayant Sinha, specifically asked the panelists (comprised of the CEOs of companies such as Flipkart, InMobi and ShopClues) whether they would consider listing their companies in India. All the CEOs said that they would love to (out of a sense of emotional attachment and patriotism) but that it would ultimately depend on the rules and norms. The reality remains that most of these companies are on track to list elsewhere in the world. Though Sinha argued that the domestic retail market might not be ready to absorb such IPOs, I believe that FIIs especially would be much more likely to invest in Indian tech companies once they are listed publicly, since there would be a lot more information available publicly about them (compared to today when some of these companies are selling shares on the secondary market without sharing much information). More needs to be done, and thoughtfully so, in this regard.

Involvement of different ministries and states: While it seems that the Department of Industrial Policy and Promotion (DIPP) and the Ministry of Commerce are taking the lead on Startup India, prime Minister Narendra Modi would do well to orient each of the ministries in the government of India to adopt a more focused approach to promoting startups in their respective fields. Whether it is the Ministry for Food Processing or the Ministry for Sports Affairs, technology startups can help solve many of the seemingly intractable problems that these ministries grapple with. Similarly, involvement of states that have not quite benefitted from the startup movement would help ensure that startups don’t end up being a phenomenon limited to places like Delhi, Bangalore, Mumbai, Pune and Hyderabad. Mini-startup hubs need to be promoted in cities across the country, so that local entrepreneurs from these hubs can also start to effectively tackle local problems by leveraging technology.

At the end of the day, as Ronnie Screwvala put it, the best entrepreneurs don’t need the government. Prime Minister Narendra Modi agrees that the government’s job is to stay out of the way. So I hope that one, entrepreneurs don’t start expecting too much from the government, and two, the Startup Action Plan (and future elements that get added to it) continue to reduce the role of the government in the evolution of startups and let entrepreneurs unleash their talents.

(Anirudh Suri is founding partner at India Internet Fund an early stage venture capital fund, and has co-founded two mobile tech startups in India. Views are personal.)

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