START­ING TROU­BLE

Hemmed in by pol­icy ir­ri­tants and the lack of an en­abling en­vi­ron­ment, Startup In­dia, the Modi gov­ern­ment’s flag­ship ini­tia­tive to en­cour­age en­trepreneur­ship, is flag­ging

India Today - - INSIDE - By Sh­weta Punj

Hemmed in by pol­icy ir­ri­tants and the lack of an en­abling en­vi­ron­ment, the Modi gov­ern­ment’s flag­ship Startup In­dia is founder­ing

Anu Acharya, CEO of Hyderabad-based Map­mygenome and a phar­ma­ceu­ti­cal en­tre­pre­neur for over two decades, is no stranger to the dif­fi­cult ter­rain of In­dian busi­ness. Yet, this Young Global Leader of the World Eco­nomic Fo­rum for the past seven years, who has nur­tured firms such as Oci­mum Bioso­lu­tions and Gene Logic, says the busi­ness en­vi­ron­ment in In­dia is not start-up friendly. “In the past five years, 35 ven­ture cap­i­tal­ists have ad­vised us to reg­is­ter our busi­ness out­side,” says Acharya.

The founder of a Hong Kong-based start-up dis­cour­ages start-ups to launch in In­dia. He rec­om­mends China, Sin­ga­pore and Hong Kong as bet­ter al­ter­na­tives even though In­dia is a huge un­tapped mar­ket. In­dia is “such a dif­fi­cult coun­try for start-ups”, he says. Asked if the In­dian gov­ern­ment’s Startup In­dia ini­tia­tive, launched in Jan­uary 2016, has changed things for the bet­ter, he says: “No, the pro­cesses are still ex­tremely cum­ber­some.”

When Prime Min­is­ter Naren­dra Modi an­nounced Startup In­dia from the ram­parts of the Red Fort on Au­gust 15, 2015, it piqued busi­ness in­ter­est be­cause start-ups seemed to have found a spe­cial place in the In­dian nar­ra­tive—a coun­try brim­ming with pos­si­bil­i­ties. Startup In­dia was meant to be the game changer—a funds pool of Rs 10,000 crore, in­cu­ba­tors, self-cer­ti­fi­ca­tion of com­pli­ance with labour and en­vi­ron­men­tal laws and tax ex­emp­tions as re­quired, all aimed at pro­mot­ing new en­ter­prises and pro­ject­ing In­dia as a global start-up hub (see How’s Busi­ness?). How­ever, three years on, the story is not so up­beat. Although 6,096 com­pa­nies have been recog­nised as start-ups by the De­part­ment of In­dus­trial Pol­icy & Pro­mo­tion (DIPP), only 74 start-ups have been ap­proved to avail of tax ben­e­fits and al­lowed to self-cer­tify com­pli­ance un­der var­i­ous labour laws.

in­dia to­day spoke to in­vestors, start-up in­cu­ba­tors and en­trepreneurs to get a sense of the en­vi­ron­ment. The ver­dict is some­what mixed. The op­ti­mists see the glass as half-full, but most are dis­il­lu­sioned. Ac­cord­ing to in­dus­try data from last year, DIPP has re­jected nearly two-thirds of the ap­pli­cant com­pa­nies. Many re­jec­tions were be­cause the com­pa­nies couldn’t ob­tain cer­ti­fi­ca­tions declar­ing them to be in­no­va­tive busi­nesses.

Sharad Sharma, co-founder, iSPIRT Foun­da­tion, says: “If suc­cess­ful com­pa­nies can­not stay in In­dia be­cause of pol­icy ir­ri­tants, where is the chance that launch­ing a start-up will be easy?” For in­stance, while in­cor­po­ra­tion of a com­pany has been sim­pli­fied, it is still not as sim­ple as in Sin­ga­pore or the United States. The prob­lem fig­ures in iSPIRT’s ‘Stay-In-In­dia Check­list’ of is­sues that need to be re­solved to curb the re­lo­ca­tion of start-ups abroad.

Reg­is­ter­ing a com­pany, which can hap­pen within a few hours in many parts of the world, still takes days—some­times months—in In­dia. Be­sides lo­gis­tic and in­fras­truc­ture chal­lenges, tax­a­tion prob­lems have also been a big de­ter­rent to investing in start-ups. The un­com­fort­able truth is that about 75 per cent of funded tech­nol­ogy start-ups are re­domi­cil­ing out­side the coun­try due to reg­u­la­tory hin­drances.

A favourable regime for safe­guard­ing in­tel­lec­tual prop­erty rights (IPRs), re­lax­ing

norms for ex­ter­nal bor­row­ings and a sin­gle-win­dow agency for clo­sure of failed ven­tures are some of the other is­sues high­lighted by start-ups in meet­ings with the gov­ern­ment. Sharma says these is­sues are slowly be­ing re­solved.

Start-up poster boys—Sachin and Binny Bansal, the co-founders of Flip­kart—are prod­ucts of In­dia’s evolv­ing tech­nol­ogy start-up ecosys­tem. But Flip­kart is not an In­dian com­pany, and af­ter Wal­mart bought a 77 per cent stake in it, Sachin had to exit the com­pany. The deal has elicited strong re­ac­tions, both from those who con­sider this as a con­fi­dence boost for the start-up uni­verse, and oth­ers, who crit­i­cise the state for not nur­tur­ing a com­pany into be­com­ing a tril­lion-dol­lar en­ter­prise.

Ac­cord­ing to the fourth edi­tion of the Nass­com-Zin­nov re­port ‘In­dian Start-up Ecosys­tem— Travers­ing the Ma­tu­rity Cy­cle, 2017’, the past decade saw the in­cep­tion of thou­sands of start-ups and the rise of uni­corns with a cur­rent mar­ket val­u­a­tion to­talling over $32 bil­lion. So while there has been an ex­plo­sion of ideas and launches, a study by the IBM In­sti­tute for Busi­ness Value says 90 per cent of start-ups in the coun­try fail in the first five years. More than three­fourths of the ven­ture cap­i­tal­ists sur­veyed said many In­dian start-ups lack pi­o­neer­ing in­no­va­tion based on new tech­nolo­gies.

Shailesh Vikram Singh, man­ag­ing part­ner, Mas­sive Fund, says: “There is no ques­tion about their (gov­ern­ment’s) in­ten­tion and will­ing­ness to en­gage. The chal­lenge, how­ever, is ex­e­cu­tion. There are still mul­ti­ple de­part­ments to deal with, though ear­lier there was no­body to even talk to. To­day, the gov­ern­ment is will­ing to recog­nise start-ups. To­day, for the first time, we have be­come main­stream.”

Reg­is­ter­ing un­der Startup In­dia pro­vides com­pa­nies ben­e­fits such as get­ting IPRs faster and three-year ex­emp­tions from in­come tax/ labour au­dits and from an­gel tax. “In­dia needs to move away from this men­tal­ity of ‘reg­is­ter­ing’,” says an en­tre­pre­neur on con­di­tion of anonymity.

En­trepreneurs say a start-up has two crit­i­cal needs: cap­i­tal and ease of do­ing busi­ness. In­dia seems to be a fledg­ling des­ti­na­tion on both counts. “We don’t want cap­i­tal in the form of loans. Ven­ture cap­i­tal­ists have their own ac­cel­er­a­tor. We don’t want the gov­ern­ment ‘to do’, but ‘to en­able’. We wouldn’t want to touch any­thing to do with the gov­ern­ment with a barge pole. It is best for start-ups to be left alone.

A Mum­bai-based en­tre­pre­neur was served a tax no­tice in Fe­bru­ary and faced pros­e­cu­tion. He spent nearly a month run­ning around to set­tle the is­sue. Hun­dreds of start-ups re­ceived sim­i­lar no­tices. ‘An­gel tax’, in­tro­duced in 2012, saw the tax de­part­ment go on an over­drive, es­pe­cially in 2017. Un­der an­gel tax, any in­vest­ment raised above the fair value, as de­ter­mined by the Cen­tral Board of Di­rect Taxes, is taxed as in­come in the hands of the start-up. The Nass­com re­port at­tributes to an­gel tax the fact that seed fund­ing halved in 2017. Seed fund­ing dropped to $49 mil­lion in the first half of 2017

“In the last five years, 35 ven­ture cap­i­tal­ists have ad­vised us to reg­is­ter our busi­ness out­side. The whole rea­son for ven­ture cap­i­tal­ists to in­vest (in star­tups) is to make money.” Anu Acharya, CEO, Map­mygenome

com­pared with over $100 mil­lion in the same pe­riod of 2016.

In a March in­ter­view to in­dia to­day, Mo­han­das Pai, chair­man, Ma­ni­pal Global Ed­u­ca­tion, had said that “tax ter­ror­ism is af­fect­ing star­tups” even as he listed the suc­cesses of the Startup In­dia ini­tia­tive. Some 6,000 start-ups have reg­is­tered on the Startup In­dia por­tal, ac­cord­ing to which 18 states have come up with their own start-up poli­cies.

Acharya sees the com­pe­ti­tion be­tween states to at­tract start-ups as a big pos­i­tive, and adds that the mar­ket is chang­ing faster than the reg­u­la­tions. The other good news is the growth of start-up in­cu­ba­tors and ac­cel­er­a­tors. Some 40 of them were added in 2016, of which over 30 are aca­demic in­cu­ba­tors. In­dia has the third largest num­ber of start-up in­cu­ba­tors and ac­cel­er­a­tors in the world, af­ter China and the US. Ac­cord­ing to Nass­com, over 1,200 tech­nol­ogy start-ups are born in In­dia ev­ery year. En­trepreneurs, how­ever, say an en­vi­ron­ment sup­port­ive of ideas and ex­tend­ing sup­port in the early stages is lack­ing.

Start­ing a busi­ness in In­dia is a cum­ber­some and long-drawn-out process. Ac­cord­ing to a World Bank re­port on ease of do­ing busi­ness, it takes nearly dou­ble the time to start a busi­ness in In­dia than in South Asia. Against 27 days in In­dia, start­ing a busi­ness takes just a day in New Zealand, two in Canada, China and Hong Kong and six in the US.

Small en­trepreneurs com­plain that reg­u­la­tory com­pli­ance costs, es­pe­cially in the be­gin­ning, bog them down. Nass­com rec­om­mends that the gov­ern­ment make it eas­ier to do busi­ness by min­imis­ing reg­u­la­tory im­ped­i­ments, re­mov­ing the asym­me­try in poli­cies, pro­vid­ing ac­cess to gov­ern­ment projects and help­ing se­cure early-stage fund­ing.

Ef­forts are on to pro­vide ac­cess to gov­ern­ment projects. The tourism de­part­ment’s ‘Adopt a Her­itage’ scheme has both big cor­po­rates and start-ups who have been al­lot­ted mon­u­ments to adopt. Mea­sures such as the sim­pli­fi­ca­tion of pay­ment of statu­tory dues and cor­po­rate taxes, eas­ier ac­cess to credit through the Prad­han Mantri Mu­dra Yo­jana and pri­or­ity to prod­ucts of In­dian start-ups in of­fi­cial pro­cure­ments are pos­i­tives for po­ten­tial start-ups. “We need an ecosys­tem that will ac­quire as­sets and ven­ture cap­i­tal­ists who will fund in­no­va­tive ideas,” says Acharya.

For Startup In­dia to be a real en­abler, it must fo­cus on be­ing less in­tru­sive and in­struc­tionary and prac­tise PM Modi’s fa­mous catch­phrase: ‘Min­i­mum gov­ern­ment, max­i­mum gover­nance’.

“Tax ter­ror­ism is af­fect­ing start-ups.” Mo­han­das Pai, chair­man, Ma­ni­pal Global Ed­u­ca­tion

“If suc­cess­ful com­pa­nies can­not stay in In­dia be­cause of pol­icy ir­ri­tants, where is the chance that launch­ing a start-up will be easy?” Sharad Sharma, co-founder, iSPIRT Foun­da­tion

Illustration by SIDDHANT JUMDE

HEMANT MISHRA

KRISHNENDU HALDER

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