STARTUP INDIA – What? Who? When? and Where?

The initiative

Startup India initiative have a lot of small embedded schemes in it. The fund of funds’  is proposed at INR. 10,000 crore (about $1.5 billion). The corpus will be deployed in tranches of INR. 2,500 crore over a period of four years ( all is not invested in a go and not going directly invested in the startups, as explained below). Government has setup committees to resolve a lot of ‘ifs and buts’ that have risen along with the initiative. This is a fund of funds so the investment from government is into those venture capitals (VC) funding which are helping the startup initiative. The fund of funds will invest in venture capital funds registered with markets regulator Securities and Exchange Board of India (SEBI), so essentially for startups to avail a portion of this fund they ought to approach the venture funds registered with SEBI. A snapshot view of what it means to the new entrepreneurs and the VC's is given below. Also we will have a quick glance at all the other embedded initiatives which are in essence the drivers of this initiative.

What it means to an entrepreneur, can they avail it all?

Who are these entrepreneurs who will get to walk the talk – for this we need to understand what we mean by a ‘startup’. Now this is critical as a ‘startup’ gets the access to governmental schemes. Reading the DIPP document will not give the definition of what a governmental scheme is, some have interpreted them as only tax related schemes. But essentially all those schemes provided by the government would ideally be covered here, so we are looking at:

• Self-regulatory compliance of labour and environmental laws.
• Quicker patent filing and rebates on patent costs.
• Tax exemptions to -
  1. Investors on capital gains;
  2. Startups on profits in first three years;
  3. Investors investment when the value invested is above Fair Market Value (earlier taxed in the hands of investor).

Startup means an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding INR 25 crore in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

The business should be aiming to develop and commercialize a new product or service or process; or a significantly improved existing product or service or process that will create or add value for customers or workflow.

Startup should -

• be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator established in a post-graduate college in India; or
• be supported by an incubator which is funded (in relation to the project) from GoI as part of any specified scheme to promote innovation; or
• be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator recognized by GoI; or
• be funded by an Incubation Fund/Angel Fund/ Private Equity Fund/ Accelerator/Angel Network duly registered with SEBI that endorses innovative nature of the business; or
• be funded by Government of India as part of any specified scheme to promote innovation; or
• have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted

What are the initiatives essentially for the ‘startups’ defined above:

Step 1

The first step taken to make life simpler for Startups is reducing the regulatory burden. The how of the thing is, self-certification compliance of 9 labour and environmental laws, which on reading are the most critical one’s, so yes that is a good step forward, especially as the same would be done through the startup app, soon to be launched (April 2016, expected timeline).

Step 2

Ease of doing business is expected to be improved by formation of the “Startup India Hub”, where all the players would be encouraged to come together, mainly like a super massive incubator. Though on a critical note this would take a lot of initiative on the government front to enable the platform and not simply put it out there for others to take the stage.

Step 3

Patents, patents and patents. New business or innovation means the idea creator is worried to ensure that this idea is not stolen. The solution under the scheme is to fast-track startup patent applications. The best part of the same is that facilitation cost of the service is being born by the government to make it easy for the already challenged entrepreneur. There is also facilitation of rebate on filing of application, startups shall be provided an 80% rebate in filing of patents.

Step 4

Boost to new firms/companies by letting them compete for the tenders without any ‘prior experience/turnover’.

Step 5

Tax exemption for first three years of profit-making years, only if no dividends are distributed.

To encourage seed-capital investment in startups, where a startup receives any consideration for issue of shares which exceeds the Fair Market Value of such shares, such excess consideration is no more taxable in the hands of investor like earlier.

The question of fund of funds – Venture Capital, are they simple enough?

Fund of funds is aimed to grow local venture capitals. Although it is claimed that the boom in startups is only aimed towards e-commerce since majority of the venture capital are funded by foreign investors and they aim to replicate the successful business ideas from their home countries. Though more than that it seems that the e-commerce approach is quicker and growing, which has led to new entrepreneurs looking at internet as their domain to expand and outreach. If one take a glance at the list of venture capital listed with SEBI and their activity portfolio, we have a small yet not minuscule proportion of Venture capitals which are funded by Indian businesses.

Government wants to make the VC's strong, the help that is being offered in terms of corpus is being given with one of the complex condition. The condition for the venture capitals being that government intends to contribute up to 50% of the stated corpus of a SEBI-registered venture capital fund only when the VC’s raise their part of the corpus.

This is complex because the market to raise the funds from market is very limited for VC’s, Banks and insurance companies are allowed to invest only 10% of the overall corpus of the VC’s. Pension funds are not allowed to invest in VC’s, as the risk factor is high. Mutual Funds would take long time to look at them as potential and safe investment option. This leaves them with High net worth individuals (HNI), who out of compassion and yearning to see something new & creative are looking towards VC’s. The incentive aren’t much and risk takers are few, so the corpus gearing up to that 50% mark is a bit tedious.

What are the other initiatives meant to boost the impetus?

Using “Make in India” here -

As a part of “Make in India” initiative, Government proposes to:

• Hold one fest at the national level annually to enable all the stakeholders of Startup ecosystem to come together on one platform.
• Hold one fest at the international level annually in an international city known for its Startup ecosystem.

There is also the launch of Atal Innovation Mission aimed on promoting entrepreneurial work by supporting them through setting up of ‘Tinkering labs’, incubators, training and funding.

Private sector boost -

Promotion of private sector to step up the game in Incubators setup, 35 new incubators in existing institution and 35 new private incubators both with a grant or fund support up to Rs. 10 crores.

Educational institution as a part -

Using the existing infrastructure to boost setting up of innovation labs, by setting up innovation centres at various IIT’s, NIT’s and others.

Bio-tech startups on the rise -

5 new Bio-clusters, 50 new Bio-Incubators, 150 technology transfer offices and 20 Bio-Connect offices will be set up in research institutes and universities across India. There will also be a Biotech Equity Fund setup to provide financial assistance.

 Conclusion

The step is a bold one which is challenging the new minds to come up with new ideas and have a foundation to work with. Although going deep into technicalities one may call this “Innovation India” as essentially that is a key factor in the whole initiative, you cannot just be a startup or you should be smart to sell your idea in the definition of a startup. But in any of the way it’s a start, with government pushing to lay the foundation it can only make the ground merrier for the private entities to improve on the start and enjoy the fruits. Lastly, there is a lot which still would be required to be done by the governmental bodies, as there are these grand schemes announced within the large sphere which will be driven by the efforts of these bodies (the innovation scheme, working with existing platforms, grand innovation fairs, and hubs for discussion). So we wait and watch how this moves and in which direction it eventually moves.

(Source: DIPP document on Startup India Action Plan - 16 January 2016).