A bold step towards building a more vibrant startup ecosystem and promoting a culture of innovation
Last weekend, January 16, 2016 was the day dedicated by the Government to #StartupIndia. We had been waiting for this day and I personally had a feeling that this shall be one of the finest days in our journey of starting the STARTUPS. By the time the day concluded, it had been re-emphasised multiple times over that our government realises that startups are really important in a young and emerging economy and that it is keenly listening to the needs of the ecosystem. Something magical is on its way for entrepreneurship to thrive.
The energy during the day was palpable, yet in-explicable. Cheers and applause were free flowing with every learning shared by any panellist or an initiative announced or an insightful question raised by the audience. So much applause at a business event, must be a new record, specifically at the Vigyan Bhawan on January 16.
Presence of our Cabinet Minister of Commerce & Industry Smt Nirmala Sitharaman along with each relevant Principal Secretary of Government of Bharat was unprecedented and commendable. With the induction of officials to the needs of startups, they can speed-up facilitating, setting, operating and exiting a startup. The government’s commitment to be the facilitator, service provider and enabler boosts the confidence of entrepreneurs, angel investors, venture capitalist that they are in the right place at the right time.
Let me share my take on the action plan that are announced:
- Self-Certification: It is a step towards building trust with business. This doesn’t mean that the startup can be non-compliant with the selected 9 laws across labour & environment. Our startups have to fully compliant but without the hassle of inspection. Saving, say a day, in a year of such an inspection, shall help them serve customers with free-mind. Startups are capable of complying with the rules and hence self-certification should be allowed in many more areas in coming years.
- Relaxed norms for public procurement from startups in manufacturing sector: Currently only a handful of manufacturing startups shall be able to benefit this scheme. Most of angel/Venture Capitalist funded startups are in innovative areas of service delivery, data analytics, software solutions, software products and platform. They too need this relaxation so that they can serve public sector without the need to partner a big software giant.
- Fund of Funds (FoF) for investing in Venture Capital Funds: Bharat needs access to domestic capital. Any investment by an angel investor in any Fund shall be supplemented by this FoF. This shall further supplement the India Aspiration Fund launched with Rs 2000 crore corpus in 2014. Startups that are solving local problems shall be the biggest beneficiaries. Its implementation shall mean no more looking towards developed markets for ideas that are normally funded by foreign funds. (Angel Investor: It is an affluent invidual who provides capital for a business startup, usually in exchange for convertible debt or ownerhsip equity)
- Credit Guarantee Fund: Our startups need working capital facility from the banking channels even after they have been funded by Venture Capital Funds. This facilitation encourages banks and lenders to provide venture debt. To clarify, we hope this shall also cover the basic need of cash-credit limit or overdraft facility. Our startups have limited requirement of long-term venture debt but each of them require funding for receivables, inventory, TDS, payment of service tax on invoicing etc. On behalf of startups, we hope this Credit Guarantee shall cover overdraft facility, performance guarantee and so on.
- Tax exemption on Capital Gains: An exceptional initiative that shall make investors to invest in start-ups rather than capital gains bonds or house property. This exemption must allow capital gains to be invested in SEBI registered AIFs, FoF, and angel investments in the startups validated by Inter-Ministerial Board. A clarification in the notification on its scope is essential.
- Tax exemption for Startups for 3 years in a 5-year window: This shall give a huge relief on working capital blocked in Tax Deducted at Source (TDS) for the startups. In reality our startup are loss-making in the initial 3-7 years as they are chasing growth, but we hope the notification shall clarify that the clients of startups shall be exempted from deduction of TDS on the invoices. A saving of cash flow that today gets blocked in TDS for 12-18 months shall enable them to run faster.
- Startup Tax (Section 56(2)(vii b): This is only an incremental step of exempting the incubation enters in addition to venture capital funds. The CBDT needs to exempt all angel investments for the startups to raise funds freely from angels.
- The freedom to close the startup in the eventuality of it failing. The Prime Minister said in his speech that we should value equally failed ideas as it gives phenomenal learning.
Overall every initiative stated in the action plan is a bold step towards building a more vibrant startup ecosystem and promoting a culture of innovation. A great beginning for our youth to create productive jobs for themselves and others. It is a great feeling to be serving our investors as venture capitalist in Bharat at this juncture. My only fear is that if this Action plan is not rolled out soon then this would be a meaningless declaration. Also the checks and balances must be objective and transparent so that this ecosystem flourishes and this entire initiative does not die a premature death.
Rajiv Sharma (The writer is founder & MD
of Empower Pragati)