January 16th 2016, a day when the government of India formally accepted the importance of startups as a key enabler in the economic ecosystem and through its policy document, made an attempt to unlock the true potential of its “Intrepreneurs” (the spelling is correct – abbreviation of in-dian entrepreneur). To clarify, the term Intrepreneur is no way a reflection of one’s nationality, rather it defines an individual seeking to invest in or build a start up in India.
It can be assumed that the startup policy cumulated after a series of discussions and debates between relevant government ministries, market regulators and successful startups, prominent amongst them being unicorns and companies with multiple rounds of funding under their belts.
We start by identifying some of the key potential policy proposals. The term potential is being used because a number of these policies will need validation during the national budget.
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Startups will be exempt from paying income tax for three years over a the initial five year period. Simply put, a startup founded in 2016 will not be required to pay income tax for any three out of the five years, until 2021.
The government has proposed to set up a high level committee which will vet startup proposals to validate tax based benefits. Another caveat proposed states that for the years in which a startup receives this income tax benefit, no dividend can be distributed.
Limitations – The first questions that comes to mind is simply how many start-ups are profitable within three or five years and in a position to pay income tax to the government. In reality, startups struggle to cover their over head costs in their initial few years, so why propose something that will have a limited impact on the overall system.
The start up agenda was highlighted as India’s final break from bureaucratic hurdles. The proposal to set up a high level committee with powers to decide on business proposals is a retrograde step to say the least.
Mobile App to register
This is a great move. Startups can register, track and follow applications seamlessly.
Limitations – There needs to be clarity around the documentation required while filing an application and the time frame to register a startup.
Simplified exit strategy
Startups that fail and have to be wound up, can do so within a period of 90 days from making an application to that effect.
Limitations – A very helpful move, given that startup businesses follow a high risk-reward mechanism and closures are not an uncommon phenomenon. The current system of closing a company is extremely time consuming and open ended.
Self certification for compliance
Startups will be able to self certify compliance for 9 labour and environment laws through the startup mobile app.
Limitations – A positive step that reduces red tape and frees up time for startups to concentrate on their core business activities.
Support in filing for patents
Through the start up policy, the government has offered to subsidize by up to 80%, the cost of filing for patents, IP and trademarks. A panel of facilitators will also be formed to assist startups with filing for patents.
Limitations – There is no clarity on how the proposal will work and throws up numerous questions; What does the 80% filing cost include? Will it cover only Indian patents or include international cover? When will a startup receive this assistance – after paying for it initially and filing for a claim back or through other mechanisms? This can end up becoming another bottle neck and needs clarification. Startups need to leverage their IP quickly to expand their capital and brand.
Public sector procurement
The government has an existing policy, based on which PSU, State and Central governments have to procure at least 20% from small and medium businesses. To encourage startups in the manufacturing sector, the government has proposed to remove the “prior experience and turnover” eligibility conditions.
Limitations – All across the globe, governments either directly or through public sector enterprises remain large buyers of products and services. Non manufacturing startups, irrespective of their business verticals should be given the same opportunity. Public sector’s can start with small procurement levels to hedge risks, gradually build on the lessons learnt and over a period of time offer bigger slices of the pie to startups.
The government through its start up policy has proposed a corpus of Rs. 10,000 crore (Rs. 2,500 crore a year for 4 years), through the “funds of funds” mechanism. This corpus will be invested in SEBI registered Venture Funds. The government has also proposed a Rs.500 crore credit guarantee for banks and other institutions for venture debt to startups.
Limitations – Funding support will help in easing the liquidity crunch faced by most start ups. A more detailed understanding on ways to access these funds is required.
Incubators and Infrastructure Development
The start up policy proposes to build and improve innovation centers, new research parks, incubators, launch innovation focused programs for students and organize incubator challenges.
Limitations – There are a number of Central and State universities which run incubators and house innovation centers. A substantial portion of the existing infrastructure remains unused. In addition, private sector enabled business parks and districts have grown across the country, some saddened with excess capacity. Instead of investing in new capital infrastructure, it would be worth looking at filling up available capacity and offering sops to private players in lieu of lower rentals to startups.
Universities hold a large number of patents in their books. However, these innovative ideas are rarely commercialized and remain a paper tiger. Creating PPP’s between startups and universities through a profit sharing mechanism/JV/Alliance to release the true potential of innovation can be looked into as another potential start up business model.
Our analysis shows that the proposed start up policy is a mixed bag, some great ideas, while others with features of the legacy license raj. But, the devil is in the detail and we look forward to a comprehensive implementation guideline from the government. However, it is a good starter for ten and places the startup community next to main stream Indian business as a driver for economic prosperity. Hopefully, over the next couple of months the policy will be firmed up, keeping in mind the needs of startup businesses.
The government has broadly defined startup’s as an entity registered within the past five years, with a turnover of under Rs.25 crore in any preceding financial year. It will be interesting to count the number of actual startups that were asked to contribute by the government, while framing the policy document or invited to speak during its launch.
It is time for us to change the status quo. That is why we are startups.