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 three-fourths 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 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 start-ups” 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’.