All you need to know about StartUp India: Opportunities and Concerns

On 15 August 2015, PM Narendra Modi announced “Start up; Stand up India”, an initiative enabling start-ups and encouraging entrepreneurship in India, thus creating jobs. Yesterday, within 5 months of this announcement, we saw the details of this program being rolled out in a grand program in Delhi, where founders of India’s leading start-ups were present.

A detailed 40 page Action Plan was launched which threw more light on each of the aspects above. We would like to focus on some of the key points here and also some causes for concern.

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The most important issue here is what is a “Start-Up”, because before you think of taking any of these benefits, you need to be eligible for them. The Action Plan has defined a Start-Up and some intriguing points come out of it:

  1. The window for an enterprise to be called a “start-up” is a rather generous 5 years. i.e. even a 4.5 year old enterprise can be a start-up
  2. The annual turnover cannot be above Rs 25 crore in any year, which again is a pretty high limit
  3. Only a Private Company or a Registered Partnership can qualify for a Start-Up
  4. A clause (rightly so) also bars any enterprise which has been formed by splitting up, or reconstruction, of a business already in existence, in order to avoid misuse
  5. The business of this start-up has to be “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“. The key here is de-linking of the business from technology driven businesses. This is a good sign since it opens up the field for all sorts of new ventures.
  6. From the above, its is clear that the focus is on “new” or “significantly improved” products or services, not copy-cat ventures. The definition of “new” or “significantly improved” though maybe an issue since it is very subjective. But then the decisions taken by Venture Capitalists while investing in a start-up are also largely subjective. Also, as we will see later, this task has been outsourced to other agencies.
  7. The definition also says initiatives which do not have potential for commercialization or which do not add incremental value for customers will be out of the picture. This again is rather subjective and looking into the future essentially. We still do not know whether online retail will ever be profitable although they do add value for customers.
  8. Further, to be a start-up the enterprise has to be supported by a recommendation from specified Incubators or Funds registered with SEBI which endorses the innovative nature of the business. While this sort of a check maybe necessary to keep out fly-by-night operators, it may also lead to nepotism and corruption.

And if you do fit the criteria as above, there are loads of goodies coming your way, the significant ones being:

  1. Startups shall be allowed to self-certify compliance (through the Startup mobile app) with 9 labour and environment laws
  2. To promote manufacturing Start-Ups, the criteria of “prior experience/ turnover” will be relaxed for such units whenever a tender is floated by a Government entity or by a PSU
  3. A faster exit mechanism for failed Start Ups to wrap up their business
  4. Startups shall be provided an 80% rebate in filing of patents vis-a-vis other companies.
  5. A Fund of Funds with a total corpus of INR 10,000 Crore which will participate in the capital of SEBI registered Venture Funds which in turn invest in Start-Ups
  6. A Credit guarantee mechanism to be introduced to encourage Banks and other Lenders to provide Venture Debts to Startups
  7. Tax exemption shall be given to persons who have capital gains and if they have invested such capital gains in the Fund of Funds recognized by the Government. Also the existing tax exemption scheme on Capital Gains shall be extended to MSMEs. The concern here could be whether real-estate sharks could misuse this scheme. To avoid this, there must be a lock-in period with respect to investment made in the Fund of Funds.
  8. Profits of Startup initiatives will be exempted from income-tax for a period of 3 years provided they have a certification from the Inter-Ministerial board
  9. Tax Exemption for Investments above Fair Market Value made by incubators in the Startups. Here again there is some scope for misuse.

Other initiatives on the anvil are:

  1. National and International Start-Up Fests
  2. Rolling-out of Mobile App and Portal to enable Start-Ups to access facilities online
  3. Legal Support and Fast-tracking Patent Examination at Lower Costs
  4. Establishment of sector specific Incubators including in PPP mode, 500 Tinkering Labs, Pre-incubation training, Institution of Innovation Awards, Launch of Grand Innovation Challenge Awards under Atal Innovation Mission (AIM)
  5. Setting-up 13 Startup centres, Setting-up/ Scaling-up 18 Technology Business Incubators, Setting up of 7 New Research Parks Modeled on the Research Park Setup at IIT Madras
  6. 5 new Bio-clusters, 50 new Bio-Incubators, 150 technology transfer offices and 20 Bio-Connect offices will be set up for Promoting Startups in the Biotechnology Sector
  7. Launching of Innovation Focused Programs for Students
  8. “Incubator Grand Challenge” to support creation of successful world class incubators in India

Details aside, the entire Action Plan has numerous goodies for start-ups of all types in India. The aim is to encouage new innovative businesses and provide them support in establishing their business. The direction of the Government is also to minimize regulatory hurdles, although this will lead to challenges such as weeding out unscrupulous entities. Apprehensions of “license raj” could be overblown but there are some genuine concerns especially with respect to the certification of start-ups’ “innovation” by authorities.

The start-up boom is already 3-4 years old in India and one wonders what effect such an initiative woudl have had back then, but better late than never.

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