One year of Startup India: Report card

Exactly a year ago, on January 16, 2016, Prime Minister Narendra Modi unveiled the 'Start-up India, Stand up India' initiative. As the Vigyan Bhavan auditorium bustled with energy and excitement, hundreds of new-age entrepreneurs looked forward to the historic announcement—the 'Startup India Action Plan'. After all, for the first time in India, a comprehensive policy for startups was being rolled out, heralding the emergence—and recognition—of the sunshine sector.

The Action Plan unveiled several initiatives and schemes to boost entrepreneurship and build a strong ecosystem for nurturing innovation. Highlights included recognition as a 'startup' based on certain criteria, tax benefits and a Rs 10,000-crore 'Fund of Funds'.

As the first year of the initiative draws to a close, Techcircle evaluates whether the ambitious initiative has been able to move the needle for Indian startups and achieved its objectives.

Recognition as 'startup', tax breaks

For the first time, the word 'startup' was defined: an entity incorporated in India not prior to five years, with an annual turnover not exceeding Rs 25 crore in the last five financial years, and which is working towards innovation, development, deployment, and commercialisation of new products, processes or services driven by technology or intellectual property.

Although hundreds of applications poured in, only eight early-stage firms were finally chosen for tax benefits last year. The government's status report states that out of 1,368 applications, 502 entities have been recognised as startups by the Department of Industrial Policy and Promotion (DIPP). Out of total applications received, 111 applications were considered for tax benefits as only these startups had been incorporated after April 1, 2016. The Inter-Ministerial Board setup by DIPP approved only eight startups for tax benefits.

KS Viswanathan, vice president (industry initiatives), Nasscom, says, "It took slightly longer time because there are multiple designated units who can certify that these startups are eligible for tax benefits. Everybody is new to the scene and due diligence takes time. The process has got streamlined, now scaling up is required, which possibly should happen soon. In the governmental system, 12 months is a luxury, but this time they have acted very fast."

Roma Priya, legal adviser & founder, Burgeon BizSupport LLP, says many startups will know how to apply and get the benefits only in the next five years. "Currently, the criteria are slightly broad. Many startups have not looked out for government benefits, because they are not generating revenues as yet."

However, a lawyer who deals with a lot of startups, adds: "There's a hell lot of parameters set by the government to recognise a startup. Hence, startups believe it's a long and tedious process, so it's better to focus on what they are already doing.

Startup India Hub

Startup India Hub became operational on April 1, 2016, with an aim to resolve queries and provide handholding to startups. The hub has been able to handle about 25,000 queries from startups through telephone, email and Twitter. One can get in touch with the hub for information regarding the certificate of recognition as a 'startup', certificate of eligibility to avail tax benefits, incubators and even funding.

However, a section of the ecosystem thinks a lot needs to be done on this front.

"The idea of Startup India Hub will achieve its full potential, when the central government along with state governments, administrations of the union territories, incubators and funds strive to help startups during various stages of their life cycle, with specific focus on important aspects like obtaining financing, feasibility testing, business structuring advisory, enhancement of marketing skills, technology commercialisation and management evaluation, which at the moment, sounds utopian," Archana Khosla, founder partner of Vertices Partners, notes.

Capital Gains Tax

A capital gains tax exemption mechanism has been proposed for those investing in the startup ecosystem. The government has made capital gains tax-exempt if these are invested in notified 'Fund of Funds'. The holding period for long-term capital gains tax exemption for unlisted firms has also been lowered to two years from three years earlier. However, the concerns of domestic angel and VCs on capital gains tax remain largely unaddressed. The investor community looks for favourable amendments in the upcoming Union Budget 2017. Nasscom has pushed for removal of constraints related to funding and taxation of startups through lowering of long-term capital gains tax rates (on sale of unlisted shares) for domestic investors to 10%, on a par with non-residents. "The domestic investors continue to pay higher tax rates, higher long term capital gain tax, we expect that to be solved soon," said Viswanathan.

Credit Guarantee Fund

The fund aims to catalyse entrepreneurship through credit to innovators across all sections of society. The Credit Guarantee mechanism will be rolled out through the National Credit Guarantee Trust Company/ SIDBI with a budgetary corpus of Rs 500 crore per year for the next 4 years.

There is no update on this scheme yet.

"This scheme is yet to see the light of the day and enable flow of the much-needed credit to startups," Khosla says.

New incubators

Under Startup India, the government announced setting up of new incubators across the country on the public-private partnership mode. As many as 35 new incubators in existing institutions will be set up along with funding support of 40% from the central government. However, it looks like it would take a few more months for the first few of them to become operational.

As per the NITI Aayog site, 17 established incubation centres have been shortlisted for scale-up support.

"These centres will be given grants depending on category A, B or C. They will get 120-150 days from the selection date to form the company and when the company gets formed the fund disbursement will happen, and everything will start. The application process started in July 2016, the selection happened in December, so in May-June 2017 the incubation process will start," Viswanathan said. Faster exits

The government has announced plans to make it easier for startups to close their businesses if they are winding up operations.

As per an update, the Insolvency and Bankruptcy Code, 2016 has been published in the Gazette. Once the code is notified, startups shall be able to wind up their business within a period of 90 days from making an application.

Rs 10,000 crore Fund of Funds

Finally, the most important part: the mega startup fund. The 'Fund of Funds' of Rs 10,000 crore for startups, managed by the Small Industries Development Bank of India (SIDBI), was announced under the initiative. The fund will invest in SEBI-registered VC funds which, in turn, will invest in startups. This was indeed the biggest announcement for the startup industry made last year. However, it has been a non-starter.

As of July 2016, SIDBI had chosen eight venture funds to invest in startups as defined under the Startup India Action Plan and announced to support them with a corpus amount of Rs 428 crore. However, no money has reached any of them and it appears that many of them are struggling to raise money from the market in a constrained funding environment.

According to Viswanathan, the actual fund allocation has not yet started because "they (the government) are getting the model right." He, however, hopes that 2017 will be the game-changing year in terms of funds getting disbursed."

Indian Angel Network chairman Saurabh Srivastava, who is also part of SIDBI's Venture Capital Investment Committee (VCIC), explained the reason for the non-disbursement. SIDBI has sanctioned some money last year, but that doesn't mean VC funds have drawn that money, he said. "At the moment, SIDBI contributes 15% of the total corpus and the VC fund has to raise another 85% from outside, which means until the VC fund raises the money from outside it cannot draw the money from SIDBI. SIDBI has sanctioned some amount but that money is still not disbursed to the funds because they have to raise the balance 85% from somewhere else."

The Fund of Funds can move faster if SIDBI can contribute 25-30%, according to industry experts. Raising money globally is not easy today. "Where would one raise the balance portion from? Most of the funds are struggling," Srivastava says.

"To expedite, the government can help by identifying other places from where these contributions can come. For instance, it can enable pension funds and insurance companies to invest in VC funds, so they will find other sources of money besides 15% from SIDBI. The government could potentially declare this as a priority sector, do necessary tweaks in the regulation in order to help create other sources of investment. Then only the SIDBI fund will become more practical." Srivastava also believes that many of these funds to whom SIDBI has given sanctions "will get operational this year."

All in all

In his concluding note, Viswanathan said: "The Startup India programme is a good beginning. The intentions were made clear. With many states coming up with their own startup policies and the countrywide momentum created, the signs are welcoming. Of course, there's always scope for improvement. Even today, not many issues have been resolved such as ESOPs, taxation etc. I believe many of these changes will get reflected during the Union Budget. Yes, 12 months have gone by, but we will see lot of momentum by this month end."

Srivastava believes Startup India was a "reasonable" show in its first year but a lot of things need to be changed, and that is not easy to do. "Startup India is already successful. Some things need to be done, it's not a finished story, more things have to happen," he feels.

Khosla sees StartUp India making incremental progress. "We can expect the government, private funds, incubators and industry veterans to collaborate and make this initiative actually stand up, which may take another 2-3 years," she says.

To conclude, the programme is off to a decent start with some challenges on the execution and implementation front. But 2017 could prove to be a year when things fall into place, and the fledgling industry gets some support from these well-intentioned measures.