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Economy Issue 2019

Tinkered, Not Tailored

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Start-ups are enthused by Budget recommendations, but want more concrete steps to help them grow at a faster clip

MUGHILAN Thiru Ramasamy, the co-founder and CEO of Bengaluru- based Skylark Drones, set up more than four years ago, is 28 years old, the average age of start-up founders in India. This alumnus of Purdue University has built an entity that uses drones mostly in infrastructure, agriculture, mining and solar energy to collect data and make meaningful interventions. From geographical mapping of projects, crop yield estimates, volumetric analyses across sectors and surveillance of illegal mining, his start-up company offers much more and works closely with several state governments and corporations in India who have increasingly woken up to the myriad benefits of the use of state-of-the-art technology in such initiatives to plug loopholes and minimise corruption.

“There is a lot of engineering involved in all this,” Ramasamy chuckles, and goes on to speak about the professional hazards of start-up entrepreneurs. Nascent, untested technologies always face resistance even from financiers, he concedes. Luckily, Skylark Drones had to raise only a “small amount” as seed capital, says Ramasamy, while the rest of the money came from clients which helped the company scale up. We are doing very well, he says, adding that the company currently employs 35 people.

This is a story of success, yet all is not well with India’s start-up ecosystem where high expectations often turn unrealistic as employees grapple with job insecurities and employers face the scourge of talent crunch, especially for highly skilled engineers in key functions such as Artificial Intelligence (AI). All of this calls for greater action by the Government to encourage start-ups in a country where, according to a forecast by Cisco Visual Networking Index, close to 59 per cent of the people will become internet users by 2021, indicating a start-up boom.

The Union Budget presented by Finance Minister Nirmala Sitharaman has clearly acknowledged the role that start- ups will play in the country at a time when the growth in job generation is slow. About the Budget, Ramasamy notes, “[It is a] welcome one for start-ups in terms of the relaxation of valuation oversight and opening up avenues to seek investment from private equity, debt and other funds.” In line with the NDA coalition’s ‘Stand Up India’ scheme launched in 2016, Sitharaman announced in the Budget that such firms will not be subjected to scrutiny over share value premium and that the Government is bringing in a system for e-verification.

Sitharaman said in her speech, “To resolve the Angel Tax issue, start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums. The issue of establishing the identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. With this, funds raised by start-ups will not require any kind of scrutiny from the Income Tax Department.” The Budget also announced that it will help make 80 “livelihood business incubators” and 20 tech business incubators in this fiscal year—and the Modi Government expects the twin measures to create 75,000 skilled entrepreneurs. Start-ups are also expected to gain from the Government agreeing to remove the mandatory 30 per cent local sourcing target for companies in exchange for allowing 100 per cent FDI in single-brand retail. Various new labour codes are also likely to be a boon for the start-up segment. The Government will also launch a television channel steered by Doordarshan, exclusively for focusing on start-up activity. In the US, ABC runs a series titled Shark Tank where aspiring entrepreneurs pitch their business models to persuade investors to partner with them or to finance them. or both Such reality shows are an instant hit among businessmen looking to invest and new entrepreneurs with smart ideas.

“The Central Government can incentivise investments for technology verticals in a more specialised manner akin to ‘drone funds’ in Japan and certain ‘dedicated strategies’ in some Scandinavian countries,” Mughilan Thiru Ramasamy, co-founder, Skylark Drones

Whatever the intentions may be, challenges abound in India, prompting start-ups to come up with their own set of demands from the Government. “The Central Government can incentivise investments for technology verticals in a more specialised manner akin to ‘drone funds’ in Japan and certain ‘dedicated strategies’ in some Scandinavian countries,” points out Ramasamy, emphasising that he would love to see more states take up the initiatives to embrace and encourage drones as a way of governance as well as employment in the way that Karnataka and Telangana have done.

RAMEESH KAILASAM HAS closely followed the challenges and opportunities for innovation in India. As CEO of IndiaTech.org, created by top start-ups such as Ola, MakeMyTrip and Quickr besides others, he has studied in detail what ought to be done by the Government, department by department, on how to help start-ups forge ahead and contribute to the country’s GDP. Recently, his team submitted a report to the Government outlining its demands. Some of the key points that Kailasam hopes will help the ambitious Start-up India and Digital India campaigns by the Government include easing of IPO norms for start-ups, providing them with more public-sector contracts, simplification of taxes on employee stock options, amendment to the Motor Vehicles Act, 1988, and a flurry of others. Kailasam’s submission elaborates on ESOPs’ taxation—‘At present, start-up employees are taxed when they exercise their options and convert ESOPs (employee stock options) to shares. It is suggested that these norms are simplified while levying tax on ESOPs at the time of (actual) sale of shares.’

The document also dwells at length on a concept called ‘permanent establishment’ to ensure a level-playing field for foreign and local entrepreneurs. ‘(Many) enterprises are altering their structures to avoid having a permanent establishment in India to gain business advantage by avoiding applicability of domestic laws and compliance’. IndiaTech has also demanded changes to the Consolidated Foreign Direct Investment Policy Circular 2017, again, to maintain a level- playing field between Indian and foreign companies. It has said that a distinction be made between the industries that engage in the actual ‘buying and selling’ of goods as opposed to provision of services. The document adds, ‘We urge the regulators to frame, design and implement the rules and laws keeping in view the interest of domestic industry as well as addressing leakage of tax revenues. We therefore request that the new requirement imposed by the Reserve Bank of India should be either withdrawn immediately or at least online payments up to $25,000 should be exempted.’

“We have submitted a document to the government which highlights our demands. These key requirements will also help the start-up India and Digital India initiatives scale new heights” says Rameesh Kailasam CEO, IndiaTech.org

With regard to IPO norms, Kailasam’s submission states, ‘In order to grow their business rapidly, Internet-based companies undergo multiple rounds of capital infusion in early stages of their business, mainly from foreign investors, that lead to significant dilution of ownership of the founders. While these companies successfully attract equity investment from strategic foreign investors, there are significant roadblocks for these companies to raise equity or undertake a public offering of securities in the Indian capital markets. The Institutional Trading Platform introduced by the Securities and Exchange Board of India (Sebi) is a revolutionary step to facilitate the listing of start-up companies.’ Kailasam also adds that they should be given access to the main board of stock exchanges. Sebi has taken steps towards this direction. According to a Sebi consultation paper, a company should be listed on an IGP (Innovators Growth Platform) for at least one year and have at least 200 shareholders for it to be eligible to trade on the main board, which is typically a preserve of companies with huge revenues.

PALLAVI JAIN AND her husband were happy living the Silicon Valley techie family life until the day they got stranded for many hours at an American airport thanks to a delayed flight. That was a traumatic experience, yet became the inspiration for them to return to India and launch Instalocate, an app that helps customers claim compensation from airlines for a variety of travel-related grievances— from the loss of baggage to flight delays and cancellations. Most often passengers give up on the fight mid-way and don’t follow up on their complaints. Here is where the opportunity struck for the Jains. They easily found angel investors back in the US and launched their start- up two years ago. Pallavi Jain tells Open that compensations worth more than $25 million are unclaimed in India alone while the global figure touches $10 billion. The going has been good for the company that will soon launch a travel insurance scheme, emboldened especially by the response to their work among corporations that typically end up spending a lot of money whenever flights are delayed or cancelled. “For corporates, such delays mean a lot of loss, from extra money spent at the airport to not being able to make it to crucial meetings,” says Jain, whose company charges 25 per cent of the compensation it secures for a client as fee. In fact, as a company that relies a lot on data and AI, one of the key challenges that she finds in the start-up ecosystem in India is a dearth of specialised engineers who often flock to big corporations at home or abroad. The absence of solid incentives and schemes to attract them to the start-up fold bodes ill for internet entrepreneurs in India, Jain avers.

“I could see a big focus on start-ups in this budget. There are some interesting provisions which the start-up world has been anticipating and hoping to see: Like easing the angel tax, the carry forward of losses and capital gain holiday,” says Pallavi Jain co-founder, Instalocate

Of the Union Budget, she says: “I could see a big focus on start-ups in this Budget. There are some interesting provisions which the start-up world has been anticipating and hoping to see—like easing the angel tax, the carry forward of losses and capital gain holiday. More incubators [20 for technology and 87 for livelihood incubators] will give a big boost to first-time entrepreneurs. Start-up TV particularly was an interesting announcement. It will be a great platform to showcase new start- ups and share stories of entrepreneurs. It will be helpful in giving good visibility to customer-oriented startups like Instalocate.”

She also notes that these provisions definitely show that this Government favours start-ups and intends to reduce compliances and improve the ease of business. “We will still have to wait and see how these provisions are implemented and what they would really mean,” she says with cautious optimism. For Instalocate (as they are launching next-generation travel insurance), 100 per cent FDI in insurance is definitely good news, Jain says. “It will help in infusing new capital in the sector and give it a boost,” she adds.

Like Kailasam, Jain, too, talks about pressing concerns for the future of tech- based start-ups, many of which, various Bengaluru-based entrepreneurs say, have become like sweatshops thanks to job insecurities, long hours and low pay.

Jain brings up the expectations about a greater role for start-ups in public sector undertakings. “Some days prior to the Budget, Prime Minister Modi hinted that it should be mandatory for every department to use 2-3 per cent of allocations to send work to start-ups registered with the Department of Industrial Policy and Promotion. This provision would have given start-ups a big push in the government. This Budget was, however, silent on it.” She goes on, “But I am hoping to see something on similar lines in the near future. At Instalocate, we look forward to partnerships with Government-owned subsidiaries like Balmer Lawrie & Co [the travel wing for the Government]. I am sure [such initiatives] will also help other start-ups in getting the right tenders, giving them a better chance to create a bigger impact.” Jain says she had hoped for incentives for female entrepreneurs since it was a female Finance Minister who presented the Budget, but was disappointed. She hastens to add, “Having said all this, it was a step in a positive direction, but we still have a long way to go. As a start-up founder, I would be looking forward to more support from the Government in the days to come.”

WHILE CHATTING WITH Dan Senor and Saul Singer when they were in Delhi a year or so after the success of their bestselling 2009 work, Start-up Nation: The Story of Israel’s Economic Miracle, a chronicle of how a small country ended up having a robust economy, it soon emerged that Israel had flourished thanks to its government’s uninhibited backing for new ideas no matter how crazy they appeared initially. The book argues that Israeli entrepreneurial culture is shaped by its armed forces that encourage young people to experiment with ideas. While many disagree with Israel’s unsavoury foreign policy and controversial military strategy, what seemed more attractive about the book were the success stories of people with smart ideas and the anecdotes—and how the state promoted them.

According to Nasscom, India is currently home to more than 7,200 start-ups of which at least 26 are unicorns (valued over $1 billion). There are also several ‘Soonicorns’ (those expected to become unicorns soon) that are doing extremely well. Yet, the sector needs a concerted push to develop healthy roots that will generate much-needed employment and economic growth for the country in future. The Budget perhaps made a good start, but much more is in order so as not to disappoint smart young men and women of this country who dream big and have set out to make our lives more user-friendly.

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