Can Modi really be a game changer for the Indian startup fraternity?

Narendra Modi is perhaps the first Prime Minister of India who has sworn to give a fillip to the startup ecosystem. His recent visit to Silicon Valley, interaction with the CEOs of tech giants such as Google, Microsoft, Adobe, Cisco and signing of seven MoUs between India and the US speak out loud about how much he is influenced by the disruptive startups in India.

Speaking at the startup event in California, he said, “When I shifted to Delhi last year, I thought of my government as a startup. So, I also saw some of the bumps you face on the road. I understand your challenges, but also the wonderful feeling of creating something new.”

Both startups and investors seem to be very optimistic about the initiatives taken by the Prime Minister. But at the same time they expressed concern over improving the ease of doing business in India and encouraging NRI startups to return to India. Besides, they also sought intervention of the government to augment the government incentives in order to build proper infrastructure which is the backbone of every startup.

Industry leaders are of the view that Indian startups are well-identified for their frugal innovation and the US innovators can learn a lot from them. Indian entrepreneurs can learn from the US on how to scale up innovation and to commercialise it.

Prajakt Raut, Founder of The Hub for Startup, says, “Our PM needs to communicate that the US startup ecosystem should encourage and enable their startups to plan for India as a market. In my interactions with the US and Canadian entrepreneurs, few consider markets beyond their home territory. And hence, they are restricting the size of their thought canvas.”

Yourstory reached out to startups and industry leaders to get a glimpse of what they think are the current issues that hurt the startup ecosystem in India:

Angel Tax

Angel Tax, which was introduced in the Finance Act, 2012, mandated that if an unlisted company raise capital from any individual against an issue of shares in excess of the fair market value, then it will have to pay 33 per cent tax under Sec 56 (2) of the Income Tax Act.

Therefore in June 2013, Securities and Exchange Board of India had articulated a rule, under which angel funds would be identified as a sub-category with a smaller corpus requirement under the SEBI AIF (Alternative Investment Funds) Regulations 2012.

Rajat Gandhi, Founder of Faircent.com, says, “India still levies Angel Tax, which first made its appearance in the Budget about a couple of years back. Section 56 or the Angel Tax is applicable to amount raised from angel investment and the government has made no attempt to recognise the fact that angel money by private investors is a big part of the ecosystem and the current tax regime is a big disincentive. This has meant startups are now shifting base to countries like Singapore.”

Angel Tax under Sec 56 (2) of the Income Tax Act has not been actually tailored to restrict startup funding but it has put startups under the Income tax scanner questioning the valuation by domestic individual investors. Though in the Union Budget 2014-15, the government has recommended to streamline the entire Angel Tax regime, it is yet to be clarified.

Praveen Sinha, Founder of Jabong, adds, “The criteria to qualify as an angel fund are stringent and need to be eased to support the startup ecosystem in the country. Angel investment is very instrumental in enabling the startup ecosystem and has recently picked up pace in India. We need to ensure that the policies are encouraging angel investment and we don’t lose to more proactive countries.”

Prashant Tandon, Co-founder and MD of Healthkart agrees on the same and states that angel tax is a silly idea and certainly defies logic. In fact, there should be tax breaks and incentives for individuals supporting startups with capital. This law has been implemented in order to increase the cost of startup capital. Also, the fact that only angel funds can get exemption mean that smaller angel investors cannot really play on a level field.

Unfriendly regulations

Unfriendly regulations and policy paralysis have led many startups in India to set up ventures in other developing countries. Currently, most of the startups fail to compete with the large firms as public procurement rules are tailored towards larger firms, mostly PSUs and MNCs.

Harshad Lahoti, Founder of Ah Ventures, says, “In India, a same level of compliance is required for a private company valued at Rs 20 lakh or Rs 20,000 crore and the New Companies Act has made matters worse. Delayed justice due to over-burdened judiciary is also a huge deterrence for investors, both domestic and international.”

One of the major issues that need to be tweaked is how private companies can be treated fairly while competing with public sector enterprises for contracts across sectors. Procurement policy needs to be simplified for startups where a minimum percentage will be procured from startups.

Indian Angel Network President Padmaja Ruperal states that the government should initiate a working capital support on softer terms for startups under the procurement policy with the loan decision and disbursal on a fast track basis.

“Multiple regulations, huge time spent in complying with regulations, poor enforcement of laws leading to business uncertainty for startups and investors, frequently changing laws impacting business planning are some of the key issues that are hurting the startup ecosystem in India,” says, Sushanto, Founder of Lead Angels.

Lack of infrastructure

Good roads, lower polluted environment, high speed Internet, corruption free business environment are very crucial to draw the interest of overseas startups in India.

Albinder Dinsa, Founder of Grofers, says, “We work with a lot of farmers and people in the agriculture sector and I think an infrastructure boost will not only increase their economic potential, but help us overall in reducing waste and inefficiencies that contribute to inflation. Proper infrastructure would help to provide better support to farmers, improve water and electricity supply and augment supply chain management to improve the quality of produce.”

Though Prime Minister Narendra Modi has brought Indian startup ecosystem to the centerstage by initiating several measures, all it needs is to give a push to execute the same. Padmaja says that considering the large domestic market, India is extremely well positioned to breed startups from within the country as well as for those seeded outside.

Wish list of startups

• To create a favourable environment for small-ticket co-investments which can help early-stage entrepreneurs raise between Rs 25 lakh and Rs 2 crore.
• To encourage the vast diaspora of innovative, educated, and smart Indians to move back to India and start up.
• Encourage the US tech majors to set up operations/support startups in India.
• Cost of capital needs to be brought down through disruptive technologies like P2P lending marketplaces. FinTech innovations like P2P lending and crowdfunding need an impetus and clarity from the government.
• Law like US’ JOBS Act should be enacted in India to open alternative avenues of raising capital for SMEs and startups.
• Persuade the US tech majors to play a bigger role in Digital India without diluting net neutrality.
• Get universities and research Institutes to set up hubs in India.
• Allow moratoriums for student loans for those pursuing entrepreneurship.
• Consider matching investments for seed investments by central funding agencies.
• Make sure there is complete freedom of expression and Internet is not tried to be 'controlled'
• Legal centres to help startups in understanding the legal framework surrounding various businesses in India.
• Simplify regulations for companies for first three years of operations including incorporation, annual filings and closure.