Rameesh Kailasam of IndiaTech.org on the effect of COVID-19 on startups, anti-China sentiments, GST, and policies

Amidst the COVID-19 pandemic, businesses across sectors have seen a slump, and startups too are facing a decline in revenues.

A Nasscom survey conducted last month showed that 70 percent of Indian startups surveyed have less than three months of cash runway. The survey said startups are seeking immediate government support in the form of favourable policies, easing regulations, partnership opportunities, and reimbursements on immediate fixed costs, among others.

In a conversation with YourStory, Rameesh Kailasam, CEO, IndiaTech.org, a think-tank for startups, talks about the impact of the COVID-19 crisis on the Indian startup ecosystem, and the possibilities of policy-based solutions to help startups across sectors recover, and eventually thrive.

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Rameesh has been a policy expert, and has earlier worked with organisations like APCO, Oracle, IBM, and others.

IndiaTech.org is a non-profit organisation set-up by some of India's successful startup founders, including MakeMyTrip, Ola, Steadview Capital, Hike, Urban Clap, Lenskart, Policy Bazaar, and others, as a policy support think-tank for internet-based startups.

Edited excerpts from the interview.

YourStory (YS): Amidst the gloom due to COVID-19, what do Indian startups have on the cards?

Rameesh Kailasam (RK): COVID-19 has had a significant impact on the revenue of startups. However, there is no let down on the appetite of investors who have shown resilience or are innovating around the crisis. Funding levels did see a fall, but the market sentiment has bounced back and continues to move towards positive from where it stands today.

In fact, just like startups, VCs are now beginning to adjust to a post-pandemic world. Swiggy raised $43 million, NoBroker raised $30 million, cloud kitchen Rebel Foods raised $50 million in series E round, and B2B marketplace Udaan raised $30 million in series D round.

Sectors like logistics, payments, and healthcare, which are more in demand, have attracted funding. The sectors that are more in the focus include startups in the edtech and gaming space, which have received funding even in COVID times.

YS: There is a lot of negative sentiment against China. How is it going to impact startups in the ecommerce space in India? How should startups tackle this?

RK: While there seems to be a significant negative perception building up in the market on this issue, it is important to look internally on ways in which Indian companies and startups that offer similar goods and services can be promoted.

While Chinese investment into Indian startups have been significantly increasing, there is some confusion on treating pooled funds, where participation from China-based investor is insignificant, but it is still considered  “Chinese”, which is a bit unfair from a perception standpoint. It is always ideal for startups to opt for a mix of investors and pooled funds to lower dependence on investors from a single country.

YS: Can you tell us more about pooled funds? Also, the central government amended its FDI policy in April to apparently curb China’s footprint in India. Can you throw some light on the same?

RK: India tweaked its FDI regulations stating that all FDI transactions from countries like China, Afghanistan, Nepal, Bangladesh, Burma, and Bhutan into India, in any sector, would require a prior approval from the Government of India. Even for transactions where the investment is not directly from any of these countries, but is coming from an entity where the beneficial owner of the investment in India is situated or is a citizen of any of the above countries would need a prior government approval.

However, one needs to wait and see the fine print of The Foreign Exchange Management Act (FEMA) notification as to whether it would apply the definitions of Prevention of Money Laundering Act (PMLA) and FDI Policy or would it provide some other thresholds to interpret these words in the Press Note.

While the regulation may be clear with respect to funding coming from identifiable sources from the above mentioned countries, since most of the investments in Indian startups would be from investors who run pooled ownership funds that may have investors from above countries (constituting as less than 25 percent); in value and number and in most cases much below 5 percent), it would be unfair to club these under this regulation and also the recipients of the same.

The government must carefully consider all scenarios and ensure that no loophole allows misuse of the decision made with the intent of protecting Indian startups and ecommerce companies, but at the same time ensure the definition is not applied in a manner that delays funding from cases that may not be attributable to above countries like the pooled fund scenario.

YS: What are some of the major FDI challenges that startups are currently facing, and what solutions do you propose for the same?

RK: The government has been supportive and has announced measures to open up FDI for various sectors. However, the time taken to implement announcements needs to be undertaken quickly.

Same is the case with FDI regulations that have been awaiting clarifications in the startup space, where significant investments can flow in if there is clarity.

Certain notifications take more than a year to translate into workable solutions, and can hurt startups when the investor puts off investment plans after waiting for more than six months, which would give legal clarity. Hence, the government should give a roadmap and timeline for every announcement to ensure these businesses have necessary clarity and do not fall into legal glitches and investor pressures.

YS: At present, ecommerce has some big players like Amazon and Flipkart, as well as small players. How do you see that gap reducing? Can policies change that?

RK: While COVID-19 has been an opportune time for big players to grow and expand their reach, consumers have also moved towards small players. Also, the competition between big and small players coming with innovative disruptive models continues to be fierce. It certainly puts the small players under pressure to compete with prices that the billion-dollar players can. The precedent set by global players has made such businesses extremely cash intensive as well as cash burning in nature.

The government has taken cognizance of the disparaging gap and hence has the ecommerce policy in the works. The policy should focus on having mechanisms in dealing with such disputes that have been time and again raised, and would also mean a level-playing field for everyone.

YS: What tax-related regulatory burdens are startups dealing with at present? What policy changes do you recommend to ease them?

RK: Some of the tax-related burdens on startups range from direct tax to GST, which if addressed can not only contribute to ease of doing business but will unlock a significant amount of working capital and reduce the cost of compliance.

The most fitting example to explain this is that of the Online Travel Aggregators (OTAs). Budget 2020 announced two provisions - Section 194-O of the IT Act and an amendment to Section 206C. Under 194-O, TDS of one percent would negatively impact the working capital of OTAs and bring down growth, especially in the air ticketing business.

Similar challenges are applicable for insurance intermediaries that are not allowed to deduct any amount from the premium collected from the customers under the Insurance Act. 

Moreover, 18 percent GST on pure insurance products (death, disability, disease) has burdened buyers and reduced insurance penetration. The individuals buying insurance plans for the first time or renewing their existing insurance policies are supposed to pay 18 percent GST. It means that for the payment of every Rs 100 (towards the premium), a service tax of Rs 15 was levied, which was revised to be Rs 18 as per the updated tax plan.

Such regulatory challenges become even more imperative for the government to reconsider at the earliest since these are sectors that would take a considerably longer time to recover from the ongoing crisis situation.

YS: What support should the government provide to the worst-hit sectors, and how could it help them revive from the current crisis?

RK: Internet-based ecommerce startups need more regulatory and policy support than economic packages. There is a definite need for the government to reconsider and reevaluate some of the announcements it has previously made, and at the same time consider the implementation of certain recommendations the industry continues to make - both in the nature which would ease compliance burdens as well as onerous tax obligations.

Additionally, the government must provide dilution of certain conventional norms for internet-based technology startups to be able to list on the main stock exchanges of India as other jurisdictions. This would mean a huge push to their fundraising abilities, which would increase their ambit of access to capital without the fear of shareholding dilution or loss of decision making and other controls. This would also offer exit avenues for investors and create wealth within India.

YS: Given the current pandemic situation, how can ecommerce startups unlock business opportunities and have greater access to capital?

RK: Every crisis creates an opportunity. While the present crisis has altered consumer spending and decisions on one side, the ecommerce sector has a unique opportunity to innovate during this disruption. There exists a huge scope for online-offline convergence to continue to offer customers a safe and secure way to access these goods and services. The digital transactions are already seeing a surge and the move towards a cashless economy seems well within reach.

As consumers increasingly shift to online spending such as cash and point-of-sale terminals, ecommerce payments are set to record a steep increase of 25 percent in 2020.

The most visible distinction of ecommerce companies is their ability to evolve and reinvent. All startups in the internet space have found ways and means to become more relevant in the current times.

This agility of modifying, combined with regulatory and compliance relaxations, can accentuate startups to get access to capital, which is most critical at this point, given revenues are at an all-time low. Moreover, startups in the internet space have proven their reach, which adds to the investor confidence.