Start-Up India Gets off to a Good Start

January 16, 2016, will be a day to remember, with the much-talked-about “Start-up India, Standup India” initiative of the Government of India getting off to a euphoric start amidst much hope (and hype!) and frenetic energy that seemed to suffuse the who’s who of the start-up ecosystem of India. And as Prime Minister Narendra Modi, as flamboyant as ever, started announcing the goodies to the high-profile ‘unicorn’ startups, venture capitalists, private equity players, angel investors and the like, the thunderous applause seemed to get louder with every sop, the loudest reserved for the Rs 10,000-crore fund to support start-up development and growth of innovation-driven enterprises.

Now that the dust has settled, post the high-octane event, an objective assessment of the policy document reveals that while there is, indeed, a lot to cheer about, there could have been much more, especially considering the sky-high expectations of the corporates. As one reads the fine print, it becomes obvious that not only are there some glaring omissions, some of the announcements are rather baffling.

The High Points

Probably, the biggest achievement of the initiative is glamourizing the word “start-up”, and planting it firmly in the policy lexicon of the powers that be. Without a doubt, this is the biggest set of start-up initiatives so far by any government in India, and there is a clear direction to view start-ups as job and wealth creators. Here’s a look at some of the high points of the initiative:

• For starters, the government is rolling out a Rs. 500-crore per year credit guarantee mechanism.
• A mobile app will be made available from April 1, 2016, for registering, filing, tracking, and applying for benefits. Registration will now take just one day, as against two to four weeks, as of now.
• Start-ups will be allowed to self-certify compliance with nine labour and three environment laws via the mobile app.
• Patent applications from start-ups will be fast-tracked to allow them to realize the value of their intellectual properties at the earliest. The companies will also receive an 80 percent rebate on the cost of filing patents. Besides, legal facilitators will offer assistance in filing trademarks, designs and patents at no charge to the start-ups.
• Businesses will be able to exit within 90 days of filing their applications after they appoint a liquidator/insolvency professional, pay off all creditors, and sell their assets.
• The government will start numerous innovation programmes in various schools and seven research parks to foster entrepreneurship in the country and build a robust ecosystem for start-ups.

The Missed Opportunities

While things look quite rosy on paper, the devil is in the implementation – and the missed opportunities. Moreover, some of the announcements that sound positive seem to have a sting in the tail. Consider the following:

• The Credit Guarantee Fund announced in the policy mentions a paltry sum of Rs 500 crore per year, which is woefully short of the actual requirement. Access to credit is the single biggest challenge faced by start-ups, and addressing it will involve a much higher commitment from the Government.
• The policy document seems to focus more on the organized investing community, such as venture capital firms and incubators, rather than entrepreneurs. Take the case of exemption from capital gains on property sale. This facility is available only to investors who invest in incubation funds, rather than to entrepreneurs who may be risking their personal wealth to sustain a start-up.
• Again, the announcements seem to discriminate against angel investors who invest directly in start-ups, as against those who invest through approved incubation funds. For every one investment by an incubation fund, there are 100 other angel investments that happen through direct investment, but this class of investors has been overlooked.
• The start-up policy has given the go-by to the much-needed relaxation of ESOP norms. In fact, it makes no mention of ESOPs, which are a valuable resource for start-ups. With the existing ESOP guidelines being too restrictive, the start-up policy would have been a good platform to address this anomaly.
• Similarly, there is no mention of service tax and custom duty exemption for start-ups, a provision that would have made them more competitive.

What was that, again?

And then, there are the baffling issues!

The policy document says start-ups do not have to pay income tax for the initial three years. Before applauding this, one might consider that very few start-ups, if any, generate taxable income in the first three years of their existence. So, what is the point of announcing this measure?

Besides, the provision for no-inspection for the first three years might be a recipe for disaster. Given that a substantial chunk of funds has been earmarked for start-ups, with an initial corpus of Rs 2,500 crore and a total corpus of Rs 10,000 crore over four years, the government is very likely to tap LIC reserves as well. Three years of unmonitored performance? That sounds way too risky.

In the first place, why is the government making equity investments in the private sector? The announcement of a Rs 10,000-crore fund for investment in start-ups seems misplaced – should the government be investing in private ventures, even indirectly? It is best to focus on providing an enabling environment for start-ups, while staying away from actual investments.

Final Word

In the end, all things considered, the start-up initiative is a very welcome step. The government would do well to take note of the feedback to the policy announcement, and improve it in the days to come. Nothing should be etched in stone. A good start has been made for the start-ups – the refinement can come later.

Suneeta Kaul is a journalist, a writer, and a blogger. She tracks the economy, the corporate sector and the stock markets, and is a keen follower of current events. Having started her career with The Economic Times, she has worked for publications such as The Asian Age, Business India, and Thomson-Reuters, among others.