How should India realign its regulatory regime to help grow startups, which have, of late, become one of the biggest employment generators in India?
Even as the country’s economy was in doldrums in the past five years, it was a bunch of technology startups that kept India’s hopes afloat with their entrepreneurial zeal and vision for future.
Helped by an equally adventurous and visionary set of angel investors, these startups showed that with the right vision and technology, they can create valuable companies out of thin air.
We have seen in the past how a similar set of startups in the US, driven (initially)by passion and foresight, created some of the most valuable companies — Google, Amazon, e-bay, Facebook, Twitter, and so on — in the world. Today these companies not only command eyepopping valuations (beating some of the old-world companies hands down), but have also generated income and employment there.
While the startup revolution in the US was helped by a benign business environment there (the US is seventh in the latest “Ease of Doing Business” ranking compared to India’s 130), the fact that India today has over 3,000 startups in a not-so-business-friendly conditions is something that makes these companies even more praiseworthy.
Of course, they have been helped by the telecom and internet data revolution in the country over the past 15 years, but if the country wants to help these startups break the glass ceilings and make it big globally, the government needs to re-align its policies to help them achieve scale.
MATTERS AT HAND
The startups need the right ecosystem to make it big after making the right start. For this, they need the right policy environment with regard to raising funds, ease of doing business, taxation, insolvency, and so on.
The government has to treat them slightly differently from the old brick-andmortar businesses. It has to understand that technology has changed the way businesses are done and accordingly draft (or redraft) policies to address their special needs. The good thing is a lot of policies are now being written/ re-written keeping in mind the need of startups.
Ease of doing business: This impacts all kinds of companies — the brick-andmortar companies, technology, servicesector companies, and others. Due to government’s efforts, our latest global ranking in ease of doing business has improved to 130 from 142.
This is a marked improvement in the ranking, but a lot more needs to be done to make it to the top 50 countries in terms of ease of doing business. The ease of doing business depends on factors such as registering a company, getting electricity, registering property, and so on.
The government recently informed the Parliament that the time taken for registering a company has been brought down from nine days to 4.5 days. It further informed that the government is planning to cut the time for registering a company further to one-two days.
The government also said it has made it easier for defunct companies to de-register themselves from the ministry of corporate affairs database
These are welcome moves, but there are other areas under state governments’ purview, such as getting electricity connections, dealing with construction permit, and so on, which need to timely resolution.
Fund raising: After a point, startups need to look beyond angel and venture capital funding for funds to break away from the startup mould and become large companies.
Raising fund from the public and getting listed on the stock exchanges is the next step for these companies. Currently, the IPO (Initial Public Offer) norms in India do not allow companies with no previous history of profitability to raise money from the markets. Under these norms, even a startup such as Flipkart, with over $5 billion valuation, cannot raise capital from stock markets in India.
This anomaly must go, and the regulators must understand that new-age companies command a valuation based on their future potential than their past profit and loss account.
The good news is that the Securities and Exchange Board of India (Sebi) is already working on a draft IPO norms for startups.
The banking regulator must also allow banks to offer loans to startups based on certain new criteria and not on the traditional cash flow and collateral considerations.
Along with easier fund raising options, the government should work on easier insolvency norms — allow companies to declare themselves bankrupt and allow creditors to liquidate a bankrupt company within a stipulated timeframe. This would encourage new creditors to come forward and extend a helping hand to these fledging companies. Again, the government is likely to introduce a new insolvency bill in the parliament soon. Taxation: This is one of the biggest issues for many startups. We have already seen taxing of some of the e-commerce companies have become a big issue for states.
Being internet companies, these startups have offices in one state but offer their services to customers in other states. Often, they do not pay any tax on sales of good through their portal. The home states feel that they are being deprived off the taxes.
Besides, the e-commerce portals are just the platform through which many retailers are selling their products. Now, states are arguing that these portals must withhold the indirect taxes such as VAT and sales tax on behalf of the revenue department.
Tax issues such as these needs to be resolved at the earliest so that these startups don’t end up in unending tax litigations.
Hopefully, the goods and services tax (GST) will bring some clarity to these issues.
CHANGE IN ATTITUDE
Technology startups are exploring uncharted territories and pushing the horizons to new levels. They have already transformed the service sectors with their unthinkable solutions.
The government must be brave to allow these companies to participate in government contracts and engage more with them in drafting new business policies.
A change in government attitude towards these companies will not only encourage them, but also add to their credibility in the eyes of customers, vendors, and borrowers.