StartUp India: Flatters Only To Deceive?

Will the StartUp India Action Plan unleash the entrepreneurial force of India leading to massive economic growth? Or is it just big words but no deeds?

There was palpable excitement all around on 16 January as the much awaited StartUp India policy was to be unveiled. Scores of intrepid, passionate, dedicated, and knowledgeable volunteers from multiple groups had worked tirelessly for several months advocating the need for the administration to recognize startups as legitimate 21st century vehicles for creating jobs and wealth in society. For this to happen, multiple sessions were held to educate, illustrate and showcase what startups had done for other economies and are beginning to do in India.

One of the great accomplishments has been to get the word “startup” accepted within the administration. Acknowledging that an educated highly talented set of individuals could come together to start an entity based on innovation and driven by technology and intellectual property was a major achievement.

Because till then, the visual metaphor was of a safari-suited micro and small business owner – much maligned in various soaps and movies – obsequiously dealing with multiple government agencies and not averse to bending the law and greasing the machinery!

It is said that the beginning of wisdom starts with definitions. Section A of the Action Plan details the definition of a startup which is quite acceptable. However, what is important is to see how language gets transferred into official government notifications and the law.

However, for a startup to get government tax benefits it has to receive a certification from an Inter-Ministerial Board that will be set up for such purposes. When such a ‘Board’ will be set up, the composition of the ‘Board’, the frequency of their meetings, the discretion powers vested with this ‘Board’ are all yet to be made known. Why not have an online self-certification mechanism for this with severe penalties for those misusing or misrepresenting their case?

A mobile app will be made available from 1 April of this year for the purposes of registering, filing, tracking, applying for schemes, by startups. Interestingly, though the hope is that it will be within a day, the ‘Action Plan’ document doesn’t specify how long it will take for a startup company to be registered! And on what prerequisites will the Inter-Ministerial Board or the DIPP or any other approved third party have to certify the startup?

Self-certification of compliance, via the mobile app, with nine Labour and three Environment laws is a welcome move with a three year moratorium on labour inspection. But why not include simple self-certification compliance for all other laws too, like secretarial and governance matters? And why not for say, five years? Especially when the definition of a startup talks of an entity that is less than five years old?

The Action Plan aims to allow a startup to wind-down its operations in 90 days after it appoints a liquidator/insolvency professional and pays off all creditors and sells the assets. This is a very welcome move as anyone who has attempted to shut a company down in India can attest that it is an almost impossible task. The Insolvency and Bankruptcy Bill 2015 (IBB) that is pending in Parliament will detail the provisions of the fast-track and voluntary closure of a business. Till the IBB is passed and the details known, celebrations will have to wait. The PM even exhorted the audience to use social media to rally support for IBB.

Since April 2015, it has been mandatory for central as well as state governments and PSUs to procure 20 percent from micro, small and medium enterprises (MSMEs). This has been extended now to include startups. But only startups in the manufacturing sector are eligible – why not all startups? And in place of “prior experience/criterion” startups have to demonstrate “requisite capability to execute the project as per the requirements”. With fears of the CAG audit, one can see how this will be implemented in practice.

Startups do not have to pay Income Tax for three years. Well, am not sure if there are any startups that generate taxable income in the first three years! Why not make startups exempt from all taxes for five years?

There is an exemption for investors with capital gains to invest in the government “Fund of Funds” and for investments in manufacturing MSMEs. This is just an extension of an existing provision. But is this exemption applicable to entrepreneurs (not just investors) who say, sell their house and invest in a startup? If not, why not?

Angel investors cannot claim the FMV certification exemption that now, thanks to this policy, includes incubators in addition to venture capital funds.

A clear liberal stock option policy, taxation policy, onerous compliance requirements for startups raising capital – either domestic or overseas – are other areas that will have to wait another day or the budget.

A Rs 10,000 crore ‘Fund of Funds’, setting up a Rs 500 crore annual venture debt scheme, encouraging the setting up of research parks, incubators and a country wide programme to spread the awareness of startups in schools and colleges showcase what the government does best, namely creating large national schemes with a grandiose hopeful vision. Clarity on how these will be implemented and more importantly, managed and monitored and what kind of outcomes are planned will, however, have to await another day.

This Startup Action Policy flatters only to deceive. The reluctance of the state to disengage from the culture of command and control shines through. India jumped 12 places to 130 from 142 in the ‘Ease of Doing Business Index 2015’ thanks in large part to the improved power situation and not due to any radical change in procedures and laws.

The good news is that entrepreneurs are unstoppable and have, in spite of the best efforts of India’s crushing bureaucracy, demonstrated their abilities and established India as a global startup hotspot. The steps outlined in the Action Plan will only nudge them along faster. And that can’t be bad. India remains the country with enormous potential!