Startup India – A letter to Mr. Amitabh Kant

The content given below is part of a mail that I sent out to Mr. Kant, the author of the Startup India policy. I welcome comments.

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Dear Sir,

It is heartening to see the government’s thrust in improving the startup ecosystem. Many thanks for your efforts in this direction.

In the Rajdeep Sardesai show you asked people in the field to write to you on observations and suggestions with regards to the Startup initiative.

In continuation, I am listing below my thoughts.

1. Definition

As per the policy, entities cleared by DIPP are the ones that will be classified as Startups. 

My take: Why should DIPP approve/ certify an entity? Why can’t the government take the ROC’s approval process as the basis? An entity registered with the ROC and whose paid up capital is less than a specific amount, say 25 crores, can be defined as a startup.

2. Background

The policy has a clause that the startup should come through an incubator or have a patent. 

My take: Why should the incubation process be insisted? Why should a startup always come through an incubator? This breeds intermediaries, who are not always essential for the rise or functioning of a startup.

As regards patent, it is good that the government acknowledges the importance of patenting, but an organisation can offer employment and generate revenues without patents. These two conditions, in my view, can be done away. How many of the listed companies have filed patents?

3. Innovation

The policy states that the entity should not be carrying out operations that are similar to existing entities.

My take: If the intent is to allow market forces to play, there should be no restriction on the operations of the startup. This clause eliminates many a startup from being recognised as a ‘startup’. Reports say that about 60% of the existing startups cannot be considered as a startup, by this clause. This is an unfair clause and only aids people who have already established business. It dissuades people from starting new initiatives. Further, it triggers discussions and debates on how similar or different is the operations/ business model of an entity. Additionally, the DIPP would not have a database of all the operations and business models of all the entities operating in India.

4. Income tax exemption on profits

My take: The policy provides exemption for 3 years. It is a fact that the first year goes into developing the operations and business model. The second year goes into building the market. Profits, if any, can be seen in the 3rd year, at the earliest. Thus, exemption provided in the first 2 years is if no consequence. Kindly consider to provide the exemption for 5 years. Only then would there be any benefit to startups.

5. Corpus of 10,000 crores

The policy creates a corpus that will be routed through Angel/ Venture Capital Funds.

My take: I understand that it is not possible for the government to directly fund the startups. The availability of this corpus to the funds along with the proposed capital gains tax benefits should ideally allow the funds to value the startups better. But, how will you ensure that the intermediaries do not use this as an opportunity to improve their profitability and avoid passing on the benefits to startups.

6. Reduced patent fee

The policy states that 80% of the patent fees will be waived for startups.

My take: The policy asks for a startup to have a patent, while the reduced fee will be applicable only for entities that are classified as startups. This is a cyclical definition. I hope the procedures that are expected to be rolled out will throw light on this ambiguity. 

I trust these points will be taken into consideration.

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UPDATE JAN 27, 2016 

Mr Kant’s reply and my response. 

I was pleasantly surprised to have Mr. Kant’s reply to my mail. His points are given below.

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Dear Rameshwar,

Thanks for your mail. Greatly appreciate your inputs and suggestions. My response is as follows:

1. ROC register companies. It does not have  a separate system of registering a Start-up.

 2. A Start-up can have a recommendation from any Incubator established in any Post Graduate College in India or be funded by an Incubation Fund/Angel Fund/Private Equity Fund/Accelerator / Angel Network duly registered with SEBI that endorses the innovative nature of the business or be funded by Government of India as part of any specified  scheme to promote innovation or have a patent granted by the Indian Patent and Trademark Office. The definition is quite broad. This has been necessitated only for purposes of Tax exemption.

 3. Kindly let me know as to where this has been said. We have said that a Start-up should aim to develop and commercialize a new product or service or process or a significantly improved existing product or service or process.

 4. Your inputs are valuable. We are taking up this issue with Department of Revenue.

 5. Our objective is to create a vast number of Venture Funds through the Fund of Funds. The Start-ups financing, mentoring and handholding should be done by Venture Funds.

 Your suggestions are extremely useful. We will act on them.

 Regards,

Amitabh Kant

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The attention that he has provided to every point and the effort that he has taken to reply to each of them is amazing. However, I had points to reply. My reply is given below.

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Dear Sir,

Thanks for your mail. Your quick response only reassures us that you are keen to help the startup ecosystem in India. I have a few observations on the points mentioned by you. 

1. ROC – Yes, it is true that the ROC does not record an entity registered with it as startup. However, isn’t every entity registered with ROC, a commercial entity and can potentially be a startup? The point of emphasis in the policy is that the entity should abundantly make use of technology in its operations. Involving the DIPP adds one more layer of application, review, discussion, and certification. Hence, isn’t there room that every entity registered with the ROC with a self certification or certification by a chartered accountant on use of technology be considered as a startup? 

2a. Incubator/ Funding – Experts suggest that a startup should hustle and not raise funds from investors unnecessarily. There is many a startup that operates using promoter funds with the reason also being that it has not come in the radar of investors. By laying out this clause, a startup would now have to work towards getting an approval into an incubator rather than focusing on its operations. 

Secondly, I am sure it is also not possible for the government to say that every startup is funded by some incubator. 

Thirdly, as a person running a startup, I would like to dilute my stake to any incubator/ investor not at an early stage, but as late as possible. This clause calls for hastening this step and benefiting the incubators/ investors. 

For example, my startup is not financed by anyone and I do not intend going to an incubator unless I sense that I require mentoring. I will also be avoiding investors till I have customer and revenue traction, so that the valuation is better. Without this freedom, I will be forced to get some investor just to fulfill this criterion.

2b. Same is the case with patent. A startup would now try to come up with some frivolous innovative step to get a patent, than actually working to impact the customer. If patenting happens as a result of working for making the business better, it is an asset to the firm, but insisting on a patent is not desirable. It only adds a load on the patent office. 

One other point is on the 80% rebate for patent charges. It is a cyclical definition currently, as it is expected that a startup has a patent and the rebate will be offered only if its is classified as a startup. I am positive that this anomaly will be ironed out.

3. Innovation – A startup enterprise can be an exact duplicate of an existing enterprise, but service a different market. For example, a Flipkart and Snapdeal survive, an Ola and Taxi for Sure survived. Entrepreneurs will bring out some change in the operations to survive in the market. There is no need for the policy to define that a startup’s processes should be ‘significantly’ improved. This difference will evolve over time; the market will ensure that the startup makes the improvement. An entrepreneur will introduce improvements to survive. But, insisting on this only raises debates and discussions on similarities/ differences to existing enterprises with the regulator/ approving body. The entrepreneur will be involved in these rather than working on his project.

4. Many thanks for accepting my suggestion on enhancing the tax exemption duration.

In summary, kindly keep the registration and classification process simple so that entrepreneurs can focus on their project. Similarly, let it not be rigid that entrepreneurs look at the policy to tick off check boxes and claim benefits.

Thanks once again for replying to my mail, Sir.

UPDATE JAN 30, 2016 

In continuation to my mail with Mr. Amitabh Kant, Mr. Ravinder IAS replied. My responses to his views are inline.

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Dear Mr. Ravinder,