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Emerging Trends towards Start-up India

-By Sagar R. Baheti

Introduction:
The Prime Minister of India, Shri Narendra Modi
had announced on 15th August, 2015 the “Start-up
India” initiative which aims at fostering
entrepreneurship & promoting innovation by
creating an ecosystem that is conducive for growth of
Start-ups.
The objective is that India must become a nation of
job creators instead of being a nation of job seekers. Start-up India campaign is based on an
action plan aimed at promoting bank financing for start-up ventures to boost
entrepreneurship and encourage start-ups with jobs creation which was organized by
Department of Industrial Policy and Promotion (DIPP)
In order to meet the objectives of the initiative, Government of India has announced an
Action Planthat addresses all aspects of the Start-up ecosystem.
The Start Up India policy would attempt to address
two key concerns the government wants to fix in
India’s start-up ecosystem.
i. Over 65% of successful start-ups re-locate out of
India owing to the difficulty of doing business,
usually to Singapore.
ii. Secondly, 90% of start-up funding presently
comes from foreign VC and PE funds.
Before, we get into more details let’s understand what is a “Start up”

Any Entity i.e Pvt Ltd Has been incorporated for not more
or Registered Partnership firm than 5 years i.e not before 01st April
or LLP 2011

Definition of Startup

Working towards Innovation,

Development, deployment or Annual turnover has not exceeded
commercilization of new INR 25 Cr since incorporation
product/service

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If any company is developing

Will not
 any products or services which don’t have any commercial value considered as
 undifferentiated products start-ups for
 without any utility or benefit for the customers on using govt purpose
such product or service

ELIGIBLITY TO
BE RECOGNISED
AS “STARTUP”

In order to obtain any benefits relating to IPR & tax, the “start-up” should get certified as an
eligible business from the "Inter-Ministerial Board of Certification". The board would consist
of DIPP Joint Secretary, representative of Department of Science and Technology; and
Department of Bio-technology.

Indian Start-ups
A quick look at Start-up space in India:
 With 4,200 start-ups, India ranks 3rd globally.
 Of $18 billion pumped into Indian start-ups
between 2010-15, $9 billion came in 2015 alone.
9 Indian start-ups have been valued at more than a billion dollars.
 Increase in number of incubators: 80 in 2014, 110 in 2015; 50% outside Delhi,
Bengaluru, Mumbai.
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Probably, in the last 5-7 years we have significantly seen in all the spaces different start-ups
coming from each space i.e. Banking & Financial Service, E-Commerce, Travel Space, Car
Pooling, Manufacturing, Rental Space, Hotel Booking, Healthcare Services etc.
All though the known fact is out 10 start-ups only, 3 would be able to raise funds & out of
which only 1-2 might really succeed.

To understand more, just look at the below start-ups in each of the sector:

Sector Companies Investors Fund Raised

E-Com Flipkart-Nasper, Tiger Global, DST Flipkart- $3.15bn

Global, Accel Snapdeal-$1.78bn

Snapdeal-Kaalari Capital, Softbank, Infibeam-NIL

Ratan Tata, Alibaba

Inifbeam- Listed company

Healthcare Qikwell-SAIF Partners Qikwell- $3.4mn

Practo-Seqouia Capital, Matrix Practo-$124mn

Partners, Altimeter, Google Capital,

Tenancent

BFSI Paytm- Un disclosed Paytm-

Mobikwik-Global payment fund, Mobikwik-

Tree line Asia $86.85mn

Travel Ola- DST Global, Softbank Capital, Ola-$1.18bn

Tiger Global Mngt. Uber- $10.16bn

Uber- Baidu, Fidelity Investments

Hotel Z0 Rooms-Orios Ventures, Tiger Z0 Rooms-$47mn

Booking Global Management. Oyo Rooms-

Oyo Rooms-Softbank Capital, Light $225mn

speed ventures

Car pooling BlaBla Car- Alexandra Mars, Martin BlaBla Car-$336mn

mignot, Dominique Vidal Rideshare-

Rideshare-

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Shared Furlenco-Lightbox Ventures Furlenco-$6mn

Economy Urban Ladder-Seq Capital, TR Urban Ladder-

Capital, Steadview Capital $77mn

E-Com Pepper trap-Innoven Capital, Pepper trap-

grocery Snapdeal $51.2mn

Grofers- Softbank, Seq Capital Grofers-$165mn

Big Basket-Abraaj group, Bessemer Big Basket- $245 mn

ventures.

F&B Swiggy-Accel, DST Global, SAIF Swiggy-$60mn

Partners Food Panda-

Food Panda-rocket Internet, $218mn

Goldman Sacs, Falcon Edge Capital

Logistics Delhivery-Tiger Global Delhivery- $128mn

Management, Multiples Alternative Gojavas- $20mn

Asset Mngt

Gojavas-Snapdeal

Action Plan of Government:

The event was inaugurated on 16 January 2016 by the finance minister Arun Jaitley along
with 40 top CEOs and start up founders and investors from Silicon Valley as special guests.
Broadly, the action plan can be classified into 4 different sectors:

Simplification
& Handling

Incentives to
startup new
Action Support for
Fund
business Plan Raising

Incubation &
Industry
Partnership

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Simplification & Handling

Reducing the compliance regulations for a Start-up

 The Government has decided to do away with compliance structuring for start-up
companies like compliance to various labour & economic labour laws like PF,
Gratuity, ESI Act etc. However, the Government has allowed window for start-ups to
self-certify that they are complaint too few of required economic & environment.

Ease of Doing Business in India & creating an Eco-System

 Presently, India is ranking at 136th for ease of doing business. To ensure, we improve
our rating substantially the Government has decided
to ease the norms of business mainly focusing on
start-ups.
 Using the A single integrated mobile app,
government wants to allow that company
incorporation should be completed in 1 day rather
than the usual time taken for other companies.
 To create a competitive & ecosystem for the start-
ups to grow, a new concept called “Start-up India Hub”
o which collaborates with Central & State governments, Indian and foreign VCs,
angel networks, banks, incubators, legal partners, consultants, universities
and R&D institutions
o To assist start-up in their business model &emphasize on crucial factors like
obtaining financing, feasibility testing, business structuring advisory etc.
o Organize mentorship programs in collaboration with government
organizations, incubation centres, educational institutions and private
organizations who aspire to foster innovation.
 Start-up Hub will be a mentor, guide, friend for all business to help them to succeed
to the next level.

Offering of Services through a Single Mobile App

 Introducing a mobile app initiative by government which is

integrated platform for offering various services like incorporation of
company, downloading documents & certificates, applying for
various registrations & licenses through a single mobile app.
 Successfully, the mobile app went live from 1stApril, 2016 enabling all
the start-ups to start availing various benefits.

Legal Support & Fast Tracking of Patent Process

 Many technology companies always come with a
unique algorithm or a new API which has new set of
proprietary data set. Companies cannot take things
public easily as this a new set of innovation behind
the application. For instance, Lenovo Technology has
around 20-30 Patients for its unique Data rules. But,
start-ups find tough time to apply patents as they are
time consuming & expensive.
 Fast tracking of start-up applications of patents, panel of facilitators to assist in
patent filing would really help a start-up to push things aggressively.
 Good news more about is that Government would be bearing the Facilitators
cost& the start-ups needs to pay only the statutory fee
 Government decided to ensure that 80% of the total patent fee be waived off
for a Start-up as incentive recognition for innovation

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Easy Access to Public Procurement for start-ups – Oral Discussion

 Earlier, in case of government or PSU tenders & biddings, it was required company to
have a certain prerequisite experiences or turnover to be eligible for such tender.
 However, know the Government has relaxed such prior conditions & turnover cap
limit for start-ups (in Manufacturing space) provided the expected quality & technical
parameters are being met.
 But, it is responsibility of the startup in manufacturing sector to prove that they
would be able to complete the tender without any hassle within the stipulated time.

Fasten up the Winding Process– Oral Discussion

 Since start-ups are all about innovating of new ideas, there is always a element of
internal risk involved relating to failure. In case a company fails to succeed, winding
procedure is pretty complicated till now.
 However, the Government has decided to open up a new window to start up where in
the winding procedure would be completed within 90 days of application by start up
on a fast track up provided the company meets certain conditions under the
Insolvency & bankruptcy bill, 2015.
 This is one of step to ensure that India’s poor ranking for ease of doing business
would be improved as they are aiming to be in top 100 within next 3 years.

Support for Fund Raising

Financial assistance of INR 10,000 Cr Corpus Fund-Equity Fund

 Many a times the biggest constraint faced by the start-up’s is
mainly the financial assistance or fund raise. Raising for funds
for start-ups either be an e-commerce, retail, manufacturing
etc is always a tough time.
 To solve this issue, the government of India has come with an
initiative of allocation of INR 10,000 Cr in the total 4 years’
time period i.e. each year a corpus fund of INR 2,500 Cr
would be utilized purely for start-ups.
 It is important to note rather investing directly into start-ups, government would be
investing into SEBI Registered funds who in turn invests into these companies.

Credit Guarantee fund for start-ups- Debt Fund

 The Earlier assistance of INR 10,000 Cr i.e. (2500*4) which would spend on start-up
who come up with a disruptive business model backed by the revenue model. The
government has decided for an additional INR 500 Cr each
year for the next 4 yours through Venture Debt
 Venture Debt is a Debt Financing transaction using the
formal banking system prevailing in the country. To ensure
the banks come up with this as venture debt is as risky
Equity financing, it will be routed through the National
Credit Guarantee Trust Company (NCGTC), SEBI.


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Incentives to start new business for start-ups

Tax Holidays on Capital Gains

 In India, the constraint is the taxation structure for foreign
investors to invest because the existence of a complex
taxation structure & Capital gains (Short Term & Long
Term). Since, the investors for start-ups would ideally be
Angel investors, Venture capitalists (VC), Private Equity
players (PE).
 So to encourage that foreign investors to invest in Indian
start-ups, Capital gains arising from Sale of Assets would exempted provided such
capital gains be invested into fund of funds of Government which would be utilized
for investing into Start-ups.
 Capital gain tax exemption would hold good for investments in newly formed
Manufacturing MSME started by individuals has been extended to all the start-ups.
Purchase of Computers & related stuff would be considered as purchase of new assets
for tech start up.
 However, there still exists an ambiguity relating to few questions in this regard as to
will the investor who invested into fund of funds be treated as Limited Partner (LP)?
Does this fund ensure better return to investor by putting his gain in corpus etc.

Tax Exemption for 3 years

 Taxation for corporates in India is presently 33%. However, for start-ups companies
to pay such hefty taxes during their initial growth stages might be a hurdle to their
cash flows & might affect the working capital requirement etc.
 To avoid such burden on Start-ups, the government has decided to provide a Income
tax exemption for the first 3 years of the company. However, a condition is that such
company should not declare the dividend to avail this benefit.
 The start-up will be eligible for tax benefits only after
obtaining certificate from the Inter-Ministerial Board,
setup for this purpose.
 It is still not clear as to whether the 3 years’ period shall
begin from the time the company starts making profits or 3
years from the incorporation. If it is former, then the start-
up will be benefitted else, there is no point the latter case
any anyways within 3 years usually start-ups don’t end up
in profits.

Tax exemptions on investments above Fair Market Value (FMV)

 To encourage seed capital investments, the government has decided to ensure any
shares which has been issued to investors beyond their current market value would
not be taxed.
 According to Income tax act 1961, any shares which have issued above the fair market
value (FMV) to the investors, shall be taxable in the hands of receiver under Section
56(2)(vii).
 But in case of start-ups, usually the valuation of companies would be arrived based on
the future growth of company, rather than the current value. To attract investors, the
government has earlier given this benefit to VC funds. Now this benefit has been
extended by incubators.

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Incubation & Industry Partnerships

 Organizing Start-up events for showcasing innovation both at national &
International level. The Government has proposed to host 1 national & 1 international
event to showcase the innovations which have been made by the start-ups to create a
eco-system which is vibrant enough for start-ups to attract funding for foreign
players & for the government to utilize any kind of new innovation for the benefit of
the society.
 The Government has come with a new scheme “Atal innovation mission“which
helps in promoting entrepreneurship through self-employment& talent utilization
wherein innovators would be supported & mentored to become successful
entrepreneurs.
 To ensure professional management of government sponsored & funding incubators,
the government has decided to setup more incubation facilities across the country.
 Building innovation centres to augment the incubation, R&D efforts by setting up 13
start-up centres & 18 Technology Business Incubators.
Promotion of Start-ups in Bio-Technology by setting up Bio-incubators, ensuring the
companies would be able to raise seed funding & Private equity at a later stage.

Stand Up India
The Stand-Up India Scheme launched to coincide
with the celebration of the 125th birth
anniversary of Dr.BabasahebBhimrao Ambedkar,
seeks to leverage the institutional credit structure
to reach out to the underserved sector of people
such as Scheduled Caste, Scheduled Tribe and
Women entrepreneurs so as to enable them to
participate in the economic growth of the nation.

The scheme will benefit at least 2.5 lakh borrowers through 1.25 lakh bank branch network
located across the country.

Why Stand-up India is Important for India

Women entrepreneurs in India find it difficult to get
funding for their start-ups. Global Entrepreneurs &
Development Institute (GEDI) published a global
ranking that looked at how female entrepreneurs fare
in the world. India was placed in the last five among
the 30 countries that were analysed. It stated that
about 73% women entrepreneurs failed to get funding
from Venture Capitalists (VC). A study based in
Karnataka found that about 90% women had only
their own funding to rely on, while 68% found it tougher to get bank loans. All that is set to
change once the Stand Up India scheme comes into action.

The Stand-Up India scheme is based on recognition of the challenges faced by SC, ST and
women entrepreneurs in setting up enterprises, obtaining loans and other support needed
from time to time for succeeding in business. The scheme therefore endeavours to create an

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eco-system which facilitates and continues to provide a supportive environment for doing
business.

The scheme, which covers all branches of Scheduled Commercial Banks, will be accessed in
three potential ways:

i. Directly at the branch or

ii. Through SIDBI’s Stand-Up India portal (www.standupmitra.in) or
iii. Through the Lead District Manager ((LDM)

Objective of Scheme
The objective of the Stand-Up India Scheme is to

 facilitate bank loans between 10 lakh- 1 Cr to at least 01

Scheduled Caste (SC) or Scheduled Tribe (ST) borrower
and;
 at least o1 Woman borrower per bank branch of all
scheduled commercial banks for setting up a greenfield
enterprise.
 In case of non-individual enterprises at least 51% of the shareholding and controlling
stake should be held by either an SC/ST or Woman entrepreneur.

The Stand-Up India portal provides a digital platform based on 3 pillars to support
enterprises promotion among entrepreneurs from SC, ST and Women category through

I. Handholding support
II. Providing Information on financing
III. Credit Guarantee.

Potential entrepreneurs can navigate through the interactive portal for support services such
as training, skill development programs, mentorship, guidance etc. or register for loans by
accessing the portal. The portal also provides crucial links to Central and State SC/ST
Corporations, Industry Associations of SC/ ST and/or Women entrepreneurs. SC/ST and
women entrepreneurs who avail loan would be given a RuPay Debit Card for withdrawal,
besides comprehensive support like pre-loan training, facilitating loan, factoring and
marketing.

Eligibility Conditions
1. SC/ST and/or woman entrepreneurs, above 18 years of age.
2. Loans under the scheme is available for only green field project. Green field
means the first time venture of the beneficiary in the manufacturing or services or
trading sector.
3. In case of non-individual enterprises, 51% of the shareholding and controlling stake
should be held by either SC/ST and or Women Entrepreneur.
4. Borrower should not be in default to any bank or financial institution.

Repayment Cycle
The loan is repayable in 7 years with a maximum moratorium period of 18 months

Security & Interest Rate

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 The rate of interest would be lowest applicable rate of the bank for that category not
to exceed base rate [MCLR + 3% + tenor premium.]
 Besides primary security, the loan may be secured by collateral security or guarantee
of Credit Guarantee Fund Scheme for Stand-Up India Loans (CGFSIL) as decided by
the banks.

THANK YOU

Sagar R. Baheti Emerging Trends towards Start-up India