Start up India Action Plan - Sandeep Jhunjhunwala

Start up India Action Plan
February 11, 2016
Presented by: Sandeep Jhunjhunwala

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Start-up community in India
Content India - fastest growing startup-base worldwide; third in technology driven product startups just behind US and UK
India has ~4200 start-ups - Growth rate of 40 percent
Investments made in startups during 2015 - Over 5 billion US dollars - INR 34,000 crores - growth rate of 125
percent over 2014 (2.2 billion US dollars in 2014)
More than 390 startups received investments in 2015 as compared to 179 start-ups in 2014
156 - Number of PE/ VC firms - growth rate of over 100 percent since 2014
8 out of every 10 top VC/ PE firms in India are foreign and global investment in the Indian startup ecosystem
Employment to ~85,000 people by the startup ecosystem in India
Source: Nascomm Survey Report on Start-ups 2015 Edition

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Start-up community in India
Incubators - 110 in 2015 - Growth of 40 percent from 80 in 2014 with nearly 50 percent are setup outside NCR,
Bangalore, Hyderabad and Mumbai
65 percent of startups located in NCR, Mumbai and Bangalore
72 percent of the founders - less than 35 years old making India home to the youngest entrepreneurs in the world
50 percent rise in share of female entrepreneurs in 2015 over 2014 driven by 4.5x growth in funding to women
driven startups
Majority of the new startups are B2C, primarily present in 3 segments namely e-commerce, consumer services
and aggregators
~300 million internet users with 213 million mobile internet users and 140 million smartphone users
Source: Nascomm Survey Report on Start-ups 2015 Edition

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Why Start up India Action Plan?

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Why Start-up India Action Plan?
Two new startups everyday. India’s startup sector is fastest growing aided with energetic young entrepreneurs,
plentiful money and eager mentors
Since 2007, when starting up started becoming fashionable, India has created 7 unicorns (companies with
valuation of at least USD 1 billion). But is it good enough for a country which is rated as one of the best places in
the world to start up in? No.
Compared to India’s 7 unicorns, China has 24. And for American Amazon, there is a Chinese Alibaba. If the US
has produced a Google, there is a Baidu in China. In comparison to American and Chinese startups, India looks
like a minnow.
Indian Government believes in the start-up vision and is willing to walk the extra mile to help this sector grow even
beyond its avowed annual growth rate of 40 percent
Threat of flight of capital - It would look to arrest the flight of Indian startups to startup friendly countries like
Singapore, Ireland, USA
To restart private investment into the economy, on the face of risk aversion, stalled or slow investments from
corporate India
To eliminate the earlier obstacles - Government apathy, corruption and complex approval processes
"Start up India is a dream India must dream. Not because it can, but it can’t afford not to"

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Objectives of the Action Plan
Flagship initiative of the Government of India, intended to build a strong eco-system for nurturing innovation and
Startups in the country that will drive sustainable economic growth and generate large scale employment
opportunities
The Government through this initiative aims to empower Startups to grow through innovation and design
Government policies and initiatives aimed towards improving and supporting the overall start-up ecosystem
19 point action list - divided into 3 areas:
Simplification and handholding
Funding support and incentives
Industry-academia partnership and incubation

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The Action Plan: Proposed schemes and incentives

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General Initiatives

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Compliance regime based on self-certification
Objective - To reduce the regulatory burden on Startups thereby allowing them to focus on their core
business and keep compliance cost low
Compliance pertaining to 6 labour and 3 environmental laws* will be allowed to be self-certified through the Startup
mobile app
No inspections will be carried out under labour laws for a 3 year period
Startups classified as "white category" as defined by the Central Pollution Control Board will be allowed self-
certification under environmental laws, with only random checks proposed
Inspections could be done on receipt of credible and verifiable complaint of violation, filed in writing and approved
by at least one level senior to the inspecting officer
* Labour laws - The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996, The Inter-State Migrant Workmen (Regulation of
Employment & Conditions of Service) Act, 1979, The Payment of Gratuity Act, 1972, The Contract Labour (Regulation and Abolition) Act, 1970, The Employees’ Provident Funds and
Miscellaneous Provisions Act, 1952, The Employees’ State Insurance Act, 1948
Environment Laws - The Water (Prevention & Control of Pollution) Act, 1974, The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003, The Air (Prevention &
Control of Pollution) Act, 1981
It is a step towards building trust with business. Waiver from labour inspections for 3 years is a significant benefit
accruing under this policy. However, the Action Plan exempts start-ups from inspection under a fixed number of labour
laws – six to be specific. There are about 45 laws at the central level and 4 times this number at the State level. The
Centre needs to work with the States to ensure a smooth rollout of the benefits under the Action Plan and avoid
discord between the policies at the two levels.

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Start up India Hub
Objective - To create a single point of contact for the entire Startup ecosystem and enable knowledge
exchange and access to funding
Government to set up a Startup India Hub which will be a single-point of contact for Startups
Such hub will enable knowledge exchange by collaborating with various stakeholders such as the Central and
State Governments, legal partners, consultants, universities, R&D institutions and assist in the funding process,
organise mentorship programmes, business structuring advisory etc
To collaborate with all stakeholders at one forum could be a challenge!

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Rs 10,000 crore ‘fund-of-funds’
Objective - To provide funding support for development and growth of innovation driven enterprises
Government to set up a Fund with an initial corpus of Rs 2,500 crore and a total corpus of Rs 10,000 crore over a
period of 4 years
Such Fund will not invest into Startups directly, but shall participate in the capital of SEBI registered venture funds
Such Fund will be managed by a Board with private professionals drawn from industry bodies, academia, and
successful Startups
Life Insurance Corporation (LIC) shall be the co-investor in the Funds of Funds
Venture Fund may obtain up to a maximum of 50 percent of the fund size from the Fund of Funds, provided it has
already raised the balance 50 percent of the stated fund size
Fund to ensure support to broad mix of sectors
Significant financial commitment by the Government of India under the Action Plan. India needs access to domestic
capital. Any investment by an angel investor in an Fund shall be supplemented by this FoF. This shall further
supplement the India Aspiration Fund launched with Rs 2000 crore corpus in 2014. Start-ups that are solving local
problems shall be the biggest beneficiaries. It’s implementation shall mean no more looking towards developed
markets for ideas that are normally funded by foreign funds.

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Credit Guarantee Fund for Startups
Objective - To catalyse entrepreneurship by providing credit to innovators across all sections of society
Credit Guarantee Fund aims to catalyse entrepreneurship through credit to innovators across all sections of
society
The credit guarantee mechanism shall be rolled out through the National Credit Guarantee Trust Company/ Small
Industries Development Bank of India (SIDBI) with a budgetary corpus of Rs.500 crores per year for the next 4
years
Debt funding to start-ups is perceived as high risk area and to encourage banks and other lenders to provide venture
debts to start-ups, this action point is being envisaged. Today, Start-ups need working capital facility from the banking
channels even after they have been funded by Venture Capital Funds. This facilitation should encourage banks and
lenders to provide venture debt to start-ups.

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Other General initiatives
Launch of Atal
Innovation Mission
(“AIM”)
Harnessing private
sector expertise for
incubator setup
Building innovation
centres at national
institutes
Setting up of new
Research Parks
The objective is to serve
as a platform for promotion
of leading innovation hubs,
start-up businesses and
other self-employment
activities particularly in
technology driven areas
To leverage private sector
expertise in the set-up of
incubators, it is proposed
that 35 new incubators be
set up in existing
institutions.
Funding support of 40
percent (subject to a
maximum of Rs 10 crore)
is proposed to be provided
by the Central
Government for
establishment of new
incubators in existing
institutions
In order to augment
incubation and R&D
efforts, 31 centres of
innovation and
entrepreneurship will be
set-up/ scaled up for
providing facilities to over
1,200 Startups, at national
institutes.
These 31 centres will
include 13 Startup centres
and 18 technology
business incubators to be
set up/ scaled up at IIMs/
NITs/ IITs.
7 new research parks are
proposed to be set up with
an initial investment of Rs
100 crore each.
These parks shall enable
companies with a research
focus to set up base and
leverage the expertise of
academic/ research
institutions.

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Other General initiatives
Promote
entrepreneurship in
Biotechnology sector
Innovation focused
programs for students
Annual Incubator Grand
Challenge
Organising Startup fests
5 new bio clusters, 50 new
bio incubators, 150
technology transfer offices
and 20 bio connect offices
will be established though
Biotechnology Research
Assistance Council
(BIRAC).
Biotech Equity Fund –
would be set up in
partnership with National
and Global Equity Funds
to provide financial
assistance to young
Biotech Startups.
Innovation core program
shall be initiated to target
school kids with an
outreach to 10 lakh
innovations from 5 lakh
schools.
A Grand Challenge
Program - NIDHI (National
Initiative for Developing
and Harnessing
Innovations) to be initiated
to support and award Rs
10 lakhs to 20 student
innovations from
Innovation and
Entrepreneurship
Development Centres.
In order to assist in
building world class
incubators, the
Government proposes to
initially identify and
establish 10 incubators
with financial assistance of
Rs 10 crore each.
Further, an annual
“Incubator Grand
Challenge” will be held to
identify incubators who
can become world class.
As a part of the “Make in
India” initiative, the
Government proposes to
hold one fest at the
national level and one fest
at the international level in
an international city on an
annual basis
Such fests would help in
showcasing innovation
and provide a platform for
collaboration thereby
connecting with investors,
mentors, incubators,
exhibitions, product
launches, etc

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Regulatory

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Rolling out of the mobile app and portal
Objective - To serve as the single platform for Startups for interacting with Government and Regulatory
institutions for all business needs and information exchange among various stakeholders
A Mobile App and Portal would be launched by 1 April, 2016 on all leading mobile/ smart devices’ platform to
provide on-the-go accessibility for -
Registration of Startups through a simple form and obtaining certificate
Filing of compliances and obtaining information on various clearances/ approvals/ registrations
Provision of a platform for collaborating with other stakeholders such as venture funds, incubators,
academia, mentors etc
Applying for various schemes of the Government under the Startup India initiative
Promoting start-ups by improving the ease of doing business is clearly at the forefront of the Action Plan. The online
interface is a step in the right direction. This also advances the ‘Digital India’ campaign of the Government.

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Faster exits for start-ups
Objective - To make it easier for Startups to wind up operations
The Insolvency and Bankruptcy Bill 2015 will allow fast track and/ or voluntary closure of businesses
Startups satisfying the specified conditions would be allowed to be wound up in 90 days on a fast track basis
Such a wind up will be carried out by an Insolvency Professional who will be in charge of the company and
oversee the liquidation process
On the appointment of the insolvency professional, the liquidator shall be responsible for the swift closure of the
business, sale of assets, and repayment to creditors in accordance with the distribution waterfall set out in the
Insolvency and Bankruptcy Bill 2015
The Government had introduced the “Insolvency and Bankruptcy Code, 2015” that provides for resolution of insolvency
in a speedier and time-bound manner. The Bill aims at promoting investments, freeing up banks’ resources for other
productive uses, boosting credit markets and improving ease of doing business in India. An effective legal framework
for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage
entrepreneurship, according to the statement of objects and reasons of the Bill tabled in Lok Sabha.
Considering the logjam seen in the Parliament in recent sessions, it is anybody’s guess as to when this legislation
might see the light of day.

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Legal support and fast-tracking patent application
Objective - To promote awareness and adoption of IPRs by Startups and facilitate them in protecting and
commercializing the IPRs by providing access to high quality Intellectual Property services and resources,
including fast-track examination of patent applications and rebate in fees
Startup Intellectual Property Protection (SIPP) scheme will be introduced on a pilot basis for a one year period to
facilitate filing of Patents, Trademarks and Designs. The scheme would include:
Fast-tracking patent application
Setting up a panel of “Facilitators” who will advise on different IPR and also provide advice on promoting and
protection of IPRs in overseas jurisdictions
Such Facilitators will also provide end-to-end advisory from making applications till the stage of final disposal
of the IPR application
The Government will bear the cost of such Facilitators and the Startups shall bear only the cost of the
applicable statutory fees
A rebate of 80 percent on patent filing fees vis-à-vis other companies is proposed
This is one of the ‘sweetheart’ deals for start-up entrepreneurs under the Action Plan and is aimed at promoting
awareness and adoption of IPRs by start-ups and facilitate them in protecting and commercialising those rights. This
could also help in obtaining higher valuation by getting a protective cover on the patents.
“There is a need to blend intellectual property (IP) with youth property (YP). We will also give 80 per cent rebate in
patent registration fees for start-ups vis-à-vis other companies,” PM Modi said.

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Relaxed Norms of Public Procurement for Startups
Objective - To provide an equal platform to Startups (in the manufacturing sector) vis-à-vis the
experienced entrepreneurs/ companies in public procurement
Startups (in the manufacturing sector) shall be exempted from the criteria of “prior experience/ turnover” in tenders
floated by any Government entity or PSU without any relaxation in quality standards or technical parameters
The Startups will have to demonstrate their capability to execute the project as per requirements and should have
their own manufacturing facility in India
Typically, whenever a tender is floated by a Government entity or by a PSU, very often the eligibility condition specifies
either “prior experience” or “prior turnover”. Such a stipulation prohibits/ impedes Startups from participating in such
tenders. At present, effective April 1, 2015 Central Government, State Government and PSUs have to mandatorily
procure at least 20 percent from the Micro Small and Medium Enterprise (MSME). Currently only a handful of
manufacturing start-ups shall be able to benefit this scheme. Most of angel/ VC funded start-ups are in innovative
areas of service delivery, data analytics, software solutions, software products and platform. Such enterprises too need
this relaxation so that they can serve public sector without the need to partner a big software giant.

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Tax

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Capital gains tax exemptions
Objective - To promote investments into Startups by mobilizing the capital gains arising from sale of
capital assets
A capital gains exemption mechanism has been proposed for investors (class of investors to be specified)
investing in the Startup ecosystem
Capital gains invested in “Fund of Funds” recognized by the Government shall be exempted
Further, existing capital gains exemption for investment in newly formed manufacturing Micro, Small and Medium
Enterprises (MSMEs) by individuals shall be extended to all Startups
For Startups, investment in computer or computer software (used in core business activity) to qualify as purchase
of “new assets” to promote technology driven start-ups
An exceptional initiative that shall make investors to invest in start-ups rather than capital gains bonds or house
property. This initiative may augment the funds available to various VCs/ AIFs for investment in start-ups.

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Tax exemption for 3 years in a 5 year window
Objective - To promote the growth of Startups and address working capital requirements
Income-tax exemption proposed for Startups for a period of 3 years
Exemption subject to non-distribution of dividend by the start-up
This shall give a huge relief on working capital blocked in TDS for the start-ups. In reality, start-ups are loss-making in
the initial 3-7 years as they are chasing growth. A clarification is needed that the clients/ customers of start-ups would
not be required to deduct tax at source on payments to be made to such start-ups. This would mean a saving of cash
flow that today gets blocked as TDS for 12-18 months.
Also, by exempting profits from tax, the start-ups may perhaps not be eligible to carry forward any tax losses made
during the first 3 years - thus, tax losses arising in the said period may not be available for set-off against profits made
in the future. Some clarity is required on this aspect as well.

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Tax exemption for investments made above FMV
Objective - To encourage seed-capital investment in Startups
Investments made by incubators in start-ups proposed to be insulated from the rigors of Section 56(2)(viib) of the
Income-tax Act, 1961
Any consideration received by start-ups for issuance of shares over Fair Market Value (FMV) to incubators, not to
be taxed in the hands of the start-up
The term “incubator” is yet to be defined for the above purpose
Where the idea is at development stage, FMV may be significantly lower than the value at which the capital investment
is made. This resulted in tax being levied under Section 56(2)(viib) of the Income tax Act. Currently, the investment by
VC funds in start-ups is exempted from operations of this provision. This is only an incremental step of exempting the
incubation in addition to VC funds. However, in the current business environment, there is a need to exempt all angel
investments (including domestic angel investments) for the start-ups to enable raising of funds freely from angel
investors as well.

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Start-up - Defined

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What is Start-up?
“Startup” has been defined to mean an entity incorporated or registered in India, with an annual turnover not
exceeding Rs 25 crore in any preceding financial year, and working towards innovation, development of
new products, or services driven by technology or intellectual property
Additionally, it has been provided that the entity:
Should not be formed by splitting up, or reconstruction, of a business already in existence
Shall cease to be a Startup if its turnover exceeds Rs.25 crore in any preceding financial year, or it has
completed 5 years from the date of incorporation/ registration
Will be eligible for tax benefits only after a certificate is obtained from the Inter-Ministerial Board set up by
the Department of Industrial Policy and Promotion (DIPP) for this purpose
‘Entity’ shall mean a private limited company, registered partnership firm or a limited liability partnership

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Key takeaways on definition of Start-up
It sets ups or institutes an inter-ministerial body led by DIPP which ‘validates’ the innovative nature of an
enterprise, thereby qualifying it as a start-up - an involvement of Government in this ecosystem that is hardly
desirable
Also requires a start-up to obtain recommendation from an incubator in order to be eligible - the need for validation
and recommendation goes against the very steps the Action Plan takes to reduce government involvement
The question is will the Government be able to keep the bureaucracy in check? The record, till date, is far from
satisfactory
Additional layer of bureaucracy could slow down the staring up process and needs to go

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Concluding thoughts
Startup India could prove truly transforming if it succeeds in providing a framework to foster the brightest minds
among them
Looking beyond the veil of PR and rhetoric, it seems a pretty tall order. Sceptics would be waiting with a bated
breath to pronounce it mere fantasy and a failure
The Government Action Plan has come at a moment when the Indian economy is in need of fresh capital and
robust regulatory environment. If implemented in true spirit, it can place India on a high trajectory
Better clarity on indirect taxes particularly the applicability of service tax on activities of ecommerce marketplaces,
at least until GST sees the light of day is being eagerly anticipated both by entrepreneurs and investors
The Plan seems to be strong on spirit but a lot will depend on how it is implemented. The devil, as they say, lies in
the detail (details of tax exemptions etc are likely to be announced in the upcoming Union Budget)

OPEN HOUSE & DISCUSSIONS
THANK YOU
Views expressed in the presentation are personal

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Identification of businesses covered under the
definition
A business is covered under the definition if it aims to develop and commercialize:
a new product or service or process; or
a significantly improved existing product or service or process,
that will create or add value for customers or workflow
The mere act of developing:
products or services or processes which do not have potential for commercialization; or
undifferentiated products or services or processes; or
products or services or processes with no or limited incremental value for customers or workflow
would not be covered under this definition
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Identification of businesses covered under the
definition (Contd..)
In order for a “Startup” to be considered eligible, the Startup should -
be supported by a recommendation (with regard to innovative nature of business), in a format specified by
DIPP, from an Incubator established in a post-graduate college in India; or
be supported by an incubator which is funded (in relation to the project) from GoI as part of any specified
scheme to promote innovation; or
be supported by a recommendation (with regard to innovative nature of business), in a format specified by
DIPP, from an Incubator recognized by GoI; or
be funded by an Incubation Fund/Angel Fund/ Private Equity Fund/ Accelerator/Angel Network duly
registered with SEBI* that endorses innovative nature of the business; or
be funded by GoI as part of any specified scheme to promote innovation; or
have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business
being promoted
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* DIPP may publish a ‘negative’ list of funds which are not eligible for this initiative

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Inter-Ministerial Board
An Inter-Ministerial Board setup by DIPP to validate the innovative nature of the business for granting tax related
benefits
Approval from the Inter-Ministerial Board shall not in any manner, limit or absolve the entity from any liability
incurred in case of any misrepresentation/ fraud arising from submission of such application and/ or supporting
such application
Annexures

Start up India Action Plan - Sandeep Jhunjhunwala

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