Tuesday, 30 January 2018

Budget Wishlist for the Start-Up Sector

By Mr. Ishan Singh, 
          CEO & MD RevStart
          Member, Mumbai Angels Network

As an entrepreneur turned angel investor, who runs RevStart, where we offer co-working, incubation and acceleration services, I meet startups and entrepreneurs daily. Startups in India have varied needs that need to be addressed by the government with an open mind & financial eye.

Mr. Modi had ignited a billion minds with Start-up India and Make in India. With large number of unemployed youth, this is the need of the hour. The current government has done a lot to help the startup ecosystem, however the Modi government's mantra of minimum government and maximum governance seems contradictory when one looks at the Angel tax or the recent news where the Income Tax department has asked ecommerce sites to reclassify discounts as capital expenditure.

For any budding entrepreneur, access to capital is the most critical factor to success. The government needs to have a broad-based program to ease the flow of equity capital and credit to entrepreneurs and start-ups.

A good idea would be to look at incentives being given in other countries – most programs involve grants, access to credit and tax credits to investors.

The Israeli prime minister had recently visited India and I hope the government learns from Israeli programs that promote entrepreneurship. It would be interesting for readers to know that in Israel, the Angels Law is an incentive to invest in start-ups by deducting the investment amount, up to NIS 5 million (approximately $1.5 million), out of their taxable income, produced from any source for up to 3 years. Now compare that to our Angel Tax! Israel also has an excellent grants and tax incentive program to promote entrepreneurship, spur R&D, tourism and even a special fund called the ‘Nitzan Fund’ to incentivise agri-research.

The US government too, has several programs that encourage business to create and retain jobs, make capital investments, promote development in rural areas and promote innovation. The US Small Business Administration has been established to fund entrepreneurs and small business where private banks may not be inclined to. There are also a host of other grants, like the Small Business Innovative Research Grant program that provides $2.5 billion of annual grants.

The Indian government has done great work with the Atal Innovation Mission and Atal Tinkering labs which have focussed on grants to educational institutions, however, to accelerate commercialization, they need to partner with private for-profit incubators and accelerators.

My budget wish list includes the following 3 major reforms that will ease the flow of capital to start-ups, these are :

1.    Tax Incentives

Countries like Israel, China and the UK provide incentives for money to be invested in start-ups by making some or all the invested capital tax deductible to a certain limit.
Along the same lines, the government can encourage broader equity participation by removing capital gains on exercising ESOP’s.
The Angel tax must go or should only be applicable to start-ups over a certain valuation (say $10 million) - investing in start-ups is not like real estate where there is a circle rate!

2.    Allow Equity Crowdfunding

I am sure all of us have heard of Kickstarter which since 2009 has seen 14 million people contribute $3.5 billion to 130,000 projects. However, equity crowdfunding is banned in India. In a press release issued on August 30, 2016, SEBI found that: “ The electronic platforms are allegedly facilitating investment in the form of private placement with companies, as the offer is open to all the investors registered with the platform amounting to a contravention of the provisions of Securities Contract (Regulation) Act, 1956 (SCRA) and the Companies Act, 2013.”

We can learn by the example of the US or Italy, which was one of the first jurisdictions to pass a comprehensive regulation on equity crowdfunding. Italy specifically allows for crowdfunding to support the development of “innovative start-up companies”.

SEBI has issued draft guidelines in April 2017 and I hope that is passed into law this budget.

3.    Establish a Small Business Bank

Any entrepreneur will tell you that it is impossible to get credit for working capital. If you are working without a salary, you can’t get a personal loan. If an entrepreneur turns to a microfinance organization, the real interest rates can be as high as 24%. On the other side of the spectrum, venture debt providers look for large ticket sizes.

The problem is - Who is giving a small start-up 25 lakhs for working capital today? That is the unserved market.

The government has announced a loan program, but unlike the US where the loan process takes a week, the implementation is a challenge. It would be great if the government looked at the US, which has established the SBA. The Small Business Administration ( SBA ) is a United States government agency that provides support to entrepreneurs and small businesses by making loans through banks, credit unions and other lenders who partner with the SBA. They have an excellent microloan program where loans less than $25,000 require no collateral and they offer credit guarantee for loans up to $5 million.

I can go on and write a long wish list of demands that various startups and entrepreneurs want. If the government can waive off 100,000 crores of farmers’ loans, why not contribute 10,000 cr to an SBA type program? If the government is listening, just implementing the broad points above will go a long way in providing capital to fuel a billion dreams!

** Disclaimer: Views expressed are in personal capacity, not the official stance of Mumbai Angels Network

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