The reform process that was initiated in 1991 and carried forward vigorously cannot be reversed but fresh transformations depend on the will of the government of the day.
By Sunil Goyal
Governments come and go, and as citizens of the world’s largest democracy, we accept and rationalise what we get. But not anymore. So one is happy to welcome the government back in action again.
Now, what’s to be done differently? Policies broadly remain the same irrespective of individual ministers. The reform process that was initiated in 1991 and carried forward vigorously cannot be reversed but fresh transformations depend on the will of the government of the day. What matters is the intent to perform and lead with conviction.
Solve for Capital Access
For startups, the depth of understanding and the will to resolve every possible hurdle at the highest levels in Niti Ayog and DPIIT is commendable; certainly, blessings of the Prime Minister’s Office are always there. It follows a process of consultation with us participants. For venture capital (VC) investors, like most investors, clarity and consistency of regulatory processes and their continuous improvement will further add to our confidence.
The NDA government opened funding opportunities with multiple fund of funds programmes to support VCs who, in turn, invest in startups, agriculture ventures, electronic development, biotech, etc. This initiative is building the local fund manager ecosystem. If we keep multiplying specialist programs across, the strategic intent around these changes will see India lead the world. Despite these efforts of structured funding, the biggest gap still remains access to capital. We propose two instant actions: first, access to debt funding and second to multiply angel investors, from say, 3,000 to much more than 300,000 angel investors in the United States.
Access to Debt Funding: MSMEs face severe challenges in converting their trade receivables into liquid funds. Our B2B startups have to wait for 45-120 days for realising their sales revenues, whereas within a few days of invoicing they have to fund for GST and TDS from their own resources.
Today, we have the finest legislation called ‘Trade Receivable Discounting System (TreDS)’, an online bill discounting platform that helps cash-starved MSMEs raise funds by selling their receivables. It has recently mandated each business that has Rs 500 crore revenue to accept trade bills and allow MSMEs to discount their invoices. These corporates or business houses are discouraging startups and MSMEs from seeking this facility. A stringent monitoring system is necessary to ensure that a significant part of invoices passes through the trade bill exchanges.
It is an opportunity for us to do what ‘Unified Payment Interface (UPI)’ has done to credit and debit cards – within five years of its launch, the monthly transaction amount is Rs 1,10,000 crore that is much higher than the combined volume of debit and credit cards put together. Similarly, the TReDS volume from Rs 7,000 crore in FY19 needs to surpass, in the coming five years, the traded volume of Rs 9,00,000 crore in the corporate debt market.
Multiply Angel Investor Base: It should be multiplied 100x to cross the 300K angels in the US. HNI capital in India is not rotating fast enough to create jobs. Demonetisation helped bring idle capital into the banking system, but this largely got allocated to the listed equity market, debt mutual funds, and insurance funds. The buoyancy in the equity and debt market is a good indicator for IPOs to succeed, but only a few ventures are able to access capital markets for primary capital. We need to now tap another idle asset of the wealthy to recycle their funds and trigger a bigger economic activity.
Unlocking Real Estate Potential
A significant part of the wealth of Indian families and individuals is locked up in the real estate sector. Imagine if India is able to help liquidate wealth in real estate that can happen when real estate prices start moving up. Regulations are in place; however, the spirit to follow RERA must be addressed urgently. To draw a comparison with SEBI for pooling of capital, we have the SEBI (AIF) Regulations 2012 that have brought trust and confidence for PE and VC funds to raise unmatched levels of capital.
RERA has the power to do the same for the real estate sector. The interest rates are low but without an upswing in property prices, buyers will continue to postpone purchase decisions. We need triggers such as faster completion of projects stuck due to the diversion of capital or malpractices in the sector. Under-construction projects must be completed faster and idle investment rejuvenated to start adding economic value.
The government has a critical role to play in enhancing the value of real estate assets. This can bring back the confidence in individuals to start spending for consumption and reallocation of the portfolio to the emerging asset class of VC/angel funding and/or the trade bills to fund MSMEs. A virtuous cycle will begin that will not just enable entrepreneurs to flourish but also create much-needed jobs across sectors in India.
The new government should continue to mean ‘Action’ – India must not lose faith in its government ever again.
(Sunil Goyal is the Managing Director at early-stage venture capital firm YourNest. Views are the author’s own.)