Time for policy changes that provide cheaper capital
As prime minister Narendra Modi launches “Startup India, Stand Up India”, the focus is on rousing the entrepreneurial spirit among the country’s youth. The hope is that start-ups will, over time, manufacture state-of-the-art products, create jobs for the youth and generate wealth to investors. Over the past few years, the start-up momentum picked pace as funding into the sector grew 125%, from $2.2 billion in 2014 to $4.9 billion in 2015, as per a Nasscom report. That is much higher than the cumulative funding of $3.2 billion over 2010-14. The total number of active investors have also grown from 220 in 2014 to 490 in 2015. In the process, India has also emerged as the third largest hub globally after the US and the UK with 4,200 technology start-ups. That number is expected to exceed 12,000 by 2020. Despite that, some of the most successful start-ups have over the years moved outside the country and made the India business a subsidiary. Flipkart and mobile advertising firm InMobi have moved base to Singapore, while Fresh Desk and Druva have relocated to the US due to operational constraints in the country.
While coming out with a start-up policy later this week, the government needs to get down to sorting out issues that ensure start-ups face on a daily basis. Young entrepreneurs seek, among other things, clarity in tax policies, increase in FDI limit in key sectors, single-window clearance, removal of tax on ESOPs and a quick GST roll-out. The advantage that a start-up gets in moving base to the US is that it could be acquired by some of the global technology companies. Second, the market for a newly developed, sophisticated device is still quite small despite the 300 million-strong middle-class in the country. The biggest issue that start-ups face relates to the cost of capital. One way out for start-ups is to issue convertible debt. Since interest rates on bank loans start at 14%, there is an embedded conversion option in the bond. While that lowers the interest rate for the start-up, it also provides another window for the investor. In future, this could well be the means to low-cost debt for start-ups. To feed into the start-up ecosystem, the government also needs to invest in educational institutions with a focus on skill development and increase spending on infrastructure. Hopefully, the government will provide the right policy direction to ensure that start-ups stay invested in India.