Deepening Of Flaws In Startup India’s Laws

Around this time last year, the Narendra Modi government launched the Startup India, Stand Up India campaign. Twelve months down the line, however, there has been very little forward movement. Only a handful of start-ups have bought into the plan, while the government is still struggling to get the nuts and bolts in place.

#DigitalErra Thought Corner

The Startup India initiative was a great move by the government to support startup ecosystem. However the norms attached to it have some important drawbacks.

The 10,000 crore startup fund which SIDBI sanctioned was suppose to invest in Venture Capital funds, which in turn

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would invest in start-ups. However, proper utilization of the funds didn’t happen. The norm stated that the bank can only put 15% of the total corpus. Rest (85%) need to be managed by investors while investing in a startup.

VCs were already struggling to raise that kind of money and subsequently, the funding stats flattened to halve, according to data analysis firm Tracxn Technologies.

Another issue was that the government had initially prescribed that VCs could only use the money to fund early-stage start-ups. This severely restricted the investment options of VCs, who then simply ignored the government’s offer.

Under the new rules, VCs will have to invest half the corpus in start-ups while the other half can go to relatively mature firms. Critics may say this is a dilution of the Startup India mandate but the fact is that the original plan was not working and practical changes had to be made.

Another reason for the poor response from VCs was the government’s requirement that participating investors had to be registered with the Securities and Exchange Board of India. But some of the biggest VCs aren’t, and the centre shut the door for them.

Centre’s complicated procedures means perplexing the startups in getting access to funds. Out of the 1,368 applications received by the government; only 502 were recognized as start-ups by the department of industrial policy and promotion. And an even smaller subset—just the 111 firms incorporated after April 1, 2016—were considered for tax benefits. Finally, the benefits were granted to only eight start-ups.

What should be done?

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Referring to hollow valuation and irrational funding numbers are not healthy for the ecosystem. A move towards rationalization of the kind that we have started seeing of late is necessary. Government funds can only short-circuit the process. Also, private sector’s failure to step up contributed to the lack of R&D in the country.

Conclusion

Promoting start-ups by improving ease of doing business is clearly at the forefront of the Government’s Action Plan. What requires is taking in the grievances of startups, investors and academia professionals from the relevant fields.

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