Being a part of the start-up ecosystem, where looking at the bright side is often the only ray of hope, let’s ask – what can our Government do for start-ups?

On a basic level, it translates into- what would I do if I were the Finance Minister? Since finance people like numbers, we begin with the fact that a start-up friendly policy environment can create over 10 million direct jobs for the Indian youth in 10 years.

Then we identify the bottlenecks in the growth of start-ups – starting, conducting and closing a business – and the lack of easily available risk capital for them.

The ground reality is that it is tough for a start-up to meet all the regulatory criteria to set-up, conduct and close a business because. How can the start-ups compete globally and efficiently, if the regulations suck their energy and enthusiasm? For ease of understanding let’s limit the discussion to Small & Medium Company (SMC as defined in Dec’06 by the Ministry of Corporate Affairs.)

Given the number of compliances and the steps needed to operate, it is not surprising that India ranks 173rd globally on the index measuring ease of doing business in a country. The irony is that India is extremely friendly on the e-governance front, as many processes are online and thus easier. However, the number of steps, amount of time, and costs to navigate is a dampener. As a VC, it is shocking to see, that a start-up sometimes considers an incorporation certificate of their company a bigger feather in their cap than winning a customer order.

Years ago, an M&A expert told me, walk into partnerships only if you know the exit mechanism. The procedures for winding-up a SMC must be simplified with stringent timelines, given the high risk of failure for a start-up. Thus having simple processes with defined time-lines to close a company will encourage setting-up a company the moment an idea germinates. Moreover, start-ups must consider a formal corporate structure rather than the current way, of sole proprietorship or partnership firm,as the former is more transparent and accountable.

Not only exit, the formation of a company should be made easy too,with a single application taking care of multiple requirements – Name Search, Director Identification Number, Digital signatures, Incorporation certificate, and Permanent Account Number. When the start-up decides the place of operation allocate Tax Account Number, register it under Shop & Establishment Act and the MSME Act again in a single application. Only when the start-up reaches the minimum number of employees, a common application should be made for Professional Tax, EPFO, ESI and Gratuity.

An appeal on behalf of the entire start-up ecosystem would be – don’t make our start-ups defaulters from the first day of operation. It is really difficult for a VC to find a SMC that is fully compliant in their initial days. Let me share an experience.A start-up normally makes payments to Google, Facebook, or Amazon via credit card, within a few days of starting operations. Unknowingly they become defaulters on Withholding Tax, Tax Deduction at Source (TDS), Foreign Exchange Regulation and even the Reverse Charge Mechanism to gross-up for deposit of service tax.

Can we provide some breathing time and concessions for a start-up so that they can standup and start walking before being dragged into such a complex compliance regime? Similarly, what is the need to mandate an internal audit or appoint an independent valuer for ESOP valuation for SMC’s accounting? Instead of valuation, the last issue price per share should be good enough. We need to permit self-regulation and self-compliance for SMCs with stringent penalties for prevention of potential misuse. Steps in these directions can save valuable a start-up valuable time, better utilized for building their product that may go global.

Let us move to the issue of finding that critical risk capital. We as a nation have consistently failed to channelize the savings of our rich for creation of productive jobs for millions of poor. All our savings go into government securities, gold, fixed income securities and real estate. Productivity of a nation enhances only when savings are channelized into risk capital. I once asked a real estate developer – what is more valuable Rs.1 of sales or Rs.1 of equity contribution in your company. His instant response was equity infusion and the wonders it can achieve. Every day multiple full-page newspaper advertisement lures our rich to invest in property. In contrast, if, our regulator, SEBI, educates the rich to invest in Listed Equity, Equity Mutual Fund, Private Equity or Venture Capital, it may increase national productivity.

We have been encouraging our rich to invest in residential properties. The capital gains from one can be re-invested in another residential property and tax can be saved under Section 54 of the Income Tax Act. We need a similar provision for VCs so that capital gains are re-invested in venture capital funds. The risk takers have to be encouraged and rewarded.

The crux is that India has a supply side problem. We want investment-led growth for our economy. We should no longer be a pure domestic consumption story. That is more than 2 decades old. It is time to fund and invest in our future.

Our budding entrepreneurs are filled with ideas. Most of them are the first generation entrepreneurs. They have a dream. Equity or venture debt can take them on the path that realizes their dreams. Let us tap multiple sources of finance for our SMCs- global pension funds, provident funds, insurance, endowment funds, charitable and religious institutions, foundations, and the developmental institutions – that want to invest in Indian Venture Capital. Strangely, our own Indian institutions, except insurance and SIDBI, are not allowed to invest in Venture Funds.

At present all the savings largely go to Government securities. Nation building requires this capital for our private sector. Let me share a controversial example – I would like a factory labourer to be proud of being able to create a job for his or her own child. One who earns Rs.10,000 per month and saves Rs.500 in Pension can be made to allocate 3% – 5%, say Rs.25 per month, for venture capital or say start-up capital. Imagine the pride when he sees his savings leading to job creation. Let us all take some bold steps… invest in our savings in start-ups. We can not continue to lose out to start-up nations like Israel, Chile, Singapore, UK, US.

Before concluding, let me state another pain-point. It takes months to convince a NRI/PIO to invest in Indian Venture Capital Funds. Now our FDI policy, as per clause 3.2.3, requires DIPP & FIPB approvals for the NRI/PIO to invest via their NRO bank accounts in India in a Domestic Venture Capital Fund (DVCFs) or say local fund managers who invest in our start-ups. Despite months and years of struggle, approvals have not been granted to many such DVCF. The advice handed to these disgruntled fund managers is set-up a fund in Mauritius and channelize it to India. This is just not viable for a fund that plans to support start-ups. Second, these local managers help the Indian Government to earn the genuine 10% capital gains tax if a non-resident reaps capital gains from Indian ventures. Since, we are not able to discourage gold import nor hold back successful & large businesses from investing overseas… how and where do we go and find cash for our budding entrepreneurs!

Maybe some of these suggestions reach the ears of the powers that be and our start-ups have a chance to be a part of the growth story and create jobs that in turn give birth to more start-ups.