Modi Government's launch of Start-up India programme offers big boost for burgeoning start-up sector Image

Modi Government’s launch of Start-up India programme offers big boost for burgeoning start-up sector

Posted: 27/01/2016

Following the stated intention of the Indian Prime Minister, Narendra Modi, to launch the ‘Start-up India’ programme in his Independence Day address last year, this became a reality on 16 January 2016. The start-up action plan includes new policies and initiatives to make it easier for investors and start-up founders to incubate their ventures in the country.

The Indian start-up sector saw aggressive growth in 2015. There was an approximate fund infusion of USD 18 billion into Indian start-ups between 2010 and 2015, of which USD 9 billion came in 2015 alone. Nine Indian start-ups have already been valued at more than a billion dollars.

Hence, Mr Modi’s special attention on the Indian start-up industry is not a surprise and recent declarations are a move in the right direction.

The ten key announcements

  • A INR 10,000 crore (approximately USD 1.50 billion) fund for start-ups

The Government will set up a fund with an initial corpus of Rs 2,500 crore and a total corpus of Rs 10,000 crore over a period of four years. The Government will set up a board of private professionals drawn from industry bodies, academia, and successful start-ups to manage the fund.

  • Credit Guarantee Fund for start-ups

Debt funding to start-ups is perceived as a high risk area and, because of the high failure rate among start-ups, the lenders are generally reluctant to extend ventures debt to them. To overcome this stigma and to encourage banks and other lenders to provide venture debt to start-ups, a credit guarantee mechanism through the National Credit Trust Company/SIDBI shall be rolled out with a corpus of INR 500 crores per year for the next four years.

  • Tax exemption for start-ups for three years

Start-ups commencing their operations after 1 April 2016 shall be exempted from taxation for the first three years of its operations subject to a condition of non-distribution of dividends for said three years.

  • Tax exemption on the incubation fund 

As per Indian income tax laws, any business receiving money in the form of share capital which is over and above the fair market value (FMV) of the company would be subject to income tax on such access amount. However, as there is no FMV for start-ups, the entire money invested as an incubator fund would be subject to income tax. 

Accordingly, to overcome this problem and to encourage seed investment, a tax exemption has been granted for investments made by incubators into the start-ups.

  • Tax exemption on capital gains 

Start–ups have been exempted from paying capital gains tax during the year, if such gains are invested in the fund of funds (FOF) recognised by the Government. 

  • A single point of registration for start-ups

The Government will launch a mobile app and a portal to enable start-ups to register their company in a day. The portal will also serve as a single point of contact for clearances, approvals and registrations, and for companies to apply for schemes under the 'Start-up India' action plan. 

  • Compliance regime based on self-certification

To reduce the regulatory burden for start-ups, the Government will allow them to self-certify compliance on nine labour and environment laws. This self-certification can be done through the start-up mobile app. 

In case of labour laws, no inspections will be conducted for a period of three years except on the receipt of credible and verifiable complaint of violation. 

  • A fast-track mechanism filing patent applications

The value of an innovation goes up considerably and it can be better exploited if it has the protective cover of patents. Accordingly, to achieve the above, the patent application of start-ups shall be fast-tracked. Further the Central Government will bear the cost of patents, trademark or design application except the statutory fee. Start-ups shall be given an 80% rebate in filing of the patents. 

This scheme is being launched initially on a pilot basis for one year. Depending on the outcome, further steps will be taken. 

  • Faster exit for start-ups 

Start-ups may be wound up within a period of 90 days from making of an application for winding up on a fast-track basis, as per the recently tabled Insolvency and Bankruptcy Bill 2015, which has provisions for voluntary closure of businesses. This process will respect the concept of limited liability.

  • Relaxed norms of public-procurement

Generally, whenever a tender is floated by a Government entity or PSU, the eligibility criteria often specify either ‘prior experience’ or ‘minimum turnover’. Such conditions are restrictive for start-ups. 

In order to promote start-ups, the Central Government, State Government and PSUs will exempt start-ups in the manufacturing sector from the criteria of "prior experience/ turnover" without relaxation on quality standards and technical parameters. The start-ups will also have to demonstrate the requisite capability to execute the project and should have their own manufacturing facility in India.

Apart from the above there are various other plans to be rolled out which include:

  • Setting up of the 'Start-up India Hub', a single point of contact and handholding facilitator that will function in a hub and spoke model with central and state governments, Indian and foreign VCs, angel networks, banks, incubators, legal partners, consultants, universities and R&D institutions.
  • Launch of the 'Atal Innovation Mission' to encourage entrepreneurship and innovation.
  • An innovation program targeted at school children aims to source 10 lakh innovations from five lakh schools, out of which the best 100 would be shortlisted and showcased at an Annual Festival of Innovations to be held at President House. 

Says Rustam Dubash, partner and head of Penningtons Manches' India group: “It is undeniable that the Modi Government deserves appreciation for recognising the need of Indian start-ups in India in such a high profile and official manner. This is a great initiative but the temptation to translate that into policy actions by splurging taxpayer funds in venture capital seems a rather scary notion.

“But the self-certification in the case of labour and environmental laws could be a big relief and the capital gains and income tax exemptions along with the start-ups fund of funds could be a great boost to the India start-ups ecosystem.”

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