38% of India’s Unicorns Are Not “Indian”

India currently has 90 unicorns – startup companies that are valued at over $1b – and will likely soon have 100 unicorns, becoming the third such country after the USA and China. Since January 2016 when the “Startup India” program was launched, the startup ecosystem of India including infrastructure for startups, be it incubators, mentorship, funding, corporate initiatives, media coverage, or even patent filing, has improved substantially making life easier for entrepreneurs. 

However, it is still not as smooth a ride for the Indian start-ups as it is for startups in the advanced economies of say, the USA, Singapore, and China. Our “ease of doing business” is yet to be on par with the developed world, especially given the high taxation, onerous compliance requirements, inadequate and cumbersome legal protection of IP, as well as time-consuming and expensive processes to access capital and secure exits. It isn’t a surprise therefore that many companies are shifting their primary legal location to foreign jurisdictions like the USA, and Singapore. 

How do the numbers stand?

As per a study by Venture Intelligence, of the presently known 90 “Indian” unicorns), 56 are based in India, 25 in the USA, 8 in Singapore, and 1 in the Netherlands spanning sectors from e-Commerce to fintech to gaming and more. In other words,  38% of “Indian” unicorns are not quite Indian as they are domiciled outside of India. Moreover, these 34 unicorns have raised approximately $30B ie, this large money could have been but hasn’t been invested into an India domiciled entity. 

Sector Wise break-up of the Unicorns 

Source: Venture Intelligence

Chart: Sector-wise domicile of unicorns as on 31st March 2022.

The reasons for incorporating in the USA are different from incorporating in say,  Singapore. SaaS founders find it easier to reach out to the large market for SaaS “Software as a Service” based offerings in the USA by incorporating there. Companies incorporated in Singapore for high “ease of doing business”, low taxation, quality infrastructure, and quality of life while remaining close to India.  

Out of 12 Indian unicorns in the SaaS category, all except Zoho and Darwinbox are based in the USA. SaaS offerings are expected to be a $1 trillion opportunity and India will lose wealth creation, tax revenues, listing, and related income, by not having these companies domiciled in India. 

Of the three unicorns in a frontier technology area like Artificial Intelligence, namely – Glance, Fractal, and Mindtickle, one is registered in Singapore while the other two are in the USA. Of the 3 unicorns in Gaming, Mobile Premier League and  Dream 11 are based in Singapore and New Jersey respectively while Games 24×7 is registered in India. 

Flipkart, India’s greatest startup success story and the poster boy for Indian e-commerce, which was acquired by Walmart at a valuation of over $20B, was domiciled in Singapore.  That set the trend of e-commerce companies having their HQs in the island country. There are many Singapore shell companies set up by VC funds to become holding companies for Indian subsidiaries. Singapore is today the hottest destination for the registration of Indian e-commerce players.

Even more worrying than this trend of registering the parent company outside India is the migration of startup founders to UAE and Singapore.  Lower taxes, easier access to capital, government support, simple compliance, and better quality of life while being just a short flight away from India make the UAE and Singapore rather attractive to founders. 

Whichever country our startups chose to register or our founders chose to migrate to, the ultimate loser is India with intellectual property ownership and funds being vested in non-Indian jurisdictions. 

Stay in India Mission

In order to retain the economic value added by the start-up ecosystem, it is important that India urgently puts in place policies that ensure that founders and startups ‘Stay-in-India”.  This will require the coming together of various ministries, particularly DPIIT/Min of Commerce, Ministry of Finance, Ministry of Electronics and Information Technology, and regulators like the Reserve Bank of India and Securities and Exchange Board of India to address the Stay-in-India Checklist. 

Stay-in-India is an evolving checklist of issues that need to be solved to contain the exodus of startups from India. These issues fall under four categories: a) Ease of doing business and making it easy to raise funds; b) harmonization of coding of digital economy c) Reducing overall tax anomalies and d) Increased DTA and foreign markets access. 

The issues are comprehensively listed in the Stay-in-India checklist

As an example, let’s consider the anomalies in the taxation of dividends. Dividend received from overseas subsidiaries, that has been already taxed, is taxed once again in India as income in the hands of the company. Also, while the rate of tax on such dividends for certain companies is 15% (as against 30%), the same exemption is not provided to limited-liability partnerships and individuals. It amounts to double taxation of income and discourages a model where overseas subsidiaries of Indian startups can pay dividends at lower tax rates to Indian shareholders. Removal of this dividend tax will directly encourage start-ups to remain domiciled in India and receive dividend income from subsidiaries abroad. 

Similarly, there are regulatory frictions e.g. TDS on the sale of software products which reduces the working capital in hands of Software product companies, or the need for filling the Softex form (which was relevant in the early days of IT services exports), and which is now redundant as GSTN Invoices already have the required and sufficient data. All that is required is for different departments of the Govt and regulators to connect digitally and share information. The unfavourable tax regime for IPR protection, such as subjection to minimum alternate tax, IPRs being subject to income tax, and not capital gains even when they are held for more than a year is another big irritant. Technology-heavy startups, therefore, tend to relocate to jurisdictions like Singapore and the USA that have a smoother and lower-cost approach. Founders relocating to overseas jurisdictions are typically seen around the time of M&A. One of the reasons relates to taxation: typically, a portion of the financial proceeds arising from an M&A transaction is held in escrow and released to the founders after some time and/or completion of certain contractual obligations. The escrow payments are treated as income by the Indian tax authorities rather than capital gains as other jurisdictions do – this needs resolution.

India is emerging as a global startup hub, with the support of the Govt, with our startups attracting capital and talent while being at the forefront of innovation, jobs, wealth, and intellectual property creation. Brand India is enhanced globally by the success of Indian startups.  With more support from the Government by way of removal of regulatory friction and by providing incentives – fiscal and regulatory –  the ecosystem required to create, enable and grow Indian startups will dramatically accelerate. 

The Ease of Doing Business must be tackled in mission mode with the Stay-in-India Mission (SIIM) being an integral part of India is to secure its rightful place around the global innovation table. 

The blog post is co-authored by our volunteers Sanjay Anandram and Amit Agrahari. You can reach out to Amit at [email protected]


Disclaimer: The article depends upon various pubic data sources apart from credible data sources that are relevant at the current date and time. Readers may like to read this accordingly. 

Data Sources Courtesy: 1. Venture Intelligence. 2. Invest India

iSPIRT’s Fifth Open House Session on Volunteering

At iSPIRT, we are about nation-building. So what kind of nation are we talking about here? And does it matter? Well, you do need to watch the video to get those answers.

What sets this Volunteer Open House session apart is that it includes four volunteer stories. Almost every volunteer who comes in leaves a mark. Get a sense of how that happens in this session.

Previous Open House sessions have pointed to specific volunteer challenges. The focus here is to explain playground building in more detail. Often, playground building is an impetus for volunteers to do something they have never done before. This is a different perspective on volunteering.

If you want to be an ISPIRT volunteer, check out the video and fill the form on our volunteer page: volunteers.ispirt.in

iSPIRT Foundation’s Official Response to Union Budget 2019

The budget has some relief for startups, but not an outsized role in the $5 Trillion plan
 
In her first budget presented today by the newly-appointed Finance Minister Nirmala Sitharaman started her speech with strong words stating that “We do not look down on legitimate profit-making. Gone are the days of policy paralysis and license-quota-control regime”. Given the resounding mandate of the people, this government has the political capital to execute a bold budget and this is what the country was expecting. While the vision is bold, the recommendations made by the government were a mixed bag – some solid announcements, but also notable for its omissions.

Startups may, at last, see the end of the dreaded “Angel Tax” that has plagued them since 2012. The creation of an e-verification process and “special administrators” whose permission would be required before an Assessing Officer can begin inquiries against start-ups who have already received orders should extend relief to those who were excluded from the February 2019 circular by DPIIT. This can also solve for section 68 – wrt unexplained cash credits – which was the more onerous section by ensuring verification of investors. Extending the exemption of section 56(2)(viib) to Cat II AIFs also brings parity and greater participation between AIFs. The tax deduction for investments into startups saw relaxations in the holding period (5 to 3 years), reduction in the minimum threshold (50% to 25%) and extending the time period.

In this budget, the government recommitted to its ideal of a less-cash economy. By allowing digital payments to the government, they are essentially legitimizing the use of digital payment methods. Further, by disincentivizing cash withdrawals by applying TDS and mandating digital payment acceptance without charges for firms over turnover Rs 50 Crores, they will further “nudge” users into preferring paying digitally. The approach just provides for a reduction in cost and discourage cash expense. This is hardly a definite fiscal measure for incentivizing digital payment. Most importantly, the government is eating its own dogfood, and starting to make digital payments through a dedicated payments platform to its own MSME suppliers and contractors, not only boosting digital payments but providing a critical lifeline to MSMEs by reducing their working capital requirements. In fact, the government has announced a significant boost to improve the availability of credit to the economy.  This includes providing Rs 70,000 Crore to the banking system, as well as a partial credit guarantee for the purchase of Rs 1 Lakh crore of pooled assets from the NBFC system. These measures should improve the availability of credit to the private sector, and boost growth!  The govt has also announced an amendment to enable all NBFCs to lend against invoices through TReDs. These are steps in the right direction and will free up much-needed working capital for the industrial sector.

It is encouraging to see the government adopt technology to improve convenience and simplification for tax-payers. Currently, there are nearly 40 crore citizens in India with a PAN in contrast to 120 crore Indians with Aadhaar. “Interchangeability of PAN and Aadhaar” was announced by Nirmala Sitaraman which has the potential to increase the tax filing base to all Aadhar holders. The details about implementation are specified as follows. Income Tax Department shall allot PAN to every person who will be filing tax with Aadhaar and currently do not have a PAN. The demographic verification will be carried out using data from the Unique Identification Authority of India (UIDAI). Additionally, citizens who have both PAN and Aadhaar can choose to use either of the options to file their returns. While the move of interoperability clearly seems to increase ease of filing taxes, whether it would also increase the number of tax-payers in informal sectors is still a question that needs examination. Further, understanding the implications of increased data linkage includes the discussion of data security.

What was missing was an indication of “Startup India 2.0” – the new phase of Startup India. The Rs 20,000 Cr Startup Seed Fund wasn’t announced, nor were fresh incentives for investments into VC Funds or startups, rationalisation of ESOP taxation, amongst others. Lowering the LTCG ( Long term capital gain) rate on startups shares, which was alluded to in the Economic Survey, also doesn’t find mention in the Budget. Additionally, there have been no measures to help our startups list in Indian exchanges. Overall, this budget has also not delivered on promoting Rupee Capital Formation which would help local startups wean off volatile foreign capital.

Despite the Economic Survey’s focus on Data as a public good, no significant announcement was made to leverage the Data assets of the country. In the speech about soft power, while Yoga and Artisans rightfully got their place, new-age digital platforms like Aadhaar, BHIM-UPI and India Stack, which are truly world-class, did not see a mention. Recognizing these Digital Public Goods as elements of soft power that can be exported to other countries would also give a massive boost to India’s start-ups in markets abroad.

Reach out to Sanjay Jain ([email protected] ) in case you would like to know more details.

Special thanks to our volunteers Saranya Gopinath, Rakshitha Ram, Siddarth Pai, Tanuj Bhojwani, Sudhir Singh, Sanjay Jain, Nakul Saxena, Sharad Sharma, Karthik KS.

While Well-Intentioned, Budget 2018 Falls Short of Expectations

Starting nine years ago, Aadhaar, eKYC, UPI and the rest of India Stack laid the foundation for a formalization of the Indian MSME sector. With the introduction of Aadhaar for Business and the unlocking of GST data for lenders, we are poised to see an explosion in flow-based lending to MSMEs, ultimately having a multiplier effect on jobs and economic growth. This is great news for MSME focused digital lenders and the product startups serving them. Therefore, a significant digital dividend for the Bharat economy is finally in sight.

It is heartening to see government adopt the same digital-first approach when it comes to health and education. While this is a great start, much work remains. Laying the policy foundation alongside an India Stack inspired technology spine will ensure the rise of the Bharat focused tech-entrepreneur. We need India’s entrepreneurs to lift outcomes for patients and students not adequately served by our existing system.

On the startup and investor fronts, this budget is a missed opportunity to address the important near-term issues. We had hoped to see the resolution for Angel Tax and other such Stay-in-India Checklist issues. Slapping a Long-Term Capital Gains Tax on the previously untaxed sale of listed equities will adversely affect the List-in-India initiative. Additionally, the compliance overhang of listing will no longer be tempered by the promise of tax-free gains. The promised tax regime must incentivize and protect foundational (angel and domestic investors) as opposed to fleeting capital.

While well-intentioned, this budget falls short of our expectations. India’s complexity and diversity call for a much more responsive and action-oriented policy-making approach. Only then can we harness our entrepreneurial energy to address India’s most pressing challenges.

About iSPIRT
iSPIRT is a non-profit technology think tank that builds public goods for Indian product startup to thrive and grow. Learn more: www.ispirt.in

Sanjay Jain, Nakul Saxena, Sudhir Singh and Sanjay Khan Nagra Fellows from our policy team have issued a press release on 1st February 2018, a copy of it is here. Reach out to Sanjay Jain in case you would like to know more details.

Special thanks to our volunteers Sharad Sharma, Siddarth Pai, Tanuj Bhojwani, Sarika Mendu, Anukriti Chaudhari, Karthik KS.