Stay-In-India Checklist Index aiming for 5 trillion $ Economy by 2025


What is Stay-in-India Checklist?

The Stay-in-India checklist is a list of regulatory hurdles that makes it attractive for Indian startups to Domicile in foreign jurisdictions like Singapore and USA.

The checklist was prepared by iSPIRT to present the most important issues where respective Government departments or regulators could being in reform to help stop this exodus of start-ups from India.

The checklist is important to achieve the vision and mission objectives of National Policy on Software Products. In turn, it will boost the innovation-driven economy, Ease of Doing Business (EOB) in India, retain and multiply the economic value thereby contributing to the 5 trillion dollar economy goals by 2025.

The issues pertaining to various regulations on making funding of start-ups complex and unattractive, difficult or redundant compliance, ambiguity or unclear notifications etc.

iSPIRT has taken up a  list of 36 issues since 2015/16. Until now out of 36 issues, some have been addressed. Some issues were resolved fully, some partially and about 17 or more issues from the original list are still unresolved.

Note: This blog is a progressive blog to maintain the evolution of the Stay-in-India Checklist and its progression as the issues get resolved by the Govt. of India.

Index of issues solved and remaining

The objective of this blog post is to provide readers in the Start-up community to keep track of issues in this checklist.

We covered many of the resolved issues on www.pn.ispirt.in  and www.policyhacks.in . Ready links given below.

  1. https://pn.ispirt.in/ispirts-stay-in-india-checklist-gains-further-traction-rbi-and-mca-follow-the-startup-india-action-plan/ 
  2. https://pn.ispirt.in/stay-in-india-checklist-successes-so-far-and-the-path-forward/ 
  3. https://pn.ispirt.in/list-of-startup-issues-resolved-stay-in-india-checklist/ 
  4. https://pn.ispirt.in/rbi-allows-convertible-notes-for-startups-from-foreign-sources/ 
  5. https://pn.ispirt.in/external-commercial-borrowing-norms-for-startup-ecb/ 
  6. https://pn.ispirt.in/notice-on-angel-tax/ 

A list of issues pending to be solved is are given below.

1.  Digital Goods and Services Confusion

Authority: MoF and MOC

Status/Explanation:

The digital economy is about “Digital Goods” and “Digital Services”. Even the physical goods are traded through “Digital services” platforms and means. Hence, it is important to get “Digital goods” defined in our legal systems as distinct from “Digital Services”.

National Policy on Software Products (NPSP) was announced in February 2019 promoting Software products with a vision to make India a Software product nation.

Software products possess all properties of “Goods” except that they are intangible. Recognition of Software products as distinct from Software services is paramount to the success of the NPSP and promotion of the Software product industry. In larger shape, this requires a clear treatment and definition of Digital (intangible) “Goods” and “Services”.

Recommendation/Suggestion:

The National Policy on Software Product (NPSP) was announced in Feb 2019 to promote the Software products. The Policy implementation has huge friction owing to the non-acceptance of Software products as separate from Services. To leverage NPSP for the success of the Software product Industry “instituting” this clarity is important.

2. Abrogate Softex forms for SW products

Authority: MoF and MOC

Status/Explanation:

Softex form is required to be filed for export of software. After the GSTN system came into existence, all exporters filed Export invoices and regular exporters filed a letter (LUT) with the Government of India. The GSTN system can be used to track remittances received against each invoice.

Software products are traded based on MRP/list price mechanism in both On-premises and SaaS models and hence does not require any valuation.

Recommendation/Suggestion:

Softex forms is a Redundant process to ascertain Foreign remittances arrivals after the GSTN system is in place. RBI systems should digitally connect EDPMS to GSTN for a homogenous tracking of export proceeds remittances just like Income tax and other systems have done it. This will give way to a homogeneous system across all goods and services.

At the least Softex forms for Software products can be abrogated to ease the business of Software product companies where there is no need of valuation and those listed on the Indian Software Product Registry (ISPR) maintained by MeitY.

3.  Remove TDS on sale of Software products

Authority: MoF

Status/Explanation:

A business can buy a hardware product without a TDS but not a Software, as the purchase of a Software product from Software companies are subject to TDS at 10% of all receipts under Section 194J.

The refund of this amount only happens after filing their IT Returns in September of each year, with this delay causing hardship in terms of working capital.

In the case of SMEs and Start-ups, it is hard to receive working capital loans from banks or NBFCs. For SaaS business the transactions are online and it is not possible to map TAN numbers at the time of online transactions and tracking of TDS on all transactions.

Since all profitable businesses with more than 40 lakh turnover are filing GSTN invoices, the tracking can easily be done through the GSTN system of each invoice amount and mapped to the income tax return filed at year-end.

Recommendation/Suggestion:

No product is subject to TDS when sold by producer to channel partners or end consumer. Software Products are subject to this sale. CBDT mixes this TDS with other TDS issues hence is reluctant to remove it. Income from Software products should not be classified as Royalty income and “Software Products” should be treated as “Goods” as defined in constitutions. This again requires recognition of “software products” and a Solution to this problem.

4.   Setup HSN Code for Software Products

Authority: MoF

Status/Explanation:

Software products are intangible goods and keeping and treating them with Services in SAC list will not be able to help in creating a “Software product Industry”. They have to be classified as “products”.

Presently Software is classified in HSN code based on the medium on which it is physically supplied. The intangible Software is not defined in HSN and for domestic purposes, the Software product companies use Service Accounting Code Services Accounting Code (SAC) list which is not internationally harmonized. Hence, the trade of Software products can’t be homogeneously measured.

Recommendation/Suggestion:

HSN code mechanism is only used for Physical goods. However, in order to promote “Software products,” some countries are giving treatment to “Software products” and “Digital goods” under chapter 98, 99. India should also create a provision for “software products” HSN code until a harmonious global system is developed for “Digital goods” (including Software Products).

5.  Level playing in B2C Sales of SW products

Authority: MoF

Status/Explanation:

Although there are mechanisms laid to report sales in India for foreign companies (non-resident taxable person), yet a lot of business of Software products especially in apps business happen in B2C area from not so popular brands. As a result, the Indian “Software product” companies have a non-level playing field as they have to comply with the GST regime of 18%.

Recommendation/Suggestion:

Provisions should be made to relieve the B2C sales of Indian “Software products” from heavy 18% GST for the advancement of “Digital India” and especially new post-pandemic digital and Gig worker economy.

6. Favourable Tax Regime for IPR

Authority: MoF

Status/Explanation:

In the past several years, India has experienced increased capabilities of innovative, creative and capable young professionals for creation of significant and valuable IPR. At the same time, India has also seen that the ownership of such IPR usually does not reside with Indian companies or in India.

Whilst there are several ‘non-tax’ reasons for this loss of ownership in favour of other jurisdictions, tax remains one of the major reasons. As a result of the huge negative tax impact, Indian companies constantly look to hold their IPRs for worldwide use in a jurisdiction which is more favorable from a tax perspective. Some of such notable jurisdictions are: Ireland, The Netherlands, Switzerland, and Singapore.

Further, governments of certain jurisdictions are aggressively targeting Indian companies to house their IPR there. For instance, a majority of Indian software product companies prefer to set up base in Singapore given the incentives offered by the Singapore government and the aggressive marketing by the Singapore government.

It is noteworthy that in the case of technology companies, IPR is one of the most (if not the most) important assets. Accordingly, technology companies usually follow their IPRs and establish base in jurisdictions that are most favourable for IPR. Lacking this, India has seen most of its technology companies shifting base to jurisdictions such as Singapore.

Creating a favourable tax regime for intellectual property is, therefore, extremely important for retaining technology companies in India.

This is partially covered in the Budget announcement, which provides that income by way of royalty in respect of a patent developed and registered in India will be taxed at 10%.

Recommendation/Suggestion:

Further action also needs to be permitted-

  • Such companies should not be subject to minimum alternate tax. However, such companies should be subject to dividend distribution tax as may be applicable to all other companies;
  • Transfer of IPR so developed and owned, or acquired and owned should result only in capital gains and be taxable as capital gains. Such IPR should be characterised as a long term asset if held for more than 3 years as is the case for other assets;
  • For self-generated IPR, the holding period should start from the date an application is made under the IPR laws for its exclusive ownership, viz, copyright, trademark or patent registration.

7.  Informal Guidance Mechanism & appellate authority at RBI

Authority: RBI

Status/Explanation:

This needs to be pursued. The RBI helpline announced recently does not resolve this issue, as it does not contemplate making RBI approvals/rejections public or appeal process for parties aggrieved by an RBI decision.

While public notification of RBI decisions has been announced for compounding orders, it is yet to be done for cases of approvals/rejections of applications under FEMA (on a no-names basis).

Recommendation/Suggestion:

In our discussion with authorities, it was suggested that instead of codifying laws on aspects like round tripping, it is better to have an informal guidance and appeal procedure at RBI, similar to SEBI. This needs to be pursued.

8. Filing of Form FC-TRS – post-transfer requirement

Authority: RBI

Status/Explanation:

In terms of the FDI policy, a transfer of shares of an Indian company between non-residents and residents can be taken on record by the company subject to it receiving endorsed form FC-TRS. While the filing of this form has been made online, it still takes a few days’ time for the AD banks to review and approve the form.

Thus, the transfer of shares cannot be recorded by the company (despite the purchaser remitting monies to the seller and completing all other formalities) until form FC-TRS is endorsed/approved by the AD bank. At times, this process takes months (there are substantial delays even after the filing process has been made online).

Recommendation/Suggestion:

Since FC-TRS filing is online now, there should not be an issue in making it a post-transfer requirement.

9. Collection of monies by a resident on behalf of a non-resident to be permitted

Authority: RBI

Status/Explanation:

The Foreign Exchange Management Act, 1999 (FEMA) prohibits any person to make any payment to or for the credit of any person resident outside India in any manner. As the nature of commerce has undergone major change and many services and goods are being delivered through aggregators using online or mobile media, there is a need to re-look at this provision. Essentially, in all aggregator arrangements, the aggregator acts ‘on behalf of’ the seller to collect payments and provide selling and/or ancillary services.

Recommendation/Suggestion:

Presently, only start-ups have been permitted to collect monies in India on behalf of their foreign subsidiaries. This needs to be permitted for all companies, and also on behalf of any other entity (regardless of such entity being a subsidiary).

10. Acquisition by residents of overseas companies with an existing subsidiary(ies) in India to be permitted

Authority: RBI

Status/Explanation:

Presently, there is uncertainty on the meaning of “round-tripping” in relation to such transactions.

Recommendation/Suggestion:

“Round tripping” is usually invoked when an Indian company acquires a foreign company, with an existing subsidiary in India.

It needs to be clarified whether the transfer of shares between an overseas subsidiary of an Indian company and a third party falls under any compliance/approval process under FEMA.

Also, there is a limitation on foreign investment by resident individuals in association with the ‘Indian Party’ in only operating entities. This may be done away with.

The RBI policy announcements contain only the following generic statement: “Streamlining of overseas investment operations for the start-up enterprises”. The aforesaid specific actions need to be performed.

11. ODI JVs/WOS investing back into India to be permitted where it is a genuine business requirement and bona-fide investment

Authority: RBI

Status/Explanation:

There is uncertainty with regard to “round-tripping” in such transactions.

Recommendation/Suggestion:

Such investments should be permitted (under the approval route, if need be) on commercial justification.

The following transaction may be specifically permitted:

  •  Bona-fide acquisition of existing structures having a leg in India; or
  •  Where the Indian investment is made for bonafide commercial reasons out of funds earned/raised overseas without Indian guarantee and is in 100% FDI automatic route sector (e.g. infrastructure).

Further, setting up an overseas structure under the ODI route to raise equity capital for investing back into India should be specified/clarified to be a bonafide and permitted overseas investment.

Since there is no bar under the extant regulations, entities which have overseas JVs / WOS which have downstream investments in India should not be subject to punitive action.

Individuals should be allowed to hold shares in foreign entities with step-down subsidiaries, subject to the investment in the foreign entity being a specific fraction (and not the whole of) of foreign funding received by step-down subsidiaries.

To permit Investments up to a specified limit (eg USD 10 million) by companies (regardless of their net worth) in overseas entities.

Again, the RBI policy announcements contain only the following generic statement: “Streamlining of overseas investment operations for the start-up enterprises”. The aforesaid specific actions need to be performed.

12. Late filing to be allowed for subsidiary formations by start-up founders

Authority: RBI

Status/Explanation:

Currently, this is not permissible.

Recommendation/Suggestion:

Lot of founders who set-up subsidiaries abroad and have not compiled with RBI, should be allowed an automatic route through late fees.

13. Restriction on FVCIs to invest in all sectors to be removed and brought in line with FDI policy

Authority: RBI

Status/Explanation:

Presently, FVCIs are permitted to invest in only certain sectors.

Recommendation/Suggestion:

In terms of RBI/2016-17/89/ A.P. (DIR Series) Circular No. 7 of 20 October 2016, FVCIs are permitted to invest only on ten sectors (viz., Biotechnology, IT related to hardware and software development, Nanotechnology, Seed research and development, Research and development of new chemical entities in pharmaceutical sector, Dairy industry, Poultry industry, Production of biofuels, Hotel-cum-convention centres with seating capacity of more than three thousand, and Infrastructure sector).

While RBI (under the above circular) has exempted start-ups from this restriction, other companies also need to be exempted from this.

14. Limit on acceptance of deposits from shareholders to be removed for private companies

Authority: MCA

Status/Explanation:

Under Section 73 of the Companies Act, private companies are allowed to accept deposits from their shareholders up to 100% of their share capital and free reserves. However, since most start-ups require constant funding during initial years, and do not have free reserves, such limits may be removed for them.

Recommendation/Suggestion:

The Companies Law Committee Report recommends removal of this limit for all start-ups. However, fine print is awaited.

15. Grant of ESOPs to promoters and independent directors for all private companies

Authority: MCA

Status/Explanation:

The provisions of the Companies Act do not permit companies to grant ESOPs to promoters or members of the promoter group or independent directors. There is no rationale for this restriction as the promoters essentially function as employees of the company. Further, through multiple rounds of fundraising, the stake held by the Promoters would have significantly diluted. Also, to get good professionals to join as independent directors, it is important to issue them ESOPs as payment in cash for compensating them is a burden on the company’s resources.

Recommendation/Suggestion:

Provisions of the Companies Act need to be amended to permit issuing of ESOPs to promoters and members of the promoter group and independent directors. Management ESOP should be permitted for unlisted companies to keep the Promoters incentivized and motivated. Likewise, the role of advisors is critical for the success of the ventures. Equity seems to be the only logical form of incentive, given the lack of liquidity.

While the MCA has permitted the issuance of ESOPs to promoters for start-ups, this needs to be permitted for other companies as well. Also, the issuance of ESOPs to independent directors needs to be permitted as well.

16. Taxation of gains from sale of ESOPs as salary or prerequisite (leading to very high tax at present)

Authority: MCA

Status/Explanation:

The ESOP regime in India is geared more towards listed entities, which have a liquid market, as opposed to start-ups. Section 17, IT Act 1961 and Rule 3, IT Rules 1962 deal with the taxation of ESOPs. First, the employee is subject to tax at the time of exercise of option – i.e. this tax is payable immediately even if the employee has not sold the share in that tax period. The magnitude of the tax is calculated on the notional gain between the acquisition price of the share (option strike price) and the fair market value (FMV) at the time of exercise. Secondly, the nature of such gains is considered as salary or perquisite. This means that the employee may be payable for ordinary income tax – 30% (excluding surcharge and education cess), calculated as per the marginal income tax rate) for the notional gains calculated above. This causes an economic outflow in the hands of the employee upon exercise, which is funded by debt or is at times even declined due to this reason. This is especially acute since the shares they hold don’t have the same rights as those offered to Investors.

Recommendation/Suggestion:

Amend Rule 3(8)(iii) of the Income Tax Rules, 1962 and as follows (insertion in bold) “In a case where, on the date of exercising of the option, the share in the company is not listed on a recognised stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker or accountant on the specified date as per Rule 11UA(1)(c)(b), provided such fair market value shall not be less than the exercise price

OR

Tax incidence should arise in the year of the sale of shares (not the year of exercise of the option). Profit made on sale of shares should be treated as capital gains (vs. the treatment as a portion of the gains as salary or perquisite).

17. Dividends from overseas subsidiaries taxed again in India

Authority: MoF

Status/Explanation:

Dividend received from overseas subsidiaries 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.

Recommendation/Suggestion:

Thus, tax levied on dividends from overseas subsidiaries should be discontinued, for parent companies incorporated by resident Indians in India.

18. Fair market value tax

Authority: MoF

Status/Explanation:

Any investment above the ‘fair market value’ (as may be determined by the Income Tax Authority at a future date) is treated as income for the company and is subject to income tax. This impacts angel investments at high valuation, as there is a risk of the Income Tax Authority determining such investment as above fair market value and requiring the company to pay tax on the differential.

Recommendation/Suggestion:

Start-ups have been exempted from this tax. However, the certification process to be recognized as a start-up is cumbersome and needs to be relaxed.

19. Harmonisation of tax policy for listed and unlisted equity instruments

Authority: MoF

Status/Explanation:

Listed Securities have a holding Period of 12 months for LTCG whereas for Unlisted it is 24 months Unlisted securities have a tax rate that is twice the rate of their listed counterparts, and the surcharge applies on the sale of unlisted securities while it is exempt for listed securities.

Recommendation/Suggestion:

Globally, the differentiation in tax treatment on listed and unlisted securities is not prevalent. Unlisted securities are more illiquid and riskier as compared to listed securities. They should have the same tenure of holding and the same tax rate on the same. There is a disparity in the tax rates applicable for capital gains on the sale of listed securities (12 months) vis-à-vis sale of unlisted securities (24 months). Dematted Unlisted securities of start-ups or companies that were registered as start-ups can also be subject to STT (or the new Stamp Duty regime announced in February 2019) in order to harmonise the tax treatment of both listed and unlisted securities.

Disclaimer: The discussion and ideas expressed here should not be construed as legal advice. The discussion is conducted with Industry practitioners and experts for purpose of benefiting the Industry members in the Software product, Start-up ecosystem and other related  industry sectors

Covid19 Crisis: Sharpen the Saw with Marginal Costing

When reality changes, it’s important for the firms to acknowledge and adjust to the new situation. This is the time to remember the mantra ‘Revenue is Vanity, Profit is Sanity, Cash is Reality’.

The Covid-19 crisis is much written about, debated and analyzed. If there is one thing everyone can agree about on the future, it is that there is no spoiler out there for this suspense. The fact is that no one knows the eventual shape of the business environment after the pandemic ends. 

When revenue momentum slows down or even hits a wall as it is happening in the current scenario, costs take centre stage even as every dollar of revenue becomes even more valuable for the firms. So, enterprises need an arsenal of strategic weapons to operate and survive, maybe even thrive, in this period of dramatic uncertainty. The same old-same old, push-push methods will not move the needle of performance. 

As an entrepreneur and CEO, I have always found the theory of Marginal Costing (MC) to be practically powerful over the years. Let me tell you why.

At the best of times, MC is a useful tool for strategic and transactional decision making. In a downturn or a crisis, it is vital for entrepreneurs and business leaders to look at their businesses through the MC filter to uncover actionable insights.

Using MC-based pricing, the firm can retain valuable clients, win new deals against the competition, increase market share in a shrinking market and enhance goodwill by demonstrating dynamism in downmarket.

As the firm continues to price its products based on MC, the idea is to continually attempt to increase the price to cover the fixed costs and get above the Break-Even Point (BEP) to profitability. However, this happens opportunistically and with an improving environment. 

Pricing for outcomes is more critical during these times and playing around with your costing models can go a long way in determining the most optimal outcome-based pricing approaches. 

Steps to Get the Best Out of MC:

1. Determine bare minimum Operating level

Estimate the bare minimum operating level or fixed costs you will need to bear to stay afloat and capitalize on revenue opportunities. This is the BEP of the business. This estimate can include:

  • Facilities, machines, materials, people and overheads. 
  • All R&D expenses required to support product development
  • Necessary support staff for deployment and maintenance of products/services.

2.  Ascertain the variable costs

Identify the incremental costs involved in delivering your business solutions to fulfil contractual and reputational expectations to both existing and new customers. These costs are the variable costs in your business model. Try to maximize capacity to flexibly hire, partner or rent variable costs as needed, based on incremental revenues.

3. Distinguish between fixed costs and transactional variable costs.

Take your fixed costs at your operating level as costs for a full P&L period. Let’s say, the fiscal year. Take your variable costs as what it takes to fulfil the Revenues that you can book. Make sure you only take the direct, variable costs. Note that if Revenues less Variable costs to fulfil the revenues is zero, then you are operating at MC.

4. Sweat the IP already created.

For every rupee or dollar you earn over and above the MC, you are now contributing to absorbing the fixed costs. Do bear in mind that all historical costs of building the IP are ‘sunk’, typically to be amortized over a reasonable period. Hence, it doesn’t figure in the current level of fixed costs. The idea now is to ‘sweat’ the IP already created. 

5. Peg the base price at marginal cost.

Start at the level of marginal cost, not fully absorbed costs. Then, try and increase the price to absorb more and more of the fixed costs. The goal is to get to BEP and beyond during the full P&L period. At the deal level, be wary of pricing based on the fully-loaded costs (variable and fixed costs, direct and indirect).

6. Close the deal to maximize cash flows

Price your product at marginal cost + whatever the client or market will bear to get the maximum possible advance or time-linked payments. This is a simple exchange of cash for margins wherever possible and an effective way to maximize the cash flows. Many clients, especially the larger ones, worry more about budgets than cash flow. 

Let’s look at a high-level illustration. 

Assume a software product company providing a learning and development platform to the enterprise marketplace. Let’s call this company Elldee.

Elldee has a SaaS business model that works well in terms of annuity revenues, steady cash flows and scale. Clients prefer the pay-as-you-model representing OpEx rather than CapEx. Investors love the SaaS space and have funded the company based on the future expectations of rapid scale and profitability.

However, given the ongoing crisis condition, Elldee needs to take a good re-look at the licensing model. By applying MC filters, it may make more market and financial sense to maximize upfront cash by doing a longer-term `licensing’ deal for the software-as-a-service at even a deep discount, with back-ended increments in price. The variable costs of on-boarding a client are similar to a SaaS deal yet the revenue converts to contribution to absorb fixed costs quickly to help survival and longer runway for future growth. So the client pays lesser than what they would have for a three year SaaS deal but Elldee is able to sweat its IP while maximizing cash flows.

Elldee can even move its existing SaaS clients to this model to capture more revenues upfront by being aware of MC and figuring out the right pricing models to get to the BEP of the business or product. Outcome-based pricing can also be designed to deliver margins beyond the MC, contributing to the absorption of fixed costs more aggressively.

Elldee is now in a position to address different types of markets, clients and alliances. It can calibrate higher and higher margins as the environment improves and client relationships deepen. Over the next two years, Elldee would come out stronger with a more loyal client base, higher market share and a growth trajectory aligned with its pre-Covid19 business plans.

Yes, this is a simplified example but many variations to the theme can be crafted, based on a firm’s unique context.

Remember that a strong tide lifts all boats but a downturn separates the men from the boys. Marginal costing techniques, when customized for sector-specific operating models, delivers a competitive edge at a time from which will emerge stronger winners and weaker losers. Be a winner.

About the contributor: Sam Iyengar is a PE investor, mentor and advisor focused on Innovation and Impact. He can be reached at [email protected].

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.

India’s new Software Products Policy marks a Watershed Moment in its Economic History – Can the nation make it count?

India is on the glide path of emerging as one of the economic powerhouses of the world – its economy is ranked sixth in size globally (and slated to climb to second by 2030); it has the fastest growing annual GDP growth rate amongst (major) countries; the country ranked in the world’s top 10 destinations for FDI in 2017-18. With a population of 1.3 billion and a large middle class of ~300 million+, it is one of the most attractive markets globally. Specifically in the digital economy – India has a huge $ 167 billion-sized IT industry; it boasts of a 55% market share in global IT services & outsourcing; 1140 global corporations run their tech R&D centres in India. In the tech startup space, India has attracted Private Equity (PE) & Venture Capital (VC) investments of $33 billion in 2018, and it has over a dozen unicorns (startups with over $1 billion valuations).

These data-points are truly impressive and would make any country proud, but they belie one of the glaring historical paradoxes of the Indian economic story – the sheer absence of world-beating products from India. Ask Indians to name three truly world class, globally loved Indian products or brands – chances are they’ll struggle to name even one. Check out the Global Innovation Index 2018 from the World Intellectual Property Organization (WIPO) – India doesn’t figure in the top 50 countries. Or the Interbrand 2018 Top 100 Global Brands Ranking – there’s no Indian name on that list. Leave aside brick & mortar industries, the Indian IT & Digital sector doesn’t fare any better on this count. IT services, which forms its lion’s share comprises largely of low end, commoditized services or cost arbitrage based outsourcing contracts. Most of the new age tech unicorns in India are based on ideas and business models that are copied from foreign innovators (with some local tweaks) – their outsized valuations are a result of them being the gatekeepers to the large Indian market, rather than from having created path-breaking products from first principles. So the overall trend is that India has a large domestic market, and it is a big supplier of technical brain power on the world stage, but when it comes to building innovative products, we come to a total cropper. This is best reflected in the Infosys Co-Founder, Narayan Murthy’s candid quote – “There has not been a single invention from India in the last 60 years that became a household name globally, nor any idea that led to the earth-shaking invention to delight global citizens”.



The launch of the National Software Products Policy (#NSPS):

It is in this light that the recently rolled out National Software Products Policy (#NSPS) by the Ministry of Electronics & IT (MeitY), Government of India marks a watershed moment. For the very first time, India has officially recognised the fact that software products (as a category) are distinct from software services and need separate treatment. So dominated was the Indian tech sector by outsourcing & IT services, that “products” never got the attention they deserve – as a result, that industry never blossomed and was relegated to a tertiary role. Remember that quote – “What can’t be measured, can’t be improved; And what can’t be defined, can’t be measured”. The software policy is in many ways a recognition of this gaping chasm and marks the state’s stated intent to correct the same by defining, measuring and improving the product ecosystem. Its rollout is the culmination of a long period of public discussions and deliberations where the government engaged with industry stakeholders, Indian companies, multinationals, startups, trade bodies etc to forge it out.

#NSPS will bring into focus the needs of the software product industry and become a catalyst in the formulation of projects, initiatives, policy measures etc aimed at Indian product companies. One of its starting points is the creation of a national products registry that’s based on a schematic classification system. Other early initiatives that will help in operationalizing the policy – setting up of a Software Products Mission at MeitY, dedicated incubators & accelerators for product startups, development of product-focused industrial clusters, preferential procurement by the government from product companies, programs for upskilling and talent development etc.

The Indian IT / Software Industry Landscape:

To understand the product ecosystem, one needs to explore the $ 167 billion-sized Indian IT / Software sector into its constituent buckets. The broad operative segments that emerge are –

1) IT Services & ITES: This is by far the largest bucket and dominates everything else. Think large, mid & small sized services companies throughout the country servicing both domestic & foreign markets. e.g. TCS, Infosys, Mindtree, IBM, Accenture, GE etc
2) Multinationals / Global Development Centers: These are foreign software companies serving Indian markets and/or using India as a global R&D development centre. e.g. Microsoft, Google, Netapps, McAfee, etc
3) Domestic Product Companies: This is a relatively small segment of Indian software product companies selling in domestic or overseas markets e.g. Quickheal, Tally etc.
4) Startups – E-commerce / Transactional services: This is the large, fast-growing segment of startups into direct (or aggregated) transactional businesses like e-commerce, local commerce, grocery shopping, food delivery, ride sharing, travel etc. e.g. BigBasket, Flipkart, Amazon, Grofers, Milkbasket, Swiggy, Dunzo, Uber, Ola, Yulu, Ixigo, MMT etc. You could also include the payment & fintech companies in this bucket – e.g. Paytm, Mobikwik, PhonePe, PolicyBazaar, Bankbazaar etc. This segment has absorbed the maximum PE & VC investments and is poised to become bigger with time.
5) Product Startups – Enterprise / CoreTech / Hardware: This is comprised of companies like InMobi, Zoho, Wingify, Freshdesk, Chargebee, Capillary, electric vehicle startups, drone startups etc. They could be serving Indian or foreign B2B markets.
6) Product Startups – Consumer Internet: This segment is composed of media/news companies, content companies, social & professional networking, entertainment, gaming etc. e.g. Dailyhunt, Inshorts, Sharechat, Gaana, Spotify, YouTube, video/photo sharing apps, Dream11 etc.

(N.B. Off course, this segmentation schema is not water-tight and there could be other ways to slice and/or label it)

Why India lags behind in Software Products?

The global software products industry has a size of $ 413 billion, and it is dominated by US & European companies. India’s share in that pie is minuscule – it is a net importer of $ 7 billion worth software products (India exports software products worth $ 2.3 billion, while it imports $ 10 billion)“Software is eating the world” – entire industry segments are being re-imagined and transformed using the latest developments in cloud computing, artificial intelligence, big data, machine learning etc. In this scenario, it is worth understanding why India seems to have missed the software products bus. The reasons are multifarious, cutting across cultural, economic, market, behavioural and societal factors –

a) The cultural aversion to Risk, Ambiguity & Failure: Indian society has traditionally valued conformity and prepares people not to fail. Our family and educational environments are geared for teaching us to eschew risk-taking and avoid ambiguity. But building products is all about managing risk and failure. When you take a product to market from scratch, you take on multiple types of risk – market risk, execution risk, product risk. For many people in India, this is in stark contrast to their social/attitudinal skills and expectancies they have built up over a lifetime.

b) “Arbitrage” offers the Path of Least Resistance: If you pour water down a heap of freshly dug mud, it will find the path of least resistance and flow along it. Human behaviour is similar – it is conditioned to look for the path of least resistance. And “arbitrage” offers that least resistance path in the IT industry – be it cost arbitrage, labour arbitrage, geographical arbitrage, concept arbitrage et al. The IT services industry leverages the cost arbitrage model via cheaper labour costs. Many of the transactional e-commerce startups in India have used geographical arbitrage to their advantage – once a successful product or model is created in another market, they bring it to India to capitalize on a local first mover advantage, build a large valuation and become the gatekeeper to the market before the (original) foreign innovators arrive in India many years later! But arbitrage means, that while you are taking on market & execution risk, you are not assuming the product risk. These dynamics played out at scale over the years has meant it is easier for a wannabe entrepreneur in India to go the arbitrage way and quickly build out a business using a readymade template than go down the software products path, which has a much longer gestation & higher risks associated with it.

IMHO, this “arbitrage” factor represents the single biggest reason why India has seen a virtual explosion in e-commerce startups, at the expense of product startups. Look around the startup ecosystem and you’ll see all kinds of transactional businesses involving activities like buying, selling, trading etc. Why… this almost reminds of that famous 17th-century quote by Napolean when he described Britain as a “nation of shopkeepers”🙂

c) Tech isn’t enough – you need design, marketing skills: To build great software products, you not only need strong technical abilities but also good design, marketing & branding skills to carve out a compelling product offering. Ask any startup in India – one of their most common problems is the inability to hire good designers and UX professionals. This puts Indian companies at a comparative disadvantage – even if they have the engineers to build the technology, their inability to translate that technology into an appealing user experience often means the difference between success and failure.

d) Lack of “patient” venture capital: This is a complaint you hear often from Indian product startups – the lack of venture capital that’s willing to be patient over the longer gestation cycles software products demand. While there is some truth to it, the more likely explanation is that software product companies present a “chicken & egg problem” for Indian startup investors. Investors are driven by financial returns – if they see returns from product companies, they’ll bet their monies on them. It just so happens, that Indian investors haven’t yet seen venture sized returns from software product companies. Hopefully, this dynamics will even out as the ecosystem grows.

e) Inadequate Domestic Market Potential:
 Many software products are monetized via subscription models, where the market’s ability (and propensity) to explicitly pay for the service is critical for success. Sometimes (SAAS/enterprise) companies try their model in India, only to discover there just aren’t enough paying customers. These startups may then be left with no choice but to either target foreign markets, or in extreme cases just move abroad for business continuity. Thus it has become imperative for the Indian domestic market to grow in size and scale to ensure the viability of product startups.

Platform companies from India are a non-starter: One aspect that needs calling out specifically is the sheer absence of any platform companies from India. Platforms are the next evolutionary step for scaled software product companies – if you get to the stage, where other industry stakeholders start building on top of the plumbing you’ve provided (thereby becoming totally dependent on you), that’s an immensely powerful position to be in e.g. AWS, Android, iOS etc. This factor assumes even greater importance given upcoming trends in AI, machine learning, deep learning, automation, robotics – the companies which emerge as platform providers may offer strategic advantages to the country of their origin. As depicted by the graphic below, India is as yet a non-starter on this count. This is deeply worrying – imagine a scenario 10-15 yrs out, when Indian software companies start dominating the domestic markets and also are a force to reckon with globally, but it’s all built on intellectual property (IP) & platforms created & owned by foreign companies!!

Some Suggested Action Areas for the National Software Policy:

MeitY in consultation with industry stakeholders is likely to create an implementation roadmap for #NSPS. Here are some specific action points I’d like to call out for inclusion in that roadmap:

Domestic Market Development: As explained earlier, the Indian domestic market needs curated development to reach a potential that makes product startups viable without having to depend on overseas markets. This calls for a series of steps, such as policy support from sectoral regulators, funding support via special go-to-market focused venture capital funds etc. The government could also help by announcing a preferential procurement policy from domestic software product companies. The Government e Marketplace (GeM) can help in institutionalizing these procurement norms.

Creating Early Awareness (Catch ‘em young): Fed by constant news in media about IT services, ITES, BPOs, outsourcing etc the average person in India is likely to be aware of IT services, but not necessarily software products. Many people may have friends and family members who work at TCS, Infosys, Wipro, IBM etc, but the same can’t be said about product companies. Given this scenario, it is important to create early awareness about products in schools, colleges, universities across metros, Tier 1, Tier 2 & 3 towns. Some of the world’s biggest product innovators like Bill Gates, Steve Jobs started writing software before they had reached high school – so if we can catch people young, we actually get a much longer runway to get them initiated into the product ecosystem. If they learn about products after they’ve started working in the industry, or when planning a mid-career shift from services to products, it might be quite late.

Reducing entry barriers for starting Software Product Companies: As shared earlier, one of the big problems in the Indian software product space is that there just aren’t enough entrepreneurs starting up product businesses. E-commerce & transactional services actually absorb (or suck in) a lot of entrepreneurial talent by virtue of having lower barriers to entry. To make a serious dent in products, you need a much larger number of product companies started off the ground. This can happen only by systematically bringing down the entry barriers – driving awareness, providing funding support, providing market development support etc. Advocacy and evangelism by software product industry role models also can help develop confidence and conviction in people to think products instead of services or e-commerce.

Building domestic Software Product Companies atop public goods: Silicon Valley has shown how you can build successful commercial applications on top of public goods (e.g. Uber built on top of GPS, Google maps & mobiles). In a similar way, public goods in India like IndiaStack, or HealthStack can be the base (or the plumbing) over which commercial applications get built for mass scalability. The good news is this trend has already been kickstarted, though its still early days.

This blog was first published at Webyantra.com

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. 

The payment gateway friction in cross-border trade of Software products

The payment gateway problem in exporting online from India

It is not easy for Indian Software product companies to export products online and receive payments in India.  This is true for both the downloadable Software product or Software as a Service (SaaS).

Experts say there is no legal or policy hurdle from RBI. Yet, there is friction. An Indian payment gateway service provider denies foreign currency cross-border transactions from India to a startups or small company.  Only exceptions could be some large companies.

the-payment-gateway-friction-in-cross-border-trade-of-software-products

As part of ‘PolicyHacks’ at iSPIRT, we attempted to attend to the issue of recurring billing in a previous blog here. This blog is another continued effort in this direction. It is based on a discussion with experts from payment solution companies. Embedded below is a video discussion with Krish Subramanian, Cofounder of Chargebee and Kiran Jain of Razorpay.

The options available and adopted by most small Software product companies’ today are:

  1. Use a foreign payment gateway like PayPal, 2 Checkout, Skrill etc. Or
  2. Setup a branch office or a subsidiary in a foreign country
  3. Incorporate in a foreign country and sell globally from there including India

The option #1 above of using international payment providers comes with a heavy transaction cost. The services are not of same order as one can avail being in US or Europe.

So, option #2 and #3 becomes much attractive. This leads to exodus of Indian Software product company’s to USA, Singapore or Europe etc. India stands to lose in the game.

Krish mentions that, “the Indian companies are forced to move abroad to seek the frictionless experience in the payment part, where they allow month on month and do seamless upgrades and downgrades”. He further adds up, “Indian companies being in India do not get the level playing field, even when the strengths of product are very similar to a foreign product. Even using a solution like 2Checkout being in India does not provide seamless upgrade and downgrade. Hence, many companies go and incorporate outside”.

This problem, therefore, is one of the ‘biggest hurdle’ to the ‘stay-in-India’ concept for startups. It is vital that policy makers pay attention and remove friction to this problem for startups to believe in ‘India Story’.

Kiran Jain of Razorpay mentioned that the added attraction for Indian Software product company to move abroad is that, “an Indian company selling on international payment gateway from outside India does not have to comply with service tax”.

This is another level playing field problem. Being in India the Software product sales online is subject to service tax. On other hand being a foreign incorporated company and selling a B2C product the service tax is totally exempted. This is so in current policy framework and is going to stay same in the proposed GST framework.

Although, this is not directly related to the payment gateway problem, it does add-up to the exodus of Startups problem. This issue has been covered in an earlier blog here. It is a policy agenda item on list of taxation issues (of iSPIRT) to be addressed by Government of India and also an item on Stay-in-India checklist.

The cross-border online trade of Software product is directly a Payment Gateway issue. Let us further understand what are the underlying causes, policy issues, possible resolutions and suggestions.

Is there a regulatory hurdle? If not, then what is the cause of problem?

Kiran says, “RBI came up with OPGSP guidelines in 2014”. And, “this policy allows the operation of International payment gateways”, that can facilitate both the foreign currency cross-border transactions and recurring billing. According to Kiran, many Indian banks have capability to provide platform which can accept international cards and multi-currency systems. Few banks support up to 17 different foreign currencies, though the settlement is all done in US dollars.

Why are banks not giving it? Kiran said that in last one year in USA, out of $28.33 trillion online transactions, $16.33 billion were classified as frauds. Indian banking system does not have a capability to incur such losses, “that is the threat to Indian banks”. This threat is the result of ‘returns’ or ‘charge-back’.

In case of delivery of downloadable Software product, at least there is a trail of transaction that can establish that the Software was really downloaded and if unsuccessful the Software can be delivered again. However, in case of services it may be difficult to handle the consumption trail at least in B2C transactions. In B2B transactions, such problems normally do not arise.

Hence, handling the risk of returns and charge-backs is the problem to solved. Solving this will encourage India banking systems to offer free and fair cross-border international payment gateway services.

What is the solution to problem?

Large players by virtue of volume or by offering a risk covering instruments can easily avail the service from banks themselves.

Small and Medium players can use payment aggregators. PayPal and 2Checkout are nothing but aggregators. Thy have infrastructure built in USA. In India they provide services under OPGSP guidelines. Their relationships with issuing banks in USA enables them to provide services in India.

Kiran says, “as on date we have many aggregators in India”. But, “we have not seen any Indian aggregator moving to US and partnering with banks like Wells Fargo or Worldpay”, who could build “an infrastructure trail in US and bring it to India and start providing cross-border payments”.

This will be a powerful option according to Kiran. This option can be used to ease out cross-border multi-currency payment system aggregation. This will give exporters alternative to PayPal and 2Checkout etc.. This will also reduce transaction costs by at least 30%. Now, an Indian merchant pays 4 to 6% plus the currency conversion costs as a compared to the 2.9% + 30 cents per transaction in USA.

The other advantage of Indian aggregator with US infrastructure will be the better understanding of the Indian merchants and the risks involved. Hence, better placed to manage the risks. “Today PayPal looks at every merchant as risky merchant”, says Kiran. The Indian players can have option of either aggregating the merchants on PayPal model. Or offer facility directly to mid and large players.  In later case the entire risk engine is managed by the aggregator. The risk engine will take care of detecting the fraud cards, stolen cards, charge-backs cards as these will not be the capability of a merchant.

In the aggregator model, it is possible to play on volumes by on boarding a large number of small and mid-size merchants. This way an aggregator can easily go to a bank and say my charge-back to sales ratio is just about 1.76%.

Kiran further adds that as an alternative risk mitigation mechanism an Industry body could register small and mid-size Software product companies (merchants) and provide some kind of a certified credit rating. This could help banks and aggregators to assess the risk associated with the individual merchant.

Krish feels, a Govt. body like MSME could build a registration system of merchants with past history, people involved etc. (this could be like extending the Performance and Credit rating scheme of MSME). “This could act as a KYC”, says Krish for the aggregator, payment gateways and banks.

Are there Indian Aggregators offering such services?

As mentioned above, banks offer services in a limited way to large merchants. Aggregators like RazorPay also provide services but again with conditions attached.

Kiran says,“Razorpay provides the services on selective basis. We do not offer the option of card details to be held by merchants”. He further informed that merchant account with many charge-backs are suspended and that cases with one-off charge types may be allowed.

So, there is conditional availability of Indian service providers of cross-border online payment gateways.

Concluding remarks and iSPIRT views

“It is a crying shame if many startups still incorporate outside India just to get a level playing field”, says Krish Subramanian. He also listed following observations:

  • there is an option that is emerging (in terms of aggregators);
  • there are no regulatory hurdles per say;
  • it is more about risk mitigation;
  • the risk mitigation is about creating awareness by closely working with banks;
  • it is also about creating awareness amongst merchants themselves to be able to understand reasons why banks act in certain way and about clarity on pricing, return and refund policy etc.
  • creating overall awareness in eco-system

iSPIRT views on the overall situation on the given problem and present policy status are as follows:

  1. For India to be a Software product nation, Indian resident companies should be able to carry out cross-border trade and receive foreign currency payments onlineseamlessly without opting for incorporating a subsidiary outside India
  2. For a healthy Software product ecosystem, it is vital that Software product companies have access to several options of payment gateway service providers with differing service offerings
  3. RBI alone cannot solve this problem.RBI policy of OPGSP allows the payment gateway players to provide services in India. The inherent risk does not encourage service providers to offer cross-border payment services. RBI may have to become more reformative in encouraging Indian international payment gateway providers.
  4. Government of India needs to intervene and devise an integrative policy that:
  5. promotes an ecosystem of Indian cross-border payment providers
  6. build a mechanism that helps banks and OPGSPs to mitigate their risk without hurting consumer interest
  7. support Software product companies in their cross-border trade by a proactive policy

MeitY can incorporate enabling policy measures in National Software product policy and offer an Indian Software product company registry that has an inbuilt mechanism to ascertain and certify a Software product company’s credibility. Also financial instrument like an Industry corpus fund could provide a common bank guarantee, that can be backup with surety bonds from individual product companies for a defined threshold.

In a digital world order, cross-border trade is going to be highly dependent on easy availability of international payment solutions. Indian merchants able to scale their international trade with ease is vital for India to be retain leadership in Software trade.

 

Cloud Telephony Startups seek support from TRAI

This write-up should be read along with the previous blog – The Value Added Service Providers in Cloud Telephony. These blogs help us to accumulate the progressive development in discourse on policy for this segment of Industry. It is important for our common understanding and help Software product industry innovating in telecom sector in general and cloud telephony in specific terms.

The Startups providing Value Added Services also refereed to as Cloud Telephony submitted their response to Consultation Papers by TRAI on Voice Mail/Audiotex/Unified Messaging Services Licence. 

TRAI also received responses from other service providers (which includes licensed Telecom Operators and ISPs) and Industry Bodies and Individuals. iSPIRT response was also submitted on the due date and can be accessed here from TRAI website.

The responses have been analysed and as required the counter comments have  been filed with TRAI.  Given below is our Response submission.

Counter Comments to responses received on Consultation paper by TRAI on Voice Mail/Audiotex/Unified Messaging Services Licence. Dt. 08/08/2016


After reading the responses to consultation papers, it is evident enough, that there is a clear divide between the Startup or SME players and the Telcos or the industry bodies representing them.

As previously described by us, almost all companies presently providing the services in this (voice mail/Audiotex) space are startups or SME players who have built their own Software products. Unified license operators are already allowed to provide these service. So, there is no barrier for them to enter in to these services, except creating specialisation around these services and building the requisite Software that runs the service.

The licensed Telecom operators in their responses to consultation paper have blindly favoured a license regime in this space, as well as attempted to make the case of revenue loss and breach of license. This is clearly an attempt to hog the telecom sector landscape.

We believe the approach taken by the large players in the Industry is contrary to the direction, thought and objectives of present Government. It confronts the principles of building an innovative society and multiplying growth opportunities for the enterprising youth of our country.

Recognize them as value added Services

We already stated this in our response earlier submitted. However, it seems there is a need to reinforce the point.

The services provided in this space are highly specialised “Value Added Services”. They are by no means either the carriage services or network services. It is a layer on top of the existing mobile and basic telephony that delights the consumer by fulfilling their needs that basic/mobile telephony cannot.

Value Addition is done on the services hired from licenses telecom operators, which have already been subject to revenue share mechanism. Hence, the very claim that these services can be sold at a cheaper rate than the local calls is squarely an imagination. So, also the revenue loss story does not stand any ground.

Therefore, the need to recognize this aspect of “Value Added Service” providers, is primary to any policy framing under consideration on the subject.

Regulate doesn’t imply inevitability of license

There is a serious need to catch up with technological advancements. A large country like India can’t be left to mercy of few companies on this account. This calls for reform and further deregulation of the telecom sector to a degree that it is accommodates the changes from time to time.

In order to allay any doubts of the stakeholders in this sector and better value to the consumer, there may be need to regulate this sub-sector of Value Added Service provider.

Regulation does not always mean “a license”. This value added service sub-sector does not hurt the incumbent licensees in any way. Hence, a simplified regulated regime with lower administrative burden and lowers costs is desirable for suitability to this segment of the telecom sector.

Hence, a registration system with period monitoring and control rather than a license regime has been recommended by us.

Promote Innovation in Digital economy

Indian is entering in to a ‘Digital Economy’ era. Digital India is also not just about connectivity and switching networks. So, a ‘Digital India’ cannot be created by just handful of licensed Telecom players. The consumer in a digital economy is going to consume variety of data and application. Innovative Software products can power up the Digital India to make it a functional ‘Digital Economy’.

Innovation is going to be the lubricant of future digital economies

This segment of the Value Added Service has been born out of innovation of individual entrepreneurs and service provision works on Software products. So, also the commercial part of the service in integrated manner.

At this juncture, when India is wanting to unleash the innovative power by its StartupIndia policy, the license raj or barrier created by large Telcos can be counterproductive to digital economy or the Digital India dream.

Telecom sector and telecom policy at large has to imbibe this need to create friendly promotional environment for innovation to happen. It is not hidden from any one that innovation worldwide is being driven by individuals and small players.

All stakeholders in telecom sector including the licensed telecom operators should contribute to Innovation. Hence, the need to support these small Value Added Service providers and welcome the new ones to emerge.

iSPIRT Request

We seriously feel that growth cannot come from fixing ourselves to status quoist approach. There is a need to further add value to the telecom sector and hence a need to create scope for number of small players to contribute to the overall telecom sector.

There is a huge opportunity for Indian Software industry to innovate and contribute to telecom sector. We from iSPIRT, request that TRAI takes the above points and our earlier response submitted in to consideration and create an enabling environment for India to grow.

Domestic venture debt

In this session on Domestic venture  debt, we talk about a recent announcement by Government of India, that relaxed the provision on raising debt from domestic non-banking sources of funds. Sanjay Khan speaks on the subject in below embedded video.

What is the problem, that this new announcement on domestic venture debt solves?

Private companies can raise debt funds in a restricted manner only. They could raise debt from some allowed sources. These could be like company directors, their relatives and other companies etc. But, not from sources like angel funds, domestic VCs who are not companies. A debt raised from such sources fell under deposits category.

To accept ‘deposits’, companies need to follow number of conditions, which are quite tedious.

What is the new announcement?

As per sub-clause (iii) of Clause 68 of Section 2 of Companies Act, 2013 definition of Private Company, “means a Company which by its articles prohibits any invitation to the public to subscribe for any securities of the Company”.

The new announcements open up some new avenues of raising debt funds from domestic markets.

These new sources of funds, added to this non-public funds category are funds registered and operating under SEBI’s regulated regime. Following are these three new sources

1. Alternative Investment Funds (AIFs)

2. Domestic Venture Capital funds

3. Mutual Funds

Prior to this announcements funding from these sources was treated as deposits and not loan.

What are the limits of announcements?

Whereas this announcement opens up these three highly potential sources of domestic debt funding, it is limited to Rs. 25 Lakhs only.

So the announcement is likely to benefit startups in their early phase.

The other good part is that, this is not limited to recognised Startups or startups registered under StartupIndia with DIPP. It is open to any private company hence it can apply to any startup.

The announcement adds up to efforts made by Government of India in creating better environment for funding. It is a step forward in the direction.

iSPIRT believes and is further taking up with the Government to not limit this provision to Rs. 25 lakhs.

The video below covers this topic with Sanjay Khan, the expert who was instrumental in building up the stay-in-india checklist of iSPIRT.

Join us in hosting the Minister for IT – Bengaluru, 1st July

At the forefront of progress is change. iSPIRT continues to drive the process of change to Transform India as a Product Nation, using the engines of private initiative, policy and programs like Playbook Round Table and PNCamp. iSPIRT’s policy initiatives involve active dialogue with Government.

Conclave for India as the Product Nation

As part of this initiative, iSPIRT is hosting  the “Conclave for India as Product Nation #1″, an open dialogue between the Product industry and our Ministry for IT.

Welcome Sh. Ravi Shanker Prasad

iSPIRT lives and breathes (software) Products and Products only. It’s think-tank has passionately engaged with the Ministry of IT to advocate recognition of the Software Product industry in its own right. We welcome the Hon’ble Minister for IT Shri Ravi Shankar Prasad, to meet the Industry folks and experience our Industry in person, first hand.

 

You already know iSPIRT is an open-source movement. This means everyone can contribute, and each contribution is recognized. It is each such contribution that makes the open-source movement go from strength to strength. In keeping with this philosophy, you are warmly invited to participate in the Conclave with the Minister. iSPIRT Founder Circle members, Product Circle members, Fellows, Mavens and Saarthis are all welcome to attend. It’s your industry, our industry, so be there!

Prior confirmation is required… so do RSVP here to help us make adequate arrangements.

Agenda:

    • Introduction
    • Showcase of Disruptive product initiatives in India
    • Interaction session with the Product industry

Venue:

Hotel Le Meridien, 3pm – 6pm
Sankey Road, Bengaluru
Registration : 2.00pm

Do come in early. Doors close at 2.45pm.

An iSPIRT’ed Budget

One of the pillars of iSPIRT’s mission statement is a focus on converting the needs of the product ecosystem to policy direction.

One of the first undertakings of the iSPIRT community will be to formulate suggestions on how to improve Finance and Investment related policies to yield better results for this industry. And what better time to do this than in the run-up to the Budget presentation on 28 th February?

We plan to host and facilitate open and transparent online discussion around the key topics where current policies should be revisited. The discussions will be seeded with the release of a series of Blue Papers –short discussion documents identifying the key pain points, what is at stake, and how we should proceed as country.

Over the coming four days, we will release a new Blue Paper each day on the following topics:

We encourage everyone to help us collaboratively build on these initial viewpoint documents. We will close the discussions as we approach Budget Day, and after the release of the Budget will then create a set of assimilated viewpoints stemming from the Blue Papers, the discussions that have transpired online, and reflecting on the actual Budget.

These viewpoints will then be shared back with the Government as inputs reflecting the views of hundreds, or hopefully thousands, of product entrepreneurs and ecosystem participants.

Keep checking back here over the coming days, and we hope to hear your voice, too!

Will B.PAC and iSPIRT Transform Urban Politics & the Software Product Industry Respectively?

While we usually focus on product, process and business model innovation as the main facets of innovation, some of the most impactful innovation can be the result of new organizational forms.

Take the case of India’s white revolution. This was driven by a unique 3-tier structure of organizations – the farmers’ cooperative at the village level as the basic organizational unit; a district-level federation of cooperatives with milk processing and marketing capabilities; and a state level apex body with brand and product management capabilities. And, behind this structure were larger organizations like the National Dairy Development Board at the national level that channelizes resources, support long-term investment activities, and accesses new knowledge and inputs. This arrangement takes advantage of flexibility – when required NDDB can look like an extension of the government, when required it is an independent body working with farmers’ cooperatives. This flexibility has helped it manage in a complex environment.

Last week saw the birth of some organizations nowhere as complex as the milk production structure, but with the potential to have major impact.

B.PAC

NR Narayana Murthy launched the Bangalore Political Action Committee or B.PAC as it is being called. This is the first time we are seeing an organization christened as a PAC in India, though this is a common term in the US. I presume this similarity is not just a matter of coincidence. PACs in the US are not political parties, but organizations created to advocate and support a particular agenda. The B.PAC has similar objectives. At one level it aims to restore the quality of life of the city of Bangalore. But at another level it is a pressure group for more political power to cities which are the value creation engines of a modern economy.

The B.PAC’s initial agenda is to enhance urban (read middle class, educated) voter enrolment and voter participation. They also promise to support candidates who back their agenda (new forms of city government, more resources, better urban planning, etc.) In the forthcoming assembly, parliament and municipal corporation elections. Subject, of course, to their meeting other criteria like no criminal cases against them, no record of corruption, etc.

B.PAC has been formed by a group of resourceful and successful individuals who have for long been expressing their dissatisfaction with the state of affairs like Kiran Mazumdar Shaw and Mohandas Pai. It represents their response to many of the issues they have raised in the past falling on deaf ears, and their inability to have a sustained impact on the political system.

Of course, the “involvement” of successful industrialists in efforts to improve Bangalore is not new. During the chief ministership of SM Krishna (1999-2004), the Bangalore Agenda Task Force was created under the chairmanship of Nandan Nilekani. The BATF tried to play the role of a coordinating body, creating a platform for different civic agencies, citizen groups and the state government to come together. While the BATF did manage to do some of this as well as have new bus shelters and toilets built, it was a body without any political legitimacy and was hastily disbanded after the Congress lost the 2004 elections in the state.

Newspaper reports indicate the existence of a similar attempt in the last few years under the chairmanship of Rajeev Chandrashekar. However, this one has been low key, restricting its role to that of a think tank. But again the long term impact doesn’t appear to be substantial.

B.PAC is an interesting development because it shows an inching of rich, successful “middle class” entrepreneurs towards electoral politics. Though apolitical in the sense that it is not a political party, B.PAC clearly has a political agenda. It represents a growing realization that technocratic approaches can’t solve India’s problems. It also suggests that the efforts to create alternate public spaces such as those tried out by Janagraha or the BATF itself could have only limited success. The creation of the B.PAC is a welcome development, for the next logical step will be immersion in electoral politics. I hope to see a party such as the German Green Party emerging out of this process with the ability to push urban issues at the national level.

iSPIRT

The second organizational innovation in the last week was the creation of iSPIRT – the Indian Software Product Industry Round Table. It came into the public view amidst controversy with a Times of India headline announcing it as a breakaway trade body from Nasscom. iSPIRT’s spokesmen were quick to assert that the organisation is an industry round table (not a trade body), that it will not offer membership, and that the founders will continue to be part of Nassom (Disclosure: I am a part of the iSPIRT Founding Circle).

I am excited by the prospect of iSPIRT because of the new activities it is promoting. An important role it will play is to act as a market maker. India has lakhs of small and medium businesses. These businesses are important sources of employment and economic growth but they face a major challenge of maintaining their competitiveness. Information technology has the potential to enhance the efficiency of these businesses. However, these SMBs often lack the ability to evaluate vendor proposals. They are price-sensitive, and risk-averse as far as IT is concerned. Burnt by past experiences, they are wary of making fresh investments in IT.

Under its iSMB initiative, iSPIRT plans to bridge the gap between domestic software product vendors who have relevant solutions and SMB customers. ISMB will study different verticals, map needs, and certify products meeting the vertical’s needs. Only product companies that have customer dispute resolution mechanisms in place will be accredited. Product companies will get feedback on where their solutions fall short of customer requirements. This initiative is designed to bridge the trust deficit that exists today between vendors and users.

ISMB will build on the positive experience of CIO Connect, an earlier effort to bring Indian product companies and large Indian corporate IT users together.

Both B.PAC and iSPIRT are Market-Makers

Though in theory markets provide the opportunity for sellers and buyers to come together, information asymmetry and high transaction costs can prevent markets from functioning efficiently. Initiatives like ISMB and CIO Connect help smoothen out these market imperfections.

B.PAC can also be seen as a market maker. A democratic system in which a whole chunk of voters does not participate will not reflect the needs of different interest groups accurately.

We tend to expect government to combat market failure. Both B.PAC and the ISMB initiative of iSPIRT represent voluntary, community efforts to do so. I will watch both these organizational initiatives with interest.