India Financial Services – Disrupt or Be Disrupted

Matrix India recently hosted two firebrands of the financial services world, Mr Sanjay Agarwal, founder AU Small Finance Bank and Mr Sharad Sharma, founder iSPIRT Foundation, Volunteer at India Stack, for a no holds barred discussion at the Matrix Rooftop in Bangalore. Here is an excerpt from the evening and some of our learnings for fin-tech entrepreneurs.

Part 1 of the two-part series features the untold story of AU Bank, in the words of Sanjay Agarwal himself, as below:

Sanjay Agarwal – on his background and early days before starting AU:

“In my early Chartered Accountancy days, I started out by doing audit work, taxation, and managing clients. I had studied hard and was naïve and enthusiastic at that time hoping, to solve the world’s problems. This pushed me to work harder and I had a desire to do something more.

I believe that we are the choices we make. While evaluating various choices, I eliminated all the options that I didn’t want to pursue e.g. to work for a fee or commission and then I started digging deeper on what really interests me – that was when the concept of AU Financiers was formed.

In 1996, as 26 years old, I began approaching HNIs to raise capital, as back then, there were no VCs. I was fortunate to raise INR 10 cr at a 12% hurdle rate and I had to secure the funding with a personal guarantee. But what is the guarantee of the guarantor? No one questioned this at that time. So, I technically became one of the first P2P lenders, and structured a product that didn’t exist– short term, secured and at a 30% rate of interest. That was the start of the AU journey.”

The Early Days of AU:

“I started off AU as a one-man army. I was everything from the treasurer to the collector. Slowly we built our team and rotated the 10 cr of capital to disburse 100 cr of loans – not a single rupee was lost. There were several challenges at that time for e.g., there was no CIBIL score, financial discipline was lacking, people were still learning how to take a loan and repay it and customer ids didn’t even have a photograph. But somehow, we managed.

The period from 1996 to 2002 taught me everything I needed to learn – how to lend, how to collect, how to manage people, read people’s body language, and most importantly how to manage yourself in different situations. I follow all of that until today, and my team also benefits or suffers from those learnings of mine even today. In those 7 years, we would have dealt with 2000 customers out of which 500 defaulted. That was the ratio of defaulters – 25%. But we managed and there were actually no NPL’s.”

Partnering with HDFC Bank

“In 2002, retail credit was beginning to take off, but our HNIs started pulling their money out, as they wanted a higher return. However, at that time, the most premium bank in the country, HDFC Bank, appointed us as their channel partner. The model we followed was very simple – AU was responsible for sourcing the customer, KYC processing and doing on the ground diligence while loans were booked on HDFC’s balance sheet. HDFC is perceived to be a conservative bank, and it is – however, they gave me Rs 400 cr, on a net worth of only Rs 5 cr! They made an exception in our case due to our strong track record, through execution, sound knowledge of the market, and most importantly our integrity.

By 2008, our net worth had increased to Rs 10 crore through internal accruals. At that time, HDFC told us that we can’t give you any more capital, as we were overleveraged, and that we now needed to bring in equity capital if we wanted to grow.”

Growing the balance sheet and partnering right

“I had two choices at that point, I could continue in Jaipur, keep my ambition under control and live comfortably or figure out what else is possible. I chose the latter and this marked the beginning of my partnership with Motilal Oswal. Its easier to raise equity now, back in the day shareholder agreements used to look like loan agreements with min IRR requirements, etc. As luck would have it, a few months after we raised equity, the Lehman Brothers crisis broke out and most banks stopped funding. We were supported once again by HDFC – they were our saviour and I will cherish my relationship with them always. Once the market settled down, having survived this negative environment, there was no looking back.

Our next major investor was IFC. For the entrepreneurs here, I want to say that you have to be selective about your investors, who will help with not just capital – there should be added value they bring to the table apart from money. IFC was giving me 20% lower valuation, but I knew that I didn’t have any lineage to fall back on. As a first-generation entrepreneur, I had to raise money on the strength of my balance sheet and not basis my family name. I knew that partnering with IFC would shift the perception of AU within the industry, especially for PSU banks. After their investment, we grew from one bank relationship with HDFC to 40 bank partnerships. One thing led to another and Warburg Pincus, ChrysCapital, and Kedaara Capital all came on board after that.”

Consistent performance

“From 2008 onwards, we started diversifying from vehicle lending and got into other forms of secured lending like a loan against property, home loans etc. We never tried unsecured lending and never ventured into microfinance or gold finance. Those were very popular products at that time but focusing on what we were good at resulted in a consistently strong performance. We never had a bad year. In the world of finance, the margin of error is very less. If you have a bad year you can almost never come back. Good companies survive regardless of the market condition, you can never blame the market for your company’s poor performance. In 2015-16, we were a successful NBFC, our RoA was close to 3% with an asset base of close to 8,000 crores, with a RoE of 27-28% and everyone was chasing us – the question at that time before us was, what next?”

How we became a bank

“As an NBFC, it is very hard to manage a book of Rs 50,000 cr with the same efficiency and effectiveness as it’s a people dependent business, there are limits to the kind of products you can do and you can’t keep raising capital. Hence, we became a bank because we wanted to be there for the next 100 years and that perpetual platform can only be created through a bank. That is the biggest platform and it is not available at a price. It’s available through your integrity, business plan and execution. Today, we receive Rs 100 cr of money every single day. This is the same person who was struggling to raise Rs 10 cr in 1996, and is now getting money at the speed of Rs 100 cr every day – it feels amazing but there is a lot of responsibility!”

Part 2 of the two-part series features insights from Sharad Sharma:

Recognizing the Athletic Gavaskar moment in Indian Financial Services

“Indian financial services industry is going through its equivalent of the Athletic Gavaskar project of Indian cricket. The motive behind this project was to instil the importance of being athletic to successfully compete in the modern game. A new team was created with the rule that if you are not athletic, you cannot be a part of the team, regardless of other skills that you bring to the table. Virat Kohli eventually became the captain of this team and the results are for everyone to see. Similar yet contrasting stories played out in hockey and wrestling. In hockey, we lost for 20 years because we refused to adapt to the introduction of astroturf. However, in wrestling, the Akhadas in Haryana embraced the move from mud to mat with rigour, and Indian wrestling is already punching above its weight class and hopefully will do even better over time. The idea of sharing this is that similar to sports, sometimes an industry goes through a radical shift. Take the telecom space, for example, if Graham Bell came alive in 1995, he would recognize the telephone system, 20 years later he wouldn’t recognize it at all. The banking industry is going to go through a hockey/wrestling or communications type disruption and a lot of us are working hard to make it happen.”

Infrastructure changes lead to New Playgrounds

“All the banks and NBFCs put together are not serving the real India today. We have 10 million+ businesses that have GST id’s, out of which 8 million+ are big enough to pay GST on a monthly basis, but only 1.2 million have access to NBFC or bank finance. This is a gap that needs to be addressed and it cannot be solved through incremental innovations.

Entrepreneurs and incumbents should learn from what happened in the TV industry when new infrastructure became available. When India went from state-run TV towers in 34 cities to cable and satellite TV in pretty much every town, there was a massive new market that was unlocked that did not want to watch the same Ramayan or Hum Log TV serials. What transpired was an explosion of entertainment products because of the high demand stemming from the new markets and the TV channel players that reinvented their content is thriving today while others that did not, are barely surviving or have shut down.

So where does this leave the bankers? I think it is the biggest opportunity for the right banker who understands this problem, wants to serve this section of the market and is willing to reinvent the way they do their business and take advantage of the new infrastructure that will be available.”

Dual-immersed entrepreneurs have the biggest advantage

“Entrepreneurs who are immersed in the messiness of both the new infrastructure and the old problem are “dual immersed entrepreneurs”. They are the ones that succeed when a market shift is underway. Today this is not happening. Some of our city-bred entrepreneurs are more comfortable with California rather than Bharat. And some of our sales-oriented entrepreneurs are intimidated by the messiness of the new technology infrastructure.”

New Playgrounds need new Gameplay

“In a world where eKYC exists, and we can transfer money through UPI from a phone, and sign documents digitally – we are ready to deliver financial products on the phone and this is the disruption that is required. Access to credit drives the economy and with this new infrastructure, it is now possible to lend to the real India. However, it’s easy to give money, but the ability to get it back and keeping defaults at a minimum is the real trick. Even there we are moving towards seeing a radical improvement. Debt providers now have powers they never had and defaulters are being brought to book. Customers are now incentivized to build their own credit history to get better and lower interest rates over time. A new Public Credit Registry is coming to enable this at scale. But the biggest innovation is related to the dramatic shortening of the tenor. One can structure a one-year loan into 12 monthly loans or 52 weekly loans. This rewards positive customer behaviour and brings about the behaviour change that is needed.

There is no secret sauce here, it requires gumption – like that shown by Reed Hastings, founder of Netflix. He disrupted the TV and home video industry by first having the wisdom to go from ground to cloud and then again when they started developing original content. In both cases, he had little support from the board or investors. If you can reinvent yourself before it becomes necessary, you’re a winner but this is harder to do for a successful company. The legacy of success provides resisters with the clout to block change. The real beneficiary of Aadhaar based eKYC in the telecom world was not the incumbents but Jio – eKYC allowed Jio to acquire customers at an unprecedented scale and they saved INR 5000 crores on KYC costs as well.”

About iSPIRT

iSPIRT is a non-profit think tank that builds public goods for Indian product startup to thrive and grow. iSPIRT aims to do for Indian startups what DARPA or Stanford did in Silicon Valley. iSPIRT builds four types of public goods – technology building blocks (aka India stack), startup-friendly policies, market access programs like M&A Connect and Playbooks that codify scarce tacit knowledge for product entrepreneurs of India.

About AU Small Finance Bank:

AU Small Finance Bank Limited (AU Bank) started in 1996 as a vehicle financing NBFC, AU Financiers and scaled to touch over a million underbanked and unbanked customers across 11 states of North, West and Central India, prior to becoming a bank in April 2017. During this time, AU attracted equity investments from marquee investors such as IFC, Warburg Pincus, Chrys Capital, Kedaara Capital and recently went public when its IPO was oversubscribed ~54 times. Over the years, AU Bank, led by its founder Sanjay Agarwal, has created significant shareholder value with its equity value growing from ~$120 million in 2012 to current market capitalization of ~$3 billion.

Please Note: The blog was first published and authored by Matrix India Team and you can read the original post here: matrixpartners.in/blog

AI/ML Shift for SaaS Companies: Insights from SaaSx Fifth Edition

Early stage SaaS startups typically struggle with one of two things. When you are just starting out, the first struggle is all about mere survival. Will we find customers willing to use and pay for our product ? Good teams typically manage to find ways to negotiate that first challenge. The playbook has been sufficiently commoditized that if you execute well enough, you can actually succeed in getting those early customers. Its a challenge for sure, but is getting easier and cheaper to overcome — which takes me to the second challenge. Once you survive that initial phase, how do you continue to stay relevant and grow? For if you don’t grow, you’ve only prolonged the inevitable and will likely get disrupted into irrelevance by the next upstart that comes along. When you play in a commodity market, that’s the sad reality.

If you find yourself gaining customer adoption, you can be fairly certain that competition isn’t far behind. Unless you find a way to establish sustainable differentiation while you have that head start, you will ultimately die. And that differentiation now increasingly comes down to the value of the data flowing through your platform and how you are able to leverage it better than your competition. In other words, if you are not thinking about constantly learning from the data that you are gathering and enabling implicit intelligence via your products, the odds of survival are going to be stacked against you. Given the significance this topic carries for us at Swym, I was really excited to have the chance to sit in on Ashwini Asokan and Anand Chandrasekaran’s session on AI/ML for SaaS at SaaSx5. And they most certainly didn’t disappoint. With a lucidly laid out argument, their talk served as a strong wake-up call for the SaaS founders in the room that weren’t sufficiently worrying about this topic.

SaaS growth is slowing

Ashwini started out by underscoring the fact that SaaS growth was slowing in general. There’s no denying that most solutions are rapidly becoming commoditized — building a good product has gotten fairly prescriptive, costs have come down and barriers to customer adoption are a lot lower than they used to be. That inevitably leads to markets getting very crowded, making survival increasingly difficult. If you don’t stand out in very defensible ways, you will perish. To make matters worse, AI is slowly but surely causing entire categories of work to disappear — Customer Support, SDRs, Financial/Market Analysts, to name just a few examples. If those workers were your market and you were helping them be more efficient, you are in trouble because your market is disappearing with them. You better be evolving from being software that’s serving those people that in turn serve a function, to actually serving the function itself. Of course you do this with human assistance, but in a progressively intelligent fashion that makes you indispensable.

Embrace the platform mindset

In order to stay relevant, you really need to create a viable roadmap for yourself to graduate from being a simple feature that’s part of a larger platform (No one likes being told they are nothing but a feature, but this really is where most early stage SaaS products sit today) to becoming the platform itself over time. It can most certainly be done because the opportunity exists, and the access you have to your data and how you are able to leverage it is likely to be the most effective weapon to get you there. Think really hard about new use cases you can light up, automations you can now enable, important solutions that hitherto weren’t possible or practical — enabling those capabilities is what will give you stickiness. And you can in turn leverage that stickiness to allow others to build on the data platform you’ve created to expand your moat. Easier said than done of course, but it is the only path to staying relevant. Alexa, Salesforce, Adobe, Hubspot, and most recently Stripe with their just announced app store, all come to mind as stellar examples of execution on this strategy.

How should I be thinking about Data Science?

Anand followed that up with some really good advice on how to go about this, especially touching on what not to do, and it was clearly resonating with the audience. For instance, when he highlighted the fact that most AI initiatives that start with “Here’s the data I have…what can I do with it?” are doomed from the get go, a lot of heads in the room were nodding in agreement — seemed like a pretty common trap that folks had fallen into. Instead, his advice was to identify the end goal that mattered first, with the caution that this could be deceptively challenging. Once that goal is well understood, then focus on the data you have and the gaps that exist — and your challenge basically boils down to filling those gaps and cleansing/validating your data. Those are your most critical, time-consuming steps in the process for once you get the data quality you want, it becomes much simpler to build and iterate your model around that and figure out how to engineer this into a repeatable part of your workflow. The sub par data quality is one of the most common causes for AI projects “failing” and no amount of modeling proficiency will save you from bad data or a poorly understood problem statement.

Get on the train, but don’t lose sight of what got you here

I’m really glad to have had the benefit of listening to their talk in person, and now that I’ve let the arguments sink in over the past couple of weeks, a few truths have become indisputably clear in my head. The AI shift is not one you can ignore as a SaaS founder. If you don’t get on the train, you’ll likely end up under it. And no, getting on the train doesn’t mean simply attaching a “.ai” to your domain name and claiming success. It really comes down to internalizing your vision for why you exist, identifying in very clear terms how your roadmap to making that vision a reality will need to evolve given the AI shift. How do you see your problem space changing in the the next 2–5 years thanks to AI, and what does that mean for you? And given your existing strengths, what can you do to make the most of that shift?

Its important to remember that a lot of the fundamentals of a good SaaS story still don’t change. For instance, a sound distribution strategy is still very much necessary, for without sustainable access to customers, the rest of it is moot. Likewise, you want to be able to protect the access you have to your most valuable asset, your data) and lower the barriers enough for adjacent players to be able to work seamlessly with your offering. All those advantages you have still very much matter. Really, the biggest mental shift you need to make is thinking very deliberately about how the world around you is changing because of AI, and how you leverage those strengths so you continue to have proprietary access to the data you need and become an integral part of that change.

The article is authored by our volunteer Arvind Krishnan, CEO & Founder – Swym Technologies.

Volunteer Hero: Nikhil Kumar

iSPIRT volunteers are strivers. We seek the good for our nation and our ecosystem. We brainstorm, ideate, experiment, build, and evangelize to fulfill our mission of making India a Product Nation. Every volunteer draws us into an ever-enlarging realm of intellectual possibilities and purposeful engagements.

Take Nikhil Kumar for instance. He stepped up almost two years ago to evangelize UPI and handhold its early adopters. He set out to create winning implementations that would put traditional payment systems to shame. Needless to say, this wasn’t an easy thing to do. There was no template to follow. And, most didn’t believe in the potential of this new breakthrough payment system. But this didn’t faze Nikhil. He had chosen his adventure inside iSPIRT and nothing could hold him back.

Today, UPI is a success story. However, that’s not the full story.

Nikhil showed us how to stay cool under fire, to foster affinity, and skillfully navigate diverse opinions amongst many stakeholders. His all-hands-on-deck work ethic came with an ability to take decisive action when the situation demanded it. He showed that a young volunteer can be a visionary with big plans and the capacity to bring them to life. He has set an example for all of us on how to pay-forward and serve a cause bigger than all of us. All this makes him an iSPIRT Volunteer Hero.

iSPIRT Volunteer Heroes – Vivek Raghavan, Rohith Veerjappa, Nikhil Kumar

From tomorrow, Nikhil is shifting gears. He is stepping away from being a volunteer-in-residence. He is taking a few months break. After that, he plans to create a startup. This is great news for iSPIRT. While our India Stack and other technology public platforms create possibilities, it is the products and services that create value. We need all elements of a healthy society – sarkar, samaj, bazaar – to come together to solve population scale problems sustainably. So, we wish him all the very best in this new pursuit of excellence.

All shifts require an adjustment. While Nikhil will remain a part-time iSPIRT volunteer working on WANI, he will no longer be the iSPIRT voice on payments for media, policymakers, startups and financial institutions.

Nikhil’s lasting legacy is that he opened up iSPIRT volunteering for talented youngsters under-30s. Today we have more than a dozen young power volunteers. He has helped all of us see the particular gifts that these young volunteers bring to the cause. His spirit will live on!

By Sharad Sharma, Pramod Varma and Sanjay Khan Nagra for Volunteer Fellow Council

Deeper Strategic Partnerships – Pitching for Significant Scale and Co-Creating the Value

David Vs. Goliath had a happy ending, but the odds of beating Goliath as a startup are slim and most startups do not have a fairytale ending, unless…

At SaaSx5, I had the opportunity to hear Vijay Rayapati share his story of Minjar. This was a fairy tale with all the right ingredients that kept you engrossed till the end. With angels (investors) on their side, along with Minjar and Vijay’s prior experience, Minjar could have faced many Goliaths in their journey. Instead of going the distance alone, Vijay followed the Potential Strategic Partner (PSP) playbook (Magic Box Paradigm) and identified one in AWS. His reasons were clear, one of the biggest challenges a startup faces is distribution. And, a PSP can open several doors instantly, making distribution easier, revenue growth faster and gives the startup multiple options. As a startup, you need to think about a PSP early in the game at the “Flop” and not at the “Turn”. You need time to develop a PSP and you need to start early.

Identifying a PSP in your vertical maybe easy, but building a relationship with them is the hardest. It requires continuous investment of time to build the bond with the PSP such that they become the biggest evangelist of your product. This involves building relationships with multiple people at the PSP -from Business, Product & Tech- to make sure you have the full support from the company to scale this relationship without roadblocks. In the case of Minjar, with AWS as their PSP, it opened roads to customers, built their brand and also increased the value of the company. One of the highlights of the Minjar story was about the CTO of AWS, evangelizing the product at their conference. As Vijay ascertained “Invest time in people who can bring visibility and credibility to your company”. Focusing on these people is a sales channel by itself, and a Founder has to be involved in building that channel when it shows glimmers of hope. The Minjar story had a happy ending, because they invested more time in building their PSP relationship and limiting other marketing activities: they did not spread themselves too thin. This involved multiple operational changes like training, presenting thought leadership & co-selling at conferences, and making sure the end users at the PSP are successful in using your product.  It is also important to note that a partnership is not a reseller or transactional relationship. A partnership is a relationship of strengths, in which each entity brings unique skills and together provides exponential value to the end customer. Partnerships work when you have champions leading on both sides of the table and one of the best outcomes a PSP can provide to a startup is a strategic acquisition. A PSP is one of the best ways for a startup to exit, especially if you have not raised a lot of capital.

At Tagalys we have tried to develop relationships with PSPs; twice, and we seem to be making good progress today after one failed attempt. My learnings resonate with Vijays’ and some of them are

Persona: Not every large enterprise, who might also serve your target customer, is a valid PSP. An enterprise is an ideal PSP if the value you provide as a startup is something that can be incorporated into the product or process of the Enterprise, and without which the end value of the enterprise depreciates. If your startup is not important to the customers of the PSP, then they are not a match for your startup.

Timing: In your early days, a startup needs to focus on customers, customers and more customers. A PSP is likely to work with you only if you are part of the affordable loss for them. Very early in your stage the risk is too high for the PSP to consider the relationship an affordable loss. Remember, you are adding value to the PSP, hence any risk in the value proposition you bring to the table, is a risk to the end customer. Only after having proven your value to your own customers, will a PSP be willing to take you to their customer.

Credibility: Today, Tagalys works with many recognizable customers in the country and that makes the process of gaining credibility & trust easier. Your product is only as good as what your customer says it is. For a PSP to work, you need buy in from stake holders like the CEO, CTO & Product Managers and they are going to put their neck on the line if they can trust you. Customer references are the best channels to gain trust.

Lifecycle: As CEO, I have time to invest in meeting with various stakeholders at the PSP because our product is in steady state. This steady state of the product is theright time to speak with a PSP because your team can take on this additional responsibility. We also have a clear understanding of our expected outcomes, risks and upside in working with the PSP, hence our conversations are well guided and makes the discussion very productive.

Bill of Materials: While Tagalys is a line item in what the PSP provides to the market, we are an important line item who can potentially extrapolate the end value provided to the customer.

Not every startup can find a strategic partner, but one thing is for certain, as Vijay said, “You miss 100% of the shots you do not take”.

Antony Kattukaran is the Founder & CEO of Tagalys. Tagalys is a merchandising engine for online retailers, dynamically predicting what products to display across search & listing pages to increase conversion.

Public Procurement (Preference to Make in India) Order 2018 for Cyber Security Products

‘Digital India’ is one of the flagship programmes of the Government of India (GoI) with an aim to transform the country into a digitally empowered economy. Given the massive push that the government is giving to this programme, some radical changes have taken place across the country at both the public as well as at the government level in terms of digitization. However, it is also a reality that the growing digitization has increased vulnerability to data breaches and cyber security threats.

According to the Indian Computer Emergency Response Team (CERT-In), more than 22,000 Indian websites, including 114 government portals were hacked between April 2017 and January 2018, including the Aadhaar data leak in May 2017. These incidents clearly emphasized a strong need for cyber security products to tackle the threat to India’s digital landscape. In fact, last year, the Union Ministry of Electronics & Information Technology (MeitY) had directed all ministries to spend 10% of their IT budgets on cyber security and strengthen the Government’s IT structure in the wake of cyber threats.

Now, in order to be prepared for cyber breaches, the government entities need sophisticated security products and solutions. Currently, there is a heavy reliance on the foreign manufacturers to source these products as there are a handful of domestic players operating in this space. MeitY had issued a draft notification in June 2017 stating its preference to procure domestic cyber security products and give further impetus to the government’s flagship programme ‘Make in India’, thereby also boosting income and employment in the country.

The good news is that now the government has mandated ‘Public Procurement (Preference to Make in India) Order 2018 for Cyber Security Products’ policy which was released on July 2, 2018. With this policy in place, the local manufacturers will get the much required clarity and support to produce cyber security products. As the participation of domestic players increases in the cyber security industry, it will not only make the digital economy stronger and safer for the nation, but also enhance the ability of the suppliers to compete at a global business level. At the same time, it will also give an opportunity to foreign players to invest in the Indian cyber security product manufacturers which in turn will enable India to channel more FDI into the economy.

Let’s take a look at the key highlights of this policy are:

What is the objective?

Cyber Security being a strategic sector, preference shall be provided by all procuring entities to domestically manufactured/produced cyber security products to encourage ‘Make in India’ and to promote manufacturing and production of goods and services in India with a view to enhancing income and employment

Who are the procuring entities?

Ministry or department or attached or subordinate office of, or autonomous body controlled by the Government of India (GoI) which includes government companies.

Who qualifies to be a ‘local supplier’ of domestically manufactured/produced cyber security products?

A company incorporated and registered in India as governed by the applicable Act (Companies Act, LLP Act, Partnership Act etc.) or startup that meets the definition as prescribed by DIPP, Ministry of Commerce and Industry Government of India under the notification G.S.R. 364 (E) dated 11th April 2018 and recognized under Startup India initiative of DIPP.

 AND

Revenue from the product(s) in India and revenue from Intellectual Property (IP) licensing should accrue to the aforesaid company/startup in India.

How big is the government opportunity?

There is a huge government opportunity waiting to be leveraged, especially because MeitY had asked all ministries to spend 10% of their IT budgets on cyber security.

What are the key benefits of the policy to the local supplier?

The main benefits of the policy that local suppliers can avail are:

  • Procurement of goods from the local supplier if the order value is Rs.50 lacs or less.
  • For goods that are divisible in nature and the order value being more than Rs.50 lacs, procurement of full quantity of goods from the ‘local’ supplier if it is L1 (refer the note below). If not, at least 50% procurement from the local supplier subject to the local suppliers’ quoted price falling within the margin of purchase preference.
  • For goods that are not divisible in nature and the order value being more than Rs50 lacs, the procurement of the full quantity of goods from the local supplier if it is L1. If not, then the local supplier will be invited to match the L1 bid and the contract will be awarded to the local supplier on matching the L1 price.
  • The cyber security products notification shall also be applicable to the domestically manufactured/produced cyber security products covered in turnkey/system integration projects. In such cases the preference to domestically manufactured/produced cyber security products would be applicable only for the value of cyber security product forming part of the turnkey/ system-integration projects and not on the value of the whole project.

Note: L1 means the lowest tender or lowest bid or lowest quotation received in a tender, bidding process or other procurement solicitation as adjudged in the evaluation process as per the tender or other procurement solicitation.

How do I get my cyber security product listed to start getting the benefits of this policy?

You need to get your product evaluated and approved by the empowered committee of the government.

The ‘Public Procurement (Preference to Make in India) Order 2018 for Cyber Security Products’ policy is a commendable step in the direction of providing a robust leap to ‘Digital India’ and ‘Make in India’ programmes.

Get complete details about the policy here. You can also reach the author for more details @ [email protected]

About Author:

Ashish Tandon, Founder & CEO – Indusface

Ashish Tandon a first-generation entrepreneur with a rare combination of strong technology understanding and business expertise has successfully lead and exited several ventures in the areas of security, internet services and cloud based mobile and video communication solutions. Under his leadership as founder & CEO, Indusface a bootstrapped, fast growing and profitable company, has been recognized as an award-winning Application Security company with over 1000+ global customers and a multi-million $ ARR. He is also closely associated with the government and industry bodies of India in drafting of the various Software Product & Security related acts, regulations & policies. Connect with him on LinkedIn or Twitter.

Scaling Sales: A Deep Dive At SaaSx Fifth Edition

As a first time attendee of iSPIRT‘s annual SaaSx conference, I didn’t know what to expect as we drove along the western coast of India towards Mahabalipuram – the venue for SaaSx5. From all the chatter around the event on Twitter, it looked like the who’s who of SaaS leaders in India were attending. Upon arrival, I took my seat with my colleague and looked around. There were only about 100 people in the room, very different from most conferences I’d attended in the past – a lot more exclusive, and a melting pot of SaaS founders building a diverse set of products. It had all the markings of an inspiring day, and it did not disappoint.

Starting with a keynote from the estimable founder of Zoho, Sridhar Vembu, the day was packed with talks and discussions focused on growing one’s SaaS company in the current technology landscape, primarily led by founders of notable SaaS companies of the country. One such event was an unconference on “Setting up and Scaling Sales across Segments and Geographies”, led by Ashwin Ramasamy from PipeCandy.

Picture this: about 80 founders seated in a room, circled around Ashwin who was leading the conversation about setting up and scaling your sales team. Since the flat organizational hierarchy at SignEasy, and the culture of openness at the company provide me with a wonderful vantage point of all functions across our company, including sales, I was eager to listen to the different perspectives that the founders brought to the table. At the start of the discussion, Ashwin graciously asked the audience for talking points they’d like covered, and the discussion began. A plethora of topics were discussed, starting from the very definition of inside sales, leading up to when and why to deploy an inside-sales team. Hiring and putting together the right sales team, including whether it should be in-house or outsourced, was another hot topic of debate with many founders offering their own experiences and perceptions.

The conversation then steered towards outbound sales and the mechanics and economics of that, which contributed to some of the biggest takeaways for me – things that cannot be found in a book and are only learned through experience.

The success rate of outbound sales peaks at 2%, as opposed to the 40-50% success rate you come to expect with inbound sales. This was an interesting insight, as it’s easy to assume your outbound effort is underperforming when it could actually be doing quite well. Also, you should use the interest you’re receiving through the inbound channel to refine your outbound strategy – your inbound interests are a goldmine of information on the kind of industries, company sizes, and job functions your potential customers represent. At SignEasy, we are constantly honing our outbound target by capturing as much information as possible from our inbound requests.


Further, the efficacy of your outbound sales effort is a direct function of the maturity of the market you’re in – for a saturated market with tens of other competitors, outbound usually fails to make a mark because it’s difficult to grab a potential customer’s attention. This is a great rule of thumb to decide if outbound is for you, depending on the market your product serves.

Outbound sales also requires dedicated effort rather than a ‘spray and pray approach’ – a minimum 6-month commitment is crucial to the success of your outbound strategy. Founders should be deeply involved in this initial effort, sending out 500 emails a day for at least 3 months, and tweaking and iterating through them as they get to the most effective email. It’s also important to dedicate yourself to a channel when experimenting, but also experiment and exhaust numerous channels over time to zero in on the most effective ones.


The value of this discussion, and indeed the day, was best expressed by the ferocity with which my colleague and I took notes and wrote down every piece of advice that was being dropped around the room. Being product leads of the SMB business and mobile products respectively, Phalgun and I were amazed at how much we could relate to each point being discussed, having been through and living the journey first-hand ourselves at SignEasy.

SaaSx5 was nothing short of inspiring, and we emerged from it feeling uber-optimistic about SaaS in India, and what the future holds

This blog is authored by Apoorva Tyagi, Product at SignEasy

The First 50 Confirmed Companies at #SaaSx5

We are almost there. Only 3 days for #SaaSx5.

For people who are have attended earlier SaaSx I don’t need to tell this, but for all those who are attending the event for the first time – SaaSx is an informal event for knowledge sharing by SaaSprenuers for SaaSprenuers. This is why we have it on the beach for the last 3 years. 🙂

If you don’t know what this is about, SaaSx5, iSPIRT Foundation flagship event for software entrepreneurs of India, is being held in Chennai on 7, July 2018 (Saturday). SaaSx has been instrumental in shaping Global Software from India in the last 3 years. This year the theme is to help SaaS entrepreneurs setup for growth over the next 1-2 years.

So the first 50 confirmed list #SaaSx5 companies is here. It has been a slog for us going through all the applications we received, especially the initial drive to set extremely fair criteria and process. Listening to feedback from earlier SaaSx this year we decided to allow Founder and +1 (from their leadership team). Having a tag team we believe is extremely helpful to the founders in learning, assimilating and taking it back to their teams. This also meant that given the small limited space we had to be strict in our curation to ensure most SaaS product startups had an opportunity.

By the time this post goes live many other invites will have been sent and confirmed. We will continue to announce the companies finalized as we go along, so they can start preparing for the amazing sessions.

There are still spots, so if you have not registered or confirmed your invite (check your email), please do it quickly.

saasx5

In no particular order, here are the first 50 (based on their confirmations).

  1. 3Five8 Technologies
  2. 930 Technologies Pvt. Ltd.
  3. AceBot
  4. ADDA
  5. Airim
  6. Almabase
  7. Appointy
  8. Artifacia
  9. Artoo
  10. Asteor Software
  11. BlogVault Inc
  12. Bonzai digital
  13. CogniSight
  14. DevSys Embedded Technologies Pvt Ltd.
  15. FactorDaily
  16. FlytBase
  17. FormGet
  18. Fourth Dimension Software Systems India Pvt Ltd.
  19. Fyle
  20. Gaglers Inc
  21. Godb Tech Private Limited
  22. inFeedo
  23. Infilect Technologies Private Limited
  24. InMobi
  25. Inscripts
  26. JKL Technologies
  27. Leadworx
  28. LiveHealth
  29. Lucep
  30. Mindship Technologies
  31. Netcore Solutions
  32. Olivo Inc
  33. Omnify Inc
  34. Playlyfe
  35. Plivo
  36. PushEngage
  37. QueryHome Media Solutions Ind Pvt Ltd.
  38. ReportGarden
  39. Rocketium
  40. ShieldSquare
  41. Siftery
  42. SlickAccount
  43. Stealth
  44. Strings.ai
  45. Syscon Solutions Pvt. Ltd.
  46. Tagalys
  47. United Translogix Pvt Ltd
  48. Vernacular.ai
  49. Waffor Retail Solutions Pvt Ltd.
  50. webMOBI

[Update: Next 20+ also announced]

All confirmed participants will receive further information in their mailboxes.

Looking forward to an amazing #SaaSx5!

Thanks to our many behind the scenes volunteers who have been tirelessly working on getting us this far and continuing on. Thanks to Chirantan & team from Software Suggest for crafting this post.

Building for Bharat – A Bharat Inclusion Initiative

Bharat Inclusion Initiative seeks to equip entrepreneurs with the right knowledge, skills and tools they need to solve some of the toughest problems of India in a scalable manner using technology. While Bharat Inclusion Research Fellows are working on some of the most interesting studies, another important source of knowledge is thought leaders and domain experts who have been there and done that. In this three-part video series, we have Dr Pramod Varma, the Chief Architect of Aadhaar, providing his perspective on how entrepreneurs can go about building solutions for Bharat.

Part 1: The Key Construct

What are Bharat’s unique attributes? Its needs and aspirations? With data becoming one of Bharat’s key assets, how can entrepreneurs leverage it to provide solutions that matter? Watch the video to know some answers to these questions and much more.

Part 2: The Journey So Far

How to leverage the opportunity made available through Data empowerment? Know how Aadhaar, India’s biometric ID, has fundamentally changed the economics of reaching the poor. Understand how the Aadhaar platform has aided in building further platforms of IndiaStack such as eSign and Digilocker which have further reduced cost and increased trust at scale. The video rounds off with another uniquely Indian platform — Unified Payment Interface (UPI).

Part 3: Exciting Times Ahead

Reimagine solutions. With the newer domain, specific stacks being built, learn how even seemingly unrelated domains can use these platforms to offer innovative solutions. With GST and BBPS already in place, and more being built around transport (ETC), National Health Stack, Diksha and Drone Stack it has been never this good for entrepreneurs crafting solutions for Bharat. Watch the video to understand how.

____________________

What is Bharat Inclusion Initiative?

Bharat Inclusion Initiative (BII) is an incubator platform at CIIE that provides entrepreneurs with the domain knowledge, training, financial support, mentorship, and market access they need to bring inclusive, for-profit-business to life. BII’s core design is to promote technology-driven entrepreneurship towards the delivery of affordable services to the Bharat Segment- the poorest 200 million households in India who survive on less than $5 per person a day through programs, fellowships, and funding where possible.

The program focuses on solutions leveraging technology, especially the India Stack. It integrates financial inclusion research with entrepreneurship and training to transform these solutions into scalable, viable and high impact businesses.  Keen on partnering with entrepreneurs who are driven by building next-generation digital services for India. Reach out to us at [email protected] or ask your questions in the comments section below.

Please note: The above information was first published by Bharat Inclusion Fellows here: https://medium.com/bharatinclusion/building-for-bharat-df8b12867271

First AI/ML Playbook Roundtable – Playing With the New Electricity

This is a Guest post by Krupesh Bhat (LegalDesk) and Ujjwal Trivedi (Artoo).

AI is seen as the new electricity that will power the future. How do we make the best of the opportunity that advancements in AI technology brings about? With this thought in mind iSPIRT conducted a symposium roundtable at the Accel Partners premises in Bengaluru on March 10th. Accel’s Sattva room was a comfortable space for 20+ participants from 11 startups. There were deep discussions and a lot of learning happened through subject matter experts as well as peers discussion. Here’s a quick collection of some pearls, that some of us could pick, from the ocean of the deep discussions that happened there.

Products that do not use AI will die soon. Products that use AI without natural intelligence (read common sense) will die sooner.

– Manish Singhal, Pi Ventures

Starting with that pretext, it isn’t hard to gather that AI is not just a promising technology, it is going to be an integral part of our lives in near future. So, what does it mean for existing products? Should everyone start focusing on how they can use AI? Are you an AI-first company? If not, do you need to be one? After all, it does not make sense to build the tech just because it appears to be the next cool thing to do. If you are building AI, can you tell your value proposition without mentioning the word AI or ML? have you figured out your data strategy? Is the need driven by the market or the product?

Before we seek answers we must clarify that there are two types of products/startups in the AI world:

First, an AI-first startup – a startup which cannot exist without AI. Their solution and business model is completely dependent on use of Artificial intelligence (or Machine Learning at least). Some examples of such startups in local ecosystem are Artifacia and Locus.sh.

Second, AI-enabled startup – startups with existing products or new products which can leverage AI to enhance their offering by a significant amount (5x/10x anyone?). Manish has a very nifty way of showing the AI maturity of such companies.

The session was facilitated by several AI experts including Manish Singhal of pi Ventures, Nishith Rastogi of Locus.sh, Shrikanth Jagannathan of PipeCandy, Deepak Vincchi of Julia Computing.

Maturity Levels of AI Startups

After a brief introduction by Chintan to set the direction and general agenda for the afternoon, Manish took over and talked about the various stages of AI based companies. Based on his interactions with many startups in the space, he said there are roughly four growth stages where different companies fall into:

Level 1No Data, No AI: An entity that solves a business problem and is yet to collect sufficient data to build a sustainable AI business. The AI idea will die down if the company fails to move to state 2 quickly. Business may be capturing data but not storing it.
Level 2Dark data, No AI: The company holds data but is yet to build solid AI/ML capabilities to become an AI company. There is a huge upside for such companies but the data strategy needs to be developed and AI capabilities are not mature enough to be considered as an AI/ML company.
Level 3Higher automation driven by data and AI: These are the companies that have built AI to make sense out of data and provide valuable insights into the data using AI/ML, possibly with some kind of human assistance.
Level 4Fully autonomous AI companies: These are the companies at the matured stage where they possess AI products that can run autonomously with no human intervention.

Manish also noted that most companies they meet as a VC are in level 1 and 2, while the ideal level would be 3 and 4. He noted that AI comprises of three important components: Data, Algorithm & the Rest of the System that includes UI, API & other software to support the entire system. While it is important to work on all three components, oftentimes, the data part doesn’t get enough importance.

Do You Really Need Artificial Intelligence?

A whole bunch of solutions are smart because they are able to provide additional value based on past data. These are not AI solutions. They are merely rule based insights. Nishith from Locus added that there is nothing really wrong with rule based systems and in a lot of cases AI is actually an overkill. However, there are two cases where it seems apt for startups to look at AI for their predicament:

  1. Data is incomplete: An example of this is Locus who gets limited mapping for gps coordinates and addresses.
  2. Data is changing constantly: A typical case was of ShieldSquare where bots are continuously evolving and improving and the system deployed to identify them also needs to learn new patterns and evolve with them.

It is important to have clarity on your AI model especially when you communicate with your internal teams. Figure out what is the core component of your product – AI, ML, Deep Learning or Computer Vision.

What’s Driving Your AI Approach?

There are two major driving forces that can help one in deciding whether to AI or not to AI.

  1. PUSH: The internal force when decision can largely be taken if your business is sitting on a lot of useful data, may be as a side effect of your key proposition.
  2. PULL: The external market driven force where clients expect or ask for it e.g chatbots. We are already observing that AI can be a great pricing mechanism.

However, take great caution when using Customer data or Derived data, it depends on legal agreement with clients and can get you into legal troubles if it violates any terms.

Is Your Data Acquisition Strategy in Place?

Anyone interested in AI should have a data acquisition strategy in place. Here are a few points that can help you get one in place:

    • What data do you collect, How do you validate it, Clean it and store it for further analysis?
    • Surveys and chatbots can provide a steady stream of data if built correctly
    • Think of data as a separate entity (has its own lifecycle), it may help to think of it as a currency and plan how you would earn, store and utilise it
    • Capturing location, user interaction data can be insightful. This may include the interactions user has committed and the ones they have not committed (deleted/skipped/hidden)
    • It makes sense to invest time, resources and people to gather data properly
    • Have a unified warehouse (can start with economical options like Google Analytics and AWS)

It is also important to give some thoughts on how you are using aggregate data across the platform. In case, if your AI model uses a combination of customer specific data and the sanitised aggregate data available in the platform (“Derived Work”), then you should make sure that you have the permission to use such data. Without such clarity, you may run into legal issues.

Deepak Vincchi explained how Julia Computing is emerging as the programming language of choice for data scientists. The platform can process 1.3 million threads in parallel and is used by large organizations to crunch data problems.

In all this was an extremely engaging 3 hours without break. Guiding the session with real examples by Nishith, Shrikanth and also shared learnings from Navneet and others really helped bring to life Why AI and How AI. This symposium is part of an AI playbooks track was aimed at kickstarting cohorts of startups ready to jump with AI and help them get traction with AI, more will emerge on this shortly.

10 startups attended this mini-roundtable session – Acebot, Artifacia, Artoo, FusionCharts, InstaSafe, Klove, LegalDesk, Rocketium, Rubique, ShieldSquare.

Thanks to volunteers Rinka Singh and Adam Walker for their notes from the session and Ankit Singh (Mypoolin/Wibmo) for helping coordinate the blog post & note

* All iSPIRT playbooks are pro-bono, closed room, founder-level, invite-only sessions. The only thing we require is a strong commitment to attend all sessions completely, to come prepared, to be open to learning & unlearning, and to share your context within a trusted environment. All key learnings are public goods & the sessions are governed by the Chatham House Rule.

Featured photo by Matan Segev from Pexels https://www.pexels.com/photo/action-android-device-electronics-595804/

The History and Future of Angel Tax

“I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose:

Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value.”

When ex-Finance Minister Pranab Mukherjee introduced angel tax in 2012, it created an uproar in the fledgeling startup and angel investor community. While the purpose of this section was to reduce money laundering by imposing the hefty tax rate of 30.9 percent, it had several inadvertent consequences.

There were several cases of money laundering by Jaganmohan Reddy that were caught by the Enforcement Directorate, who revealed that people had “paid bribes to Reddy in the form of investments at exorbitant premiums in his various companies to the tune of Rs 779.50 crores apart from making payment of Rs 57 crores to him in the guise of secondary purchase of shares and donation of Rs 7 crores to the YSR Foundation”.

To prevent such abuses of the law, the government clamped down and stated that any unjustified share premium given by a private company would be taxed as income in their hands. But to catch one culprit, they threw the book at many innocents. The relevant law known as section 56(2)(viib) of the Income Tax Act came to be known as the angel tax section. Many startups which are private companies and had issued shares at a premium to angel investors ended up facing notices from the tax authorities under this section. This premium is treated as income in their hands, classified as “income from other sources” and taxed at the maximum marginal rate of tax.

The ‘Startup India’ initiative changed all that. Under the stewardship of the Honourable Prime Minister, startups became a focus area. As per the ten points in the Action Plan, if a startup was registered post- April 1, 2016, then the angel tax was not applicable to the startups. The move had helped startups operating in that area, but a problem still existed for startups that were incorporated before 2016. In fact, in December 2017, many startups received notices and orders for the Financial Year 2013-14. A few entrepreneurs who faced income tax notice hassles launched an e-petition called Change.org in January 2018 so that the government could take some concrete action in Budget 2018.

iSPIRT has taken up the matter with MoF and DIPP on the same. We had made some representations to MoF specifically before the budget. In the budget, the Finance Minister made a statement on continued assistance to the Angel Ecosystem. Due to rigorous efforts that went into sharing of information by these startups, we have recently seen MoF making the welcome announcement.

As per the latest announcement, angel tax would not be applicable on startups which are incorporated before 2016, fulfil the criteria under Startup India Policy and have been granted angel funding up to Rs10 crores. It is believed that at least 300 startups will get a breather from angel tax. The government is also likely to establish a separate committee for the recognition of startups that meet these criteria.

In a further relief to startups, the Finance Secretary Hasmukh Adhia also announced that income tax officers would not take precipitate action and will proceed only after the first set of appeals decided in appellate cases. The exact phrase they used was “no coercive action”, which helped many startups heave a collective sigh of relief. All pending appeals by March 31, 2018, will be quickly addressed.

If you are a startup and need further guidance on angel tax, you should follow the steps below:

  1. Register at DIPP for a startup even if you were incorporated before 2016 and currently are still a startup as defined by DIPP by logging onto this site and filling up the form at https://www.startupindia.gov.in/registration.php.
  2. If you are a startup as per DIPP definition, then get your DIPP certification. All startups which may have raised funding post-April 2016 and are registered with DIPP will not have angel tax applicable to them.
  3. If you are a startup which has received income tax notices for years before 2016 and is still eligible to register as a startup, then please register yourself with DIPP. You can share the registration certificate and relevant notifications with the assessing income tax officer to get an exemption from angel tax.
  4. If you are a startup which has received income tax notices for years after 2016, then please repeat step 2 mentioned above and then appeal against the order. It is important that due process is followed so that the redressal measures taken by the tax authorities can come into effect.

These startups do not have to pay 20% of the tax order at the time of appeal as this has been a one-time exception granted till 31st March 2018 to avoid hurting the sentiments of the startup ecosystem. You can share the order with iSPIRT.

Also, pursuant to our meeting with MoF, we have been assured that the income tax officers in the various jurisdictions have been directed to exercise leniency on this till the new taxation regime for angel and venture capital investors comes into place, as announced by the Finance minister in his budget speech. The officers are aware of the hardships that startups now face and are doing their best to mitigate this within the ambit of the current law.

DIPP and MoF are also in the process of allowing a waiver to the earlier startups facing the angel tax issue, provided the investment made is under Rs 10 crores and subject to an Inter-Ministry board approving the same. This should happen in the next 5-10 days.

We will encourage all startups which have received notices and orders under Section 56 to follow the above steps to chart their way across the new announcements.  

Please forward your orders to [email protected] enabling us to use these orders to take a strategic view to policy to help with this issue in the long term.

Start up India.

Stand up India.

This post is co-authored by Nakul Saxena and Siddarth Pai, Policy Expert Council Members, iSPIRT Foundation

iSPIRT’s Response to Justice SriKrishna committee’s White Paper on Data Protection Framework for India

Read more about the Data Protection Law here: https://pn.ispirt.in/india-in-a-digital-world co-authored by Shrikant Karwa and Sarika Mendu.
For any query, Feel free to write to us: [email protected]

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. 

A Look Back At How Startup India Has Eased The Journey Of Startup And Investors

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It’s been two years since the fateful 2016 budget which recognised “Startups” as a separate breed of companies unto themselves, demanding bespoke treatment from the government and authorities. The clarity brought forth helped quell the nerves of both companies and investors, who had to otherwise resort to exotic exercises, supplementary structures, and platoons of professionals to keep their entrepreneurial dreams alive.

As we all await with bated breath for the slew of reforms expected of the Finance Minister, it behoves us to see how far we’ve come and how much further we need to proceed so that a billion dreams may become a reality.

This article is the first part of a two-part series which explores how Startup India has eased the friction in the Startup ecosystem so far, from an investor’s perspective with the second part talking about the next step of reforms which would have a multiplier effect on the ecosystem.

Flywheel of Funding

More often than not, any coverage about fundraising covers the journey of startups and entrepreneurs and the travails of raising their multimillion dollar rounds. But there exists another dimension to this story, that of fund managers raising their own funds. A large section of the investor community was elated that the government recognised this oft-ignored story and created the Rs 10,000 Cr (USD 1.5 billion) Fund of Funds managed by SIDBI which invests into SEBI registered AIFs and Venture Capital Funds.

This approach seeks to galvanise an ecosystem through a flywheel effect, instead of gardening it via direct intervention. The 10,000 Cr corpus can help seed AIFs worth Rs 60,000 Cr in India, which when fully deployed, is estimated to foment 18 lakh jobs and fund thousands of Indian startups. By contributing a maximum of 20% of the corpus of a fund, many fund managers can hasten they fundraise and concentrate more on helping their portfolio companies raise, instead of competing with them.

The Fund of Funds has invested into 88 AIFs so far, thus galvanising more than 5,600 Cr (USD 873 million) worth of investments into 472 Startups.

Bringing back tax breaks, not a back-breaking Tax

The Government’s support of Indian investors found its way into the Income Tax Act, with several measures to incentivise investments into the Indian Startup ecosystem, such as:

  • Insertion of Section 54 EE, which exempts Long-Term Capital Gains up to Rs 50 lakhs provided it has been invested in the units of a SEBI registered AIF
  • Insertion of section 54GB, which exempts Long-Term Capital Gains of up to Rs 50 lakhs provided it been invested into the shares of a Startup which qualifies for section 80IAC
  • Clarifying that the conversion of debentures or preference shares to equity shares will not be considered as a transfer and thus subject to capital gains at the point of conversion (the entire Venture Capital industry is based on convertible debentures and preference shares and this move has settled long-standing disputes regarding the instruments of investments)
  • Issuing a notification that the dreaded angel tax will not apply to shares issued at a premium to domestic investors by those startups who qualify under the DIPP scheme (although the scope of this needs to be extended to rid the spectre of angel tax that haunts various investors and entrepreneurs)
  • Clarifying that the stance of the assessee in categorising the sale of listed securities held for more than 1 year as Capital Gains or Income from Business can’t be questioned by the taxman
  • Changing the definition of a capital asset to include any securities held by a Foreign Portfolio Investor, thus removing the friction arising from asset classification (a similar provision is sorely needed for domestic hedge funds and Category III AIFs)

Capital without Borders

The Startup India scheme over the past few years has rolled out the red carpet to foreign investors while rolling back the red tape. The success of this is evidenced by the percentage of funding foreign capital represents in the Indian startup ecosystem, which is 9 times higher than domestic capital investment.

Some of the initiatives include:

  • Liberalising Foreign Direct Investment into most sectors including financial services, single brand retail, pharma, media and a host of other sectors up to 100% in most areas
  • Abolishment of the Foreign Investment Promotion Board
  • Relaxation of External Commercial Borrowings (ECBs) for Startups for up to USD 3 million
  • Allowing for issue of shares for non-cash consideration to non-residents under the automatic route
  • Marshalling foreign investment into Indian entities primarily for the purpose of investing in other Indian entities has been brought under the automatic route as opposed to the previous government approval route
  • Dismantling the approval mechanism for the transfer of securities by a Foreign Venture Capital fund to an Indian resident
  • Moving most of the filings (FCGPR, FCTRS, etc) to an online window managed by the RBI (ebiz.gov.in)

Well begun is half done

The government’s efforts to improve life for Startups in investors have begun to bear fruit in tangible ways as evidenced by the reduction in the number of companies seeking to have a Delaware entity with Indian operations. The recent leapfrog in the “Ease of Business” rankings also stands testament to this.

The Government must now seek to consolidate all these gains and clarify its stance and the stance of the tax department on long pending issues which have been a bane to all startups. While we have miles to go before we sleep, we must look back and take note of what we’ve achieved before we seek to scale greater heights.

This post has been authored by Siddarth Pai of 3one4 Capital

Angel Tax in India — Demystified and Explained

Group of business people analysis with marketing report graph, Young specialists are discussing business ideas for new digital start up project.
Section 56:2(viib) or not to be

Context

Section 56(2)(viib) of the Income Tax Act, 1961, or the dreaded “Angel Tax” was inserted by the Finance Act, 2012 to tax any capital raised by a closely held company which is above its Fair Market Value (FMV) as income from other sources, with Rule 11UA(2) stipulating the following two methods for determining the Fair Market Value:

  • Net Asset Value (NAV) Method
  • Discounted Free Cashflow (DCF) Method

However, the Fair Market Value in section 56(2)(viib) is defined as the value

(i) as may be determined in accordance with such method as may be prescribed (Rule 11UA(2));

or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,

whichever is higher;

This section, in particular, has been a bane to small businesses, startups, and investors as it seeks to tax any amounts invested by a resident individual into a privately held company. In the sections below, we will explore the problems with the sections that govern the Angel Tax issue as well as the remedies that have been actioned by the government.

With a few more recommended clarifications and modifications, the entire issue can be resolved to incentivise the ecosystem and reward good behaviour.

Analysis of Section 56(2)(viib)

The reason why 56(2)(viib) evokes such fear in the hearts of startups and investors is that it bestows significant discretionary powers in the hands of the Assessing Officer (AO), goes against the principles of the DCF method, and until recently, discriminated against individuals on the basis of residency.

There are four major issues with this section which causes significant problems to Indian startups.

1. Lack of Enforcement of the Law:

  • 56(2)(viib) clearly states that the FMV shall be the higher of:
    — Value as per NAV or DCF (Rule 11UA(2))
    OR
    — Value to the satisfaction of the AO based on the value of the company as of the date of issue of shares
  • From a plain reading of the section, it can evident that even if the AO is unsatisfied about the value of the Company or believes the value to be lower, the disjunctive OR allows for the higher value to be the Fair Market Value (FMV).

Ideally, the Assessing Officer should not have the discretionary power to disregard a valuation acceptable to the entrepreneurs and a group of sophisticated investors and arrived at by a professional in the form of a qualified Chartered Accountant or a Category I Merchant Banker. Many startups have faced a challenge whereby the AO takes the lower value as the FMV and taxes the entire premium as income in the hands of the companies. This results in the law not being fully enforced, leading to consistent bias against the companies.

2. Discretionary powers of the IT Officer:

  • The valuation arrived at by the Company is on the basis of a Valuation Report given by a qualified Chartered Accountant or Category I Merchant Banker, is based on the inputs of the management and is acceptable to sophisticated investors. However, it has the additional criterion of being to the satisfaction of the Assessing Officer. This subjective interpretation often goes against the objective valuation methodologies specified in the Income Tax Act.
  • For tech entrepreneurs or ventures with long gestation cycles, this hampers the flow of invaluable capital needed to scale their businesses and causes a lot of them to flee to other countries like Singapore or the United States of America to escape this requirement to satisfy the AO.
  • This imputes significant discretionary powers in the hands of the IT Officers and exposes startups to the tender mercies of the taxman. It also takes away from the very basic tenets of finance, as shown below.

3. Projections vs Perfection

  • The principle of a DCF valuation is to encapsulate the present value of possible future cash flows. These are based on a Business Plan prepared by the entrepreneur to the best of their abilities and subject to various risk factors, market conditions, etc.
  • To penalise an entrepreneur for failing to exactly reach their projections by comparing it to their financials on a later date vitiates against the very premise of DCF and robs of the uncertainty inherent in it.
  • The market penalises failure by making future funding harder to come by, an erosion of brand value, of morale, etc. — but adding the risk of a massive tax liability for assuming that the future is certain will cripple the entrepreneurial mindset of venturing forth in spite of deviations from ideal plans.
  • The law states that the FMV is based on the valuation methodology adopted as of today, but takes into consideration what the future may hold. However, 56(2)(viib)(ii) flips this on its very head, as shown below.

4. Present Tense, Future Uncertain

  • 56(2)(viib)(ii) states that the Company needs to satisfy the Assessing Officer based on the value of the Company as of the date of the fundraise, whereas the valuation methodologies (56(2)(viib)(i), which leads to Rule 11UAA), allow for you to discount future cash flows as of today.
  • These contradict each other as the value as of today will always be less than the value in the future.
  • This allows for the complete disregard of the DCF methodology by the AO, leading to taxation on the basis of the present Net Asset Value instead of the probable future value.

The Added Dread of Section 68

In addition to the challenges with 56(2)(viib), Section 68 of the Income Tax Act, 1961 adds another dimension to these issues. Section 68 states that any sum credited to the books of accounts of an assessee can be charged to tax if:

  • The assessee is unable to explain the source of the credit;

OR

  • The explanation is not to the satisfaction of the Assessing Officer

Several startups, who have faced off with the sword of section 56(2)(viib), also have to contend with section 68, which again allows for significant discretionary powers in the hands of the Assessing Officer compounded by the discretionary powers already afforded by section 56(2)(viib).

This tag-team reminds one of the chants that haunted the English cricket team during the 1974–75 Ashes tour of Australia-

Ashes to Ashes, dust to dust,
if Thomson don’t get ya, Lillee must.

Given a choice, several entrepreneurs would rather brave the danger of the speedsters than the discretion of the taxman.

Remedies Already Enforced

The government has taken several proactive steps to protect and nurture the startup ecosystem in India. But this Sword of Damocles still dangles over the head of every entrepreneur. Until it is sheathed for good, there will always be fear about these issues.

On June 14th, 2016, the CBDT released a notification stating that for any company registered as a “Startup” and recognised by the Department of Industrial Policy & Planning (DIPP), any amount raised from an Indian tax resident will be outside the scope of section 56(2)(viib). The total list of exemptions to this section are:

  • Any funds received from a Venture Capital Fund or Venture Capital Company
  • Any class of people as notified by the Central Government, such as:
    — Non-residents
    — From June 14th, 2016 — for a company registered as a “startup” under the Startup India Scheme — any resident

While this goes a long way in helping future companies, those who raised money in assessment years 2015–16 and prior are still exposed to this section even if they are startups.

Recommendations

With a few more additions and clarifications to these sections, the last vestiges of doubt can be quickly addressed to help the startup ecosystem proceed forward with clarity and confidence.

  • If a company has a valid valuation report in accordance with the law, the tax authorities should not be able to question if the valuation is justified based on prospective information
  • If any entity qualified to be a startup from June 14th, 2016 onwards, 56(2)(viib) should not apply for any funds raised at a premium from the date of their incorporation
  • The exemption under 56(2)(viib) offered to a startup shouldn’t be denied on the technical failure of not applying to become a startup if they qualified to become recognised
  • The PAN details of the Investors should be sufficient explanation of the nature of the cash credit for Section 68 and for the Assessing Officer to decide, based on the investors past tax filings, if the source of income can be substantiated or not

Conclusion

Out of the USD 10 Billion of investment into the Indian startup ecosystem last year, only 10% of it came from domestic investors. If the inspirational Make in India and Startup India visions of the government are to be achieved and the true value of the ecosystem is to be unlocked, the government must focus on encouraging domestic investment instead of penalising it. Domestic investors shouldn’t be discriminated against and treated sub-par to foreign investors in terms of the legitimacy of their money, which is the current status quo under 56(2)(viib).

After all, a tax is not the best form of defence.

This post has been co-authored by Siddarth Pai and Pranav Pai of 3one4 Capital

India in a Digital World

Quick Update: We have submitted our response on 30 January 2018. You can find it on this link

It is widely known that the amount of data generated daily worldwide is rising at an incredibly exponential rate. Yet, what remains shrouded is how this data, particularly those data types concerning or generated by us, as individuals, are being used and stored by both the public and private sector. As we move into a data-driven world, it is crucial that the laws developed around Data center on the premise of both empowering and protecting the individual. In fact, the main purpose of the 4th layer of India Stack, the “consent layer”, is just this: to provide for a set of tools and utilities, as part of the Data Empowerment and Protection Architecture (DEPA), that  empower citizens to assert control over their data.

The Justice Srikrishna led committee of experts has released a White Paper articulating their provisional thoughts on the Data Protection Framework, and are seeking public comments on the subject. iSPIRT will be submitting a formal response to the White Paper. This blog post lays out our current views regarding Data Protection and we seek suggestions and comments from the larger iSPIRT community as we finalize these into iSPIRT views.

We want the community members who are keen to contribute on the topic. If you have any feedback or you’re interested in contributing to the response, please reach out to us at [email protected]

 Restoring balance between the individual and data controller

From social media platforms to online loan applications, to ride-sharing apps, many of the services we access regularly require mandatory data collection from the individual to the data controller, either on a one-time but often on a recurring basis. Data collected by data controllers often gets used in ways far outside the stated purpose. This in turn automatically places the individual at a data-disadvantage, so to speak. We believe that this current industry practice is an anomaly and data collected must be used only for the purpose it was collected for and nothing else. The law should work towards enforcing this principle and aim to restore balance across all elements of the privacy construct i.e consent, notice, choice, etc.

In addition, the use cases for data are also rapidly evolving. Without empowering the individual, in addition to restoring the balance, a data protection law cannot be considered complete; bringing us to the second core principle.

Data should be used to empower and not for harm

Indians will be data rich before they are economically rich. They must be empowered to use their data for their own benefit. For example, I must have access to a secure mechanism to share my financial information with a personal finance application such that I may easily track my spending and get intelligent recommendations on where to invest.

Progress in the area of data sharing is evident as in February 2017, the Digital Locker Framework was proposed as a national standard for aggregation. Along with it, an Electronic Consent Framework for enabling consent for sharing of data has also been released.

Yet, what about the vast amounts of personal data that have already been collected under various legal frameworks? Under new norms, individuals can be empowered by being given an option to “opt-out.” Where this is not feasible, the law should favour the rights of the individual, placing the higher onus on the data collector.

Individuals have Rights over their Data

When consent models were first implemented in the 1980s, data was largely static in nature. The opposite is true today with data being tracked, processed, and correlated in a multitude of forms, from the trends of our online shopping choices to the timing of our financial transactions. This transformation calls for a move away from the antiquated “consent-based model” to a “rights-based model” for data protection. The proposed rights model can be guided by three principles: accountability, autonomy, and security. Together these principles will ensure that individuals are provided a right to fair treatment, right to information, right against processing, and right to the security of his/her data. For additional information on the rights-based model, the Takshashila Institution has released a Discussion Document on this very paradigm.

The White Paper stays away from the word ‘ownership’ completely and instead opts to create rights which are always with the individual. The individual has a right to each piece of data that relates to her, and she can exercise this right to accomplish everything all that she needs.  The data controller does not have any rights to this data other than those granted by the individual.  We (iSPIRT) need to come to a conclusion as to whether this language is sufficient from our perspective.

Data controllers must be accountable

Data controllers are typically organisations (including non-profits, governments) and hence much more powerful than individuals. While consent is important from an empowerment standpoint, we are also aware of the practical shortcomings of this approach. Many users do not or can not know enough to make a truly ‘informed’ choice.  The data controller, on the other hand, has been entrusted this data by the user for a specific purpose – it is a very conscious act, and they must be held responsible for how this data is used.  This is a fiduciary responsibility, and the controller must keep the data secure, ensuring that the user does not come to any harm from their possession or handling of the data.

This accountability needs to be enabled and enforced by multi-dimensional checks & balances through an independent Data Protection Authority and appropriate adjudication process that will process dispute resolution when situations involving privacy harms have occurred.

Times of disruptive change require agile regulators

Successful businesses today must have the ability to evolve rapidly. Operating in this environment will require regulators to be agile and provide timely intervention. The law must also recognise that these changes are accelerating and that it will be impossible, at this time, to cover everything. Thus the law should empower regulators by providing a framework with a set of principles which are timeless, along with a mechanism that can change with the times and a context to provide suitable intervention.

Leveraging technology for enforcement

Data is no longer the imperative of a few industries, but fast becoming a utility across industries. Therefore, unlike other regulators for Savings, Lending, Banking or Telecom, the Data regulator will have to deal with at least 10,000x the number of entities.  Every company deals with the data of its employees, shareholders, customers, vendors, etc., which may fall under the supervision of this regulator.  In such an operating environment, it makes it imperative for the enforcement of the law on data to leverage modern technology tools to drive compliance, investigation, etc.

For example, the authority could create a technological framework for enforcement (such as data audits, logging, etc.) to minimise the effort required and only needs to regulate the exceptions or data breach notification could have the objective of helping mitigate the consequences of a breach and to serve as notice for an incident.

Balancing India’s needs for privacy, transparency, and development

Balance is a universal aspiration in all aspects of life and an essential requirement for smooth, sustained and predictable growth. If the balance between privacy and development is not maintained, we may end up with a scenario where an individual may not be able to use their personal data, sitting with one data controller (say tax authority) for a beneficial service from another authority (eg new loan). Similarly, the balance between privacy and transparency is also essential, especially for scenarios involving the utilisation of public resources i.e. a PDS shop refuses to provide details of beneficiary it services under the garb of privacy and is thus able to misuse the system to create ghost beneficiaries.

The law should encourage concepts such as anonymised open datasets and democratised access to other datasets that serve the public interest, paving the way for data to become a public good. The UK’s Biobank & RBI’s effort to create a Public Credit Registry are good examples of data becoming a public good.

There is also a need for balance in the efforts and action of the state and private organisation on surveillance and related activities. With newer technologies making access to data easier and cheaper, it becomes even more important to tread the path of balance more carefully. History has proven, time and again, how surveillance will be misused for personal benefit. Therefore, the law should explicitly call out principles to prevent misuse of surveillance.

In addition, the new law must harmonise various existing laws, particularly, the Information Technology Act, 2000, Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, and Right to Information Act, 2005, which directly or indirectly touch upon the issue of data protection.

Overall, the law should strive to create a balance between protecting personal privacy, providing transparency and accountability for institutions (including government), and ensuring development, growth, and empowerment for the individual and other market participants.

Innovations: Trust Score & Consent Dashboard

It is refreshing to see the White Paper bring out new concepts for consideration like the Trust Score and Consent Dashboard.

The innovation of a Trust Score could also provide a means to empower users by assigning every data controller a score based on the robustness of their data protection and data use practices. At a minimum, this would create a red-flag in the mind of the user, versus the black-box that users currently manage, prior to sharing personal information.

Having said that, the actual design of the Trust Score will be critical. It is easy to understand that the score will punish past incidents of data misuse, but we must also decide what behaviour to reward. Should the score be decided by a centralized authority or through decentralized feedback from end-users, audit agencies, etc.? iSPIRT welcomes views on designing such a Trust Score.

A Consent Dashboard could help individuals easily view to which organisations they have provided consent to process their personal information and how that information has been used.

The Consent Collector entity, part of MeitY’s Electronic Consent Framework, may be extended to perform the function of a Consent Dashboard. Through the consent dashboard, businesses may capture and log user consent, provide users with the ability to see what data has been collected, give users the ability to revoke their consent and erase their data, be able to notify users in a timely manner in the event of a data breach, and most importantly give users the ability to easily port their data to another data controller.

The Consent Dashboard could be designed in a manner such that it only generates and tracks an individual’s consent for collection and sharing of data. However, the data could be directly sent from the Data Provider to the Data Controller (and Data Processor) without passing through the Consent Dashboard. In this way, the Consent Dashboard could just be a registered entity, not a regulated entity, and be maintained by a third party instead of the government.

Next Steps

We request your thought/comments on the principles above, and in helping to add/subtract to the list. The final principles will guide and inform iSPIRT’s response to the Sri Krishna Committee White Paper. If you wish to engage more deeply on this topic of Data Empowerment & Protection and help us frame the response, please let us know by reaching out at [email protected]. The feedback submission on the White Paper is Jan. 31st 2018, thus we request all responses by Jan. 20th 2018 to receive consideration.

Update : We have submitted our response. You can find it on this link.


This post has been co-authored by Shrikant Karwa and Sarika Mendu.