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.

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:

Use a foreign payment gateway like PayPal, 2 Checkout, Skrill etc. Or
Setup a branch office or a subsidiary in a foreign country
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:

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
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
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.
Government of India needs to intervene and devise an integrative policy that:
promotes an ecosystem of Indian cross-border payment providers
build a mechanism that helps banks and OPGSPs to mitigate their risk without hurting consumer interest
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.

13/09/201612/03/2017

Recurring Billing for SaaS. Is it available in India?

Recurring Billing – demystified for SaaS companies

Abstract

For any SaaS Startup with India market focus, the biggest bottleneck today is recurring billing. It is not available as an open, over the counter service from payment gateways. Most startups have to work around to solve this problem. The workaround may be using an expensive international payment gateway or it may be incorporating a subsidiary in foreign geography. Many startups also move all out of India, if they can afford to do so. In the process India loses some good SaaS companies.

Reading into details, recurring billing is not banned by RBI in India. But, banks and payments gateways do not have the offering available over the counter. Complying with two factor authentication (2FA) and the associated risk of chargebacks are the reasons behind. The payment industry experts say, banks offer it but needs to cover their risk for chargeback scenarios. So, one has to negotiate with banks and therefore large players are able to avail these services.

To bridge the gap startups like Razorpay are building the aggregator payment platform that that can work between the SaaS startups and the Banks to offer recurring billing.

Since, it is not smooth enough, recurring billing is an area, which requires policy maker’s attention. To realize the full potential of a single unified market under GST, the ‘Digital India’ requires a more open, clearly defined and an enabling policy and procedure on digital payments, at par with developed countries.

This article is based on a deep dive into the problem of recurring billing, with experts from payment solution companies Krish Subramanian, Co-founder, Chargebee (Subscription Billing & Recurring Payments Software) and Kiran Jain of Razorpay (a payment gateway aggregator).

Embedded below is a hangout video with these two experts. You may like to watch the video and/or read the blog piece below (which is built on the conversation in the video).

Some terms used in online payment industry

Recurring billing

It is a subscription driven model of charging or collecting payment from customer. Both the frequency interval of charging and amount charged are fixed to qualify for recurring billing. Software as a Service (SaaS) companies are the biggest users of this service.

Merchant: A person or business who want to sell goods or services.

Acquiring Bank: It is the Merchant’s Bank

Card holder: The buyer who owns and uses a credit/debit/prepaid card etc. to buy goods and services

Issuing Bank: It is the Cardholder’s Bank. An issuing bank issues credit cards to consumers.

SaaS industry and status of recurring billing?

SaaS startups offer products or productized services in a subscription model that runs in a per user/seat at a fixed frequency say per month. In SaaS industry, the recurring billing is often at a low cost transactions e.g. $10 to $50 per user per month.

In developed countries like USA online payment gateways and payment aggregator offer these services. A startup in India can sign for the service from these international payment gateways (like 2Checkout and PayPal) sitting in India. This can be done with minimum paperwork and absolutely no hassles. But, the cost is almost double the cost of payment gateway services in India. The down sides are payments may not be real time. Also, currency conversion cost twice. Once, when the Indian customer pay in foreign exchange and again when the international payment gateway pays to the Indian merchant.

Problem is the Indian payment gateways do not provide the recurring billing option as seamlessly as foreign payment gateways. Hence, the need to go to foreign gateway, when an Indian SaaS company wants to sell to Indian customers.

Krish of Chargebee adds, “for SaaS companies a non-negotiable aspect to provide frictionless experience to customers is the ability to collect payments on month on month basis”. (please see the video)

Statutory position of recurring billing in India

If one reads through the RBI’s circulars on two factor authentication (2FA), there is no mention of recurring billing. The RBI’s communication vide RBI/2011-12/145 DPSS.PD.CO. No.223/02.14.003 / 2011-2012 August 04, 2011 covering card not present (CNP) transactions which includes online transactions as also the IVR transactions states following two conditions:

Based on the feedback from the stakeholders and keeping in view the interest of card holders the following directions are issued:

(i) It is mandatory to put in place additional factor of authentication for all CNP transactions indicated in para 4 of our directions dated December 31, 2010 with effect from May 01, 2012.

(ii) In case of customer complaint regarding issues, if any, arising out of transactions effected without the additional factor of authentication after the stipulated date, the issuer bank shall reimburse the loss to the customer further without demur.

For an avid policy interpreter this means 2FA is the requirement for every transaction. It is not a straight forward clear position.

Kiran Jain of Razorpay, reads in to the sentence of same communication, where it says, “The matter was discussed in a meeting of banks with the Reserve Bank of India on June 22, 2011 wherein it was emphasized by the Reserve Bank that while it was not advocating any specific solution in this regard,”. Kiran says, “From RBI perspective there is no restriction in India”. According to him recurring billing is allowed under RBI guidelines provided in first transaction 2FA is followed and there is no restriction even by banks. (please see the video)

If recurring billing is allowed why is it not available openly?

Banks have a risk in complying with the mandatory charge back, in case when customer files a complaint. The issuing banks are supposed to refund to customer in case complaint from the customer. Normally the risk is never transferred to the acquiring bank.

Kiran in the conversation talks about the lack of understanding on risk involved, by merchants in India. Banks needs to cover their risk through transaction fee. Merchants in India don’t want to pay high transaction fees, that can cover the risk involved in charge backs.

Banks are not willing to underwrite the risk for small players. This is why there are no readymade recurring solutions available in Indian online payments.

How can this risk problem be solved?

Kiran says, “the alternative is to create a partner in between the banks and the ecosystem of SaaS companies, who is willing to underwrite the risks”. Razorpay is one such player, who is attempting to solve this problem.

Why can’t a Startup go to Bank directly? What is the way out?

The problem in recurring billing is not only the payment gateway but also the management of the subscriptions. Baking systems are all legacy systems. They are not able to handle the dynamic situations. For example, if a customer lost the card, the new card information should be updated in time. Such gaps are filled by the layer created by third party Payment Gateway solutions.

Also, this further requires some subscription management systems in an online system. Krish calls this “billing intelligence”. This can either be provided by ready made solutions like Chargebee or can also be built in-house.

Startups can solve this puzzle by availing solutions offered by companies like Razorpay and Chargebee. Razorpay reduces the complexities of recurring billing on banking side. Similarly, Companies like Chargebee reduce the complexity of “billing or invoicing intelligence”.

What more can be done on Policy side?

Krish feels, if we engage with banks and banks can build a system that can underwrite risk for small players and also make Bank realize how service providers can help mitigate risk, there can be a chain built to see a successful recurring billing system in India, easily available to SaaS startups.

Kiran’s view is, from policy perspective not much can be done as RBI does not mandate anything specific. It has do’s and don’t type of framework. His view is charge backs are like non-performing assets (NPAs). So, large merchants in India will still get recurring billing solutions from many payment gateway solutions easily and will also have in-house capability to build billing and invoicing platforms.

Looking further (iSPIRT’s Views)

If one researches hard there is possibility to find payment gateways offering recurring billing solutions in India. However, there are lots of questions asked and it is certainly not available as an across the counter service and definitely not to everyone.

Aggregator service like Razorpay have a chance to fill this gap and they will offer valuable service much needed by Startups. A combination of solution like Raozorpay + Chargebee could solve the problem for many startups.

RBI has not banned the recurring billing. On other hand it has also not put the record straight. Going further, there is a need that RBI and Government of India recognize the importance of recurring billing in a digital economy. Once the need is recognized, a layer of reform in policy framework by RBI should be added. Clear regulation that covers all stakeholders as well as encourages banks to offer recurring billing solutions, is needed. A digitally signed online agreement that is backed up by a 2F authentication in first transaction should be enough to cover the paper formalities required for a fixed amount, fixed tenure (frequency of payment) transactions. The buyer of service can revoke the online service agreement online any time. Customer’s risk is therefore limited up to the time he opts out of the service agreement.

RBI will not take actions that promote an Industry. It is Government of India, who should create an enabling policy for SaaS companies. Ministry of Electronics and IT (MEIT) can carve out a scheme that can mitigate risk of Bank, in turn helping SaaS industry. Such things should happen under the National policy on Software product being considered by MEIT.

The bottom line is that the Indian businesses must have access to multiple choices of service providers for availing recurring billing services at a low cost per transaction with a well laid out fraud protection and complaint redressal mechanism.

Both GOI and RBI needs to work together in direction of removing the bottlenecks. India is unveiling a unified digital market with GST coming in. Without seamless digital payments not only we will fall short in our dream of creating a globally competitive SaaS industry but also a fully buoyant ‘Digital India’.

01/09/201605/09/2016

Taxes on Imported Services

Tax on Services procured from foreign service providers

Startups and SMEs in a digital world use many services from across the world. Skype, Google ADwords and hosting services from foreign hosting providers are some examples. So also are the online services of consultants, designers, content writers and developers etc.

There is a service tax required that apply on many such services. Many people confuse on when a service tax applies or advised that there is no service tax. We also come across an opinion floating around that we can circumvent the service tax by paying using personal cards.

Yet, another confusion is on online advertisements. This got complicated further with the addition of equalization levy introduced in budget 2016-17. In some extreme cases entrepreneurs were advised that only 6% equalization levy is to paid when buying from foreign providers. So, we talked to some local consultants. And, to our dismay we found the confusions was equally prevalent among them, on equalization levy on online advertisements..

There is lot of material present on Internet on equalization levy (introduced in finance bill 2016). So, also are articles on service tax on import of service and online online advertisements. Most of these articles are in very legal language. Also, they are not presented at one place to clear the confusion for young entrepreneurs.

This article is aimed at clearing the confusions and helping small companies in understanding the issues involved, to enable them in right compliance. Let us understand the issues in following order:

Provisions of service tax on import of service
Service tax on online advertisement services
Equalization levy on online advertisements

Service tax on import of services

A service tax is payable on all ‘taxable services’ in India. Present rate as on date is 15% (14% Basic, 0.5% Swatch Bharat Cess, 0.5% Krishi Layan Cess).

What are taxable services

To know if a service is taxable or not, one has to refer to provisions of Service tax act and the negative list. The negative is the list of items excluded from service tax. Usually all services that do not fall in negative list are ‘taxable services’.

The most common services that startups use are:

Consulting or professional services – Designers, Coders etc.
Services like Skype
Online advertisement services (google add words/ADSense)
Hosting or cloud services etc.

Please note that the Software is a service, unless it is physically imported on a media through a port of entry. This means the downloaded packaged Software and Software in SaaS model are ‘taxable service’. So also are other digital goods (pdfs, eBooks, music, video etc) downloaded.

Who is liable for Service tax on import of service?

Generally, the liability to pay service tax is on the ‘service provider’. Since it is an indirect tax, the service providers bills the service tax to service receiver, collects tax from service receiver and deposits it to the service tax department. However, in case of imported services it is different.

An import of service occurs when a ‘service receiver’ located in taxable territory of India receives a service from a ‘service provider’ located in nontaxable territory i.e. from outside borders of India.

Since, in case of import of service the ‘service provider’ is not located in the taxable territory of India, the responsibility of service tax lies on ‘service receiver’. This is known as reverse charge mechanism, in service tax act parlance.

The reverse charge mechanism (RCM) is applicable vide Notification No. 30/2012-ST dated 20.06.2012. This RCM notification prescribes that, “in respect of any taxable services provided or agreed to be provided by any person who is located in a nontaxable territory and received by any person located in the taxable territory”, 100% of service tax shall be payable by the person receiving the service.

This provision is not applicable in case of ‘individuals’ who have received such service other than for the purpose of use in business or commerce (Provisions made under section 66A of the Finance Act, 1994).

In view of above let use answer following two questions.

Am I liable to pay Service tax?

A business receiving services from a service provider located outside India, is liable to pay service tax at prescribed rate and as per rules in force at the time.

Can I pay from my personal credit card and get reimbursed from my company?

An individual can receive services for a consideration paid to a service provider located outside India, without a liability to pay service tax, provide the services received are not for business or commercial consumption.

This means, you should not buy services on your personal credit card and use for business. Small amounts may go unnoticed or not enforced by service tax department. But, substantial amounts of such transactions can put you in trouble at later date.

Using online advertisements from foreign suppliers

In case of online advertisements, we come across following two provisions:

a) Service tax on online advertisement services
b) Equalization levy on online advertisements

As mentioned above we came across some entrepreneurs confused on weather both of applies or one of them apply.

Service tax on online advertisement services

Finance act 2014 brought in changes to negative list to broaden the tax base. It now includes provision of online advertisement space on Internet as a taxable service.

Hence, a 15% tax will apply on service of advertisement.

Some people confuse on payment of service tax when they buy from companies like Google and Microsoft. At times, such companies provide some selective services from Indian subsidiary. And, they provide other services from their parent company or a subsidiary outside India.

One should be watchful on where the billing of services is being done from. If this is Google India (e.g. for ADwords), the service tax will be billed to you. The service recipient can see the service tax in the bill. E.g. Google provides Adwords from Google, India.

Many a times when you buy a service using a card online, you buy it from foreign entity. This may go unnoticed as the payment happens in Indian rupees. This happens because of real time conversion from US$ to Indian rupees by the payment gateway.

The transaction is so seamless that the buyer of service does not realize that she actually bought from a foreign company. This happens quite often in case of companies like Google and Microsoft. You buy in Indian Rupees but the transaction may be done by Google, Ireland.

You should be careful about such transactions and your liability to pay service tax. Check is the service tax is mentioned in bill as an item. If not and your billing party is foreign entity or person the service tax is your responsibility.

Special case of ADsense (or similar services)

As per common knowledge ADsense services is presently provided by Google Inc. USA. Hence, the advertisement space revenue received by the Indian websites is in US$. There is an argument that this being export of service is not subject to service tax.

The ADsense issue is not straight forward. clear. The advance ruling issued by service tax department says it is subject to Service tax. Since the agreement is between the Indian website company and Google, INC, some experts treat this as export of service. Thus not falling under service tax net.

However, there is a warning here as per service tax place of business rules. If one is able to establish the end use of service being done by an India company i.e. the advertiser is Indian company, then the situation is complex. The service tax department can call for scrutiny of cases to prove that there was not use of service by any Indian company.

So, ADsense case is not crystal clear and there is needs for caution to be exercised.

Equalization levy

The finance bill 2016 introduced an equalization levy of 6%. This is a type of withholding tax on income of non-resident (foreign service providers) from their sales in India.

The first important point to be noted here is that this is not linked to service tax at all. Service tax is an indirect tax on consumption of service, administered by service tax department. The equalization levy is a type of a direct tax levy on income and administered by Income Tax department.

What is covered under Equalization levy?

The equalization levy is applicable at a rate of 6% on the gross consideration payable for a ‘specified service’. It is applicable if the aggregate value of consideration in a year exceeds Rs. 1 lakh (approximately US$1,500). At present, the ‘specified service’ as defined in the provision are:

Online advertisement
Any provision for digital advertising space or any facility/service for the purpose of online advertisement

In addition, the notification also says more services can be added in future.

Who needs to comply?

As in case of service tax individual consumers are exempted. So, the levy is currently applicable only on B2B transactions.

Every resident person and foreign company (having a PE in India) is required to withhold the equalization levy when making payment to a non-resident (individual or business) service provider.

It is not applicable to non-resident service providers having a PE in India, because they will be subject to regular taxation as a PE in India e.g. Google Inc, USA having a PE in India (Google India Pvt. Ltd) is exempted from equalization levy.

Who bears the burden?

The equalization levy is designed as a withholding tax to be deducted by Indian service recipient from payments to be made to foreign service provider and deposited with Income tax department. The foreign service provider can take the tax credit in home country as per procedure.

However, there are apprehensions that some service provider will not agree to these deductions and finally the Indian companies will bear this as cost.

In any case, the responsibility to deposit the tax with Government lies with Indian service recipients.

Why was equalization levy applied?

The background of equalization levy lies in a ongoing hot debate on subject of base erosion and profit shifting (BEPS) Action Plan. BESP has been under discussion at Organisation for Economic Co-operation and Development (OECD). In digital world, companies from one country can sell online across their borders without having a presence in that geography. This can cause profit erosion in these geographies across borders.

OECD does not favour proactive use of equalization levey. But, they agreed that countries could introduce one in their domestic laws as an additional safeguard against BEPS, provided they respect existing treaty obligations, or include them in their bilateral tax treaties.

It is a tax to equalize the tax burden on remote and domestic suppliers of similar goods and services in a digital world and a safe guard against BEPS.

It has been introduced in in India through Finance bill 2016, by inserting a new chapter titled Equalization Levy.

Situation in GST transition

The clarity on all aspects has still to come in GST. Yet, concepts like reverse charge mechanism (RCM) will apply. Software or all intangibles will be treated as ‘services’ as per model law. We from iSPIRT are arguing against it and wants Software products treated as ‘digital goods’. The rate of service tax will further go up. States will also be charging service tax. Hence, there will be two services tax that will be payable in GST. The state GST (SGST) and center GST (CGST).

Equalization levy has nothing to do with GST. It is going to stay and may be extended to other e-commerce in cross border trade, in future.

11/08/201612/03/2017

Company Incorporation further Simplified by MCA

Ease of doing business – Some new additions in Company Incorporation rules

Ministry of corporate affairs (MCA) has announced the Companies (Incorporation) Third Amendment Rules,2016. The set of announcements made will replace or change the the Companies (Incorporation) Rules, 2014.

There are about 12 changes announced in the notification published at MCA website here. However, the simplifying impact is well associated with few clauses with reasonable clarity.

Mr. Sanjay Khan Nagra, iSPIRT volunteer explains the new announcements in below the embedded video.

Rule 13(2) of Companies (Incorporation) Rules, 2014 following explanation has been added

2014 notification: Following provisions existed

i) The memorandum and articles of association of the company shall be signed by each subscriber to the memorandum, who shall add his name, address, description and occupation, if any, in the presence of at least one witness.

ii) Where a subscriber to the memorandum is illiterate, he shall affix his thumb impression or mark which shall be described as such by the person, writing for him, who shall place the name of the subscriber against or below the mark and authenticate it by his own signature

2016 notification: Now the type written or printed particulars of all the subscriber and witnesses shall be allowed.

Rule 16(1)(m) – of Companies (Incorporation) Rules, 2014 following explanation has been added

2014 notification : Every subscriber to the memorandum was required to submit and file Proof of Identity with the jurisdictional Registrar of companies.

2016 notification: If the subscriber is holding a valid Director Identification Number (DIN), and the same have been updated as on the date of application and the declaration on this effect is given in the application, the proof of identity and residence need not be attached.

For other changes in the rules we suggest you refer to the Notification given at MCA website. Access this link here.

10/08/201610/08/2016

ESOP provisions get a booster from MCA for Startups

ESOP another Stay-in-India checklist item gets MCA nod

Ministry of corporate affairs (MCA) has recently relaxed sweat equity issuance norms for startups. These new relaxations are for limited to Startups recognized by Department of Industrial Policy and Promotion (DIPP). The announcement will immensely help startups. For startups not recognized under DIPP, there is not change.

The new announcement is – Companies (Share Capital and Debentures) Third Amendment Rules, 2016 (Amendment Rules). It amends the Rule 8 governing sweat equity shares issuance and Rule 12 of Rules 2014 that pertains to issue of shares under ESOP. The other rules to draw out an ESOP plans remains same.

This blog explains the new announcement and some basic concepts for those who may not be aware of terms like ESOPS and Sweat Equity and how they benefit the startups.

Mr. Sanjay Khan Nagra, iSPIRT volunteer explains the new announcements in below the embedded video.

There is lot of material on internet on examples and ESOPS plans and how they benefit the entrepreneur and the employee both. The objective of this blog is to set a background and describe new announcement.

An ESOP plan effects the basic capital structure of the company. It also has long term legal or tax implications. A good ESOP plan can maximizing the benefits from the existing and new provisions. Hence, we suggest startups interested in drawing up an Employee Stock Option Plan (ESOP) should seek a professional advice.

What is an ESOP?

An Employee Stock Option Plan (ESOP) is a benefit plan for employees which makes them owners of stocks in the company. ESOPs have several features which make them unique compared to other employee benefit plans. Most companies, both at home and abroad, are utilising this scheme as an essential tool to reward and retain their employees. Currently, this form of restructuring is most prevalent in IT companies where manpower is the main asset. (Definition Source: The Economic Times).

How ESOPS benefit Startups

ESOPs are a proven tool for startups to succeed and grow. There are many ways that ESOPS can be beneficial for startups.

Some of the ways this helps are as given below:

Promoters or founders who can’t contribute capital but bring knowledge and dedication to startup can be have access to equity.
Startups can attract experience and talent with sweat equity
Startups can use ESOPs as a reward to motivate employees
It gives sense of ownership to employees and hence act as an employee retainer ship tool

Change made for Startups

MCA has announced two changes. One, that will increas the base of sweat equity that a startup can issue. Two, that will expand the horizon of sweat equity to promoters and director. Both the changes have are described below.

Increase in limit of Sweat equity shares issued by start-ups

The Rule 8(4) of Rules, 2014 restricted companies from issuing sweat equity shares in excess of 25% of the paid up capital at any time. The rule also limits the issuance of sweat equity shares per year to 15% of the paid up capital or issue value of Rs.5 crores whichever is higher.

The amendment in new announcement expressly permits Start-ups to issue sweat equity shares not exceeding 50% of its paid up capital up to 5 years from the date of its incorporation or registration.

The limits of 15% of paid up per year or capital or Rs.5 crores whichever is higher will still need compliance.

Stock options to promoters and shareholder/directors of startups

The new announcement allows Startups to issue the sweat equity under ESOP to their promoters and to directors who hold more than 10% for the first 5 years from the date of their incorporation. The restriction on issuing stock options to promoters and such directors continues for all other companies

In order to provide this benefit MCA has used notification to exempt the startups from application of Clause (i) and (ii) under Explanation C of Section 62 (1)(b) of Act, 2013 that defines the term ‘Employee’. The Explanation in Section 62(1)(b) reads as below.

Explanation:

For the purposes of clause (b) of sub-section (1) of section 62 and this rule ”Employee” means-

(a) a permanent employee of the company who has been working in India or outside India; or

(b) a director of the company, whether a whole time director or not but excluding an independent director; or

(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company but does not include-

(i). an employee who is a promoter or a person belonging to the promoter group; or

(ii). a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.

[The clauses (i) and (ii) given in blue does not apply on DIPP registered startups for 5 years]

09/08/201609/08/2016

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.