“High share premium is not the basis of a high valuation but the outcome of valid business decisions. This new whitepaper by our iSPIRT policy experts highlights how share premia is a consequence of valid business decisions, why 56(2)(viib) is only for unaccounted funds and measures to prevent valid companies from being aggrieved by it”
Angel Tax (Section 56(2)(viib)) has become a cause celebre in Indian startup circles due to its broad-reaching ramifications on all startups raising capital.
This paper traces the origin of this section, it’s analysis, impact, how it adversely affects startups. Special mention is also made of the seldom covered Section 68 and it’s used in conjunction with Section 56(2)(viib). The paper also proposes recommendations to ensure that genuine companies are not aggrieved by this while the original intent of the section is preserved.
For any support or query, please write to us at [email protected]
What’s The Scoop With Flipkart?
“The digital industry is suffering because there have been several cases where advertisers default on payment… We do not have a strong industry body in terms of payment collection yet.” – Amar Deep Singh, CEO, Interactive Avenues
(article originally posted here)
Between April and May 2016, one of India’s e-commerce leaders – Flipkart– filed cases against 20 of its clients for payment, to collect unpaid advertising dues.
Unlike Snapdeal and Amazon, who charge their clients ahead of time,Flipkart provided advertising services to clients on credit.
Though this move made sense as an advantageous proposition to attract more clients away from competitors, they have now initiated legal procedures against non-paying patrons who respectively owe them anywhere from Rs. 90,000 ($1,350) to Rs.1 crore ($150,000).
Is This Non-Payment A Common Problem?
The Indian business culture is infamous for the chaotic state of its payment practices. In fact, India has the longest average payment delays in the Asia Pacific region (Atradius Payment Practice Barometer).
Furthermore, 97% of Indian SMBs were paid late by their clients last year.38% of these businesses claimed that the late payment was an intentional move by clients. It was a means of using trade credit to finance their own working capital needs.
What’s more is that most of these companies will never enforce their contractual terms on overdue Accounts Receivables. Even when 1 in 2 B2B SMB invoices are paid late. And 1 in 7 B2B invoices are still pending past 90 days.
This is because enforcing a contract in court for non-payment by a client can take up to 3 years and 40% of the claim value to resolve (Doing Business India). By the time suppliers manage to get their money from the over-burdened court system, they’re already sinking under.
Which means that larger clients and buyers run pretty roughshod all over smaller SMBs in their supply chain. They even threaten to withhold payment altogether if their suppliers don’t give them unreasonable discounts to get paid faster.
Large buyers are well aware that their smaller suppliers are:
- Either not aware of their legal rights in such situations;
- Won’t act upon their legal rights because they would choose preserving business relationships over getting paid faster;
- Will be tied up in an expensive legal case for years if they try to take matters to court.
This has created an environment where only the most exclusive businesses can demand payments upfront. While others are usually forced to roll the dice on the kind of client they land up with. Or have to face being ignored altogether by prospective customers.
To put this in perspective, for all the talk of “Why don’t businesses just demand payments upfront”, 98% of Indian SMBs extended goods and services on credit to their clients in 2015.
And if you think the situation is bad for regular Indian SMBs, it’s even worse for businesses which deal in digital services or mass communication products.
So Why Does This Story Matter?
Because the Internet and Mobile Association of India (IAMAI) has used the publicity provided by this issue to push for the development of a payment recovery mechanism for their industry.
Several of the largest digital communication platforms and services are members of the IAMAI. And the organization is wisely using this move by Flipkart to justify enforcing meaningful out-of-court payment protections for the digital communication service industry in India.
The issue of late payment has been a given in the Indian business culture for a long time, to the point where it’s barely mentioned in mainstream media. Even according to law firms interviewed on the Flipkart matter by YourStory staff, this case has gained significance in the media only because a large brand like Flipkart was involved.
This is why, by this point, we’re sure you’re asking – How does this affect me as a small business? Of course Flipkart, a well-known brand, would be able to afford taking its clients to court. Yet if we, as small businesses, did the same – we’d probably be bankrupt by the time a verdict came in.
First, most late or non-payment situations can be addressed by integrating global best payment practices into your business – which Hummingbill’s Gmail plugin automatically does for you for free.
Second, Indian companies are gradually getting less court-shy in getting back money they’re owed by non-paying clients.
Third, the actions of the IAMAI shine a light on the necessity of out-of-court payment mechanisms.
Yet, none of the mechanisms put in place by the IAMAI’s committee will protect other non-member small businesses like you or us. Even though we need these defenses just as sorely.
With that in mind, we at Hummingbill are scaling up our war to break India’s late payment culture in the immediate future. The Indian business culture needs a concentrated effort to create better non-litigious protections which can be enforced. SMBs and startups need shielding from larger buyers who wish to exploit their position on the supply chain.
And for that effort, we will need the support of every single one of you. Keep an eye on this space for more information over the next few days.
In the meanwhile, let us know in the comments section below. If you had the ability to enact out-of-court enforceable protections against late paying clients, what measures (except straightforward mediation) would you put in place?
– Adam Walker & Aniket Saksena
ProductNation, a portal dedicated to the cause of the Indian software product industry and Sandhill, a portal that offers business strategy for the software, cloud and mobile ecosystem have tied-up to share industry best practices with companies that are emerging and growing in India. This is an important development in the Indian software product landscape as it brings to the table pragmatic views from Silicon Valley and from India, which has grown to be recognized globally for its software prowess.
ProductNation was launched earlier this year in India to be the one stop resource for companies who need solutions and advice even as they conceptualize, incubate and grow their businesses. The portal is run by industry veterans who act as catalysts to bring in content from around the world and real life examples of companies who are in the software product space. The portal is run in a democratic fashion and anyone who has material to contribute from various domains is encouraged to participate.
Sandhill is run by industry leader M.R. Rangaswami from Silicon Valley, the hotbed of the software industry. Over the years, Sandhill has grown with the software industry and today is an important destination for the newer technologies and developments that must be understood by entrepreneurs who run or are contemplating to run their own enterprises.
Given that more than 400 companies start their businesses each year in India in the software product industry, it is important that an ecosystem support this endeavour to ensure that companies make a success of themselves and provide value to their customers. Today, it is estimated by Zinnov that there are more than 3,400 software product companies in the country alone with 51% located in Bangalore and the National Capital Region (NCR) around Delhi.
ProductNation encourages entrepreneurs, venture capitals, angel investors, advisors and the ecosystem in general to contribute their thoughts for the benefit of this nascent industry which has the potential to accelerate even further in the coming years.
Acquisition to Expand Social Capabilities of Autodesk 360 Cloud Services.
SAN FRANCISCO, Oct. 4, 2012 — Autodesk Inc., (NASDAQ: ADSK) has completed the acquisition of Qontext,enterprise social collaboration software, from India-based Pramati Technologies. The acquisition of the Qontext technology and development team will accelerate Autodesk’s ongoing move to the cloud and expansion of social capabilities in the Autodesk 360 cloud-based service. Terms of the transaction were not disclosed.
“Autodesk’s acquisition of the Qontext technology is a testament to the Pramati strategy,” said Vijay Pullur, Pramati president. “This transaction is a significant milestone in our ongoing efforts to incubate and build companies that address the rapidly changing needs of business through highly innovative technologies.”
Autodesk intends to use the Qontext technology to add new social capabilities to Autodesk 360, a cloud-based platform that offers users the ability to store, search, and view critical design data improving the way they design, visualize, simulate and share work with others at anytime and from anywhere.
At a time when “Cloud” was still a buzz word and “Platform as a Service” as a category didn’t exist, Fullerton India was looking for the next generation computing technology to help them build business applications faster, cheaper, better. Fullerton India stumbled across OrangeScape Platform (formerly known as DimensionN). They realized that the conventional approach to build a whole host of of application in the “White Space” area will be heavily time consuming taking anywhere between 30 to 90 days for an application.
And, added to that complexity, these applications change every other week and change management becomes a huge challenge. OrangeScape helped Fulllerton to fill this gap by providing a platform approach not only to build these new applications, workflows as per their business process but also to frequently upgrade them as the business need changes. Listen to Pramod!
Mr. Pramod Krishnamurthy who as EVP – Technology (2005 – 2010) at Fullerton India Credit Corporation Ltd. (FIC) talks about his discovery of OrangeScape and how he adopted our platform which ultimately resulted in their IT team building business apps faster than they would have done in the traditional mode.
Pramod shares more on this success story over a video here and ends with a message to his peers on cloud adoption and working along with emerging companies. Pramod is currently CTO at Birla Sun Life Insurance.
If there is one area within the new-age technology that is red hot right now, it is software-as-a-service or SaaS – both in terms of startup activity and as a tool for entrepreneurs to build a low-cost business from scratch. Techcircle.in has come up with a listing of India’s top 10 emerging SaaS companies who have shown significant market traction, created unique products or services that can disrupt existing markets and most importantly, have a very high potential to make it big in the coming years. The listing has been compiled by a distinguished jury comprising Shailendra Singh, MD, Sequoia Capital; Manik Arora, MD, IDG Ventures and Mukund Mohan, an active angel investor. These 10 companies have also showcased their products during Techcircle Runway at Techcircle SaaS Forum 2012, in Bangalore on Aug 31. Here are brief notes on the 10 startups (note: this not a ranking, the companies are arranged in alphabetical order).