iSPIRT works to transform India into a hub for new generation software products, by addressing crucial government policy, creating market catalysts and grow the maturity of product entrepreneurs. Welcome to the Official Insights!
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 andSanjay Khan Nagra Fellows from our policy team have issued a press release on 1st February 2018, a copy of it is here. Reach out to Sanjay Jain in case you would like to know more details.
Special thanks to our volunteers Sharad Sharma, Siddarth Pai, Tanuj Bhojwani, Sarika Mendu, Anukriti Chaudhari, Karthik KS.
The payment gateway 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.
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.
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.
In this session on Domestic venture debt, we talk about a recent announcement by Government of India, that relaxed the provision on raising debt from domestic non-banking sources of funds. Sanjay Khan speaks on the subject in below embedded video.
What is the problem, that this new announcement on domestic venture debt solves?
Private companies can raise debt funds in a restricted manner only. They could raise debt from some allowed sources. These could be like company directors, their relatives and other companies etc. But, not from sources like angel funds, domestic VCs who are not companies. A debt raised from such sources fell under deposits category.
To accept ‘deposits’, companies need to follow number of conditions, which are quite tedious.
What is the new announcement?
As per sub-clause (iii) of Clause 68 of Section 2 of Companies Act, 2013 definition of Private Company, “means a Company which by its articles prohibits any invitation to the public to subscribe for any securities of the Company”.
The new announcements open up some new avenues of raising debt funds from domestic markets.
These new sources of funds, added to this non-public funds category are funds registered and operating under SEBI’s regulated regime. Following are these three new sources
1. Alternative Investment Funds (AIFs)
2. Domestic Venture Capital funds
3. Mutual Funds
Prior to this announcements funding from these sources was treated as deposits and not loan.
What are the limits of announcements?
Whereas this announcement opens up these three highly potential sources of domestic debt funding, it is limited to Rs. 25 Lakhs only.
So the announcement is likely to benefit startups in their early phase.
The other good part is that, this is not limited to recognised Startups or startups registered under StartupIndia with DIPP. It is open to any private company hence it can apply to any startup.
The announcement adds up to efforts made by Government of India in creating better environment for funding. It is a step forward in the direction.
iSPIRT believes and is further taking up with the Government to not limit this provision to Rs. 25 lakhs.
The video below covers this topic with Sanjay Khan, the expert who was instrumental in building up the stay-in-india checklist of iSPIRT.
At the forefront of progress is change. iSPIRT continues to drive the process of change to Transform India as a Product Nation, using the engines of private initiative, policy and programs like Playbook Round Table and PNCamp. iSPIRT’s policy initiatives involve active dialogue with Government.
Conclave for India as the Product Nation
As part of this initiative, iSPIRT is hosting the “Conclave for India as Product Nation #1″, an open dialogue between the Product industry and our Ministry for IT.
iSPIRT lives and breathes (software) Products and Products only. It’s think-tank has passionately engaged with the Ministry of IT to advocate recognition of the Software Product industry in its own right. We welcome the Hon’ble Minister for IT Shri Ravi Shankar Prasad, to meet the Industry folks and experience our Industry in person, first hand.
You already know iSPIRT is an open-source movement. This means everyone can contribute, and each contribution is recognized. It is each such contribution that makes the open-source movement go from strength to strength. In keeping with this philosophy, you are warmly invited to participate in the Conclave with the Minister. iSPIRT Founder Circle members, Product Circle members, Fellows, Mavens and Saarthis are all welcome to attend. It’s your industry, our industry, so be there!
Prior confirmation is required… so do RSVP here to help us make adequate arrangements.
Showcase of Disruptive product initiatives in India
One of the first undertakings of the iSPIRT community will be to formulate suggestions on how to improve Finance and Investment related policies to yield better results for this industry. And what better time to do this than in the run-up to the Budget presentation on 28 th February?
We plan to host and facilitate open and transparent online discussion around the key topics where current policies should be revisited. The discussions will be seeded with the release of a series of Blue Papers –short discussion documents identifying the key pain points, what is at stake, and how we should proceed as country.
Over the coming four days, we will release a new Blue Paper each day on the following topics:
We encourage everyone to help us collaboratively build on these initial viewpoint documents. We will close the discussions as we approach Budget Day, and after the release of the Budget will then create a set of assimilated viewpoints stemming from the Blue Papers, the discussions that have transpired online, and reflecting on the actual Budget.
These viewpoints will then be shared back with the Government as inputs reflecting the views of hundreds, or hopefully thousands, of product entrepreneurs and ecosystem participants.
Keep checking back here over the coming days, and we hope to hear your voice, too!
While we usually focus on product, process and business model innovation as the main facets of innovation, some of the most impactful innovation can be the result of new organizational forms.
Take the case of India’s white revolution. This was driven by a unique 3-tier structure of organizations – the farmers’ cooperative at the village level as the basic organizational unit; a district-level federation of cooperatives with milk processing and marketing capabilities; and a state level apex body with brand and product management capabilities. And, behind this structure were larger organizations like the National Dairy Development Board at the national level that channelizes resources, support long-term investment activities, and accesses new knowledge and inputs. This arrangement takes advantage of flexibility – when required NDDB can look like an extension of the government, when required it is an independent body working with farmers’ cooperatives. This flexibility has helped it manage in a complex environment.
Last week saw the birth of some organizations nowhere as complex as the milk production structure, but with the potential to have major impact.
NR Narayana Murthy launched the Bangalore Political Action Committee or B.PAC as it is being called. This is the first time we are seeing an organization christened as a PAC in India, though this is a common term in the US. I presume this similarity is not just a matter of coincidence. PACs in the US are not political parties, but organizations created to advocate and support a particular agenda. The B.PAC has similar objectives. At one level it aims to restore the quality of life of the city of Bangalore. But at another level it is a pressure group for more political power to cities which are the value creation engines of a modern economy.
The B.PAC’s initial agenda is to enhance urban (read middle class, educated) voter enrolment and voter participation. They also promise to support candidates who back their agenda (new forms of city government, more resources, better urban planning, etc.) In the forthcoming assembly, parliament and municipal corporation elections. Subject, of course, to their meeting other criteria like no criminal cases against them, no record of corruption, etc.
B.PAC has been formed by a group of resourceful and successful individuals who have for long been expressing their dissatisfaction with the state of affairs like Kiran Mazumdar Shaw and Mohandas Pai. It represents their response to many of the issues they have raised in the past falling on deaf ears, and their inability to have a sustained impact on the political system.
Of course, the “involvement” of successful industrialists in efforts to improve Bangalore is not new. During the chief ministership of SM Krishna (1999-2004), the Bangalore Agenda Task Force was created under the chairmanship of Nandan Nilekani. The BATF tried to play the role of a coordinating body, creating a platform for different civic agencies, citizen groups and the state government to come together. While the BATF did manage to do some of this as well as have new bus shelters and toilets built, it was a body without any political legitimacy and was hastily disbanded after the Congress lost the 2004 elections in the state.
Newspaper reports indicate the existence of a similar attempt in the last few years under the chairmanship of Rajeev Chandrashekar. However, this one has been low key, restricting its role to that of a think tank. But again the long term impact doesn’t appear to be substantial.
B.PAC is an interesting development because it shows an inching of rich, successful “middle class” entrepreneurs towards electoral politics. Though apolitical in the sense that it is not a political party, B.PAC clearly has a political agenda. It represents a growing realization that technocratic approaches can’t solve India’s problems. It also suggests that the efforts to create alternate public spaces such as those tried out by Janagraha or the BATF itself could have only limited success. The creation of the B.PAC is a welcome development, for the next logical step will be immersion in electoral politics. I hope to see a party such as the German Green Party emerging out of this process with the ability to push urban issues at the national level.
The second organizational innovation in the last week was the creation of iSPIRT – the Indian Software Product Industry Round Table. It came into the public view amidst controversy with a Times of India headline announcing it as a breakaway trade body from Nasscom. iSPIRT’s spokesmen were quick to assert that the organisation is an industry round table (not a trade body), that it will not offer membership, and that the founders will continue to be part of Nassom (Disclosure: I am a part of the iSPIRT Founding Circle).
I am excited by the prospect of iSPIRT because of the new activities it is promoting. An important role it will play is to act as a market maker. India has lakhs of small and medium businesses. These businesses are important sources of employment and economic growth but they face a major challenge of maintaining their competitiveness. Information technology has the potential to enhance the efficiency of these businesses. However, these SMBs often lack the ability to evaluate vendor proposals. They are price-sensitive, and risk-averse as far as IT is concerned. Burnt by past experiences, they are wary of making fresh investments in IT.
Under its iSMB initiative, iSPIRT plans to bridge the gap between domestic software product vendors who have relevant solutions and SMB customers. ISMB will study different verticals, map needs, and certify products meeting the vertical’s needs. Only product companies that have customer dispute resolution mechanisms in place will be accredited. Product companies will get feedback on where their solutions fall short of customer requirements. This initiative is designed to bridge the trust deficit that exists today between vendors and users.
ISMB will build on the positive experience of CIO Connect, an earlier effort to bring Indian product companies and large Indian corporate IT users together.
Both B.PAC and iSPIRT are Market-Makers
Though in theory markets provide the opportunity for sellers and buyers to come together, information asymmetry and high transaction costs can prevent markets from functioning efficiently. Initiatives like ISMB and CIO Connect help smoothen out these market imperfections.
B.PAC can also be seen as a market maker. A democratic system in which a whole chunk of voters does not participate will not reflect the needs of different interest groups accurately.
We tend to expect government to combat market failure. Both B.PAC and the ISMB initiative of iSPIRT represent voluntary, community efforts to do so. I will watch both these organizational initiatives with interest.