Startup India: Prime Minister Modi offers $1.5b fund, tax breaks, simpler regulations for startups

Narendra Modi, Prime Minister of India,. REUTERS/Mike Segar

The Indian government organized its biggest-ever conference for entrepreneurs in New Delhi that began in the morning. However, the big announcements came several hours later, when Prime Minister Narendra Modi began his speech. And he did not disappoint startup founders and venture investors, by announcing policies that fulfilled their long-standing wishes.

Modi announced the creation of a Rs 10,000 crore ($1.5 billion) fund, to be set up over four years, which will be used to invest in startup businesses. That would help startups that have been deprived of funding due to the big sums that investors put into consumer and internet-led sectors such as online marketplaces, cab hailing apps and food delivery firms. “I urge all entrepreneurs to create companies that solve India’s problems and create jobs,” Modi told a packed auditorium at Vigyan Bhawan in New Delhi.

Modi also said that his government will provide tax breaks for startups. Startups will not need to pay any tax either on their revenue or funding for the first three years. That would make India an attractive destination — it was so already going by the record amounts invested in 2015 —for investors who had chosen to set up offshore entities in Mauritius or Singapore to avail of tax benefits, while investing in Indian startups.

Finance minister Arun Jaitley promised that he will scrap the tax on seed funding by angel investors when he presents the Union Budget in February. These tax breaks will encourage investment from India-based entities, who have lagged behind foreign investors when it came to funding startups.

For venture capital investments, Modi offered what they had been wishing for years: exemption from capital gains tax. As previously reported by DealStreetAsia, not being exempted was one of the reasons why Singapore has been a more attractive destination for the startup ecosystem, than India. Long term capital gains tax is zero for stock investments, and domestic venture capital firms had asked for a similar structure for startup investments.

“The government should not interfere in startups,” Modi said, to an audience that comprised leading global investors such as Masayoshi Son, the founder of Japan’s SoftBank Corp, and founders of some of the hottest startups, like Travis Kalanick, the CEO of Uber Technologies, and collaborative workspace provider WeWork founder Adam Neumann.

India has the third-largest number of startups globally. The National Association of Software and Services Companies (NASSCOM) estimates the number of new companies launched in India grew by 40 percent in 2015.

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Relaxing rules

The government also said that the patent application process will be made much quicker, by setting up a fast-track mechanism to manage them. Patent filings will also become cheaper, through a 80 per cent rebate on fees for startups.

Startups will be exempt from compliance-related inspections for the first three years, something that has been a long-standing demand from founders, who are often faced with a cumbersome list of regulations that most of them can ill-afford.

“We are here today to find out from you what the government should not do,” said Modi. Startups will have access to a credit guarantee program, so that they can get quicker loans from banks. Jaitley said that the ministry is working with the central bank to make more credit available from India’s banks.

A credit guarantee fund for startups will be set up to encourage venture loans from banks. The government will set up a ‘National Credit Guarantee Trust’, with an allocation of Rs 500 crore each year for the next four years.

Modi said that the government will make it easier for them to bid for major government procurement contracts, by removing a minimum threshold of experience and turnover that proved a hindrance in the past.

The government will also introduce a simpler registration process for startups. Currently, that is a cumbersome process, because startups are governed by the same rules that exist for larger companies. “The policy unveiled today treats startups almost like a separate sector given their unique circumstances. Between 2010 and 2015, Indian start-ups raised $18 billion. The next five years would be significantly more action-packed,” said Vamsi Krishna, CEO of edtech startup Vedantu.

The conference was organized to kickstart ‘Startup India’, one of Modi’s key projects along with Digital India, to spur innovation and sustainable economic growth in the country. The program seeks to build a strong startup ecosystem, which in turn is expected to generate more jobs for India’s youth.

India has been in the midst of a startup boom since 2014, and record amounts have been invested by venture capital and private equity firms as they seek the next Alibaba and Uber. The surge in funding, mainly from foreign investors such as Tiger Global and SoftBank, has led to high valuations among some startups. The funding ebbed somewhat in the last quarter of 2015, as investors started looking for business models that would yield potential returns, but might pick up quickly after the announcements made by the government today.

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