When online grocery seller Grofers shifted its headquarters to Singapore in the first week of October, it became the latest to join a exodus of Indian startups that are leaving for a better environment for fund-raising and doing business in.
The process works in the way that such startups retain their operations in India, along with the vast majority of its employees, but move their headquarters out. In Singapore, Asia’s financial capital, they get access to a more developed eco-system of startup funding, including the chance to get higher valuations if they go for a public offering. E-commerce major Flipkart, which has raised $3.15 billion in funding, is rumored to be planning an IPO next year and was among the first to move out.
Since then the trend has accelerated considerably. InMobi, Mobikon, Fresh Desk, Druva and AdNear have also moved out. Last year about 55 per cent of startups moved their headquarters to Singapore, and this year the number has balooned to 75 per cent. In absolute terms, the number of startups moving out has gone up to about 150- 200 a year.
“Most startups which are gaining scale, and looking to raise funding beyond Series A and eventually an IPO as an exit option for investors, are moving out,” said Nakul Saxena, Fellow, Industry Policy Advocacy, iSPIRT Foundation, a think-tank, in a chat with DEALSTREETASIA. “Except for a few companies like JustDial, most tech companies failed to get optimal valuation during IPOs in India. In Singapore or on Nasdaq, they would have got a much higher valuation.”
There are various reasons, mainly lower corporate taxes, a simpler tax code, and smoother compliance norms. Hong Kong also has similar benefits and companies that have investment from China-based funds are opting for that, but Singapore has attracted far more startups.
“It is way easier to set up a business there, with less paperwork. Tech companies are really valued in Singapore. Inflow and outflow of funds is not scrutinized unlike in India where the Reserve Bank monitors it very closely,” said Sanjay Khan, associate, Khaitan & Co., a law firm which has worked with several startups and companies in a chat with DEALSTREETASIA. In addition, the corporate tax rate is 34.6 per cent in India, way higher than Singapore’s rate of 17 per cent.
But lower taxes are not the only reason. The capital gains regime is also more stringent in India. Here, you need to hold shares for just a year in a listed company for it to qualify for long-term capital gains, which means that proceeds from sale of shares will be exempt from tax. But for unlisted companies, the holding period needs to be atleast 3 years otherwise it will fall under short-term capital gains and be taxed at a higher rate. “That deters investors from funding startups, because this structure is making the investment even riskier,” said Khan.
Compliance rules are the same for large, established conglomerates and for a startup being run out of a garage by fresh graduates. That makes it tough for early stage companies, because much of their time goes into managing tax and compliance issues. It takes atleast a month to a month and a half to set up a startup, and then there are conditions like one resident director should be there on the board and so on. “Such compliance issues are not there in Singapore. Further, the manner in which taxes are paid in India requires professional advice at each step, which takes precious time away from their job of running the business,” Khan said.
Another impediment for startups is that major Indian-origin investors, who know the country well and are more inclined to invest, do not get any treaty tax benefits. To avail of that, they need to set up a fund in Singapore or Mauritius which would then invest in the Indian startup, making the process more complicated. “Indian-origin tech investors make up for a substantial number of overall tech investors in the valley. They would invest much more if rules are relaxed,” said Khan.
Such issues, apart from corruption and red tape, have made India among the more difficult places to do business in, with a rank of 142 — lower than Sierra Leone, Iran and Yemen — in the World Bank’s annual ‘ease of doing business’ survey. In contrast, Singapore has topped the rankings for seven years. Prime Minister Narendra Modi has said he wants India to be in the top 50, but even that lowly goal appears ambitious in the face of daunting challenges in the economy.
Venture funding in Indian startups, which might touch $5 billion this year, has largely gone towards consumer-facing businesses such as e-commerce. That has created a scarcity of funding at this time of plenty for startups working in the enterprise space. Some of them are either heading to Singapore or the Silicon Valley, like Fresh Desk and Druva. “E-commerce is getting more than what they deserve, while the potential of B2B startups is not being recognised in India,” said Saxena. “In the Valley and Singapore, innovation is valued.”