Budget 2023 – Digital Public Infrastructure (DPI) the ‘Mantra’ for New India
iSPIRT Foundation, a technology think-and-do tank, believes that India’s hard problems can be solved only by leveraging public technology for private innovation. iSPIRT as a think tank pioneered the Digital Public infrastructure (DPIs)
India is at the cusp of what could be the most exciting quarter century of its post-independence existence, referred to as ‘Amrit Kaal’ by the Economic Survey yesterday and today in the Budget speech. The Economic Survey also mentioned that GDP could be boosted by 1% by Digital Public Infrastructure (DPIs), where India is stealing a March on the world for sure.
The second testimony to the important contribution of DPIs to the economy comes in the budget speech today when the finance minister stated, “India’s rising global profile is because of several accomplishments: unique world class digital public infrastructure, e.g., Aadhaar, Co-Win and UPI” in the forefront.
Development of DPIs, Stay-in-India Checklist (for Ease of Doing business of Startups), and a ‘jugalbandi’ between public technology and private innovation, through techno-legal regulations, are central to iSPIRT’s work in an attempt to build Product Nation.
The union budget 2023, brings in cheer to see attempts on the following:
Digital Public Infrastructure: The resolve to deepen the DPI and the belief in their role in economic growth. India Stack to build the DPIs has become central to the thought process. Taking the queue ahead the budget 2023 announced the development of DPI for Agriculture, which will be an open source, OpenAPI digital public good, to build inclusive farmer-centric solutions, credit & insurance, farm inputs market intelligence. An Agriculture Accelerator Fund has been announced to promote Agritech start-ups.
Vigyan Infrastructure: efforts to boost R&D, though limited to some sectors right now. Notable among these are – It encourages private sector R&D teams for encouraging collaborative research and innovation in select ICMR labs in the PPP model
One hundred labs for developing applications using 5G services will be set up in engineering institutions.
Center of Excellence for AI for “Make AI in India and Make AI work for India
MSMEs funding& growth is part of the budget thought process, which may lead to the use of another DPI called Open Credit Enablement Networks (OCEN) for enabling MSME funding.
The importance of Ease of doing business is reflected in some announcements like using PAN as a Common digital identifier and entity DigiLocker for MSMEs.
Wanting to keep the startup revolution going is reflected in the intent to use Startups to build technology in multiple sectors and also use the policy for a new India.
However, beneath all the euphoria, some chronic issues remained to be addressed. The disappointment is on the Stay-in-India checklist (a list of Ease of doing business issues for Startups) to stop startups from slipping from India, which has not been addressed. The checklist is being continuously pursued by iSPIRT and is much needed to provide a competitive edge for India to refrain startups from leaving her jurisdiction.
About iSPIRT Foundation – We are a non-profit think-and-do tank that builds public goods for Indian product startups to thrive and grow. iSPIRT aims to do for Indian startups what DARPA or Stanford did in Silicon Valley. iSPIRT builds four types of public goods – technology building blocks (aka India stack), startup-friendly policies, market access programs like M&A Connect and Playbooks that codify scarce tacit knowledge for product entrepreneurs of India.
India currently has90 unicorns – startup companies that are valued at over $1b – and will likely soon have 100 unicorns, becoming the third such country after the USA and China. Since January 2016 when the “Startup India” program was launched, the startup ecosystem of India including infrastructure for startups, be it incubators, mentorship, funding, corporate initiatives, media coverage, or even patent filing, has improved substantially making life easier for entrepreneurs.
However, it is still not as smooth a ride for the Indian start-ups as it is for startups in the advanced economies of say, the USA, Singapore, and China. Our “ease of doing business” is yet to be on par with the developed world, especially given the high taxation, onerous compliance requirements, inadequate and cumbersome legal protection of IP, as well as time-consuming and expensive processes to access capital and secure exits. It isn’t a surprise therefore that many companies are shifting their primary legal location to foreign jurisdictions like the USA, and Singapore.
How do the numbers stand?
As per a study by Venture Intelligence, of the presently known 90 “Indian” unicorns), 56 are based in India, 25 in the USA, 8 in Singapore, and 1 in the Netherlands spanning sectors from e-Commerce to fintech to gaming and more. In other words, 38% of “Indian” unicorns are not quite Indian as they are domiciled outside of India. Moreover, these 34 unicorns have raised approximately $30B ie, this large money could have been but hasn’t been invested into an India domiciled entity.
Sector Wise break-up of the Unicorns
Chart: Sector-wise domicile of unicorns as on 31st March 2022.
The reasons for incorporating in the USA are different from incorporating in say, Singapore. SaaS founders find it easier to reach out to the large market for SaaS “Software as a Service” based offerings in the USA by incorporating there. Companies incorporated in Singapore for high “ease of doing business”, low taxation, quality infrastructure, and quality of life while remaining close to India.
Out of 12 Indian unicorns in the SaaS category, all except Zoho and Darwinbox are based in the USA. SaaS offerings are expected to be a $1 trillionopportunityand India will lose wealth creation, tax revenues, listing, and related income, by not having these companies domiciled in India.
Of the three unicorns in a frontier technology area like Artificial Intelligence, namely – Glance, Fractal, and Mindtickle, one is registered in Singapore while the other two are in the USA. Of the 3 unicorns in Gaming, Mobile Premier League and Dream 11 are based in Singapore and New Jersey respectively while Games 24×7 is registered in India.
Flipkart, India’s greatest startup success story and the poster boy for Indian e-commerce, which was acquired by Walmart at a valuation of over $20B, was domiciled in Singapore. That set the trend of e-commerce companies having their HQs in the island country. There are many Singapore shell companies set up by VC funds to become holding companies for Indian subsidiaries. Singapore is today the hottest destination for the registration of Indian e-commerce players.
Even more worrying than this trend of registering the parent company outside India is the migration of startup founders to UAE and Singapore. Lower taxes, easier access to capital, government support, simple compliance, and better quality of life while being just a short flight away from India make the UAE and Singapore rather attractive to founders.
Whichever country our startups chose to register or our founders chose to migrate to, the ultimate loser is India with intellectual property ownership and funds being vested in non-Indian jurisdictions.
Stay in India Mission
In order to retain the economic value added by the start-up ecosystem, it is important that India urgently puts in place policies that ensure that founders and startups ‘Stay-in-India”. This will require the coming together of various ministries, particularly DPIIT/Min of Commerce, Ministry of Finance, Ministry of Electronics and Information Technology, and regulators like the Reserve Bank of India and Securities and Exchange Board of India to address the Stay-in-India Checklist.
Stay-in-India is an evolving checklist of issues that need to be solved to contain the exodus of startups from India. These issues fall under four categories: a) Ease of doing business and making it easy to raise funds; b) harmonization of coding of digital economy c) Reducing overall tax anomalies and d) Increased DTA and foreign markets access.
The issues are comprehensively listed in the Stay-in-India checklist.
As an example, let’s consider the anomalies in the taxation of dividends. Dividend received from overseas subsidiaries, that has been already taxed, is taxed once again in India as income in the hands of the company. Also, while the rate of tax on such dividends for certain companies is 15% (as against 30%), the same exemption is not provided to limited-liability partnerships and individuals. It amounts to double taxation of income and discourages a model where overseas subsidiaries of Indian startups can pay dividends at lower tax rates to Indian shareholders. Removal of this dividend tax will directly encourage start-ups to remain domiciled in India and receive dividend income from subsidiaries abroad.
Similarly, there are regulatory frictions e.g. TDS on the sale of software products which reduces the working capital in hands of Software product companies, or the need for filling the Softex form (which was relevant in the early days of IT services exports), and which is now redundant as GSTN Invoices already have the required and sufficient data. All that is required is for different departments of the Govt and regulators to connect digitally and share information. The unfavourable tax regime for IPR protection, such as subjection to minimum alternate tax, IPRs being subject to income tax, and not capital gains even when they are held for more than a year is another big irritant. Technology-heavy startups, therefore, tend to relocate to jurisdictions like Singapore and the USA that have a smoother and lower-cost approach. Founders relocating to overseas jurisdictions are typically seen around the time of M&A. One of the reasons relates to taxation: typically, a portion of the financial proceeds arising from an M&A transaction is held in escrow and released to the founders after some time and/or completion of certain contractual obligations. The escrow payments are treated as income by the Indian tax authorities rather than capital gains as other jurisdictions do – this needs resolution.
India is emerging as a global startup hub, with the support of the Govt, with our startups attracting capital and talent while being at the forefront of innovation, jobs, wealth, and intellectual property creation. Brand India is enhanced globally by the success of Indian startups. With more support from the Government by way of removal of regulatory friction and by providing incentives – fiscal and regulatory – the ecosystem required to create, enable and grow Indian startups will dramatically accelerate.
The Ease of Doing Business must be tackled in mission mode with the Stay-in-India Mission (SIIM) being an integral part of India is to secure its rightful place around the global innovation table.
At the Fourth National Startup Advisory Council Meet held on 17.05.2022 under Hon’ble Minister of Commerce and Industry, Consumer Affairs, Food & Public Distribution, and Textiles Shri Piyush Goyal, the NavIC Grand Challenge (GC) was launched. The GC seeks to mainstream the use of NavIC and establish it as a domestic mapping solution.
iSPIRT has contributed to the development of this Grand Challenge. During the Third NSAC Meet, Sharad Sharma, Co-founder of iSPIRT and a member of the National Startup Advisory Council (NSAC), proposed the concept of prominence to NavIC as a domestic mapping solution.
Later, the iSPIRT Team, led by Captain Amit Garg and our volunteers Sayandeep Purkayastha, Captain George Thomas, and Tanuvi Thakur, presented the concept note and working paper on the GC to DPIIT (Dept for Promotion of Industry and Internal Trade).
Multiple rounds of discussion among the Department for Promotion of Industry and Internal Trade, Indian Space Research Organisation (ISRO), and iSPIRT Foundation brought the final shape to the working paper. All of this culminated in the launch of GC-NavIC on the 17th of May.
What is NavIC?
NavIC or Navigation of Indian Constellation is India’s independent regional satellite navigation system created by DOS/ISRO. Its signals are inter-operable with the civilian signals of the other navigation satellite systems namely GPS, Galileo, Glonass, and BeiDou. NavIC has made in-roads into civilian applications in India like vehicle tracking, power grid synchronization, location-based services (using mobile phones), disaster alert dissemination, etc. Efforts are being made to enable the incorporation of NavlC into drones, the maritime sector, wearable devices, time dissemination, geodesy, etc. The applications are being promoted by the availability of NavlC-enabled off-the-shelf chipsets & devices at competitive rates and by the adoption of NavlC in national and international industry standards.
The GC is a step towards taking NavIC adoption further into the future, i.e. the future of AtmaNirbhar Mapping Solution. The GC brings together the triumvirate of NavIC, Agriculture, and Drones by becoming a big-bang thrust for the Kisan Drones Project as well.
The GC-NavIC has an intersection with GOI’s Project Drone Shakti. It seeks to promote:
The use of drones to solve the problem of agriculture insurance, i.e., the integration of the product to solve cases under the Pradhan Mantri Fassal Bima Yojana, is in line with the Government’s steps to harness technology for agricultural growth;
Building a digital database of agricultural data that will supplement the digitization of land records and crop assessment measures of Drone Shakti;
The use of ISRO’s homegrown NavIC technology in developing drones under the GC will promote the use of NavIC in the commercial drone landscape for remote sensing, imagery, mapping, etc.
The GC has invited innovative solutions that will utilize NavIC-enabled drones to capture data related to farm field topography, process this data, and make it available for use for commercial purposes. Ideas should be such that the product can be deployed across all terrain types in the country. Further, the captured and processed data should be viable and efficient for use within the Pradhan Mantri Fasal Bima Yojana (PMFBY) framework.
A detailed application process (here) calls for a detailed proposal of the tech specs of the participants’ product solution. This will be the basis for 25 participants selected for a presentation of their product before the Experts Panel. 7 selected participants on the basis of an objective and transparent selection criteria will compete in Phase 1 of the GC – the prototype deployment stage. In phase 2, the top 3 participants will compete towards fulfilling the problem statement by deploying their fully functioning product.
Transformative Powers of Challenge Grants
Challenge Grants have transformative powers and scalability opportunities that can serve as an impetus to quality innovation. Treatment Adherence for TB was the first challenge launched under the Grand Challenges in TB Control program. The aim was to devise solutions for improving tuberculosis screening, detection, and treatment outcomes. One of the participants, 99Dots, came up with a novel solution for low-cost monitoring and medication adherence program by using a combination of basic mobile phones and augmented blister packaging to provide real-time medication monitoring at a drastically reduced cost. By 2017-18, 99Dots was used across all districts in India and is now listed as a treatment program on the Government’s Nikshay portal.
The GC-NavIC through its intersection with Project Drone Shakti and the revamped operational guidelines of the PMFBY that emphasize tech-based solutions will help harness technology for agriculture and create opportunities for commercial utilization of NavIC. The recent ban on foreign drones by the Government will move the focus to domestic manufacturing. Encouraging local drones with local technology will increase the AtmaNirbhar potential in the drone and navigation ecosystem and enable Indian Startups to unlock the $5 billion drone market.
The GC-NavIC is touted to deliver three essential outcomes – better regulations in the drone and mapping space, ecosystem development, and channel of public money for private innovation. All three will lead to transformative innovations that will push India into modern agricultural practices and domestic mapping-navigation solutions.
The post is authored by our volunteer fellow, Tanuvi Thakur. She can be reached at [email protected].
External commercial borrowings(ECB) imply borrowing (debt) from a foreign (non-resident) lender. ECB is an attractive financing route as it generally offers access to finance with low rate of interest available from overseas low interest markets.
ECBs have been in use by many corporations, PSUS and especially by MNCs setting up operations in India. Who can raise an ECB, from where and under what conditions, rate, maturity period etc. are all governed by Reserve Bank of India (RBI) in India. Startups till now did not have access to the ECB route of funding.
RBI announcement on ECB for Startups
Announcement was made by the Reserve Bank in the Fourth Bi-monthly Monetary Policy Statement for the year 2016-17 released on October 04, 2016, for permitting Startup enterprises to access loans under ECB framework.
Sanjay Khan Nagra, iSPIRT volunteer talks about this announcement in the video embedded. Below.
As such RBI circular is self-explanatory attached here. However, for ready reference, some salient features of the RBI announcement are covered in the text given below.
What are the key announcements?
What is a Startups as per circular?
The above circular covers Startups as defined by the Official Gazette of Government of India dated February 18, 2016 (i.e. Startup Policy of DIPP) given here.
How much can a startup borrow and in what currency?
A startup can borrow up to US$ 3 million or equivalent per financial year either in Indian rupee or any convertible foreign currency or a combination of both. In case of borrowing in INR, the non-resident lender, should mobilise INR through swaps/outright sale undertaken through an AD Category-I bank in India.
What is minimum maturity period?
Minimum average maturity period will be 3 years.
For what end-use can startups use ECB?
Usually there are end-use direction for an ECB. However, for startups under the above said circular of RBI, ECB can be used for any expenditure in connection with the business of the Startup.
What is all-in-cost of ECB?
There are no limits. The RBI circular says, this shall be mutually agreed between the borrower and the lender
In what forms can one receive the lending?
It can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares and the minimum average maturity period will be 3 years.
Can this be converted in to equity?
Yes, conversion into equity is freely permitted, subject to Regulations applicable for foreign investment in Startups.
Who can lend?
Previously, ECB regime inter alia set out various conditions for Indian companies raising loan from external borrowings including conditions relating to (i) eligible borrowers (ii) eligible lenders (iii) permitted end uses etc.
After this circular, the lender / investor shall be a resident of a country who is either a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies; and shall not be from a country identified in the public statement of the FATF. (Please see RBI Circular for detail)
However, overseas branches and subsidiaries of Indian banks and overseas wholly-owned subsidiary or joint venture of an Indian company will not be considered as recognized lenders.
What are security norms?
Foreign lenders or Investors are allowed to request security for any collateral in the nature of movable, immovable, intangible assets (including patents, IP rights etc.) but shall comply with foreign direct investment norms applicable for foreign lenders holding such securities.
Issuance of corporate or personal guarantee is allowed. Guarantee issued by non-resident(s) is allowed only if such parties qualify as lender under paragraph 2(c) above. Exclusion: Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs is not permitted.
For more details you are requested to refer the RBI circular here.
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.
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]