Start Up India || About Startup India || Emerging startup ecosystems

Introduction:

• On 16th January 2016, Prime Minister Narendra Modi launched the Start Up India Action Plan, with an aim to build a strong eco-system for nurturing innovation and Startups in the country.
• Three years on, India has transformed into a big startup ecosystem in the world.
• The government has been working towards recognising the real potential of startups operating across diverse segments.
• The govt’s focus has been on three C’s – capital, courage and connections – which Prime Minister Modi describes as the main pre-requisites for setting up a business.
• Due to this, there has been a significant rise in entrepreneurs, particularly from Tier-2 and Tier-3 cities.
• The participation of women has also increased under the Startup India programme.

About Startup India

• Startup India is a flagship initiative of the Government of India, intended to build a strong eco-system for nurturing innovation and Startups in the country that will drive sustainable economic growth and generate large scale employment opportunities.
• The Government through this initiative aims to empower Startups to grow through innovation and design.
• The campaign was first announced by Indian Prime Minister, Narendra Modi during his speech in 15 August 2015 address from the Red Fort, in New Delhi.
• The event was inaugurated on 16 January 2016

Activities and Initiatives

• A startup defined as an entity that is headquartered in India, which was opened less than 10 years ago, and has an annual turnover less than ₹100 crore.
• Under this initiative, the government has already launched the I-MADE program, to help Indian entrepreneurs build 10 lakh (1 million) mobile app start-ups, and the MUDRA Bank’s scheme (Pradhan Mantri Mudra Yojana), an initiative which aims to provide micro-finance, low-interest rate loans to entrepreneurs from low socioeconomic backgrounds.

Various benefits

1. 10,000 crore startup funding pool.
2. Reduction in patent registration fees.
3. Improved Bankruptcy Code, to ensure a 90-day exit window.
4. Freedom from inspections for first 3 years of operation.
5. Freedom from Capital Gain Tax for first 3 years of operation.
6. Freedom from tax for first 3 years of operation.
7. Self-certification compliance.
8. Created an Innovation hub, under the Atal Innovation Mission.
9. To target 5 lakh schools, and involve 10 lakh children in innovation-related programmes.
10. New schemes to provide IPR protection to startup firms.
11. Built Startup Oasis as Rajasthan Incubation Center.

State rankings:

The second edition of the exercise was launched in 2019 and has now been completed with active participation of 22 states and 3 Union Territories.

Best performer:

Gujarat, Andaman & Nicobar Islands

Top performers:

Karnataka, Kerala

Leader:

Maharashtra, Odisha, Rajasthan, Bihar, Chandigarh

Aspiring leaders:

Telangana, Uttarakhand, Haryana, Jharkhand, Punjab, Nagaland

Emerging startup ecosystems:

Chhattisgarh, Himachal Pradesh, Andhra Pradesh, Tamil Nadu, Madhya Pradesh, Uttar Pradesh, Assam, Delhi, Mizoram, Sikkim.

Overview of Startup India Action plan

1. In order to meet the objectives of the initiative, Government of India Action Plan that addresses all aspects of the Startup ecosystem has been announced.
2. With this Action Plan the Government hopes to accelerate spreading of the Startup movement:
3. From digital/ technology sector to a wide array of sectors including agriculture, manufacturing, social sector, healthcare, education, etc.; and
4. From existing tier 1 cities to tier 2 and tier 3 cities including semi-urban and rural areas.

The Action Plan is divided across the following areas:

1. Simplification and Handholding
2. Funding Support and Incentives
3. Industry-Academia Partnership and Incubation

Highlights of the action plan

Simplification and Handholding

Compliance

Regime based on Self-Certification –

1.  Startups shall be allowed to self-certify compliance (through the Startup mobile app) with 9 labour and environment laws.
2.  In case of the labour laws, no inspections will be conducted for a period of 3 years. Startups may be inspected on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer.
3. In case of environment laws, Startups which fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in such cases.

Startup India Hub –

To create a single point of contact for the entire Startup ecosystem and enable knowledge exchange and access to funding.

Rolling-out of Mobile App and Portal –

To serve as the single platform for Startups for interacting with Government and Regulatory Institutions for all business needs and information exchange among various stakeholders

Legal Support and Fast-tracking Patent Examination at Lower Costs –

• Under this scheme, the Central Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a Startup may file, and the Startups shall bear the cost of only the statutory fees payable.
• Rebate on filing of application:
• Startups shall be provided an 80% rebate in filing of patents vis-a-vis other companies.
• The scheme is being launched initially on a pilot basis for 1 year; based on the experience gained, further steps shall be taken.

Relaxed Norms of Public Procurement for Startups –

• In order to promote Startups, Government shall exempt Startups (in the manufacturing sector) from the criteria of “prior experience/ turnover” without any relaxation in quality standards or technical parameters.
• The Startups will also have to demonstrate requisite capability to execute the project as per the requirements and should have their own manufacturing facility in India.

Faster Exit for Startups –

• Startups may be wound up within a period of 90 days from making of an application for winding up on a fast track basis, as per the recently tabled Insolvency and Bankruptcy Bill 2015, which has provisions for voluntary closure of businesses.
• This process will respect the concept of limited liability.

Funding Support and Incentives

Providing Funding Support through a Fund of Funds with a Corpus of INR 10,000 crore –

• In order to provide funding support to Startups, Government will set up a fund with an initial corpus of INR 2,500 crore and a total corpus of INR 10,000 crore over a period 4 years (i.e. INR 2,500 crore per year) .
• The Fund will be in the nature of Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds.

Credit Guarantee Fund for Startups –

Credit guarantee mechanism through National Credit Guarantee Trust Company (NCGTC)/ SIDBI is being envisaged with a budgetary Corpus of INR 500 crore per year for the next four years.

Tax Exemption on Capital Gains –

• With this objective, exemption shall be given to persons who have capital gains during the year, if they have invested such capital gains in the Fund of Funds recognized by the Government.
• In addition, existing capital gain tax exemption for investment in newly formed manufacturing MSMEs by individuals shall be extended to all Startups.

Tax Exemption to Startups for 3 years –

• The profits of Startup initiatives are exempted from income-tax for a period of 3 years.
• The exemption shall be available subject to non-distribution of dividend by the Startup.

Tax Exemption on Investments above Fair Market Value –

• Under The Income Tax Act, 1961, where a Startup (company) receives any consideration for issue of shares which exceeds the Fair Market Value (FMV) of such shares, such excess consideration is taxable in the hands of recipient as Income from Other Sources.
• Investment by venture capital funds in Startups is exempted from operations of this provision.
• The same shall be extended to investment made by incubators in the Startups.

Industry-Academia Partnership and Incubation

Organizing Startup Fests for Showcasing Innovation and Providing a Collaboration Platform –

To bolster the Startup ecosystem in India, the Government is proposing to introduce Startup fests at national and international stages.

Launch of Atal Innovation Mission (AIM) with Self-Employment and Talent Utilization (SETU) Program –

• The Atal Innovation Mission will establish sector specific incubators and 500 ‘Tinkering Labs’ to promote entrepreneurship, provide pre-incubation training and a seed fund for high-growth startups.
• Three innovation awards will be given per state and union territory, along with three national awards, as well as a Grand Innovation Challenge Award for finding ultra-low cost solutions for India.

Harnessing Private Sector Expertise for Incubator Setup –

To ensure professional management of Government sponsored / funded incubators, Government will create a policy and framework for setting-up of incubators across the country in public private partnership.

Building Innovation Centres at National Institutes –

In order to augment the incubation and R&D efforts in the country, the Government will set up/ scale up 31 centres (to provide facilities for over 1,200 new Startups) of innovation and entrepreneurship at national institutes

Setting up of 7 New Research Parks Modeled on the Research Park Setup at IIT Madras –

The Government shall set up 7 new Research Parks in institutes with an initial investment of INR 100 crore each. The Research Parks shall be modeled based on the Research Park setup at IIT Madras.

Promoting Startups in the Biotechnology Sector –

• 5 new Bio-clusters, 50 new Bio-Incubators, 150 technology transfer offices and 20 Bio-Connect offices will be set up in research institutes and universities across India.
• BIRAC AcE Fund in partnership with National and Global Equity Funds (Bharat Fund, India Aspiration Fund amongst others) will provide financial assistance to young Biotech Startups.

Launching of Innovation Focused Programs for Students –

• An innovation core program targeted at school kids aims to source 10 lakh innovations from five lakh schools, out of which the the best 100 would be shortlisted and showcased at an Annual Festival of Innovations, to be held in Rashtrapati Bhavan.
• A Grand Challenge program called NIDHI (National Initiative for Developing and Harnessing Innovations) shall be instituted through Innovation and Entrepreneurship Development Centres (IEDCs) to support and award INR 10 lakhs to 20 student innovations.
• Uchhattar Avishkar Yojana, a joint MHRD-DST scheme has earmarked Rs. 250 crore annually to foster “very high quality” research amongst IIT students.

Annual Incubator Grand Challenge –

The government will identify and select ten incubators, evaluated on pre-defined Key Performance Indicators (KPIs) as having the the potential to become world class, and give them Rs.10 crore each as financial assistance to ramp up their infrastructure.

Prarambh: Startup India International Summit:

• The Summit is being organized by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.
• The Summit marks the fifth anniversary of the Startup India initiative, launched on 16 January, 2016.
• The Summit will be the largest startup confluence organised by the Government of India since the launch of the Startup India initiative.

Startup India Seed Fund Scheme:

The Startup India Seed Fund Scheme (SISFS) has been launched.

About the Startup seed fund:

• The Fund aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market-entry, and commercialization.
• 945 Crore corpus will be divided over the next 4 years for providing seed funding to eligible startups through eligible incubators across India.
• The scheme is expected to support an estimated 3,600 startups through 300 incubators.
• Nodal Department: Department for Promotion of Industry and Internal Trade.

Significance:

• The SISFS will Secure seed funding, Inspire innovation, Support transformative ideas, Facilitate implementation, and Start startup revolution.
• The Scheme will create a robust startup ecosystem, particularly in Tier 2 and Tier 3 towns of India, which are often deprived of adequate funding.

Need for the scheme:

• Easy availability of capital is essential for entrepreneurs at the early stages of growth of an enterprise.
• Funding from angel investors and venture capital firms becomes available to startups only after the proof of concept has been provided. Similarly, banks provide loans only to asset-backed applicants.
• It is essential to provide seed funding to startups with an innovative idea to conduct proof of concept trials.

Why the scheme has not been able to meet the expectations?

• A tax break of three years has been given in the scheme.
• Anyone who has business sense knows that only a few of start-ups will be profitable in the first three years and so this handful can avail themselves of the tax break.
• When it comes to the ‘fund of funds’ under the initiative, Rs500 crore has already been provided as fund corpus in 2015-16 and Rs. 600 crore has been earmarked for 2016-2017.
• Cumbersome procedures to access funds from the Rs. 10, 000 Cr. corpus have, however, made the plan a non-starter and Sidbi has committed only Rs. 129 crore to VCs so far so the progress has been slow.
• Under the scheme, bank only puts in 15% of the total corpus, while it is the VC that has to bring the remaining 85% to the table. And, this year, VCs have struggled to raise that kind of money—as a result, funding has almost halve.
• There is also the government’s requirement that participating investors have to be registered with the Securities and Exchange Board of India.
• But some of the biggest VCs aren’t, and the government has essentially shut them out.
• There is still no exemption is MAT (Minimum Alternate Tax) which could’ve helped businesses to cut losses.
• A lot of entrepreneurs and investors think that demonetization and the lack of exits in start-ups by investors are adding to the gloom;
• After demonetisation, the investors are afraid to exit their investment due to slump in the IPO (initial public offering) market.
• The scheme sets up an ‘Inter-Ministerial Board’ led by the Department of Industrial Policy and Promotion which ‘validates’ the innovative nature of an enterprise, thereby qualifying it as a start-up – an involvement of government in this ecosystem that is hardly desirable.
• It also exempts starts-up from inspection under a fixed number of labour laws — six to be specific.
• But, there are about 45 laws at the central level and about four times this number at the state level.
• The Centre needs to work with the States to ensure a smooth rollout of the benefits under the Action Plan and avoid discord between policies at the two levels.
• The Action Plan requires an enterprise or partnership to be innovative by developing and commercialising a new product or service — a step to promote truly innovative ideas.
• But it institutes an inter-ministerial body led by DIPP to examine whether an enterprise is ‘innovative’.
• It also requires a ‘recommendation’ from an incubator setup by the government or be supported by an incubator in a post-graduate institution recognised by the government — this need for validation and recommendation goes against the very steps the Action Plan takes to reduce government involvement.
• This additional layer of bureaucracy could slow down the starting up process and needs to go.

Way ahead:

• Around 800 start-ups founded after 2011 have shut shop already, signaling a deteriorating health of the sector.
• The year 2015 had seen an 87% increase in the number of startups being founded, the number dropped by 67% in 2016. Funding has also decreased in 2016 by around 47.7%.
• A year on since the launch of Startup India Stand Up India campaign, the mood is slightly muted, the momentum slowed a bit and the talk shifted from bombastic projections of crossing Silicon Valley to more realistic targets of making India an innovation hub.
• But entrepreneurs and investors acknowledge that after the January 16 event last year, the needle on entrepreneurship has certainly dramatically moved.
• Over the last year there was lot of out-of the box thinking and a sense of direction given.
• This year’s Budget to be announced next month is expected to be a big one for start-ups. The startup ecosystem is expecting the government to announce initiatives to support them like: Widening of the tax-free regime to five years from three years.

Conclusion:

• Indian Startups are now spread across the length and breath of the entire country.
• The shift in global focus is on promoting women entrepreneurs and fostering an inclusive and innovative environment.
• Efforts are also being made by diverse stakeholders in the Indian startup ecosystem to elevate domestic policies in concurrence with global trends.
• The role of the state government becomes very important in developing the necessary infrastructure and support to foster the startup ecosystem.
• Due to the given constraints of infrastructure and supporting services, India needs to build upon low-cost and high-impact solutions.
• Although there has been an increase in angel and venture capital funding, the amount invested must be augmented.
• It is crucial that the ecosystem is well integrated to connect startups to fund houses and other stakeholders.
• While it is important to elucidate overarching features of the ecosystem, this report delves deeper into the role of states and India’s federal structure in both building the ecosystem as well as closely monitoring futuristic measures that can aid India’s growth story.