Author: Amit Kumar, https://www.linkedin.com/in/amit-kumar-a97b854/
Funding and assistance landscape
The startup promotion framework in India has undergone massive overhaul in the last 3 years, since the launch of the Startup India initiative and platform. Before 2016, Department of Science and Technology, Government of India along with selected state governments was at the forefront of running funding and assistance programs for startups. However, in the last three years many central government ministries and a majority of Indian states have launched their own startup support schemes and programs, which complement the efforts spearheaded by the Department for Promotion of Industry and Internal Trade (DPIIP). In short, the startup funding and assistance ecosystem in India is currently thriving but the landscape is very vast, and one need to navigate their way as per the geographic presence and thematic focus. As highlighted earlier the Startup India platform provides a good overview and can act as an information gateway for German startups interested in setting up their operations in India. Before peeking into the vast landscape of funding and assistance for startups, it is important to understand the term “startup” in the Indian context of government support schemes.
Definition of startups
As per DPIIT, startup means an entity, incorporated or registered in India:
- Up to a period of ten years from the date of incorporation/registration
- Incorporated as either a private limited company or registered as a partnership firm or a limited liability partnership
- With an annual turnover not exceeding Rs. 100 crores (Approx. 13 Million Euro) for any of the financial years since incorporation/registration
- Entity should not have been formed by splitting up or reconstruction a business already in existence
- Working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
The definition also outlines that the mere act of developing products or services or processes which do not have potential for commercialization; or undifferentiated products or services or processes; or products or services or processes with no or limited incremental value for customers or workflow would not be covered under this definition.
Basis this definition, DPIIT awards recognition to startups – which make them eligible for tax incentives and several other benefits.
Startup support agencies
As stated in the beginning, the startup funding and assistance landscape in India is vast. Public support programs are offered both at the Government of India and the State government level. At the central level, DPIIT is responsible for the Startup India mission as well as providing registration to startups for claiming tax incentives and other public benefits. Atal Innovation Mission managed by NITI Aayog is another important government ecosystem enabler that has supported the set-up of incubation centres and conducts several other startup initiatives on a regular basis. In addition to these two, there are 50+ startup schemes administered by different sectoral ministries. Department of Science and Technology (DST), Department of Biotechnology (DBT), Biotechnology Industry Research Assistance Council (BIRAC) and Ministry of Agriculture, Department of Electronics and IT, Ministry of MSMEs, Ministry of Skill Development and Entrepreneurship are few of the main players at the central level. Small Industries Development Bank of India (SIDBI) is the apex development financial institution responsible for many of the “fund of funds” and “guarantee” programs.
At the state level, most states have their own startup promotion policies being implemented through their science and technology departments or state innovation council or industry departments. Some of the state have also created special entities on public private partnership models to spearhead startup promotion in their respective states. States like Karnataka, Telangana, Andhra Pradesh, Tamil Nadu, Maharashtra, Kerala, Gujarat, Rajasthan, Goa, Delhi have been successful in creating an enabling ecosystem for the startups.
Funding and assistance
The startup promotion framework in India consists of an array of tools being practiced worldwide, ranging from direct grant to loan to tax incentives to enabling policies. Startups meeting the definition criteria and registered with DPIIT are eligible for following benefits under the Startup India initiative.
- Self-Certification and self-compliance for 3 environmental and 6 labour laws through a simple online procedure to reduce the regulatory burden
- In the case of labour laws, no inspections will be conducted for a period of 5 years. Startups may be inspected only on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer.
- In the 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.
- Eligible startups can be exempted from paying income tax for 3 consecutive financial years out of their first ten years since incorporation.
Easier public procurement norms:
- Opportunity to list product on the Government e-Marketplace: The Government e-Marketplace (GeM) is an online procurement platform and the largest marketplace for Government Departments to procure products and services. DPIIT recognized startups can register on GeM as sellers and sell their products and services directly to Government entities. This is a great opportunity for startups to work on trial orders with the Government.
- Exemption from Prior Experience/Turnover:In order to promote startups, the Government has exempted startups in the manufacturing sector from the criteria of “prior experience/ turnover” without any compromise on the stated quality standards or technical parameters. However, startups have to demonstrate requisite capability to execute the project as per the requirements and should have their own manufacturing facility in India.
- EMD Exemption:DPIIT recognised startups have been exempted from submitting Earnest Money Deposit (EMD) or bid security while filling government tenders.
Easy winding up of a company:
- As per the Insolvency and Bankruptcy Code, 2016, startups with simple debt structures, or those meeting certain income specified criteria can be wound up within 90 days of filing an application for insolvency.
- An insolvency professional shall be appointed for the startup, who shall thereafter be in charge of the company (the promoters and management shall no longer run the company) including liquidation of its assets and paying its creditors within six months of such appointment.
- Upon appointment of the insolvency professional, the liquidator shall be responsible for the swift closure of the business, sale of assets and repayment of creditors in accordance with the distribution waterfall set out in the IBC. This process will respect the concept of limited liability.
Startup patent application & IPR application:
- Fast-tracking of startup patent applications: Patent applications filed by startups shall be fast-tracked for examination so that their value can be realised sooner.
- Panel of facilitators to assist in filing of IP applications: For effective implementation of the scheme, a panel of “facilitators” shall be empanelled by the Controller General of Patents, Designs and Trademarks (CGPDTM), who shall also regulate their conduct and functions. Facilitators will be responsible for providing general advisory on different intellectually property as well as information on protecting and promoting intellectual property in other countries.
- Government to bear facilitation cost: 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. This will help them pare costs in the crucial formative years
Section 56 Exemption:
- Exemption under Section 56(2)(VIIB) of Income Tax Act.
- Investments into eligible startups by listed companies with a net worth of more than INR 100 Crore or turnover more than INR 250 Crore shall be exempt under Section 56 (2) VIIB of Income Tax Act.
- Investments into eligible startups by accredited Investors, Non-Residents, AIFs (Category I) & listed companies with a net worth more than 100 crores or turnover more than INR 250 Crore, shall be exempt under Section 56(2)(VIIB) of Income Tax Act.
- Consideration of shares received by eligible startups shall be exempt up to an aggregate limit of INR 25 Crore
To alleviate the funding constraints during the early as well as growth stage, DPIIT has set up a 1400 Million Euro corpus “Fund of funds”. The fund supports a broad mix of sectors such as health, agriculture, education and manufacturing. To reduce the perceived high risk and also to encourage banks and other lending institutions to provide venture debts to startups, credit guarantee facilities have also been initiated by DPIIT.
Most of the startup funding and assistance programs have a strong focus on creating incubation facilities for startups. Generally, grant support to meet capital and or operational expenditure for three to five years is made available to eligible agencies for setting up incubation facilities. However, in many support programmes there also exists a provision of seed funding/idea support/rebate on incubation rental/reimbursement of incubation lease rental for startups.
To provide early stage funding to startups, various agencies and departments offer seed funding grants ranging between EUR 15.000 to EUR 70,000 Euro. Support is available for validation of idea, prototype development, go to market strategies, etc. Mode of application varies between call-based approaches to rolling applications. While most of the seed funds are non-refundable grants, there are also a few interest free ten-year repayable loans. Disbursement also varies from scheme to scheme i.e. one-time disbursal to milestone-based approaches.
Grant challenges are another popular support instrument used by different startup promotion agencies, both at the central and state level. They are like seed funds but differ in the amount of funding, thematic focus, research and innovation and mode of implementation, etc. Implementing agencies follow a call-based approach and run these challenges every year for a fixed period. Though direct grant support is available for all stages i.e. proof of concept to commercialisation, there has been an increasing trend to provide support for scale up and commercialisation. The Atal Innovation Mission (AIM) is a flagship initiative within the overall startup India framework, it incentivises innovation in areas critical to India’s growth such as health, hygiene, housing, energy and water. AIM runs a “New India Grant Challenge” to (a) help create products from existing technologies relevant for national and social causes (productization) and (b) help new deep-tech products find markets and early customers (commercialization) in the context of India. Biotechnology, agriculture, e-mobility, semiconductor, defence, artificial intelligence are some of the other key thematic areas of the grant challenge.
Angel and venture funding
In addition to the Startup India Fund of Funds from DPIIT, state governments and central ministries runs their own fund of funds or venture fund programs to enhance availability of angel and venture funding for startups. They forge partnership with angel investor networks, large incubators, registered funds for making investments. Some state governments have created their own venture funds e.g. Gujarat Venture Fund Limited. Many of these funds also have special thematic/ sectoral focus as per the mandate and priority of the respective state and ministry.