India Govt Scraps 1,200 Laws So It Can Speed Up Startup Registrations

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The National Institution for Transforming India (NITI) is maximizing efforts to encourage entrepreneurship in India.

Led by CEO Amitabh Kant, NITI Aayog has scrapped 1,200 laws in order to facilitate the registration of startups.

“Today one can register a company in a day and for an MSME, it takes around five minutes to register,” Kant said at Entrepreneurship India 2017 conference.

NITI also focuses on making India a safe place for investment by bringing in bankruptcy protection laws, as well as, the plans to implement GST (Goods and Services Tax). These actions were all taken as a response to the steep decline in startups registered.

In 2015, both India and the US witnessed a huge boom in their respective startup ecosystems. However, in 2016, both ecosystems suffered declines, with India’s being more severe.

According to a comparison published VCCIRCLE, in 2014 the US had 1,300 VC’s while India only had 156, the same scaling goes for unicorn companies, with the US leading with 98 and India having only 7.

However, all reports lead to the same fact that India is currently growing with much higher acceleration. Startups are expected to reach 11,500 companies in 2020, in comparison to 4,200 today.

Many startups that had emerged in 2015 within the Indian ecosystem were inspired by promised tax reforms. GST, for example, had to close their doors to business due to lack of funding and withdrawal of most venture capitalists from an unstable market.

Despite all the efforts taken by the government, the main issue facing startups is lack of funding, to which the government addressed with FFS (Funds-For-Funds), a governmental venture fund valued at $1.5 billion.

Unfortunately, the initiative has yet to reach its aspired intentions. Along with the plan to support startups, FFS enforces rules upon private venture capitalists that obstruct the progress of entrepreneurship due to contradictions with the nature of capital venture operations. Said rules include:

  • FFS can only invest in venture capital funds that are registered with the Securities and Exchange Board of India under the AIF (Alternative Investment Funds) regulations.
  • Start-ups must be at most five years old at the time of raising capital from a FFS-backed venture capital fund. Therefore, capital ventures cannot invest in them a day after 5 years.

“Funds have their follow-on strategies and can’t take a chance that by the time they invest again it (the start-up) may or may not be a start-up as per government rules,” says Ashish Fafadia, chief financial officer at Mumbai-based venture capital firm Blume Ventures.

The issue is that venture capitalists don’t want to see their investments diluted by later rounds of investments, thus acquiring a lesser share.

The bright side is that there has been a significant increase in seed investments, which is targeted towards startups at stage A. Such investments are the lifeline that make sure startups survive past the launch stage.

Some private venture capitalists like Sequoia Capital India, Nexus Venture Partners, and Accel India have managed to sum up the total of $1 billion as investment funds for partners.

These venture capitalists, however, are mostly from the US or Europe, hence any economic changes in their respective countries would directly affect the amount of investments, as well as, the interest rates on them.

The government is trying to encourage local banks, family businesses and also, Indian venture capitalists, to join the movement led by the FFS to help boost the rise of businesses and subsequently accelerate investments into the country.

“Once venture funds support startups, the ecosystem of startups will grow and flourish,” said the NITI CEO.

Although the Indian startup market has to face numerous other obstacles like the influence of the police on policies affecting their business, as well as, competition from industry giants from foreign countries, Indian startups are increasing at an unprecedented rate.

So what’s next?

NITI will have to work with the legislators to relax the laws imposed by the FFS to encourage further investments.

As it sits, foreign investors are doing their best to catch early-bird investment opportunities, while local venture fund companies are struggling to collect the needed capital, as well as, searching for the ideal investment opportunities through loopholes in the FFS laws.