Apprise Finance Minister Arun Jaitley of bumps in M&As and investing.
Excessive red tape in processes such as early-stage investing and mergers and acquisitions is forcing young, promising ventures in India to shift overseas, a group of top Indian entrepreneurs and investors told Finance Minister Arun Jaitley during his trip to Silicon Valley, U.S., last week
They, however, welcomed the recent easing of listing norms by the Securities and Exchange Board of India to help start-ups raise money locally. Manu Rekhi, director at Inventus Capital Partners, told Mr. Jaitley: “A Facebook corporate development executive vented to me about the complexity of doing a deal in India. He mentioned that the $22 billion acquisition of WhatsApp in the U.S. was simpler than the $10 million acquisition of Little Eye Labs in India.”
“The red tape and ambiguity in Indian rules and taxes were overbearing,” he added.
Mr. Rekhi said Mr. Jaitley, who was on a nine-day visit to the U.S. last week, responded by acknowledging the issue, and saying the government is looking to make transactions simpler.
Mr. Rekhi was part of a delegation including Raju Reddy, founder of tech firm Sierra Atlantic, Kanwal Rekhi, managing director of Inventus Capital, and Arvind Sodhani, president of Intel Capital, which met the Minister. Naren Gupta, managing director of Nexus Venture Partners, Sanjay Mehrotra, co-founder of memory chip-maker SanDisk, and Ram Reddy, founder chairman of Global Industry Analysts, were the other industry leaders who participated.
“The Indian tech start-ups are shifting their headquarters to the United States and Singapore utilizing virtual data rooms, as it is lot easier for start-ups to raise money and have options for acquisition by tech companies like Facebook, Google and Twitter,” said Mr. Raju Reddy. He said it took just $800 (Rs. 50,000) to incorporate as a U.S. company online within an hour. One major issue Indian entrepreneurs in Silicon Valley discussed with Mr. Jaitley was the bureaucratic hurdle for early stage investors in India. “Why is investing in India so difficult and treated with disdain? As an investor why do I have to go from San Francisco to Delhi via Mauritius?” said Mr. Kanwal Rekhi, one of the India’s most senior venture capitalists.
‘It will be an exodus of start-ups’
As many as 75 per cent of India’s new tech start-ups (ranging from cloud, data analytics, security to mobility) that intend to raise seed or venture capital will be domiciled outside, says ISpirt, a software product industry think tank.
This year, three of four new technology start-ups that focus on the global market and plan to raise seed or venture capital are getting domiciled outside the country.
“There is an exodus of tech start-ups from India. Regulations have to change for early-stage investing, merger and acquisition transactions and initial public offering to arrest this,” said Sharad Sharma, cofounder of iSpirt. “SEBI has thoughtfully tackled the IPO part.”
Experts said about 95 per cent of start-up exits happen through mergers and acquisitions and only 5 per cent happen by going public.
Nine of the top 30 business-to-business software product companies by market capitalisation have already relocated to the U.S., Singapore and the U.K., according to iSpirt’s Software Product index (iSPIx), which tracks the growth of the industry. These 30 companies are worth about $6.2 billion (Rs. 39,341 crore), employing about 18,000 people, according to the index.
Top Indian companies such as online retailer Flipkart and mobile advertising firm InMobi have re-domiciled to Singapore.
Venktesh Shukla, president of entrepreneur network TiE in the Silicon Valley, said if the government wanted to give tax break, it should give it through the front door. “Don’t force investors to go through the back door and suffer needless complications of having a paper office in Mauritius,” he said,
Naushad Forbes, president of Confederation of Indian Industry, mentioned that the China growth story was fuelled by about 50,000 investments of $2 million (Rs. 12 crore) each over a decade. Half of this was from the Chinese diaspora. “We need Indians globally to invest in India.”
To this point, Manu Rekhi said that there was a need for India to adopt the global best practices as in the U.S, Singapore and Israel. For example, there is a need to make convertible notes possible similar to the U.S. where over 300,000 angel investors invest through convertible notes.
Convertible notes are debt instruments, a signed document from a company to an angel investor, intended to convert to stock once a start-up raises a larger round of financing from a venture capital firm.
“This instrument is most popular way of raising first round of funding by startups in Silicon Valley,” said Sanjay Khan, an associate at law firm Khaitan & Co.
Finance Minister Arun Jaitley, who met entrepreneurs in Silicon Valley, asked for support from the entrepreneurs and investors to work together to “recreate the magic” in India that Indian entrepreneurs have achieved in Silicon Valley. He said India’s potential growth rate of 8-10 per cent over the next couple of decades could be the new normal.