Many Indian startups have faced this dilemma at some point—stay home or head for the country top-ranked in “ease of doing business.”
Home, for what it’s worth, ranks 134th on that list, put out by the World Bank.
And so, many leave. In 2013:
- Mobikon, a cloud-based customer engagement platform for restaurants moved its base to Singapore;
- AdNear, a mobile-advertising company set up in Bangalore in 2009 and backed by Sequoia Capital, also moved its headquarters to Singapore;
- Venture capital funding among tech firms in the city-state topped $1.7 billion; meanwhile, tech companies in India attracted about $507 million.
How to hang on? Here are a few things the Indian government needs to do to keep entrepreneurial talent:
The social crowdfunding site, Milaap, is headquartered in Singapore, even though all its operations are based in India. Explaining why, founder Sourabh Sharma says, “the fund-raising environment is much more encouraging for startups in Singapore. There is a lot more equity capital available in that country. Also, schemes by the government allow investors to take a lot more risks there.”
Indeed, Singapore offers government schemes to assist early stage startups. Under the National Framework for Innovation and Enterprise, the government could co-invest up to 85% of the capital in select startups being incubated at technology incubators for a value of up to S$500,000 (nearly US$400,000). Technology incubators pitch in the remaining 15%. The incubator can then buy out the stake held by the government after three years.
Another government-operated venture fund invests in startups by matching private investors dollar-for-dollar for up to S$1.5million. So-called angel investors were only recognized by the Securities and Exchange Board of India in its definition of venture capital funds last year. R. Ramaraj of Chennai Angels, also a senior adviser to Sequoia Capital in India, says the country needs to make it easier for startups to get venture debt without collateral from banks. “If an angel or VC has invested in a startup then banks should provide a certain amount of debt without collateral,” he says.
Sure, Singapore has fewer government procedures, but it also has less red tape and corruption. While the new Modi government has promised as much, startups are hoping the cleanup comes soon and helps cut down the time it takes to do business, particularly in cases where they have to interact with government agencies. The Indian government also has schemes to support small and medium enterprises, but a lack of information and long drawn-out procedures to qualify pose a challenge.
Singapore’s tax structure is considerably simpler than India. For its first three years, a startup in Singapore pays no tax on its first S$100,000 (US$80,000) of annual profits and pays only half the tax due on the next S$200,000 (US$160,000) annual profits. Corporate taxes for companies making profits of S$300,000 (US$240,000) and above, the overall tax rate is as low as 17% compared to 30% in India. Ramaraj also points out that Singapore has no capital gains tax making exits simpler for investors. “The government needs to incentivize investing in startups,” says Ramaraj. “There are a number of examples from around the world where tax incentives are given to investors that support young companies.”
On the ease of starting a business, Singapore ranks third while India ranks 179th. The World Bank report notes that it takes 27 days to start a business in India. In Singapore it takes two and a half days. Registering a business takes less than a day in Singapore. There are 12 procedures that need to be completed before one can start a business in India. In Singapore, there are three.
It’s not as much the ease of starting up there as the difficulty in winding up a business in India that tempts Indian entrepreneurs, according to Ramaraj. “Startups in India find it very challenging to wind up a business here in case they fail,” he says. “They get stuck with a lot of processes and find it difficult to move on to the next business.”
India has laws to protect intellectual property. Enforcement is another story. There is a general lack of respect for IP and delays in court proceedings to enforce laws that help IP owners. Enter Singapore—yet again. According to the World Economic Forum’s Global Competitiveness Report 2013-2014, Singapore has the best IP protection in Asia and second best in the world. India on the other hand ranks 71st on that list behind countries like Bhutan, China, and Sri Lanka.
Another advantage of being based in Singapore, Milaap’s Sharma says is a broader definition of business. “The Singapore government identifies social enterprises as a different category of companies. The Indian government identifies not-for-profit enterprises but not social enterprises separately in the Companies Act,” he says.
Indian social enterprises don’t access funds as easily as not-for-profit organizations, particularly in the case of corporate-social-responsibility grants and government grants to not-for-profits. Sharma says: “Many companies give discounted services to organizations that create a social impact, but since social enterprises are categorized together with other for-profit companies they don’t get that advantage, despite making a social impact.”