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News on FinTech Startup

 

RBI permits fundraising by Startups in form of ECB.

by - Ameet Roy

ameet@vinodkothari.com

The Startup India initiative introduced by the present government happens to the key pin to turn India into a 21st century super economy. The government and the policy makers are looking forward to use the Startup India policy as the master weapon to combat multiple national issues live unemployment, poverty, escalation of social status etc.

 

The Startup India initiative promotes the youth of the country to startup a business venture. The policy makers are well aware to needs to keep a business running, multiple steps has been taken to make finance easily available to the new generation ventures.

 

On 27th October 2016,  fundraising by the startupsfrom overseas in form of ECB upto USD 3 mn, was allowed by the RBI The Apex bank seem to be clear in its objective of permitting only those business which has been identified by the government of India as new and innovative in nature, in form of DIPP recognized startup ventures, to raise funds in form of ECB.

 

The RBI notification dated 27ts October 2016 lists down the entire guidelines which needs to adhere to by the Startups to raise ECBs.

 

  • Minimum Maturity and value of ECBs: The minimum average maturity of the ECBs raised by the startups must not be less than 3 years and the maximum value of such borrowing must never exceed US$ 3 mn.
  • Currency: The borrowings must be dominated in any freely convertible currency or in INR or in partly thereof.
  • Lenders: The Indian Startup entities are permitted to raise funds in form of ECB’s from lenders situated in countries which are members of Financial Action Task Force (FATF) or a member of a FATF – Style Regional Bodies.
  • Forms: The borrowing can be in form of loan / optionally convertible or partially convertible preference shares.[AG1] 
  • Conversion into Equity: Conversion of the ECBs to equity is freely permitted, subject to compliance of regulation applicable for foreign investment in startups.
  • Guarantee: Issuance of corporate / personal guarantee towards the overseas lender is permitted except the following - guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs
  • Leverage and Equity ratios: Provisions for leverage and equity ratio in not applicable for ECBs raised by Indian startups
  • Security: The security to provide against the ECBs can be decided by the borrower and shall comply with foreign direct investment / foreign portfolio investment / any other norms applicable for foreign lenders / entities holding such securities
  • End Use: The ECBs must only be used in connection with the business of the startup

 

Till now foreign investments in startups were through FDI route which diluted the Indian ownership of the entity and also posed complications for the foreign investors while exiting from the Indian entity and foreign debt investments were allowed only in a class of business, which means there were only a certain number of entities eligible to raise funds in form of ECB. Apart from this the sectorial restrictions in case of investment in form of ECB is not applicable on startups.  Now with allowance of ECB in startups, under a separate guidelines Indian startup business can raise debt funds from foreign sources regardless of the fact where the entity is an eligible borrower under EBC norms.

 

This is will help the Indian startup space to boom up even faster with continued injection of the much needed funds into the business in crucial times which will enable these new generation business to emerge as successful ventures in the long run

 


 [AG1]Write in details what has come

 


The new means of payments – IRIS Scanning

 

Ameet Roy

ameet@vinodkothari.com

The launch of Unified Payment Interface platform by the National Payment Corporation of India has created turmoil in the fintech space. Every fintech present in the country is trying to make good use of this opportunity and come up with the most striking and innovative payment solution to win over their competitors.

 One such entity is Simpal Mobile Payments and Information Services founded by merchant banker Vineet Toshniwal. Simpal Mobile Payments and Information Services has come up with a payment system which is like a leap into the future for the India payment systems providers, and so secure that it is virtually it can never be hacked to gain unauthorized access over someone else’s money.

The Mumbai based payment venture is the first of its kind in India to integrate retina scanning with payment systems. The systems is developed over the largest reserve of biometric data to the Aadhaar. “OctroPOS” the android based device designed by Simpal is set to double up as a smartphone as well as POS system for both consumers and merchants.

The OctroPOS iris scanning engine is major milestone to move India into a cashless economy, where payments will be authorized by the most unique authentication and the same can never be reproduced or tampered with.

The revolutionary Aadhar-enabled payment system is a real time, path-breaking system, operating on all accounts, and where, most importantly, the payment will bear no cost on the people using it. Reach to the unorganised retail sector of India has been very low as a reason why the payment systems has not be able to take off in a large extant. With integration of payment system with UIDAI this short come can be overcome as  most of the adult Indians are registered under AAdhaar.


 

P2P platforms ready to roar: reaches out to bank institutional investors for more

Kanishka Jain

Kanishka@vinodkothari.com

 

Bygone is the era when financial intermediation use to mean involvement of only banks and NBFCs – for all our p2p articles this has become a standard line -- . The new age thing i.e. Peer to peer concept (P2P) is creating disruption and literally changing the ways of the world. This segment of Fin-tech startup is giving traditional institutions a run for their money and the same is evident from the fact that an international bank like Goldman Sachs is exploring possibility to enter the P2P market[1]. The concept is being implemented in countries around the world at a lightning speed and with global adoption of the concept, India is not far behind.

 

In a span of three year starting from 2012, close to 30 P2P platforms have started operations in the country, reported by a leading daily. The concept has evolved over time and the same can be gauged from the fact that the platforms which use to make individual investors and borrowers meet are now proposing to bring in institutional investors as eligible investors. Though this type of model has been into existence in other countries like USA and UK but it is only now that the model has started taking roots in India.

i-lend has become the first P2P platform to have partnered with an NBFC known by the name Star-Finserve based out of Hyderabad[2]. While platforms like Microgram[3], Faircent[4] and LenDen Club[5] are in talks of having similar partnerships. The reason for the said partnership can be attributed to facts that administration and loan origination cost for the NBFCs and banks have risen in recent years. For instance if an NBFC receives 10 loan applications, rejects six and accepts only four, it will have to pay intermediary agencies for receiving the initial 10 applications.

"The cost of loan origination is going up steadily for NBFCs and banks, the number of successful applications is declining and through these partnerships the institutional lenders can cut down on incurring origination of loan and administration costs," saidVVSB Shankar, founder of i-lend.

The partnership will surely bring a boost to the business of P2P platforms and NBFCs and thus would be a win-win situation for the two entities. The P2P platform would earn up to 3% per transaction while institutional investors would gain access to borrowers and would earn interest on the money so advanced. Apart from gaining access to borrowers the institutional investors would also get access to the undeserved market which is largely being accessed by these platforms now.

The flip side of this association is that p2p was created with the idea of removing physical interface with financial intermediaries and connecting peers with peers. NBFCs using p2p as affiliates is only adding modes by which NBFCs can generate more.

The odds are sure in favour of the partnership but it will also be interesting thing to watch whether this will actually work out for the two entities.

 

[1] http://www.lendacademy.com/goldman-sachs-is-entering-p2p-lending-first-bank-to-launch-a-platform/

[2] http://economictimes.indiatimes.com/small-biz/startups/p2p-players-bank-on-institutional-lenders-for-growth/articleshow/53037736.cms

[3] https://www.micrograam.com/

[4] http://www.faircent.com/

[5] https://www.lendenclub.com/


 

The next era of startup funding starts

by - Ameet Roy

ameet@vinodkothari.com

 

 

The Startup Action Plan had been rolled out by the government of India on January this year, and it promised to deliver INR 10,000 Cr. as fund based support to the emerging entrepreneurs of the nation. But the Budget 2016, was a disappointment for the startup enterprises as there was no mention of this fund in the budget. As a result the funding for startup have been slowing down since then[1].

 

This scene is about to change as the large business houses of the nation come up with sector specific solutions to cater exclusively to the funding need of the startups. The flagship project launched by the government of India to turn the country into a 21st century super economy, has started to take its shape after 8 months of its launch.

 

Kotak Mahindra Bank[2] and Oil and Natural Gas Corporation of India[3] have come up with support facilities to help startups in their industry flourish. This happens to be the greatest success of the Startup Action Plan, which has simulated the sensation of helping new entrants in the industry, among the industry giants. When players in the market come to help other, success is just around the corner as all round development of the economy comes into play.

 

“ONGC Startup” launched by the ONGC to help startups in the oil and gas sector flourish, is set to provide a chain of support facilities to the new entrants in the industry which would include seed capital, hand-holding, mentoring market linkage, and follow-ups. The most vital support which the ONGC Startup is set to provide is market linkage. Market is the most important factor for business to survive and when one is able to grab market with backing from one of the largest energy sector enterprise of the nation, it will be seen as a means to propel the enterprise toward sustainable and long term development and in turn bring in combined economic upliftment of the entire nation.

 

Kotak Mahindra Bank, one of the premier private sector bank has also launched its startup support facility “innovation lab” at Bengaluru to help technologies and startups flourish which impacts the operation of the bank.

 

A senior official of the bank stated that they have started a dedicated space for starups engaged in fintech operation to test their concepts and launch them into full-fledged commercial products. Bengaluru being the Silicon Valley of Asia has the largest number of fintech based startups in the nation and launch of a project like “innovation lab” in such hotspot will enable more and more enterprises to emerge as full prove business ventures, rather than some fancy idea based product, which loses its utility in the long term.

 

The launch of such large scale projects by these two fortune entities will attract other entities in different industry to launch startup support facilities and develop their industry and in turn bring all round development of the entire economy.

 

 

[1] http://www.india-financing.com/component/content/article/332.html#losingsteam

[2] http://profit.ndtv.com/news/start-ups/article-kotak-mahindra-bank-open-to-investing-in-start-ups-1444105

[3] https://yourstory.com/2016/08/ongc-to-fund-startups/

 

 

  


 

DIPP urges state governments and union territories to set up startup hubs

 

------By Ayush Dokania

saurav@vinodkothari.com

The Government of India recently came out with the progress report of the Startup Action Plan[1], which was launched in January, 2016. As per the report[2], DIPP has urged the State Governments and Union Territories’ administrative authorities to establish Startup Hubs within their jurisdiction[3]. The Startup Hub, at New Delhi is in operation since April 01, 2016. The Hub aims at discussing business ideas and models with the Government, Venture Capitalists, Angel Investors, Incubators, Mentors, etc. It also provides handholding support to the startups during their lifecycle, on all aspects, such as providing mentorship, incubator facilities, IPR support, funding etc. The whole purpose for creation of hub is to facilitate a single point of contact for the entire Start-up ecosystem, thus, enabling exchange of knowledge and access to funding.

As per the status report on Start-Up Action Plan, the National Expert Advisory Committee (NEAC) formed by the HRD Ministry has submitted their proposal for setting up of 7 Research Parks, 16 TBIs (technology business incubators) and 13 start-up centres in the current financial year.

Further, DIPP has also requested the incubators to help start-ups throughout the development stage. In this regard, the top companies will also be asked to support the initiative by setting up new incubators, or scale up existing incubators in collaboration with educational institutes. The proposal to raise tax holiday from three years to seven years for early stage entrepreneurs has also been recommended to the Finance Ministry.

While there is a lot of movement at DIPP’s end in order to make the startup environment favourable, we will however, have to wait and watch how these efforts unfolds and how effective these measures turn out to be.

 

[1] Read more at: https://www.kpmg.com/in/en/services/tax/flashnews/kpmg-flash-news-action-plan-on-'startup-%20india'-1.pdf           

[2] Read more at: http://taxheal.com/start-up-india-status-report.html     

[3] Read more at: http://www.livemint.com/Home-Page/YGQzrsGz89qE1u3lO1zPMJ/DIPP-asks-states-Union-Territories-to-set-up-startup-hub.html                

 


 

Startup funding losing steam in FY 2016

By Ameet Roy

ameet@vinodkothari.com

The Standup, Startup Indian campaign announced by the honorable Prime Minister, increased the tempo of interest in early stage enterprises, which dreamt of making it large by their innovative product and services. But the number of investments do not seem to mirroring the favour of our Prime Minister on the issue.

The idea of promoting startups was already in existence before the announcement of the program, however the startup culture received a boost post the announcement of the Startup India program at the central level on 16th January, 2016.

Young generation now aims to own an enterprise rather seek jobs in large organization, and the thing which will enable this phenomenon to sustain and evolve is steady flow of funds into the early stage of the business ventures. The recent report by NASSCOM (Start-up India – Momentous Rise of the Indian Start-up Ecosystem) says, there are over 4000+ startups in the nation and the number is set to cross 10000+by the year 2020.

The eye popping deals of Flipkart, Snapdeal, Paytm and Ola[1] which took place in the year 2015 has left dents in the pockets of the investors. The  investors had to write down their investments taking a hit on their financials due to the fall of  large number of stratups in the last year[2]. Which has led to the deal size getting smaller in the current year, but there have been deals of USD 100 Mn plus for Shopclues, CraTrade, OyoRooms, Snapdeal, Big Basket etc. which signifies that the investors still has hope for the new generation enterprises to strike big.

Investments in Startups

H1 2016

3.2 bn.

H2 2015

3.9 bn.

H1 2015

1.8 bn.

 

No of deals

H1 2016

654

H2 2015

536

H1 2015

279

 

The second quarter of  2016 saw funding of USD 1.5 bn spread across 310 deals, initiated by 304 startups, which is almost similar to the number of deals in the previous quarter (310) but the amount of funding which was USD 1.7 bn. in the previous quarter has seen a decline in the present quarter. However the largest part (60%) of the funding in the first quarter of the current year was picked up by early stage enterprises in form of seed and angel investment.

Bengaluru remains the breeding ground for startups with a total of 85 deals in the last three months followed by Delhi with 80 deals. In terms of funds disbursed, the National Capital Region is at the top position with USD 584 Mn. as compared to USD 539 Mn. in case of Bengaluru. Studies show that other regions of the nation like – Ahmedabad, Jaipur, Kolkata, Chandigarh are emerging fast and attracting significant amount of funding.

 

The volume of deals in different segment of the startup industry shows that the E-Commerce segment is of prime interest for the investors with over 100 deals followed by Fin-tech with over 32 deals, Health-tech with 29 deals and SaaS with over 20 deals in the last three months. There has been significant increase in the number of M&A in segments like – E-Commerce, Hyper local services, logistics and food-techs with over 20 acquisitions in the last quater.

 

The hope for the industry is still there with new venture capital firms and incubations centers, to inject funds into the startup ecosystem and help it thrive.

 

[1] http://xeler8.com/img/Indian-Startups-in-Q2-2016_Xeler8.pdf  

[2] http://economictimes.indiatimes.com/small-biz/startups/foxconn-goes-slow-on-startup-funding-invested-only-in-4-startups-in-india/articleshow/52843191.cms

 


Is there a need for the FinTech operators to come up with new products?

                                                                                                  

 --------------        By Ayush Dokania

saurav@vinodkothari.com

 

With the markdown of valuations in start-ups last year, many fintech start-ups are now resorting to creating new market and products. As it shall be a faraway vision for these fintech firms to be earmarked as “venture capitalists”, they need to invest more in solving real world problems rather than merely addressing new problems.

As per the reports published by NASSCOM[1], the Indian fintech software market is expected to touch $2.4 billion by 2020 from the current $1.2 billion. The transaction value for the Indian fintech sector is estimated to be approximately $33 billion in 2016 and is expected to reach $73 billion in 2020, growing at a five-year compound annual rate of 22%, according to a report on fintech by KPMG [2]. The growth in smart-phones usages and consumers’ willingness to transact online have spiked up a large number of start-ups, all trying to take advantage of this opportunity.

Fintech investment in India rose from $247 million in 2014 to more than $1.5 billion in 2015, with the likes of Paytm, Freecharge and Mobikwik accounting for the lion’s share[3].Although there has been a spurt in the rise of number of start-ups, most of the start-ups are following the established models of lending businesses.

However, for the fintech start-ups to survive in Indian scenario, they should ideally create new and differential products. The diversity in the product offering of these fintech start-ups will justify the statistics published by NASSCOM. As major chunk of these financial start-ups concentrates mainly on the addressing technology problems, the real world problems need a separate focus. A dedicated approach shall also lay on the expansion of services like banks and other financial institutions.

What can be concluded is that, facilitating only the online lending business transactions by these fintech companies shall not achieve the goal of creating a niche in the start-up industry. It must also borne in mind that investors are yet to be optimally satisfied with the fintech services.

 

 


 

 The new in the list: Private incubators may soon be allowed to certify startups.

 

By-  Kanishka Jain

kanishka@vinodkothari.com

 

The start-up scheme in India is all set to witness another boost, with Department of Industrial Policy and Promotion (DIPP) planning to allow private incubators to certify star-ups as eligible for availing tax and other benefits. Though there has been no official announcement of the same but a notification is soon expected in this regard. The start-up culture received a kick start after the present government came out with the Stand-Up India start-up policy earlier this year. Small developments are being continuously made in the policy to augment growth of start-ups and of such development allowing the private incubators to certify is certainly one.

"We are in the process of finalizing the eligibility norms for an incubator. This will widen our base of incubators in the country" said an official from the DIPP[1].

The notification by DIPP which came out on 17th February this year[2], considered only incubator funded by the government or established at post graduate college as certifying authorities. Thus this has created paucity of incubators which is actually working against the government’s vision of job creation through start-ups. Employment generation through start-ups has been one of the agenda behind promoting the start-ups in the country and thus has forced the government to allow private incubators to certify start-ups.Till date there are only 47 incubators which have been certified by the Department of Science and Technology (DST)[3] as against the tirade of start-ups which require incubation and certifications as well. The numbers of incubators are far less than what is required to cater the demand of the ever growing start-up needs in India. 

Also, the word incubator has also nowhere been defined in the start-policy. Therefore the eligibility conditions of the private incubators would require inclusion of larger contours to actually make the environment all the more conducive for the start-ups.

As such the government has been able to make the environment for start-ups conducive but it would be an interesting thing to witness whether the move made by the government will actually solve the problem or add woes.   

 

 


Peer to Peer Platform: Is it a disaster recipe?

By-  Kanishka Jain

kanishka@vinodkothari.com

 

The Peer to Peer (P2P) concept of intermediation has gained momentum world over. It seems that more and more people are falling for this technology enabled business of intermediation and the same is evident from the fact that in the 1st quarter of 2016 Lending Club lent $2.75bn, 68 per cent more than it did 12 months earlier as compared to JPMorgan Chase, being larger, which was able to expand its consumer lending by only 16%[1]. The momentum with which the P2P sector is growing is astonishing but at the same time signs of disaster have started showing up.

The symptoms are clear, unsecured consumer loans being lent, no collaterals, low credit quality and to add to the woe securitisations. This is becoming a perfect recipe to the second sub-prime disaster which is near if not controlled. The P2P business in recent times has witnessed a great leap in its business model. The basic model of P2P which used to link individual borrowers with individual investors was straight forward. However soon the credit flow from the investors started dying up and to keep the business alive, P2P platforms started seeking investment from the institutional investors, banks and hedge funds. And in turn to keep their liquidity banks, institutional investors and Hedge fund managers started securitizing these unsecured consumer loans. Thus the story to disaster has started brewing.    

While P2P securitization is not the only concern, we need to be wary of the other concerns associated with this type of intermediation as well. The loan disbursement figures of big P2P players do indicate the scalability of the business but at the same time concerns like end use of money and credit quality is to be strongly looked after. For one a few months earlier the reputation of the number two in the US market, Prosper, was hit when it was found to have lent money to one of the San Bernardino gunmen and suspected terrorists. The sustainability of the platforms is also area of concern as P2P platforms solely strive on income from new loan origination therefore in a bid to earn more they may disburse loans without proper assessment of credit of the borrower and the same has already taken a toll on the Lending club which had an $8bn valuation when it floated in late 2014 in comparison to $1.7bn today.

The opportunity the P2P model provides are enticing but deep within lies the risks which can have huge impact on the economy. The Parallel with the subprime crisis is somewhat clear and apparently looks like it may be sooner or later when it is again bound to happen. The story has begun but interesting thing would be to witness what the regulators around the world do to prevent the brewing disaster.

 

[1]http://www.ft.com/intl/cms/s/0/84f696ec-2436-11e6-9d4d-c11776a5124d.html#axzz4ADZ2HWbU

 

 


DIPP mapping incubation centers across the nation to help startups thrive

 By- Nidhi Bothra

(nidhi@vinodkothari.com)

Ameet Roy

(ameet@vinodkothari.com)

DIPP is now mapping incubation centres for startups to reach facilitate startups to seek guidance[1]. DIPP in a recent news release, mentioned that the mapping will not just be for IIT or IIM aided incubators but also for other government aided and private sector incubators as well[2]. DIPP also mentioned that there is a special focus on north-east for giving impetus to the startup culture in the region.

DIPP is also mulling on using incubation centres as commercial proposition or part of corporate social responsibility to engage the companies. 

The DIPP has started to look into all the states, their capabilities, their startup environment etc. to point out and mark them as national incubation centres so as to push the startup wave across nation, especially  to the north-eastern states. The DIPP aims to give a 21st century makeover to the north-eastern states along with the Tier II and Tier III cities.

The Rural Livelihood Business Incubators (LBIs)[3] has already marked several virgin rural areas of the nation, which have huge potential of growth and development in term of SSIs, cottage industries and handloom and contribute to the national GDP.

Apart from the rural areas, some of the urban areas has also been marked as incubation centres which holds strategic importance few of them being – Guwahati, Itanagar  (Arunachal Pradesh)[4] for communications and information technology incubation, Hyderabad (Telengana) for aerospace and gaming incubation[5], Pune (Maharashtra), Bengaluru (Karnataka) etc. The DIPP has not yet let out much information on the number of places mapped or the criteria of the mapping but it would be quite an interesting repository.

This is a major leap forward for making the startup action plan a huge success, the startup wave has been flagship reform of the present government to turn India into a 21st century super economy and the people of the country has huge hope of this startup wave. Setting-up incubation centres across the nation is one of the promise made the action plan, and it seems to be materialising. It will be good to witness in times to come, whether the wave becomes a revolution for the first generation entrepreneurs to growth.

 

[1] The DIPP recently launched the startup hub along with the startup portal and mobile app to provide a single point contact for the entire startup ecosystem. All these together is aimed to provide all round support to the budding startups and the VCs, Angel Funds, Incubators, mentors etc.

[2] http://economictimes.indiatimes.com/small-biz/entrepreneurship/dipp-mapping-incubation-centres-to-extend-help-to-business-ideas/articleshow/51972379.cms

[3] http://www.mapsofindia.com/my-india/government/rural-livelihood-business-incubators-lbis

[4]http://economictimes.indiatimes.com/tech/ites/STPI-setting-up-incubation-centre-in-Arunachal-Pradesh/articleshow/50380660.cms

[5]http://economictimes.indiatimes.com/small-biz/startups/telangana-to-set-up-aerospace-gaming-incubation-centres/articleshow/50025768.cms

 
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