Author Archives: Aristotle Consultancy
In order to promote awareness and adoption of intellectual property rights of startups and protect and commercialise them, Indian Patent Office has issued some guidelines. This will guide the startups regarding the procedure to be adopted for filing/processing their applications for patents, designs, trademarks and fees to be paid to the facilitators thereof.
The step will help in encouraging entrepreneurship and to boost innovation.
As per the guidelines, a startup willing to file a patent application for an invention will have to select one facilitator from a list of 280 facilitators, who would help in preparing the request and also assess the patentability of the invention as per acts and rules.
In case, the startup is unable to select a facilitator, should contact the head office of the respective Patent Office as per jurisdiction, who shall provide three names of the facilitator and the startup will finalise the name.
The public notice further added that the fee for filing the application and other statutory fees would have to be borne by the startup. Earlier in January, the government announced to bear the cost of facilitation for filing of patents, trademarks or designs as well as relaxed public procurement norms for startups.
The application will further get passed to the Head of Office of respective patent office and will than forward it to the office of the CGPTDM (Controller General of Patents, Designs & Trade Marks).
The facilitator shall also have to monitor and perform further steps of proceedings of startups patent application, prepare the reply to any query from patent office, attend the hearings, etc. and shall file the relevant documents in patent office by following the timeline.
The process will be similar for filing and processing applications for designs and trademark, where facilitators will be chosen for list of facilitators of patents and facilitators of trademarks, respectively.
Source – Inc42.com
Section 56 of the Income Tax Act confers the tax department the power to tax the excess consideration (more than the fair value) against issue of shares in the last round of funding.
Fair value is basically the actual value of the company. Recently, the valuations of many companies like Flipkart and Snapdeal were slashed due to worries over profitability, growth, and intense competition. These were factors that were not considered in earlier valuations; thus, the company was considered overvalued in earlier rounds of funding.
The income tax department is of the opinion that considering the current slashed down valuations as the fair price of the company, the differential amount of the funds raised in earlier rounds at a higher valuation are taxable.
Let’s understand this with the help of an example.
- XYZ Limited is a startup with a share capital of 2,00,000 ordinary shares with face value of Rs 10 per share, making the total share capital Rs 20,00,000.
- At the time of the first round of funding, 50 percent of the shares were issued at a price of Rs100 per share. It means 1,00,000 ordinary shares were issued at Rs100 per share and company received Rs 1,00,00,000 as initial funding. The issue price of Rs 100 per share comprises Rs 90 as share premium.
- Now, at the time of second round of funding, 25 percent share were issued, but this time at a lower price of Rs 50 per share because the valuation of the company was slashed. It means 50,000 ordinary shares (2,00,000 shares x 25 percent) have been issued at Rs 50 (Rs 40 as share premium) per share and company received Rs 25,000,00 in the second round of funding.
- Now as per the tax department, the current valuation of the company per share is Rs 50 per share and the extra consideration received during the first round of funding becomes taxable.
Calculation of taxable amount:
Premium received: First round: 1,00,000 shares x Rs 90 per share = Rs 90,00,000
Less: Share premium as per latest valuation: 1,00,000 shares x Rs 40 per share = Rs 40,00,000
Thus, extra consideration received = Rs 90,00,000 – Rs 40,00,000 = Rs 50,00,000
Normal Tax Rate of 30 percent, plus surcharge will be applied on Rs 50,00,000 received as extra consideration.
However, the tax department is exempting those startups who have been funded by venture capital funds registered with the Securities and Exchange Board of India (SEBI).
Purpose of this tax
Section 56 of the Income Tax Act aims at controlling black money in the economy.
Investing in startups is one way of bringing black money in circulation where sometimes the firm may be purposefully over valued to raise more capital, and bring in more black money from promoters who may rerouting their money as angel investments. The recent frequent valuation markdowns might indicate towards a certain level of intentional or unintentional faulty assumptions made during the first round of funding, and this has brought the government’s attention to this issue.
Impact on startups
Raising initial rounds of funding is a struggle for any startup, and this tax seems to only add to the intensity of this struggle.
“Valuations are based on what is going to happen in future. It can only be guessed and no one can predict accurately,” says Neeraj Jain, Co-founder at Zopper. “Startups are struggling to raise money and it is unfair on the part of government to take away money from them.”
Though taxmen cannot be deemed completely wrong in triggering this scrutiny, however, compared to the extend it will help curb black money, this levy might prove much more detrimental to the startups.
Valuations at initial stages of business are very tricky as there is no past data to build a model on. It’s based on assumptions, opinions, and expectations. Thus, it cannot be assumed that every overvaluation is intentional. This tax will, however, embed a constant fear about valuations in the startup world.
In the initial stages, startups struggle with fund requirements at every step and the extra tax burden is going to increase the pressure further. Also, angels will get warier and apprehensive about making investments, making raising funds even more tough.
Startups are too vulnerable and the money crunch can lead to hampered operations or even shutting down shops.
This is definitely not good news for germinating businesses. This tax is not formally yet announced, and we can still hope for amendments and exemptions.
However, if implemented, startups will be left with only two options – either be very careful with valuations at initial stages, and in worst case bear the taxes, or look for other methods of funding than equity, i.e., debt and debentures.
Source – YourStory
It seems that PM Narendra Modi’s Startup India initiative is proving to be a walk on pins and needles for aspiring startups. In the last 3 months,out of 250 applications received, only one got clearance from the government to set up new business.
Hyderabad-based Cygni Energy Pvt Ltd is the first startup to be selected. It provides inverter-less home renewable energy controller, thereby replacing the traditional inverters. The solution would help reducing electricity bills by 50% through intelligent use of solar, battery and energy-efficient DC equipment. The technology for the backup was developed in collaboration with IIT Mumbai, and provides a 48V DC power backup line.
The officials have cited incomplete registration process as a major reason for rejection. About 170 applicants didn’t complete the registration process, while about 25 had not given their process details of business. The remaining were stuck with hard luck as board members didn’t find them attractive enough to certify.
Does that mean there is lack of innovative ideas in the country? No.
As said by officials, “Many entrepreneurs don’t come to us for registration. They get funding from other sources and they are doing their own business.”
PM Narendra Modi kicked off the ‘Startup India, Standup India’ campaign in January this year. The Ministry of Commerce and Industry launched the Startup web portal and mobile app in April.
DIPP has also set up an inter-ministerial board to verify the eligibility of startups opting to avail tax and IPR-related benefits. Besides, the department is engaging with state governments in building incubation capacities for young entrepreneurs. The Modi government has already declared the fund for startups in the Budget and accordingly INR 2,500 crore each year would be released to SIDBI over the next four years.
Since the launch of this programme, there has been a continuous debate on the efficiency of the initiative. Where some are finding the registration process tedious, others are troubled with the loopholes in eligibility criteria.
For example, one has to get a recommendation letter from the recognised incubator cell or be recognised by the GoI or should be funded by recognised funds. Well, this is not an easy task as everyone is not from an IIT or an IIM.
No one knows what the future beholds. But if Government continues to reject applications in such large bundles, it will definitely impact the morale of upcoming startups.
Source – Inc42
Private investment activity started on a tepid note in 2016 with private equity dealmaking staying weak while venture capital firms turning cautious on backing startups in the first three months.
According to accounting firm PwC, during January-April 2016, early stage PE investments witnessed a decrease of 57% in value terms and 25% in volume terms. Investors too agree that funding is increasingly getting difficult to come by.
“We are seeing a slowdown but there is nothing to panic. Smartphone proliferation and 4G will create a large platform where big enterprises can be created,” said Rajesh Raju, managing director, Kalaari Capital.
Therefore, the overall focus goes back to the fundamental question of how startups can build scale in a challenging funding environment.
The truth is that slowdown in funding has made competition less intense in many segments of the consumer internet sector as a lot of companies, especially those in food-tech and hyper-local segments, have closed operations. “This gives room for the existing companies to build strong foundations and focus on unit economics,” said Sudhir Sethi, chairman and managing director, IDG Ventures.
Entrepreneurs should go back to their bootstrapping mode, cut expenses, delay capital spending, reduce working capital and explore alternative funding options.
According Paytm founder and CEO Vijay Shekhar Sharma, going for a down round, where a startup raises money at a valuation lower than the previous one, is not bad if a company believes that it has a strong business model.
“The current cycle of venture capital funding that peaked last year was built over five years starting 2010. This kind of a downtrend is good. Otherwise, people tend to forget startups are real businesses. Unit economics has become the key factor for new startups,” said Mohandas Pai, angel investor and chairman of the venture capital firm Arin Capital. “Globally, large companies were built during tough times. Google emerged after the dotcom bust of the 90s and Facebook, post 2008 recession. “In India too, some of the big companies were founded during tough periods. Flipkart in 2008 and Ola in 2010-11 found it extremely tough to raise money,” said Anupam Mittal, founder of People Group.
In such tougher times, entrepreneurs need to be wiser and choose routes that they would have avoided when the going is good. The focus should be on product (business model) and instead of spending big on brand, they have to concentrate on customer engagement. Therefore, in a constrained funding environment, it’s just about unit economics, margins and a healthy path to profitability, not GMV (gross merchandise value) figures that will lead companies to profitability.
Source – kotakbusinessboosters.vccircle.com
Rocket Internet-incubated fashion e-commerce venture Jabong that hit a speed bump in the second half of 2015 has begun the new year with a marked improvement in performance while simultaneously cutting down operating loss.
Jabong, which competes with Flipkart-owned Myntra among others, has been focusing on mending its leaking boat. Its EBITDA or operating loss (adjusted for share-based compensation) had been shrinking from Q3 and declined further in the three months ended March 31, 2016.
The performance of the first quarter shows that the firm is back on the growth track while pruning its day-to-day losses even further.
Jabong saw a change in management at the fag end of last year with former Benetton India head Sanjeev Mohanty taking over as CEO in December.
Indeed, Mohanty had claimed early this year that Jabong registered the highest-ever month-on-month growth of nearly 35% per cent in net revenue for January, which marked its best performing month ever since inception in 2011.
In what appeared to be a veiled reference to arch rival Myntra, he had said, “Some players in the industry hide their real performance behind the veils of lofty GMV figures. In those terms too, we touched $66 million in GMV in January itself positioning us as the largest fashion e-commerce company in India, with a robust growth of 56% in our gross orders and 59% in gross items. At this rate, we will be within striking range of the $1 billion GMV mark by the year-end.”
The company secured €300 million ($339 million or Rs 2,250 crore) from Germany’s Rocket Internet SE and Swedish investment firm Kinnevik. The transaction valued the company at €1 billion. This was a drop of almost 68% from its previous funding round in July when it was valued at €3.1 billion.
While the deteriorating performance of Jabong last year showed the big risk for e-commerce firms who have grown at a hectic pace on the back of aggressive customer acquisition tactics with discounts, its more recent track record reveals a silver lining.
But that has not stopped the dilution in valuation. Global Fashion Group (GFG), the global parent of Jabong, had recently raised fresh funding from its existing investors at a sharply lower valuation
GFG was created by combining six e-commerce brands that continue to operate in emerging markets around the world. It includes India’s Jabong, Latin America’s Dafiti, Russia’s Lamoda, Namshi of the Middle East, Southeast Asia’s Zalora and The Iconic in Australia.
Source – Techcircle.com