Mr. Sameer Rastogi, is the founder and Managing Partner of fastest growing International Law firm India Juris. Mr Rastogi has expertise in corporate and commercial practice with specialization in cross border transactions and M & A. He is globally trusted by large multinational companies, banks and FIIs for his expertise in joint ventures, foreign collaborations, India entry strategy, private equity investments, capital market advisory, F & O transactions, ESOPs, tax structuring, public offerings and infrastructure projects. He is also acclaimed for legal advisory on projects of renewal energy sectors. Mr Rastogi is advising prominent global venture capitalist funds and had played an instrumental role in shape up large side startup VC funding transactions. Being a legal expert in start up transactions on both sides we spoke to Mr Rastogi on his views on startup eco system in india and the challenges. The initiatives taken by Government under Start-Up India Action Plan are commendable and welcomed. Start-Up industry must be curious and they would be having many questions in their mind regarding the Start-Up India Action Plan
How do you rate Indian startup eco system and what are the entry barriers for entrepreneurs?
Presently India is witnessing a very exciting and never seen before phase of Start-up eco system. The Govt. has already made many announcements to promote and facilitate startups and introduction of Companies (Amendment) Act 2015 is a one of the motivation. Generally the barriers of entrepreneurs relates to Cash crunch, finding the right investor, mentoring, scaling the model, valuation of business, dealing with investors and compliances to be taken care of.
What steps should be taken by government to make a robust Eco-System?
Most of the times, it is costly affair for the young entrepreneurs to setup the company for doing the business. Having very little money at their disposal from personal sources, they are not in a position to form company unless they get some seed funding. At the same time, investors expect that entrepreneurs should come to them after having company and initial statutory registration. The entrepreneurs are scared, if the investor does not invest than they have to maintain company at their cost. Further, at the time of investment, first start-up has to increase its authorized capital for issuing shares to the investors, which again involves cost to entrepreneur. It will be a very good step if the deferred payment of (Ministry of Corporate Affairs) MCA fee for(a) incorporation of the company and (b) increase in authorized capital, be allowed upto 6 months so that after investment Start-Up can pay the fee to ROC without any difficulty.
What is your suggestion to make a robust system & make startup India Action Plan more effective?
As per Start-Up India Action Plan, the entity shall fall under definition of Start-Up, if it has not completed 5 years from the date of incorporation/ registration and shall cease to be a Start-Up if its turnover for the previous financial years has exceeded INR 25 crore. There may be some start-ups who have already passed few years or has completed 5 years from the date of incorporation. This may be a road block for many entrepreneurs. To facilitate the Start-Ups the period of 5 years should be calculated from the date of grant of certificate by Inter- Ministerial Board, as Start-Ups and not from the date of Incorporation of company.
What are the hassles for investors who are looking to invest in startups
In Start-Up funding generally individual investors come together and invest in Individual capacity. Due to high valuation the number of shares issued to investors are less and many times the face value of shares issued is less than Rs.20,000/-, which sometimes create hindrances in the process of investment and therefore delays the whole process. This provision may be relaxed for Start-Ups for smooth process of Investment. Presently while making investment in start-ups, Shareholder Agreement and Share Subscription Agreement are entered into between Investor and Start-up. Articles of Association of the Start-Ups are altered according to such agreements. for Start-Ups, subject to Companies Act 2013, the Shareholder Agreement and Share Subscription Agreement entered between the parties shall be held superior to Article of Association.
Start up in india mean an IT company. Is it so.?
Presently in India, Start-Ups relating to particular sectors such as IT and Technology are getting funding and rest other areas such as manufacturing, traditional businesses, rural areas, etc find it hard to find Investors. Government should provide additional benefits to investors in such areas by way of tax reduction at various levels.
What should be the ideal time to dilute the equity by a start up and how much
Entrepreneurs and Start-Ups are not aware of how much dilution of equity is to be done to the investors. If the equity stakes of the promoter substantially go down in initial round of funding, the investors for subsequent avoid investing in such companies. During 5 years till the time it enjoys the status of as Start-Up, the promoter’s equity shall not dilute below 65% or so, by way of fresh issuance of shares.
What are key parameters of startup valuation in India
There is no set parameter as how the valuation of the Start-Up is to be made and the valuation amount varies from Investor to Investor. The Promoters of the Start-Up themselves don’t know how to value their Start-Up. Valuation provisions and requirements under company law and tax law should be relaxed for Start-Ups, which would save time and cost.
What could be done to minimize the documentation work for startups business?
How can we narrow down the prevailing gap between likeminded investor and startups.
Start-ups are confused and have no knowledge, which investor to approach for funding. Due lack of information many Start-Ups are not able to reach correct set of investors. Government should develop an online freely accessible portal where all Angel Investors, Funds, Incubators, etc. are listed after KYC check. The portal should provide the contact details along with their addresses, investment areas, investment ranges, process etc; this can provide genuine and easy access of investors to Start Ups.
Is it opportune time for the E commerce company to approach Capital Market?
It is not the appropriate time for E-Commerce & startups companies to approach the capital market in India. Capital Market in India is not very optimistic and ready to accommodate the high valuation of such companies. E-Commerce & Startups should wait till the capital market and the public has confidence on the valuation and stability of such companies.
What are the areas in which startups have better prospectus?
The Key for success of startups is Technology, Innovation, Scalability, and constant review & modification in business model. The startup in the space of Artificial Intelligence, fintech, Health & Pharma and Education have better prospectus.