The narrative of ride-hailing and mobility in India so far revolves around the duopoly of Ola and Uber, similar to Flipkart and Amazon in the ecommerce segment, and even Zomato and Swiggy in the food delivery space. Despite ruling the space, the duopoly has done little to revamp the ride-hailing segment in the country.

As of 2022, data sourced from Statista indicates that Ola commanded a 41% market share, closely trailed by Uber at 37%, leaving little room for other players. But this stranglehold on the ride-hailing segment and the disruption of legacy cab and ride-hailing players has largely come on the back of steep incentives and discounts.

While one cannot deny that technology and the platform model of connecting drivers and commuters totally changed the mobility market, the extensive market share can be primarily attributed to substantial discounts offered to riders and incentives extended to drivers in the early years.

For the initial years till early 2016, both platforms claimed driver earnings exceeding INR 1 Lakh per month, which enticed a segment of the lower and lower-middle-class individuals to ply their vehicles for Ola and Uber. Numerous auto-rickshaw operators also sold their vehicles to join the growing trend.

On the consumer side, the growth came on the back of heavily subsidised rides and VC-funded discounts.

But the times have changed drastically since then.

Over the past few years, the euphoria surrounding Ola and Uber has given way to disillusionment for a significant portion of commuters due to recurrent ride cancellations by drivers, while drivers complain about lower earnings, as both platforms have looked to maximise their margins.

Today, drivers find themselves grappling with rising aggregator commissions, diminishing per-ride margins and increasing fuel costs.

Consequently, we are witnessing a number of challenges such as ride cancellations, demands of cash payments, dirty cabs, damaged seats, and lack of basic hygiene. The ride-hailing sector is also marred by many instances of drivers outrightly refusing to turn on air conditioning during rides, unless commuters shell out more.

For every INR 100 received by drivers, 20%-25% of the total fare goes into paying the platform commission, INR 5 towards GST and then there is fuel and maintenance cost, leaving drivers with very little to take home.

The predicament is exacerbated for drivers saddled with car loans, where equated monthly instalments (EMIs) are another source of distress.

Various state governments have raised concerns about surge charging and other pricing issues, while drivers have gone on strike to protest against their falling earnings.

So, what’s the solution?

At least for Ola, the answer came in the form of Prime Plus, a premium-tier service that addresses the concerns of commuters such as cancellations and promises drivers consistent earnings for drivers.

Launched in May 2023 in Bengaluru, Ola Prime Plus comes with a minimum business guarantee (MBG) scheme which ranges from INR 1,815 and INR 7,700 on a daily basis for drivers in Bengaluru.

For instance, according to various Prime Plus drivers operating in Bengaluru, completing six rides entitles a driver to earn INR 1,815, while 11 rides lead to INR 3,300, 18 rides to INR 4,900, and 28 rides to INR 7,700 (approximately).

In fact, Ola makes up for any difference between the actual earnings of the drivers and the promised MBG. If a driver completes 11 rides and only earns INR 2,500 through these rides, Ola adds an additional INR 792 (INR 800 – 1% TDS) as the incentive to uphold the MBG terms.

The MBG offered by Prime Plus is notably higher than that of regular Ola rides, according to some Prime Plus drivers that Inc42 spoke with.

Having piloted the model in Bengaluru, Ola has expanded the Prime Plus service to Mumbai, Pune, and Hyderabad. However, the specific MBG differs from city to city.

In Delhi, for instance, the MBG for 11 completed bookings will reportedly be set at INR 2,800, while Pune and Hyderabad have an even lower MBG threshold.

Is Ola Prime Plus The Answer To Ride-Hailing Problems? 

At first glance, Prime Plus seems to have solved two of the biggest problems in the ride-hailing sector, but analysts are sceptical about the long-term viability of the solution.

The Indian market is highly price-sensitive, and Prime Plus charges commuters a premium of 20%-30% above the standard fare. Remarkably, the fare for Prime Plus even surpasses that of Uber Premier, the highest tier of service on rival Uber.

An analyst from Deloitte expressed reservations about this approach. He argued that by presenting higher prices under the guise of addressing basic issues, Ola has essentially inflated the cost of access to service.

While Prime Plus might initially seem appealing to commuters and has experienced some success in the short term, its long-term feasibility is questionable. Drawing a parallel to Uber and its attempts to break up the services into Uber Premier, Uber Black, and Uber Lux based on the cost to the commuter, the analyst asked why commuters would pay a premium for basic services such as a ride guarantee.

Ola too has discontinued its premier services like Ola Select (launched in 2015) and Ola Play.

The disparity in pricing becomes especially pronounced during peak hours when standard services are already subject to 2-3X surges and Prime Plus imposes an additional premium over this, making a simple cab ride significantly more expensive than otherwise.

Analysts argue that this approach might not be economically sound in the long run.

Moreover, when considering the core offerings of Prime Plus — assured rides and well-maintained cabs — critics argue that if a service provider is unable to deliver these essentials, it’s an issue on the provider’s end, rather than a consumer problem. Charging extra for such basic assurances seems unjustifiable at this point in time.

Girish Kumar Agrawal, the founder of 3 Cube Analytics and Strategy Solutions, raises concerns about Prime Plus’ requirement for drivers to commit to rides without cancellations. He notes that enforcing such contracts with drivers has historically proven nearly impossible.

Over the past decade, numerous schemes have been attempted but none remained successful. Agrawal contended that unless a feasible breakeven point is achieved for all participants — riders, drivers and the platform — the model is prone to failure.

Does Ola Prime Plus Address Driver Concerns?

There are other concerns when it comes to Ola Prime Plus.

According to Tanveer Pasha, the president of the Ola and Uber Drivers’ Association, which represents over 36K cab drivers in Bengaluru, the service does not adequately address issues of lower earnings and unfair working conditions for drivers.

Currently, the number of cab drivers in Bengaluru has decreased from over 1 Lakh in 2019 to approximately 45K-50K drivers in 2023. The driver enrolment numbers for Ola and Uber fluctuate daily, with drivers choosing the platform offering the better deal at the time, said Pasha.

“In Bengaluru, Ola and Uber charge a 25% commission. Our demand is to reduce this commission to a maximum of 10-15%,” Pasha emphasises.

On a typical day, for normal Ola rides, drivers complete around 12-18 rides and achieve a net income of INR 800 to INR 1,000 at most. When considering maintenance costs for the cab, the actual earnings come down to INR 500. Given Bengaluru’s high cost of living, this level of income is insufficient to make ends meet.

Pasha has engaged in numerous discussions with Karnataka Transport Minister Ramalinga Reddy and CM Siddaramaiah. The aim is to either compel ride-hailing platforms to reduce their commission rates or establish a new platform like “Namma Yatri” with reduced commission rates tailored for cab drivers.

This is another chapter in the ongoing struggle of drivers seeking sustainable earning opportunities and improved working conditions through ride-hailing platforms.

“Ola Prime Plus does not give us the freedom to choose our destination. As a result, most of the time, we have to drive even 30 Km without any ride while returning home at night,” an Ola driver told Inc42.

Moreover, there is a fear that Ola might completely change the MBG terms as it has done in the past. Drivers claim that often the company changes terms without any explanation and this means earnings are extremely inconsistent.

Ola’s Deeper Issues

Ola has been sidestepping core issues for a while, and Prime Plus seems to be part of that pattern. This strategy is unlikely to bring Ola closer to achieving financial sustainability. To genuinely achieve breakeven, Ola needs to address its fundamental challenges by integrating the principles of Prime Plus into its regular services.

The company finds itself grappling with a staggering increase in year-on-year losses. Additionally, with its valuation plummeting by over 50% in the books of its investors, Ola’s readiness for an IPO seems questionable at best.

Recently, Vanguard, the US-based investment advisor with about $7.7 Tn in global assets under management, which previously invested $51.7 Mn in Ola, has devalued its Ola shares to $25 Mn. As a result, Ola’s valuation has plummeted from $7.3 Bn to $3.5 Bn in the investor’s books.

What’s intriguing here is that Ola has garnered over $3.9 Bn in funding over the last 12 years. Given the state of its financials and the mega losses in ride-hailing, securing additional funds for the company appears to be an uphill battle. Indeed, the focus of Bhavish Aggarwal is squarely on Ola Electric, which the CEO claims will go public before Ola Cabs.

Notably, a considerable portion of the Ola Cabs app is dedicated to promoting Ola Electric vehicles. This emphasis on electric vehicles indicates a bigger focus on this vertical, rather than cab-hailing.

Revenue generation is a significant hurdle for the company. Analysts believe that execution challenges will require substantial rectification rather than surface-level interventions like Prime Plus.

Any model based on big incentives on a daily basis is not going to last long. Further, the Deloitte analyst quoted earlier, underscored the necessity for a refocussed approach. Ola’s current trajectory hardly addresses the fundamental issues at hand. Perhaps the starting point is in genuinely listening to the concerns voiced by both consumers and drivers.

In this regard, Ola’s customer and driver support systems leave much to be desired. The accessibility of Ola’s support number is severely limited for both drivers and consumers. This is in stark contrast to the principles of operating a company in the Indian context, where attentiveness to customer and employee needs is deeply ingrained, the analyst added.

This disparity between operational practices and customer expectations underscores the need for a comprehensive transformation within the company’s operations.

Disrupting The Disruptors

Unlike Ola, Uber has announced plans to go all-electric by 2040. A senior Uber employee told Inc42 that Uber has already acquired a significant number of electric cars from Tata Motors which is being rolled out under the Uber Green brand. Having signed an MoU with Tata, the plan is to acquire 25K electric cars in the next one year from Tata.

With EVs, the fuel cost could be minimised by 10x, and this is where a breakeven could be achieved for the company as well as for drivers.

However, electric cabs, too, have their own issues, including charging infrastructure and high ownership costs. An electric car is usually INR 3 Lakh to INR 4 Lakh more expensive than ICE vehicles.

While Ola, too, plans to acquire 10K electric cabs, no timeline has been assigned by the company. Meanwhile, Ola Electric plans to launch affordable electric cars by 2030, a distant dream as of now.

The emergence of local ride-hailing platforms in various cities poses more significant challenges for giants like Ola and Uber.

For instance, Bengaluru-based Namma Yatri has rapidly onboarded over 89K auto drivers, establishing itself as the largest auto platform in the city.

In contrast to Uber and Ola, which charge a hefty commission, Namma Yatri has operated as a zero-commission platform thus far. However, Namma Yatri is now considering to charge a subscription fee to cover platform maintenance, development, and operational costs.

The Ola and Uber Drivers Association of Bengaluru has even urged the Karnataka government to launch a state-led platform as a countermeasure against Ola and Uber, which is currently being deliberated.

Besides Namma Yatri, Bengaluru-based Rapido is another rival of Uber and Ola in the auto and bike rental segment. Smaller competitors such as Redtaxi have gained immense popularity in Tamil Nadu cities such as Coimbatore, Trichy, Madurai, and Salem.

Another rival InDrive has captured a significant market share in multiple cities. Interestingly, InDrive is known to onboard drivers that have been blacklisted by Ola and Uber, offering rides at a comparatively lower cost.

The biggest new challenger to Ola and Uber is Gurugram-based Blu Smart Mobility, which has positioned itself as an all-electric service and offers the zero cancellation feature that Prime Plus is banking on. The platform offers well-maintained cars, and good drivers as part of their basic services, unlike Ola

Naturally, analysts and observers have questioned whether Ola is adequately addressing the existential challenges marring its platforms, given that rivals are ready to jump in to fill the gap.

So, even as Ola has launched Prime Plus as a way to temporarily plug the service quality gap, this only serves to deflect attention from the core issues and it’s unlikely to be a lasting solution to the many problems that plague ride-hailing.

The post Ola Prime Plus: A Much-Needed Overhaul Or Just Old Wine In New Bottle? appeared first on Inc42 Media.

“Bengaluru takes pride in being home to the world’s second-largest AI talent pool…Our state government has launched a deeptech cluster seed fund of INR 25 crores to nurture startups specializing in deeptech and AI,” remarked Priyank Kharge, the Minister of IT and BT, Karnataka.

Speaking at a TiE India Internet Day event in Bengaluru, Kharge highlighted the Karnataka government’s endeavours to foster the AI ecosystem in the state, emphasising that the state stands as a hub of technology and innovation.

Bengaluru ranks among the top five AI cities globally, securing the fifth spot according to a study conducted by the rigorous framework listed in the Harvard Business Review.

Kharge pointed out that the Karnataka government has established centres of excellence in collaboration with private anchor institutions, focusing on emerging technologies. These centres drive initiatives across four areas —  startup ecosystem development, industry collaboration, government engagement, and research and academia.

An illustrative example is The ARTPARK, inaugurated by the state government in partnership with the Indian Institute of Science, Bengaluru. This initiative is designed to catalyse technological innovation in AI and robotics.

Additionally, the government of Karnataka, in partnership with the World Economic Forum and IIIT Bengaluru, has set up the Center for Internet of Ethical Things. This centre addresses the intersection of AI, IoT, and ethics, firmly committed to ethical foundations, as emphasised by Kharge.

According to research from Precedence, the global AI market reached a size of $454 Bn in 2022 and is anticipated to skyrocket to around $2,575 Bn by 2032. A study conducted by the Indian Institute of Management Ahmedabad suggests that successful AI adoption could contribute up to 1.4 percentage points to the annual growth of real GDP.

Projections indicate that AI could inject an additional $957 Bn into India’s economy by 2035. As per the Stanford AI Index report for 2023, Indian AI companies secured $3.24 Bn in funding during 2022, positioning India as the fifth highest recipient of AI investments, as highlighted by the Karnataka government.

Directing his words to the entrepreneurs, Kharge reaffirmed the government’s commitment to address and resolve their challenges, urging them to articulate these concerns.

In line with these efforts, the Karnataka state government, having recently approved the cybersecurity policy, is also preparing a white paper outlining an ethical framework for governing IoT, AI, and AI systems.

The Transport Policy Falls Short In Addressing Ride-Sharing And Hailing Standards 

Responding to a question from the audience about the regulatory conundrum for ride-hailing startups, Kharge took a pointed stance on the operations of Ola, Uber, and Rapido businesses.  He cited the absence of clear operational policies in ride-hailing services in India and the incompatibility of many ride-sharing models with India’s existing transport policy.

Notably, Karnataka’s transport minister Ramalinga Reddy and CM Siddaramaih held meetings with the Uber and Ola Drivers Association in recent weeks to address some of their concerns.

The Association’s persistent demand has been for Ola and Uber to lower their commission from the current 25% to a range of 10% to 25%.

Sources told Inc42 that the state government is also mulling to introduce an app similar to Ola and Uber through BMTC (Bangalore Metropolitan Transport Corporation) at a reduced commission rate.

The post Bengaluru Is A Global AI Hub: Karnataka IT Minister Priyank Kharge appeared first on Inc42 Media.

New-age tech startups have largely staggered to stay abreast of their projections post their initial public offering (IPO) journey. While late-stage firms like BYJU’S, BharatPe, and GoMechanic are struggling with corporate governance issues, there’s a noticeable scarcity of high-quality deals in the world’s third-largest startup economy.

Unfortunately, these are just a few of the many factors due to which Indian startups have experienced a more than 70% year-over-year decline in funding.

According to data compiled by Inc42, the Indian startup ecosystem raised $42 Bn in 2021 and minted 45 unicorns that very year. Further, in 2022, which is infamous for hosting the funding winter that now has overstayed its welcome for all the wrong reasons, funding plummeted 40% YoY. Despite this, Indian startups raised $25 Bn and the country entered 22 startups into the coveted unicorn club.

However, it has been a downward spiral since then, as Indian startups only managed to raise $5.4 Bn, sans even a single unicorn, in the first half of 2023

“This is because there is a scarcity of high-quality startup deals,” said Madhu Shalini Iyer, managing partner, Rocketship.vc.

Having invested in startups like Yulu, Moglix, and Nobroker, Silicon Valley-based Rocketship.vc is an early-stage fund with a focus on the global market. Interestingly, unlike many Indian VCs, Rocketship.vc is a 100% outbound fund.

What’s even more fascinating is the fact that the VC firm leverages its extensive data sets to identify high-potential startups. The investment firm employs computational algorithms to meticulously select the most promising ones from a vast pool of ventures.

So, how has the data-driven company selection approach worked out for the VC so far?
In a candid conversation with Inc42, Madhu Shalini Iyer tried to answer everything — ranging from VCs’ current investment sentiments to factors that are impacting late stage funding in the country.

However, before we delve deeper, it is pertinent to mention that the VC has readied a war chest of $125 Mn Fund III to be deployed in 2023.

Here are the edited excerpts…

Inc42: Since Rocketship.vc is 100% outbound, how does it shortlist startups?

Madhu Shalini Iyer: Rocketship’s approach to investments distinguishes itself from conventional methods. We possess an extensive dataset comprising petabytes of both static and dynamic information about numerous startups. This dataset encompasses essential details such as founder identities, investor profiles, founding dates, and locations, along with dynamic information like web data, signals from platforms like LinkedIn and Twitter, and any web mentions.

This intricate dataset is applied to a single company among a staggering count of 50 Mn global contenders. Our expertise extends to crafting sophisticated algorithms that leverage this data. Through our investment journey, we’ve realised that a larger denominator of data points contributes to improved predictive accuracy and higher betting odds. Essentially, precision is enhanced when dealing with a larger scope of factors.

In essence, our methodology revolves around employing computational algorithms to meticulously select the most promising companies from a vast pool.

Inc42: But, at the early stage, online data on startups may not be that adequate. What are your thoughts?

Madhu Shalini Iyer: That’s true. Our focus lies primarily on Series A investments, as we’ve identified it to be the optimal sweet spot. We allocate a significant portion of our investments to Series A rounds, especially when there’s a substantial amount of data available, and the valuations are not overly inflated. It’s important to note that we don’t compete directly with growth-stage funds and our strategy centres around Series A and occasionally Series B investments.

Series A presents an opportune stage because it allows for the accumulation of sufficient data. However, it’s crucial to recognise that this approach is still directional, distinct from the strategies employed by public hedge funds. Data-driven public hedge funds often make calculated decisions solely based on available data, sometimes without even engaging in direct communication. Due diligence may not be as crucial for them, given the data landscape.

In our case, the process diverges. From a pool of 150 shortlisted companies each month, we initiate outbound communications. This proactive approach constitutes our deal flow, and we entirely avoid inbound inquiries. Guided by our data analysis, we reach out to the companies we’ve already developed strong convictions about. Subsequently, we aim to bolster these initial convictions through further interactions and information-gathering.

Inc42: How many startups have you planned to invest in via Fund III? Since it’s a global fund, is there any particular focus on Indian startups? Is there any change in the Fund III strategy when it comes to investing in Indian startups? 

Madhu Shalini Iyer: We are going to stick to pretty much what we did during the allocation of Fund II, which is investing in 20 to 25 startups across the globe picked by algorithms.

Fund II was about 60% emerging markets, of which approximately 50% was India. Fund III could be more or less similar to Fund I, where 40% of investments were towards emerging markets like India.

For the Fund III India Investments, the corpus has already been given. Therefore, we are more excited than ever and are following the directional signal from our algorithms, finding Indian companies.

It is pertinent to mention that we invest more than $3 Mn in Series A deals, but we are flexible. We also engage in follow-on rounds with companies that we partner with.

Inc42: Indian startup funding has witnessed a more than 75% decline since 2021. Has there been a change in your funding strategy? How do you look at the funding winter? 

Madhu Shalini Iyer: Our data has been telling us that certain sectors are doing better than others. Some of these sectors are deeptech, climate tech, predictive AI, EVs, and spacetech. So, yes, there has been a certain shift.

Other factors that indicate a robust ecosystem in the longer run are the emergence of founders from tier II and II cities of India, the macroeconomic landscape and the country’s GDP.

The fact that there’s a dearth of funding cannot be denied. The funding winter has also been triggered in the absence of investor exits. We are now looking forward to some of the IPOs next year.

Inc42: Despite sitting on massive amounts of dry powder reserves, investors are shying away from deploying capital. How do you see this? 

Madhu Shalini Iyer:

I’ll be frank here. The reality is that the quality of startups isn’t yet meeting our expectations. While we are actively engaging with numerous promising startups, not all of them make it through our pipelines successfully.

It’s a variable situation — sometimes the alignment is there and sometimes not. Our eagerness to invest remains intact, but we maintain a high threshold for what we consider investable quality.

Presently, a lot is happening in the early-stage space, yet we’re not encountering an abundance of truly exceptional companies.

Undoubtedly, there are a few standout companies, but we haven’t executed any investment decisions as of now. Our approach remains cautious, and we’re adopting a watchful stance. The situation might gain more clarity once the IPO landscape stabilises. The companies emerging during this period will be particularly intriguing to observe.

Meanwhile, we’re consistently in conversations with potential investment candidates, thoroughly examining each opportunity before making any moves.

Inc42: Has the funding winter slowed down your investments?

Madhu Shalini Iyer: Yes. This sentiment is similar across the VC landscape, and every VC would concur. I say this with complete candour and transparency. Our stringent criteria for investments contribute to this acknowledgement.

Are we enthusiastic about the prospects? Absolutely. Allow me to clarify — our engagement isn’t merely an exercise in gauging the market environment, we’re driven by a genuine desire to invest.

Our interactions with potential investment candidates are guided by a strong intention to allocate funds. We actively consider every company that emerges as a strong contender within our pipelines. Our goal is to forge partnerships with these companies, grounded in our commitment to making impactful investments.

Inc42: You spoke about IPOs. But, Indian tech startups have performed poorly in the post-IPO phase. Who according to you was not ready — startups or the market?

Madhu Shalini Iyer: I believe that there’s a need for further action, and it’s always encouraging to witness the government’s proactive efforts in streamlining these aspects. Rigorous regulatory adjustments hold considerable importance in ensuring a healthy ecosystem.

Regarding the startups’ readiness, the ongoing situation has prompted startups to engage in a reflective process and absorb crucial insights. The market has undergone a period of reckoning, leading to a rapid learning curve. Startups have absorbed valuable lessons about the essential metrics to focus on and what requires prudent attention.

This phase can indeed be regarded as a valuable learning experience. Conversations with founders highlight a newfound awareness about the importance of measured progression rather than haste, ensuring a solid foundation before moving forward.

The value of these lessons transcends theoretical teaching. While it’s too early to definitively predict if past mistakes might resurface, the crucial point is that this chapter has likely imparted lasting insights.

Whether these lessons are internalised or not remains to be seen, but the general trajectory is toward continuous improvement. Ultimately, there’s a sense of dedication to personal and collective growth. Frankly, that’s the best course of action moving forward – to constantly strive for enhancement and refinement.

Inc42: The issue of corporate governance has also impacted the late-stage Indian startup ecosystem. What’s your observation? 

Madhu Shalini Iyer: Certainly. However, this isn’t a challenge confined to startups but rather an issue encompassing the entire ecosystem. To lay the blame solely on startups would be a hasty judgment. This challenge extends its reach to VCs too. It’s incumbent upon all of us to take responsibility, learn from the experiences, and collectively evolve.

Participation at the board level plays a pivotal role in addressing these concerns. As someone who is actively engaged in several boards, I can attest that being a part of these discussions and providing constructive feedback is of paramount importance. It’s crucial to acknowledge that perception isn’t the sole consideration, and the focus should be on doing what is ethical. Overcoming adversities, including challenges like layoffs, should not deter the commitment to building and rebuilding companies as needed.

Moreover, India grapples with the issue of perception. There’s an undue concern about external opinions or judgment, which can hinder progress. This mindset needs to change, and a more assertive approach is required.

As far as early-stage startups are concerned, the emphasis often isn’t on perfection but on the process of building and evolving. This is where course corrections become pivotal.

In essence, this is a collective journey of growth and learning, encompassing startups, VCs, and the entire ecosystem. Acknowledging the challenges, embracing feedback, and having the resilience to overcome obstacles are key elements in steering this ecosystem towards a more robust and sustainable future.

Inc42: What’s been the success ratio for Rocketship.vc?

Madhu Shalini Iyer: It would be too early to evaluate Fund II. However, out of our Fund I, which was more of an experimental fund, we have seven unicorns.

The post How Rocketship.vc’s Data-Driven Approach Helps It Secure Quality Startup Deals Even During Slowdowns appeared first on Inc42 Media.

On July 25, 2023, a London and Ahmedabad-based web3 AI startup, ZYBER 365 Technologies, announced its ascension to the ranks of India’s unicorns, claiming the title of the country’s 109th unicorn after securing $100 Mn at a valuation of $1.2 Bn.

The Series A funding came from SRAM & MRAM Group, a UK-based diversified business group with a focus on futuristic tech and the sole participant in this round, while the initial seed round was funded by its founders and friends.

Notably, ZYBER 365 Technologies Ltd. was established by Pearl Kapur, the founder and CEO, and Sunny Vaghela, the cofounder and CPO, on May 3, 2023, in London. Subsequently, an Indian subsidiary by the name of Zyber 365 Technologies Private Limited was formally registered on July 20, 2023, in Punjab.

While the company claims that its India office is based out of Ahmedabad, Gujarat, as per the Ministry of Company Affairs, its registered office is in Hoshiarpur, Punjab.

The company’s strategic focus spans a diverse array of domains, including web3, AI, and cybersecurity, with an emphasis on Globalisation 3.0 and sustainability. With headquarters situated in London and operational roots firmly embedded in India, the company’s ambition is to establish India as the epicentre of its operations.

Commenting on the infusion of funds, Kapur expressed her pride in ZYBER 365’s tireless efforts in spearheading the development of a groundbreaking web3 AI ecosystem to drive Globalisation 3.0. The capital injection was poised to expedite the company’s expansion efforts and usher in a new era of value creation for its clientele.

At a cursory glance, achieving unicorn status within three months of incorporation is undoubtedly impressive. Among the notable Indian web3 and crypto startups that have the coveted unicorn tag are Coinswitch Kuber and CoinDCX.

However, it is worth acknowledging that both of these unicorns have established businesses over the course of more than five years, navigating through several ups and downs. Another blockchain unicorn 5ire, also backed by SRAM and MRAM Group, was set up in 2021 and turned unicorn a year later.

In contrast, ZYBER 365’s aspirations rest on forthcoming product launches. So far, the company has not introduced any product, not even in the alpha or beta stages. The only action taken has been the publication of a white paper.

The founder of the company, Kapur, is the director of three other companies — No Lines Retail Pvt Ltd, Billion Pay Technology Pvt Ltd and Brock Pharmaceuticals Pvt Ltd.

What’s more strange is that as per the UK filings, Kapur was born in 1997 and hence is currently around 26 years old. However, as per his company’s website (Brock Pharma), Kapur has more than two decades of experience across business and technical functions. The other cofounder, Vaghela, is said to be an ethical hacker and a cybersecurity expert.

Amid the ongoing funding winter when venture capitalists are cautious about allocating substantial sums to startups, even those in the growth stage, and when decacorns are transitioning into unicorns and unicorns are edging towards soonicorns, many founders and analysts believe that the intriguing case of Zyber 365 may set an inappropriate precedent for the Indian startup ecosystem.

This is especially when the Indian crypto sector has seen three Indian startups, Pillow, Flint Money, and WeTrade, shut down over the past few months due to regulatory setbacks and hostile market conditions.

Moving on, another concern is that the company might expend considerable resources to gain experience and hastily construct products with the sole intention of meeting deadlines.

In essence, these anticipations raise many questions. However, before reaching any conclusion, let’s delve deeper into the curious case of ZYBER 365, which had us intrigued in the first place.

As per the UK RoC filings examined by Inc42, the most recent funding round led to a redistribution of ownership within the company, both its cofounders, Kapur and Vaghela, saw a reduction in their ownership stakes. Kapur’s shareholding slipped from 96% to 77.7%, while Vaghela’s stake decreased from 4% to 1.7%.

Two newcomers, Neang Sokhen and Raghav Kapur, now hold 15.3% and 5.3% shares, respectively, in the company. Notably, the new shareholders are associated with the SRAM and MRAM Group. While the latter (Kapur) serves as the group director, Sokhen’s current position is not clear. However, her Linkedin profile reveals that she was an account manager at the SRAM and MRAM Group at one point in time.

Considering that a 20.6% stake was attributed to the SRAM and MRAM Group at $100 Mn, the overall valuation would seemingly be $485 Mn, which is not even half the size for a unicorn.

This prompts a critical question — Has the stated valuation been overinflated?

ZYBER 365: A Unicorn That Is Thinking Of Building Products

In response to Inc42’s inquiries, the company divulged insights into the products it intends to launch. While the company’s website was undergoing development until recently, it has now been updated to include a comprehensive product timeline. The company’s product development strategy is divided into two phases.

In Phase I, ZYBER 365 is slated to develop L0, L1, and L2 blockchains alongside AI-driven autonomous cashless stores. Transitioning into Phase II, the focus will primarily shift towards the development of blockchain operating systems and an array of application suites.

In a white paper, the company elaborates on its product offerings, outlining a conceptual framework for these products and the transformative change they are expected to bring. However, the technical intricacies of each of these product stand undisclosed.

Developing A Complete Blockchain Ecosystem From The Scratch

Before we get into the specifics of L0, L1 and L2 blockchains that ZYBER 365 intends to offer, let’s take a look at L0, L1 and L2 blockchain layers.

L0 blockchains serve as cross-chain interoperability protocols, enabling the smooth transfer of information and tokens between incompatible blockchains. Projects like Polkadot, Cosmos, and Chain Link exemplify this by providing off-chain data to apps and blockchains.

Layer 1 blockchains act as fundamental digital ledgers, supporting secure data storage and employing distinct consensus models and smart contracts for automated transactions. Some examples include names like Ethereum, Solana, Binance Chain, Ripple, Monero, and Litecoin.

Layer 2 blockchains are built upon existing blockchains and offer enhanced scalability through reliance on Layer 1 infrastructure. Ethereum’s Polygon, Arbitrum, and Optimism are Layer 2 instances, trading some decentralisation for speed and cost-efficiency; however, they are contingent on Layer 1 networks and may not match their security.

ZYBER 365 has shared its own specifications for L0, L1, and L2 blockchains with us.

For comparison, while existing L0 layer Polkadot offers 1,000 Transactions Per Second (TPS), L1 layer Solana and L2 layer Polygon are much faster with 65K and 75K TPS, respectively.

Regarding tokenomics, a company spokesperson indicated that the design of the tokenomics structure will be finalised after the architecture and incentive structure are fully developed. This comprehensive approach aims to safeguard the tokenomics against potential vulnerabilities and ensure that the investor community’s interests are upheld.

While the company expresses its commitment to deliver products in the future, the reality remains that it has yet to offer any tangible product. The ‘unicorn’ has recently onboarded a few individuals as advisors, including Nikita Sachdev, founder, Luna PR; Daniel Diemers, cofounder, SNGLR Group; Maya Marbuger, executive board member, Zurich Film Festival, and Antonia Martina Durisch, a film producer and an advisor.

Given that hardly anyone in the web3 arena is familiar with what the company does or who its founders are, legitimate concerns have been triggered within the crypto startup community, with many industry leaders questioning the identity of this startup and founders.

Further, ZYBER 365 is confidently pledging to deliver within a specific timeline when regulations and complexities that envelop many blockchain applications are ambiguous on a global scale.

Isn’t this an irony of sorts?

Sharing his insights, Shivam Thakral, the founder and CEO of BuyUcoin, emphasised the necessity for these businesses to uphold their commitments, translate their vision into tangible products, and demonstrate clear pathways to revenue to instil confidence and credibility among investors.

Voicing his perspective, Sharat Chandra, one of the cofounders of India Blockchain Forum said, “A significant influx of funds alone cannot guarantee value creation when there is an absence of product, product-market fit and a lack of clear product differentiation. What the web3 industry truly requires are innovative solutions and products capable of onboarding the next billion users, generating meaningful impact, and unlocking opportunities for both web2 native businesses and enterprises.”

Web3 Startups Want Valuation Yardstick To Change For Them

Despite agreeing that ZYBER 365 needs to perform first, crypto founders demand a separate yardstick for web3 startups. Mahin Gupta, the founder of Liminal, a crypto wallet platform, commented that in the realm of innovation, valuations that transcend billions without a tangible product or revenue may appear unrealistic but it also reminds us of the power of ideas.

Despite being a 3-month-old startup that is not even registered with DPIIT, some may say, Zyber 365’s rise to a unicorn with no products or revenues in sight definitely challenges conventional wisdom and could be seen as both a testament to the founders’ ability to attract investor interest and a reflection of the high-level of optimism and potential perceived in their plans for L0, L1, and L2 blockchains, along with a blockchain operating system.

“However, the success or failure of Zyber 365 will ultimately depend on the execution, the demand for its offerings, and the ability to turn its vision into reality,” Gupta added.

Seconding this, Poorvi Sachar, head of operations, Tezos India, a blockchain adoption entity said that web3 ventures should be judged on their vision, the strength of their ideas, and their capacity to challenge accepted norms. The courage to invest in game-changing ideas could revolutionise several industries, she added.

Meanwhile, Zyber 365 has risen to wear the unicorn sash when several companies are seeing valuation markdowns in the books of their respective investors due to reasons ranging from operational bottlenecks, bloating losses, and regulatory setbacks, just to count a few.

Recently, US-based investment firm Vanguard slashed the valuation of its stake in homegrown ride-hailing giant Ola for the second time this. Similarly, last month, US-based asset management company Fidelity Investments slashed the valuation of its stake in SaaS unicorn Gupshup by more than 20%.

In July, Fidelity also cut the valuation of fintech startup Pine Labs by nearly 9.2% to $4.5 Bn. these names are just a few of the many Indian startups whose valuations have been slashed recently.

However, what’s mindboggling here is seeing a startup with zero offerings and revenues become a unicorn just three months after its inception when many others with a range of tangible products are facing investors’ wrath and are bogged down in performance pressure.

The post ZYBER 365: An ‘AI + Web3 Unicorn’ With No Product appeared first on Inc42 Media.

After much back and forth in the Parliament, President Droupadi Murmu has finally granted her assent to the Digital Personal Data Protection Bill, 2023. The bill that has remained in limbo for the last six years has now become a law that is expected to uphold the sanctity of every citizen’s fundamental ‘right to data privacy’ both in the real and the virtual realms.

However, before we delve deeper into what impact the Act will have on the world’s third-largest startup economy, let’s take a quick look at its evolution.

Six years ago, in July 2017, the Ministry of Electronics and Information Technology (MeitY) appointed a 10-member panel (aka Srikrishna Committee), under the chairmanship of Justice BN Srikrishna, to submit a detailed report on data privacy and draft a bill on personal data protection.

The Bill, after being introduced in the Parliament and referred to a Joint Parliamentary Committee, was later withdrawn in August 2022. Consequently, a new bill called the DPDP Bill, 2023, was introduced in Parliament earlier this month. Between 2017 and 2023, the bill went through multiple revisions before landing on the President’s table, requesting her assent.

Interestingly, despite the opposition’s demand that the new draft bill (2023) should be handed to either a Joint Parliamentary Committee or a Standing Committee, it was upheld by the Parliament this week (on August 9).

It seems that the fifth and final version of the bill addresses some of the key issues raised by the startups in 2022 when it was released for public consultation.

For instance, the provision of penalty was reduced from an earlier INR 500 Cr to a maximum of INR 250 Cr under the newly received bill (now an Act). The government is also expected to extend further relief to early-stage startups under the DPDP Act, 2023.

Moving on, while the earlier version proposed publishing a list of countries where data transactions would be allowed, the Act specifies a list of countries that are barred from data transactions, giving more clarity to the startups that handle data.

Speaking with Inc42, Sanjay Jain, a partner at Bharat Innovation Fund, said that the DPDP Act is an important milestone in the way we govern technologies. Given the rate of change (or lack of maturity) in the technology ecosystem and the governance thereof, it is the first attempt to provide clarity to technology companies on how users’ rights must be protected.

While the Act provides clarity to users on how corporations can use their data, it also provides clarity to companies (including startups) on how they must deal with users’ personal data, and consent. The Act is also expected to make industries and sectors respect users’ rights and control over their data.

“I expect that we will see companies that will start to incorporate this thinking into their tools and architectures as they build a safer online existence for all of us… This Act is a signal from the government that it (data) is an important space, and that they are keen to protect the rights of users. Certain exemptions have also been provided to startups to ensure that they are able to innovate without any undue burden on them,” Jain said.

Given that we have already covered the first draft of the Personal Data Protection Bill, 2018, and the draft DPDP Bill, 2022, in detail, allow us to highlight some key amendments in the DPDP Bill, 2023, and how the new Act directs Indian startups to maintain the sanctity of the user data.

Bringing More Clarity To Digital Personal Data  

The DPDP Bill, 2022, had many complicated parts and therefore needed clarity. For instance, the provisions of the last draft of the bill would not apply to the non-automated processing of personal data; offline personal data; personal data processed by an individual for any personal or domestic purpose; and personal data about an individual that is contained in a record that has been in existence for at least 100 years.

This portion was removed from the fifth revision of the bill, which simply states that the Act shall apply to the processing of digital personal data within the territory of India where the personal data is collected (i) in digital form or (ii) in non-digital form and digitised subsequently.

Thus, the DPDP Act, 2023, shall not apply to the processing of personal data in the non-digitised form.

Govt To Publish A Negative List For Cross-Border Data Transactions 

The earlier draft of the bill stated that the central government may, after an assessment of certain factors and as it may consider necessary, notify countries or territories outside India to which an Indian data fiduciary may transfer personal data, in accordance with terms and conditions as may be specified.

However, this, too, has been removed from the Act, giving much-needed relief to startups that have clients outside India.

According to the Act, the central government may, by notification, ‘restrict the transfer of personal data by an Indian data fiduciary for processing to such country or territory outside India as may be so notified’.

“With respect to cross-border data transactions, the Act prescribes a simplified process. Under the Act, such transfer may occur with prior approval of the Centre. The government may, while providing such approval, prescribe additional provisions that will have to be followed. However, unlike the GDPR, the Act does not have an elaborative framework for cross-border data transactions,” the founder of Fountainhead Legal, Rashmi Deshpande, told Inc42.

Certain Exemptions Can Be Granted To Startups Under The Act

According to the DPDP Act, 2022, the central government retains the right to exempt certain classes of data fiduciaries, including startups.

Earlier, the Union Minister of State for Electronics and Information Technology (MeitY), Rajeev Chandrasekhar, indicated that early stage startups could be exempted from certain penalty provisions. However, there will be a sunset clause for the exemption.

Jain of Bharat Innovation Fund said that the Act provides for the board to consider certain factors when it determines the penalty to be imposed. This includes the size and significance of the breach, along with the actions taken to mitigate the breach. This could also include the impact of the monetary penalty on the offending party.

“To this extent, I do think that some consideration has been provided to spare smaller companies from large penalties. However, we will only get clarity on how regulators use their powers and set up a process to determine these fines, among other things,” Jain added.

While the Act is a move in the right direction, it still gives little clarity over its implementation and additional operational costs.

Startups Fear An Increase In Expenses

While the entire consent mechanism would increase the data transaction cost, startup founders feel that significant data fiduciaries will come under additional obligations. They may also be required to fulfil additional requirements such as the appointment of a data protection officer to address data principals’ grievances and an independent data auditor to carry out data audits and periodic data protection impact assessments.

According to the founder of fintech startup Niro, Aditya Kumar, fintech companies will now be required to establish systems that grant users access to their data and allow them to have the final say in its usage. Under the new regime, digital lenders are expected to fare better, given that customer experience and grievance redressal are already part of their regulatory framework.

“However, one significant consequence of this Act could be an increase in the expenses related to implementation and compliance, potentially demanding more resources and a heightened level of awareness,” Kumar added.

Implementation Challenge In The Age Of AI

The Act directs setting up a Data Protection Board of India to ensure the implementation. However, unlike GDPR, which has detailed the fine print of implementing the law, the DPDP Act, 2023, misses details on multiple fronts.

The founder and MD of Tech Whisperer, Jaspreet Bindra, said that the formation of the Data Protection Board and the fact that it will be housed by professionals is welcome. However, the implementation of the same will be a real challenge.

This is because technology tends to move much faster than regulations, and implementing regulations effectively and speedily is expected to pose a challenge.

Take Generative AI for example. The EU is groping in the dark to integrate this new technology into its regulation framework, however, by the time the new framework will be ready, the technology will have changed.

“There are many aspects to GenAI like plagiarism of data, data bias, deep fakes, etc. that would be difficult to track and regulate, given the power and wide distribution of technology,” Bindra added.

The New Bill Gives The Government A Free Pass

Clause 17(2) of The DPDP Act, 2023, allows exemptions to the government with respect to the processing of personal data.

Former union minister, MeitY, Manish Tewari said that this Act drives the entire digital universe into two parts — First, the bill will apply in full force to all non-government organisations, and second, the entire government entities are going to be exempted from it.

Meanwhile, Deshpande said that the fact that the central government, and in certain cases, the state governments, including the Data Protection Board and its members, are exempt from the provision of this framework, it could pose a major threat to the right to privacy (including data) of Indians.

The right to privacy, as upheld by the Supreme Court of India in multiple cases, is a fundamental right, which cannot be violated even by the government. Therefore, there exists a conflict and it cannot be said that the Act provides absolute protection of data and ensures that the right to privacy is upheld.

Since DPDP Act, 2023 has retained the powers given to the Central Government, Justice BN Srikrishna who headed the first committee on data protection and had vouched for an independent authority/board for data protection found it worrying.

Speaking to Inc42, Justice BN Srikrishna had earlier stated that it is simple with regard to simple things but does not rise to the level required for complex things. For example, it gives too much margin to the government and does little to protect individuals’ fundamental right of data privacy. It will not be able to safeguard citizens or individuals against the poaching of data and misuse thereof by government agencies.

Is India On The Brink Of The Privacy Revolution?

Despite concerns, the Indian startup ecosystem has welcomed the Act. For starters, many founders agreed that the DPDP Act, 2023, is simple and easier to implement.

They also believe that the Act will set the stage for a new era of data privacy and accountability in the country’s digital landscape. Further, embracing data protection can forge stronger user relationships and propel responsible innovation.

“We’re on the brink of a privacy revolution. By embracing it (the Act), we not only comply but also build stronger connections with our users,” a startup founder said.

The Act that has received the President’s green light signifies the government’s recognition of the critical nature of data protection and its commitment to preserving user rights. Meanwhile, it is all set to usher in a new era of trust and innovation for the world’s third-largest startup economy.

The post Decoding The Digital Personal Data Protection Act, 2023 appeared first on Inc42 Media.

The pandemic disrupted businesses across sectors and retail investments saw a notable transformation.

In January 2020, the cash segment (equities market) of the National Stock Exchange (NSE) boasted around 3 Mn active retail investors. In January 2022, this skyrocketed to 11.7 Mn, a staggering 4X surge in two years.

In total, a whopping 10.4 Mn new investors were recorded in FY20, and this bloomed to 14 Mn by FY21.

All companies and promoters wanted to have a slice of this mushrooming class of retail investors. Though individual investments might have been relatively small, the cumulative impact of this groundswell resulted in substantial fundraising efforts.

In line with this, with an ambitious target of facilitating transactions worth INR 1,000 Cr, Tyke Invest launched around this time and envisioned a crowd fundraising platform for startups based in Mumbai and capitalised on the rising interest of retail investors in diversifying assets within their tech portfolio.

Tyke effectively enticed retail investors to invest in promising startups, facilitating a mutually beneficial ecosystem. Of course, startups could also benefit from the faster fundraising mechanism, claimed Tyke.

At the early stage, startups have to sell their equities at a meagre price tag. This troubles later. With multiple instruments of investments, Tyke Invest offered startups an opportunity to raise funding without losing the equity.

But things have changed dramatically post-2022. What was once easy fundraising avenues have now become a lot messier and could pose existential threats to new startups.

Understanding Tyke: Crowdfunding, Angel Network Or Something Else?

Tyke made a compelling promise to retail investors; it brought seemingly painless access to startup investments. Its advertisements boldly challenged the notion that startup investments were exclusive to the ultra-rich, as Tyke’s investment opportunities began at just INR 5,000, eliminating a big hurdle.

The mainstream popularity of investing in startups was already soaring at this point, in part due to the influence of shows like Shark Tank India that fuelled people’s aspirations to be part of the startup ecosystem.

However, unlike other angel networks and angel funds such as LetsVenture or AngelList, Tyke Invest had a unique investment instrument called CSOP (or Community Stock Option Pool) along with other alternative options like Compulsorily Convertible Debentures (CCDs), discounting, Compulsorily Convertible Preference Share (CCPS), Non-Convertible Debenture (NCD) or Invoice Discounting.

It is worth noting that, unlike CSOPs, invoice discounting, and NCDs, CCDs give investors access to the cap table and hence trigger Section 42 of the Companies Act, 2013. According to Section 42 of the Companies Act, CCDs can be offered only to select persons as identified by the board of the company.

The offer cannot be made to more than 200 people. A company making a private placement cannot offer its securities through any public advertisements or utilise any marketing, media, or distribution agents or channels to inform the public about such an offer.

Unlike equities, CSOPs didn’t put retail investors on the startup’s cap table but instead got similar to what are called share appreciation rights (SAR). It seems like a win-win situation for founders who don’t want their equity diluted early on.

“We currently focus on operating with CSOPs and invoice discounting. However, we remain highly responsive to market demands, and while other instruments like CCD and NCD have not been placed on Tyke, we continuously evaluate the landscape to offer suitable choices that align with public demand and industry trends,” said Tyke Invest’s cofounder and CEO Karan Mehra.

Tyke’s model quickly garnered attention and the company secured funding for its own growth. It successfully raised $100K from Navin Surya initially and later received a substantial investment of $1.5 Mn from prominent investors like Venture Catalysts, 9Unicorns, Better Capital, Jupiter’s Jitendra Gupta, and Pine Labs’ Amrish Rau, among others.

By the end of 2021, Tyke had become a sought-after avenue for startups seeking angel/seed stage funding. So far, with a subscriber base of 200K registered investors, Tyke claims to have facilitated 500+ deals, making a significant mark on the startup ecosystem.

Tyke’s initial success prompted competition such as Jiraaf and InfuBiz, which also offered retail investment opportunities in startups for as low as INR 5,000.

The question, of course, is did startups really benefit from this seemingly wider net cast by Tyke and others.

“Tyke offers an opportunity not only to raise funding without diluting any equity, but, more importantly, it helps in branding. These investors act as the brand ambassadors for the company and influence others to adopt their brands,” said Naveen Srinivas, the founder of Bengaluru-based smart TV brand Ridaex, who had earlier raised funding through Tyke.

Tyke Invest claims to be investor-friendly as well. For instance, if anything goes wrong or a deal does not happen, Tyke refunds the money to investors. In some cases, investors have even got their refund with interest as well.

Overall, Tyke’s fee structure aligns with the range of services it provides to companies, according to some of the companies we spoke to.

Like Kickstarter, Indiegogo or other crowdfunding platforms, Tyke allows startups to offer perks to investors to attract more backers. Ridaex offered extras such as a silver coin for first-day buyers or a flagship 32-inch Ridaex Future TV for investors planning to invest over INR 1 Lakh.

Other startups too that have gone through the Tyke journey told Inc42 that, like on Shark Tank India, the Tyke platform is equally for marketing and branding. It helps establish connections with a community pool of brand ambassadors who have invested in the product and are more likely to speak positively about the product and spread the word.

The Curious Case Of Deciwood And Nutkhat Organics

Not all campaigns go as smoothly as Ridaex.

Back in August 2021, Deciwood (Legal name: Anbronica Technologies), a D2C speaker brand based in Delhi NCR, successfully raised INR 12.5 Lakh through CCD on Tyke.

In February 2023, the Registrar of Companies, Delhi, ordered Deciwood and another company Nutkhat Organics (Legal name: Septanove Technologies) to pay a penalty of INR 4 Lakh each for violating Section 42(7) of the Companies Act.

As mentioned earlier, this Section prohibits companies from soliciting investments for equity issues through public ads or media, marketing, or distribution channels that advertise on their behalf.

Moreover, the Section mandates that private placements of equity issues should be made exclusively to a select group of individuals identified by the Board, with the number of such persons not exceeding 200.

The RoC also issued show-cause notices to Tyke and startups on December 27, 2022.

Later, in its order, RoC stated that no satisfactory responses were provided by none of the two companies.

It noted that there were significant changes on Tyke’s website. Previously, a substantial amount of pitch-related information about companies utilising the Tyke platform for raising securities was visible without the need for a login.

After the show-cause notice, Tyke put all this information behind the members-only section. “At one point, Tyke claimed to have around 1.5 Lakh members, which is still a sizable number of individuals who would be able to see information about the pitching companies,” observed the RoC.

The RoC also pointed out that Tyke’s platform showed CCDs (Compulsorily Convertible Debentures) being oversubscribed, indicating that more than 200 investors participated in the campaign.

Septanove Technologies, which was fined by the RoC Delhi, raised over INR 30 Lakh by issuing CCDs to 196 people, leading to a penalty of INR 4 Lakh.

Deciwood has already filed an appeal with the Regional Director, Ministry of Corporate Affairs (MCA) against the order.

A Deciwood executive, without wanting to be named, however, clarified that the oversubscription on Tyke Invest merely reflected that the company had exceeded its fundraising target of INR 10 Lakh; it ended up raising INR 14.5 Lakh. But the actual number of people who bought during the campaign was only 28, far from the limit of 200 investors.

Mehra said, “We are hopeful that the appeal would result in a positive outcome.”

Sarika Raichur, partner of Luthra and Luthra Law Offices India said that publicising the issuance of any securities by a private limited company (including CCDs and CSOPs and SARs) is barred by law. Accordingly, any videos by or for the benefit of private companies soliciting investments into securities also violate the Companies’ Act 2013.

Despite explanations given by both Tyke and the companies that have raised from the platform, the Indian regulator looks primarily at the intent of the law, which prohibits private placements (fundraises) from being published in open markets to solicit investments through communities or other closed groups.

Jitesh Agrawal, founder and CEO of legal firm Treelife Consulting, said that in the US, this asset class is considered high-risk, leading to restrictions on the annual investment amount for regular investors apart from ‘accredited investors.’

While Tyke no longer focusses on CCDs, some of the investors have pointed out that there are some other platforms that still assist crowdfunding through equities and the campaign remains visible to all the members. Inc42 has not been able to verify them independently.

Is it time that India brings more clarity to such rules?

Let’s take a look at the most popular instrument of investment — CSOP.

CSOP: How Does It Work

In the wake of Tyke Invest, Infubiz and other smaller investor platforms, CSOPs have gained popularity.

Holders of CSOPs have the opportunity to benefit from the increase or appreciation in the value of the company’s stock, especially if the company raises funds in subsequent funding rounds at higher valuations. This benefit can be realised when CSOP holders decide to sell their CSOPs or during an IPO.

The CSOP agreement is a contractual agreement where SARs are granted to the subscriber, but critically, as many have pointed out SARs do not give subscribers any shares in the company.

It’s largely a formula for calculating payout and the process of such a payout to the subscriber at the trigger of an exit event, Raichur explained.

As per the sample contract reviewed by Inc42, Tyke offers the following clarifications to investors:

1. A CSOP plan is an incentive-based scheme designed by the company to reward its community evangelisers and is not considered a security under the Companies Act, 2013. It does not grant any rights to the holder in relation to the company as a security holder.
2. The contribution to the CSOP Plan is considered a subscription, not a deposit or loan to the company, and subscribers cannot request a refund of the subscription amount except in case of an exit event.
3. A CSOP plan and the agreement do not guarantee any monetary return to the SAR holders. Instead, it offers the SAR holders an opportunity to benefit from the growth of the company.
4. The company and the founders shall not be liable in any manner to the SAR holders in relation to the payout amount for the SARs held.

It’s worth noting that CSOPs do not provide investors access to the company’s cap table. Instead, it’s more about chasing a potential upside in the long term, if at all.

Are CSOPs issuance governed by the Securities Contract Regulation Act 1956 (SCRA)?

Raichur explained that SARs are basically “securities” in the nature of “derivatives” under the Securities Contracts (Regulation) Act, 1956. Such “securities” may only be offered by a private limited company by way of a private placement or rights or bonus issue in accordance with the processes set out in the Companies’ Act 2013 and the relevant rules.

“There is a regulatory grey area in respect of issuance of SARs by private companies as there is no specific mention of SARs in the Companies’ Act, 2013. In this fast-changing world of securities, amendments must be brought in to cover the issuance of SARs and similar securities for ensuring better compliance with the Companies’ Act, 2013, she added.

Are CSOPs Even Worth It? 

Several investors, preferring anonymity, have voiced concerns about how expensive CSOPs are currently and said their decision to invest in startups was largely due to the popularity of Shark Tank India and the mainstream buzz around startups.

High taxes have made it challenging for investors to benefit from CSOPs as they are categorised as products or services, attracting an 18% GST.

Sanjeev Sachdeva, partner at Luthra and Luthra Law Office, further explained that after CSOPs are granted, the discounts and benefits allotted thereunder to the investor would be permissible as a deduction from the value of supply on which GST is to be discharged for all future supplies made by the company to such subscribers.

All of this might be too complicated for someone who just wanted to invest because they enjoyed what they saw on Shark Tank India. And it doesn’t get easier.

“The redemption of SAR in the form of deferred cash payout would qualify as an actionable claim under GST laws. Actionable claims, other than lottery, betting and gambling, are neither considered goods nor a service and hence fall outside the purview of taxability under GST. A subscriber can freely transfer CSOP to other persons. Such transfers would also attract GST at the rate of 18% if the transferring subscriber is a registered person under GST laws,” added Sachdeva.

Additionally, for companies running CSOP campaigns, the revenue generated through CSOPs is shown as revenue, subjecting them to an additional direct tax. This becomes particularly tricky when campaigns are run in March and companies cannot show the expenses for the same.

Mehul Shah, partner at Rasesh Shah and Co, said, “Startups should not run their campaign when the fiscal year is about to end. Else, they would not be able to claim the expenses and the entire revenue would attract tax over revenue from other sources.”

According to Tyke’s document on Accounting and Taxation Treatment for CSOPs, which Inc42 has reviewed, total subscription fee collected is accounted as revenue to the company and shall be subject to any further IT payable as applicable. Taxes applicable on the CSOP subscriptions are:

• 10% IT TDS deduction is applicable (only if company’s subscriber is a Company/Firm/AOP/Individuals & HUF with turnover exceeding INR 1 Cr during previous year and payment to a particular company is exceeding INR 30,000 during a Financial Year)
• 18% GST

Further, it states that CSOPs are recorded as long-term/short-term provisions on the equity and liabilities side of the balance sheet. The same is not an allowable expense u/s Section 37 of the Income Tax Act, 1961 for the purpose of calculating tax payable.

Moreover, Tyke Invest charges a commission ranging from 1% to 4% over the total funding raised.

However, tax is not the only concern of investors. Investors alleged that startups often don’t meet the promises they make while running their CSOP campaigns.

Startups Break Promises After Raising Funds

It’s not unusual for startups to entice potential investors with alluring promises, which later investors claim were too tall to be fulfilled.

For instance, in February 2023, Geeani electric tractor, featured on Shark Tank India’s Season 2, got on-air commitments from three judges. It subsequently raised over INR 1.5 Cr through Tyke.

As part of the campaign on Tyke, the company promised an electric cycle worth INR 60,000 to every investor that invested more than INR 1 Lakh. Over 50 investors said to have invested over INR 1 Lakh each, but the founder did not deliver on the promised electric cycles, citing pending approvals and certifications.

This response left investors dissatisfied, prompting a hullabaloo, and eventually, Tyke has now agreed to refund all investments, said one of the investors.

Raising Superstars, another startup offering games-related activities for babies 0-6 years, also appeared on Shark Tank India, and raised INR 3.78 Cr from Tyke at INR 75 Cr valuation. On TV, though, the company got a commitment of INR 1 Cr from one judge at a much lower valuation of INR 26 Cr. This left the subscribers in a lurch.

Some vented their frustration on Linkedin and other social media platforms.

Tyke, however, later issued a clarification to the investors that the deal was offered to the sharks in October 2021, almost four months before the Tyke Campaign and the company meanwhile continued to grow with new products, and geographically.

At the time of the campaign, the company was also raising a total of INR 6-8 Cr from external investors, and already had 60% committed at a valuation of INR 75 Cr (approx. 4x of annual revenues run rate) with a discount of 20% to the next round.

Later, Raghav Himatsingka, founder of Raising Superstars wrote a letter to all the CSOP subscribers stating that the company will refund all their subscription amount with interest. Inc42 has reviewed the copy.

Speaking about these two cases, Mehra of Tyke stated that regarding Geeani Tractor, the agreement is still in place, and that Tyke has communicated with all subscribers to keep them informed. The refund process has not been initiated yet, and the Tyke team is working closely with investors and clients to ensure a smooth resolution.

As for Raising Superstars, they made an internal decision not to proceed after the raise was completed. “In such cases, it is not uncommon for deals not to materialise after reaching the final stages. Rest assured, all investors received a full refund along with 1% interest. We value transparency and maintain open communication with our community, ensuring that their investments are handled with the utmost care and diligence,” said Mehra.

He added, “In the past year, we have observed numerous instances where startups faced challenges leading to their failure, often attributed to either their business category or the lack of clarity in the pitch presented by their founders to the subscribers. However, we are proud to state that the failure rate of campaigns for onboarded startups remains impressively low, at less than 5%.”

While Tyke, investors said, helps resolve the concerns. Regrettably, such cases are not isolated incidents, they said.

CSOP subscribers may not be in the position to do due diligence on the potential startups they are backing. Subscribers alleged that for many campaigns, founders fail to uphold their promises.

Several subscribers told us they were never invited to any events promised as part of the perks and did not receive any curated deals or other benefits.

These issues raise concerns about the level of risk retail investors might be undertaking in the name of startup investments. Moreover, since CSOP contracts are not considered securities, they fall outside the purview of SEBI’s regulatory oversight. Any potential legal implication could leave investors with no recourse for a few months at the very least.

In such a scenario, it becomes crucial to address the interests of these aspiring startup investors and ensure transparency and accountability in the fundraising process.

The Liquidity Issue

One of the biggest challenges with CSOPs has been that it is highly illiquid, as even SARs of startups cannot be sold easily on an exchange or similar secondary trading platform.

One of the startups that raised funding through Tyke Joules Health in March 2022 purchased 20% of the SARs at 2x in the month of March 2023.

However, these were far and few. In order to address the issue of CSOPs’ liquidity, Tyke Invest has now come up with another peer-to-peer platform, Tyke Square, where CSOP holders could actually buy and sell their SARs after three months. Tyke claims that a SEBI-approved Trustee oversees all movements of money.

“Since its launch, Tyke Square has witnessed over 750 transactions in just a few weeks. As we continue to enhance the platform and expand its offerings, we remain committed to providing our users with unparalleled investment opportunities and a seamless exit experience,” said the Tyke Invest cofounder and CEO Karan Mehra.

Navigating The Landscape

Tyke Invest entered the market with the promise of democratising startup investments, providing retail investors with access to promising ventures through innovative instruments like CSOPs. However, the journey has been marked by a mix of successes and red flags.

The rise of retail investors in the equity market during the pandemic created a lucrative market for platforms like Tyke, offering a novel way for startups to raise funds. The CSOP-based model aimed to bridge the gap between startups and investors, but it treads in a regulatory grey area and faces scrutiny for its approach. The conflict arises from the question of whether CSOPs should be subjected to SEBI’s oversight.

Furthermore, instances of startups failing to deliver on promises made during fundraising campaigns and regulatory violations have raised concerns about transparency and accountability. Tyke’s efforts to address issues such as liquidity through the introduction of Tyke Square show a commitment to improving the ecosystem, but challenges remain.

The overall impact of Tyke’s approach and the broader landscape of crowdfunded startup investments rests on a nuanced assessment. While Tyke’s intentions to open doors for retail investors are commendable, the story underscores the need for clarity in regulatory frameworks and due diligence in evaluating startups before investment. As the startup ecosystem evolves, it becomes essential for platforms like Tyke Invest and regulators to work collaboratively to protect investors while fostering innovation and growth in the sector.

Update | August 8, 2023 6.28 PM

The logo of Bhive Alts has been updated. Earlier, it referred to Bhive Workspace.

The post Tyke Invest And Why ‘Crowdfunded’ Startup Investments Are A Grey Area appeared first on Inc42 Media.

India’s ‘techade’ has arrived and the country is all set to accomplish in the next decade what neighbours like China achieved in 30 years, Minister of State for Electronics and Information Technology Rajeev Chandrasekhar said on Thursday (July 27).

Chandrasekhar was speaking at a press conference ahead of the start of Semicon India 2023, organised by the India Semiconductor Mission (ISM), tomorrow in Gandhinagar in Gujarat.

Techade is a term earlier used by Prime Minister Narendra Modi to describe a decade that will be dominated by technology.

Speaking about the achievements of the ISM, Chandrasekhar said semiconductor major Micron announcing its first-ever $2.75 Bn ATMP (assembly, testing, marking, and packaging) project in India at Gujarat is a big milestone in the country’s journey becoming a semiconductor manufacturing hub. The project is expected to create at least 5,000 direct and 15,000 community jobs.

On the policy framework required for the components, Chandrasekhar said, “The necessary policy framework is already in place to create a vibrant component ecosystem. And if there is any need for the government to intervene and create more PLI type of schemes, we will do so,”

Semicon India 2023 is a three-day event to catalyse a conducive environment for the semiconductor ecosystem in the country.

Chandrasekhar also announced that the semiconductor fab at Semi-Conductor Lab (SCL) Mohali will be modernised with the help of global majors. An amount of INR 10,000 Cr has been earmarked for it.

In December last year, the government approved the Semicon India programme, with an outlay of INR 76,000 Cr, to develop India’s semiconductor design and manufacturing ecosystem.

Under the SemiconIndia futureDESIGN, over 30 semiconductor design startups have been set up in India so far. Five startups have already received government financial support and another 25 Startups are being evaluated for their proposals for gennext products and devices.

Several proposals in ATMP and fabs are being evaluated by the ISM, including manufacturing 40nm CMOS fabs and multiple compound semicon ATMPs.

Besides, the Indian government also plans to set up a global standard India Semiconductor Research Centre. However, the location and timeline for its establishment haven’t been disclosed yet.

It is worth noting that under the ISM, the Indian government offers 50% of the project cost for setting up a semiconductor fab, display fab, compound semiconductor and semiconductor ATMP. Design-linked incentive (DLI) has also been enabled under the programme.

The government has set up an expenditure finance committee, led by the secretary of the Department of Expenditure, to determine the structure and quantum of fiscal support under the scheme for establishing the semiconductor fabs.

Earlier, Chandrasekhar, while speaking to Inc42 at a Semicon India event in Bengaluru, said that semiconductor design and manufacturing is a very complex area and highlighted that the space is not for everyone. However, he added that the semiconductor design and manufacturing ecosystem is developing in the country. It currently has a presence of about 21 startups (now 30), which is expected to grow to 50 by the end of 2023.

While Micron’s decision to set up an ATMP plant in Gujarat is seen as a big step, India’s semiconductor ambitions have also received some setbacks.

Earlier this month, Taiwanese semiconductor major Foxconn said it was withdrawing from a $19.5 Bn joint venture with Vedanta to manufacture semiconductors in India. Foxconn had 37% stake in the project.

However, Vedanta, having acquired the licence for production-grade technology for 40nm fabs, said Foxconn’s move won’t impact the project, which is expected to start generating revenue from 2027. Meanwhile, Foxconn also said it is committed to its plans for India.

The post Semicon India: India To Accomplish In A Techade What China Did In 30 Years, Says Chandrasekhar appeared first on Inc42 Media.

In the first week of July, the Nykaa stock took a significant hit, falling 42% from its 52-week high. Further, the Association of Mutual Funds in India (AMFI) downgraded the stock, dropping it from the top 100 listed companies in the country. As of now, the company is ranked somewhere between 101 and 250 on the market capitalisation threshold.

From a near monopoly in the beauty ecommerce space, Nykaa has lost its top spot. Not to mention, new competition, in the form of D2C brands and behemoths such as Tata and Reliance, has complicated the situation even more.

The downgrade by the AMFI means that Nykaa is no longer an attractive largecap stock in India, and this could have an impact on the company’s visibility in the near future.

So, what exactly triggered this collapse?

It was only in November 2021 that Nykaa’s INR 5,352 Cr IPO saw 82x subscription, the highest among large startup IPOs in India. Having withstood competition from marketplaces such as Amazon India and Walmart-backed Flipkart and Myntra, Nykaa seemingly set a new benchmark for Indian ecommerce startups with its blockbuster IPO.

But the last 20 months have been nothing short of disruptive. Reliance-backed AJIO has grown in stature, and the Indian conglomerate has also launched Tira in the beauty ecommerce space.

Meanwhile, Tata has also bolstered its beauty and personal care product assortment on its platform Tata CLiQ. Furthermore, the Tatas have added 20 beauty tech stores across the country, aligned with its ecommerce operations, while Myntra Beauty has registered 2X-3X growth in recent months and expanded its brand collection. Therefore, Nykaa needs to come up with something exceptional to compete with the aforementioned well-funded BPC contenders.

Adding to the company’s woes was the announcement of the issue of bonus shares in a 5:1 ratio and changes in key management personnel after a successful IPO. This did not go down well with investors. Bonus shares announcement was largely perceived as a way to keep the company’s anchor investors from offloading shares at the end of their IPO lock-in period.

Experts believe that amid declining year-on-year profitability, Nykaa could see a cash crunch as it prepares to combat with deep-pocketed corporations. For now, it will be interesting to see if Nykaa can hold onto its market share?

Nykaa’s Losing Its Footfall To AJIO & Myntra

First, let’s look at the bread-and-butter for ecommerce platforms such as Nykaa — that is visits, page views, engagement and repeat orders.

It must be noted that Nykaa has separate properties for fashion (Nykaafashion.com) and beauty (nykaa.com). If we look at the performance over the last 3-4 months, the fashion vertical has definitely seen some gains, but Nykaa.com itself has experienced negative growth in total visits.

The flagship property is bleeding users due to an ever-intensifying competition, which is quite clear in the graph given below.

Further, Nykaa, Nykaa Man and Nykaa Fashion have the lowest numbers when it comes to average visit durations.

On the ecommerce front, Nykaa has a lot of catching up to do against its competitors. Some of Nykaa’s private labels  — take Dot&Key for instance — have become popular discounted items on Myntra, AJIO, Amazon India and other marketplaces, which shows that the company is forced to use its competition to sell its products.

In contrast, Myntra, AJIO, Tira and Amazon’s private labels are largely walled inside their respective marketplaces. To beat the competition and stay in the public spotlight, Nykaa has opted for the omnichannel strategy, and it is looking to add brand-owned stores on the retail front. But here too, the competition is stiff.

Nykaa Faces Challenges With Its Online-To-Offline Strategy

When we look at the omnichannel operations, Nykaa has 145 physical stores, 38 fulfilment centres, and 2,749 stores of its owned brands. The company plans to open more physical stores this year, according the announcements made in its last earnings call.

Nykaa’s founder and CEO Falguni Nayar had earlier said, “Physical retail is a necessary investment that we need to make, even if it adversely affects overall profitability. So, we are aiming for the optimal mix of online, offline, and duty.”

This is where the situation becomes more complicated. Being primarily an online platform, Nykaa has managed to stay lean and achieve profits thus far. However, opening more stores means more investments and a significant increase in operational expenditure, including higher employee expenses.

Plus, this entails entering into fierce competition with Tata and Reliance.

Reliance Retail alone has launched over 3,300 new stores in FY23 under its various brands, including Tira Beauty, Trends, and others.

Similarly, Tata has been a well-known name in the BPC and fashion industry. It introduced the first-ever cosmetics brand, Lakme Cosmetics, to India (later sold to Unilever). Tata has over 22 in-house labels for its Westside brand, which operates over 200 stores across the country.

While Tata plans to open 20 beauty tech stores, equipped with AI and VR, it already has 391 Zudio stores nationwide.

For Tata and Reliance, it is relatively easier to build an online business backed by their offline stores compared to Nykaa’s strategy of building an offline presence backed by online operations. These large conglomerates have years of experience in building retail brands in the offline space.

So, essentially, Nykaa seems to have lost ground in its strength areas of ecommerce and offline retail, as it is not as experienced as its rivals.

Speaking to Inc42, Devangshu Dutta, the founder and CEO of Third Eyesight, a boutique management consulting firm explained, “Apart from the impact of Covid, in the last 3-4 years, many brands have started moving offline because that’s where the bulk of the business happens. But moving offline means entering a completely different business. You’re not able to centralise inventory as much, and you may not be able to respond to market-specific segments as quickly.”

He also believes, like any other offline retail business, Nykaa will face high operational costs, but it has an advantage in the fact that it may be able to use data more effectively from its online operations. Nevertheless, this is a minor advantage.

“Your store locations have to be correct, and self-sustaining quickly, at least on a cash operating basis. At the business level you may look at profitability in a longer term,” Dutta added.

Profits Plummet: Nykaa’s Other Big Worry

India’s beauty and personal care market, presently valued at $16.8 Bn, is poised to grow at a compound annual rate of 11%, with cosmetics and perfumes categories growing at a faster clip.

According to a joint report by international beauty brand Estée Lauder and Gurugram-based business insights firm 1Lattice, a substantial portion of sales worth about $1.3 Bn are through ecommerce channels. This is expected to grow at a CAGR of 30% during FY22-27, followed by companies that retail beauty products in health and beauty stores and modern retail shops.

With 30% of India’s BPC market share, Nykaa has so far managed to stay ahead in the race. Nykaa’s beauty category (55% of the broad BPC category) saw 33% full-year growth with a GMV of INR 6,649 Cr. On the fashion side, the GMV grew 47% for the full year at INR 2,570 Cr.

BPC and fashion are the two mainstays of Nykaa’s business, even though fashion is a relatively new vertical for the Mumbai-based company. The company had earlier launched Nykaa Man, a separate platform for men’s grooming, beauty and fashion, but with less than 1 Mn visits, it has failed to grow over the last few years while AJIO has grown from 0-37 Mn users, as per analysts.

“At one end, Nykaa’s online PAT has been going down for the last two years, while Nykaa Fashion’s loss for the year has grown consecutively, putting Nykaa business in a fix,” said an analyst from PwC.

Nykaa needs to bring a balance between short-term losses and long-term profits. However, the company’s current strategy fails to show a way out, the analyst added.

The Balancing Act For Nykaa

As per the analyst quoted above, the company’s BPC products have so far had lower prices than Myntra and AJIO, where discounts are typically lower.

However, when compared to Amazon India and its long list of D2C brands and private labels, Nykaa products were slightly more expensive. Amazon also scored over Nykaa with its better supply chain and distribution.

Nykaa banked on product assortment, the assurance of quality and authenticity of products, but as more and more brands join Tira, AJIO and Tata CLiQ, this is also fast eroding.

Access to international brands is no longer exclusive to Nykaa, so it needs to tackle distribution and supply chain, where its rivals score heavily.

Giving Nykaa the benefit of the doubt, a consultant from brokerage firm Motilal Oswal recently said, “There is no clear playbook for these businesses. When Nykaa entered the segment, it was pioneering many aspects in India.”

However, now the company needs to exercise extreme caution regarding expenses and investments because of heavyweight competition with deeper pockets.

P Ganesh, chief financial officer at Nykaa, highlighted that the company still has funds remaining from the IPO, which will be utilised to secure future capital needs.

Ganesh added, “It’s worth noting that while we have observed a considerable increase in working capital as the company scales up, the number of working capital days is expected to stabilise. This means that the amount of funding allocated to working capital should moderate in the future.”

But analysts also believed that Nykaa cannot afford to sacrifice its market share in India’s rapidly growing beauty, personal care, and wellness segment. One thing that is advantageous for Nykaa is that Reliance-owned Tira is still new in the market and will take some time to get to critical mass adoption.

This is a window of opportunity for Nykaa to stretch its lead and fight off its rivals. Nykaa’s brand value primarily comes from its online business, so it must not let offline expenses hinder its online growth plans. However, given the competition, Nykaa is in a Catch-22 situation.

In the BPC segment, owned and private label brands play a vital role in increasing long-term profitability and repeat purchases. All of this will require extensive investment from Nykaa’s leadership — there are segments in BPC where Nykaa has no private label or owned brands.

As of now, the question remains: Can Nykaa maintain its dominance in the online market while facing fierce competition on multiple fronts?

The post Nykaa Faces Uphill Beauty Battle: Can It Fight Off Tata CLiQ And Reliance Tira? appeared first on Inc42 Media.

It was in August 2021 that Bhavish Aggarwal, founder of Ola Cabs and Ola Electric, revealed that both companies would be going for a public listing, with the ride-hailing business positioned to be the first of the two. But two years later, Ola Cabs has become something of an afterthought for Aggarwal, as all effort and focus is on the initial public offering for Ola Electric.

From a ride-hailing unicorn, Ola has changed its focus to become a two-wheeler electric vehicle original equipment manufacturer (OEM). And now Ola Electric is expected to get an IPO in early 2024, as per reports.

There’s little doubt that the big focus for Aggarwal and his team is on the Ola Electric business. In the past two years, Ola’s ride-hailing business has been out of the spotlight. In May 2023, Ola Electric was reported to have raised $300 Mn at a valuation of $6 Bn and was said to be planning to file the Draft Red Herring Prospectus (DRHP) ahead of an IPO by September 2023.

Plus, over the past year, Ola Electric has announced several products, including plans for two electric cars, electric motorcycles as well as India’s first-ever battery cell manufacturing facility, and more.

Ola Electric is in talks with Goldman Sachs and Kotak Mahindra Capital to act as the book-running lead managers (BRLMs) for the IPO. Additionally, the company has appointed Topsy Mathew, a veteran from Standard Chartered bank, as its corporate finance head.

Reports last week point to Ola accelerating the listing plans for its electric vehicle business. “Ola Electric has grown and matured faster than I had initially planned because the market response has been very strong,” Aggarwal was quoted as saying in a Bloomberg report on July 17, 2023.

However, some analysts and trade experts believe that Ola Electric’s ambitious claims do not align with reality and are exaggerated in many aspects. This scepticism suggests that even if the Ola Electric IPO manages to raise $1 Bn, the stock performance may fail to live up to those figures.

Ola Sets The Pace For Two-Wheelers

Thanks to a marketing blitz and its customer acquisition strategy of relying on the Ola app, the company has also set the pace in the electric two-wheeler market.

According to data from the Ministry of Transport, Ola Electric has emerged as the leading electric two-wheeler manufacturer over the past year and a half. While Okinawa and others have experienced significant declines in market share, from 38% in FY20 to 4% in FY24 (so far), Ola’s EV business has witnessed substantial growth, capturing 30% market share in just three years.

To maintain its dominant position and further penetrate the market, Ola Electric has outlined ambitious plans:

• Constructing the largest ‘future factory’ with an annual production capacity of 1 Mn cars and 10 Mn two-wheelers
• Establishing the largest battery cell manufacturing facility with a capacity of 100 Gigawatt hours (GWh)
• Opening an R&D Innovation Centre in Bengaluru
• Teasing scooters, motorcycles, and cars with impressive on-paper specifications — a range of 500 Km per charge, the ability to charge up to 80% in a 1 hour, or acceleration from 0-100 Kmph in 5 seconds
• Expanding its network of retail experience centres across the country, aiming to reach 1,000 by August 2023

However, executing these ambitious plans requires significant funding.

For instance, Ola has committed to investing INR 7,164 Cr to build battery cells and four-wheeler EVs in Krishnagiri, Tamil Nadu. Additionally, the company plans to invest INR 4,106 Cr in constructing a 500K sqft ‘Battery Innovation Centre’ in Bengaluru.

To build these ambitious projects, Ola Electric intends to raise $800 Mn to $1 Bn by March 2024. Given Ola Electric’s strong market position and a clear product pipeline, experts believe it won’t be a challenging task for the book-running lead managers to meet this target. The company reportedly generated over $1 Bn in revenue in FY23.

Ola Electric’s Plans: Too Big To Be True?

Experts in the automotive space express doubts over the claims made by Ola Electric, stating that some of them seem implausible.

For example, Ola Electric currently has a production capacity of up to 2 Mn scooters annually. The company plans to increase this capacity to 10 Mn scooters per year. However, last year the company sold only around 150,000 scooters.

Dr Deb Mukherji, managing director of Anglian Omega Group and former MD of Omega Seiki Mobility, a two-wheeler, three-wheelers, and commercial EV OEM, said, “India hardly consumes 6 Mn scooters in total. Even if we assume a 50% conversion to EVs, the figures [claimed by Ola Electric] simply don’t add up.”

It’s worth noting that Ola Electric plans to export two-wheelers to the European market, but even accounting for the appetite of the global market and the wider competition, these numbers don’t add up.

For context, a report by Bain & Company estimates 40%–45% EV adoption for two-wheel (2W) vehicles and 15%–20% for four-wheel (4W) passenger vehicles by 2030, with 12 Mn to 13 Mn new 2W EVs and 1 Mn new 4W PVs being sold in India annually by 2030. So how exactly does Ola Electric plan to ship 10 Mn scooters in such a market?

Ola Electric’s Blueprint: BYD

A former employee of Ola Electric, now working for a competitor, told Inc42, “If you look closely, Bhavish Aggarwal is following the path of the Chinese company BYD in order to succeed. Back in 2018, BYD set up then the largest battery manufacturing plant in the world with an installed capacity of 24 GWh, while Ola Electric claims to build a plant with 100 GWh capacity.”

The concern here is that despite BYD’s initial plans to increase its capacity to 60 GWh by 2020 and become the largest manufacturer, the Chinese EV giant has faced challenges in delivering batteries on time. In spite of acquiring significant lithium and cobalt mines in Africa and other countries, BYD has been facing issues in scaling up its manufacturing. Till 2021, BYD had an installed capacity of 26.4 GWh which increased by 167%  to 70.4 GWh by 2022 end.

The employee quoted above questioned how Ola Electric plans to achieve these numbers without having direct access to the same raw materials, despite which BYD has not been able to pull off its grand plans.

Seconding him, Dr Mukherji said, “Ola does not have access to these raw materials, so how will they achieve these numbers?”

With its large targets for manufacturing, EV waste management will be a critical factor in Ola’s ambitions. Experts believe this would create a whole host of environmental issues, if not addressed timely. So far, Ola Electric has been mum on managing e-waste.

In light of these challenges, Aggarwal’s lofty claims may only serve to attract investments but not hold a lot of weight in reality.

How Govt Subsidies Drove Ola’s Growth

Even while it has led the market, Ola Electric’s sales have declined in recent months by up to 40% — from 28,638 units in May 2023 to 17,590 units in June 2023. This decline can be attributed to the Indian government’s decision to reduce EV incentives for 2-wheelers from 40% to 15%.

Prices of Ola S1 and Ola S1 Pro have increased from INR 1 Lakh and INR 1.25 Lakh to INR 1.29 Lakh and INR 1.39 Lakh respectively.

The fate of Ola Electric scooters after the complete removal of FAME II subsidies remains uncertain, as it does for the rest of the market. The government’s plan for launching FAME 3.0, following the expiration of FAME 2.0 on March 31, 2024, is still unclear. So EVs, which attracted an automatic discount for consumers, may not be as attractive from a price point-of-view.

According to sources, the chances of a new subsidy scheme are slim, considering the government’s announcement of an INR 18,000 Cr package under the PLI scheme for battery and component manufacturing. Additionally, a lack of compliance with the rules of the existing scheme by two-wheeler OEMs may deter the government from introducing a new scheme.

After an investigation under the FAME scheme, Ola Electric agreed to refund INR 130 Cr to over 1 Lakh consumers for the cost of chargers, for which the company had previously charged separately.

Sources close to the company alleged that these chargers were sold separately and are priced at around INR 15,000. If the charger had been included with the Ola scooter from the beginning, the company would not have been eligible for the FAME II incentive. “The sale numbers would have been halved,” one of our sources added.

The reliance on government incentives and subsidies raises concerns about Ola Electric’s self-reliance once these support systems are removed, leaving the market without clarity, according to Umesh Chandra Paliwal, cofounder and CEO of Unlisted Zone.

Is Ola Electric Overvalued?

“Ola Electric’s $10 Bn valuation is not sustainable in today’s market,” – Umesh Chandra Paliwal, cofounder, UnlistedZone

Paliwal expressed doubt about Ola gunning for a huge valuation, saying that investors were uncertain about their valuations when new tech companies like Paytm, Zomato, and Nykaa entered the market.

However, now that their performance is evident, it’s critical that companies planning an IPO have strong financials, including bottom-line profitability and positive cash flows, not just high top-line revenue or GMV.

Hero MotoCorp, the world’s largest two-wheeler maker in the internal combustion engine (ICE) sector, is currently valued at around $7 Bn for context, Paliwal added. Meanwhile, Bajaj Auto, the world’s third-largest two-wheeler maker in the ICE sector, is valued at $16.7 Bn. So the reported IPO valuation for Ola Electric is definitely richer than some of the more established players that have built large manufacturing and distribution networks.

While ICE companies like Bajaj, TVS, and Hero MotoCorp are mostly recognized for their traditional offerings, Ola Electric’s valuation could potentially be justified due to the technology that the company has built and acquired.

If ICE OEMs are valued at 2-3.5 times their revenue, Ola Electric, which is an EV disruptor, can justify its current valuation of $6 Bn.

Pankaj Passi, a partner at Pro Legal Solutions, acknowledges that the global shift towards sustainable transportation and growing environmental concerns have contributed to the rise of electric vehicles (EVs) worldwide. Companies operating in the EV space often attract higher valuations and multiples due to their potential to disrupt traditional industries and tap into the expanding EV market.

When comparing Ola Electric with established two-wheeler companies like Hero and the Bajaj Group, it is crucial to recognise that Ola Electric is a relatively new player in the automotive sector.

Hero and Bajaj have successfully gained significant market share in the two-wheeler industry, building strong brands, loyalty, trust, and a solid customer base. Despite their market dominance, these companies typically trade at revenue multiples of 2X-4X, highlighted Passi.

Ola Electric’s estimated valuation of approximately $10 Bn is based on the company’s future plans for 2025-26.

Venture capitalists are willing to pay a premium price, knowing they are investing in the future. However, Paliwal suggests that public market investors would exercise caution after observing the experiences of Nykaa, Zomato, and Paytm. Typically speaking a long product roadmap would require multiple years of investment, which would hamper Ola Electric’s potential for profits.

While Ola Electric may rely on Tata Passenger Mobility Ltd for valuation benchmarking, Paliwal notes that it may not serve as a direct comparison for evaluating Ola Electric’s valuation. Each company operates in differentiated segments which have unique market dynamics and distinct competition.

Despite reports of Ola Electric generating $1.2 Bn in revenue for FY23 and turning profitable in the last quarter of the fiscal year, the company has yet to even file its financials for FY22. We have to take these claims with more than a pinch of salt.

Paliwal argues that revenue figures alone do not provide a complete picture, citing the case of BYJU’s and PharmEasy, which reported substantial revenues but experienced significant drops in valuation. He emphasised that bottom-line profitability and consistent financial reporting are really the only true benchmarks for the right valuation of a company.

Consistent reporting of financials shows good corporate governance. Currently, Ola Electric does not have a great track record for this. Before filing its DRHP, experts believe that Ola Electric needs to consistently report its financials, which shows the company is being transparent in its disclosures and is actually ready for a public listing and the spotlight from regulators.

Can Ola Electric Cross The Two Ts: Trust & Technology?

Tata Passenger Mobility Ltd drives its brand value from the century-old brand ‘Tata’ which is known as one of the most trustworthy brands in India. The same could be said for the likes of Hero, Bajaj and others in the OEM space.

In contrast, Ola drives its brand value from Ola Cabs, which is only a decade old. Neither Ola Cabs nor Ola Electric has anywhere near the trust that has been garnered by Tata and others.

Besides ANI Technologies saw a whopping 150% decline in revenue for FY22, due to the overhang from the Covid pandemic.

Paliwal says, “When you go to Twitter, and other social media and search Ola, you will find that there are numerous complaints. For no other EV brand, you would find such a high number of complaints. The problem is they have scaled so fast that they have not concentrated on the performance. And, if the performance is not good, there will be a huge trust deficit sooner or later, which may backfire.”

In the automotive sector, trust comes from strong after-sales services, and despite having sold lakhs of scooters across the country, Ola Electric is struggling to meet expectations in this regard.

The former employee quoted earlier in the story added, “There are trust issues within the company too. You have to be a ‘Yes Man’ to Aggarwal or you’ll become a nobody. This is why almost two dozen top executives have left the company within a short period of time, including a cofounder, HR head, production head, and many others.”

Finally, the heart of the EV industry is technology, and technology is still evolving. At a time when Ola Electric is building Lithium-ion battery manufacturing plants, battery technology seems to be slowly moving to sodium and aluminium air batteries.

“It’s not unsurprising that Honda and Suzuki are slow towards the adoption of EVs. They do the in-house testing of their technologies, at least for five years before launching into the market. Ola Electric is not even five years old since it started manufacturing. Can its technology really bring trust?” asked Anglian Omega’s Dr Mukherji.

In the automobile industry, building a good product is not enough. Consistency and high levels of excellence are just as critical. It is not like building software that can be easily replicated. This can’t happen without developing a resilient ecosystem.

Ola Electric has reported some very impressive results. However, its products and its numbers are not time tested as seen in the case Honda, Toyota, Elon Musk’s Tesla or even Indian automotive giants.

Clearly, Ola Electric needs time. Is an IPO coming too soon?

The post Ola Electric’s $1 Bn IPO Dream: Reading Between The Lines appeared first on Inc42 Media.

Early stage investing is about trusting the founders and investing in the founding team of startups, experts said at Inc42’s MoneyX.

“We are investing in startups at a stage when there is nothing but founders. These people are ready to fly. The question is how do we enable them,” said Padmaja Ruparel, cofounder, Indian Angel Network (IAN).

She was part of a panel discussion on early stage investing. The session also saw participation from Venture Catalysts cofounder Apoorva Ranjan Sharma, 100X.VC founder & partner Ninad Karpe, Unicorn India Ventures managing partner Anil Joshi and Full Stack Capital founder Jasminder Singh Gulati.

IAN invests in early stage startups in the range of $50K to $7-8 Mn. It has invested in over 225 startups till date. Commenting on her philosophy of investing in founders, Ruparel said, “We have had failures but not a single one due to their corporate governance or regulatory issues.”

Meanwhile, Sharma said if a firm or an investor helps build brands, getting good startups wouldn’t be an issue for them. “If you do help build big brands, good startups would naturally come to you,” he said.

Elaborating on this, Sharma said Silvassa-based peanut butter brand MYFITNESS’ founders wanted Venture Catalysts to invest in the D2C brand as the VC firm helped build companies like OYO. Sharma said the VC firm invested $1 Mn in the brand and got 60X returns withing two years. MYFITNESS was later bought by Mensa Brands.

Early stage investments are mostly done through angel funds, syndicate, and angel network. The vibrancy of the Indian startup ecosystem has piqued the interest of even growth and late stage global investors.  However, the ongoing funding winter has also hit early stage funding, like all other stages.

Earlier in the day, multiple other investors, including Paytm’s Vijay Shekhar Sharma, highlighted the need to increase the participation of domestic capital in the Indian startup ecosystem. Meanwhile, Peak XV Partner’s Rajan Anandan said there is no funding winter and no dearth of capital for Indian startups.

Presented in partnership with Peak XV Partners, supported by Venture Catalysts, JSA, Samsung, IVCA Associates, Indian Angel Network, JIIF and Marwari Catalysts, MoneyX is aimed at bringing the driving forces of the Indian startup ecosystem under a single roof. 

The post Early Stage Funding Is All About Investing In The Founding Team, Says Experts appeared first on Inc42 Media.

The GIFT IFSC in Gujarat has triggered reverse  flipping, and now countries like Singapore and Mauritius are asking private equity (PE) investors what needs to be done to stop them from moving to GIFT IFSC, according to Dipesh Shah, executive director (Development), International Financial Services Centres Authority, GIFT City.

Speaking at Inc42’s MoneyX, Shah, in a panel discussion, said GIFT IFSC has emerged as a new frontier for private equity firms.

Siddarth Pai, founding partner of 3one4 Capital, Tushar Sachade, partner at Price Waterhouse & Co LLP, and Kushal Agrawal, partner & CFO of Lightrock India, were also part of the panel.

Shah said, earlier, there was a trend of lots of entrepreneurs moving abroad from India for better opportunities and simpler regulations. “We have structured GIFT IFSC to stop this. Whatever tax and other benefits PE investors would get (there), we are offering similar facilities here.”

Speaking on the advantage of GIFT City, Sachade said since the formation of IFSCA in 2019, regulations have been revamped and brought on par with global standards.

Located on the banks of Sabarmati River, between Ahmedabad and Gandhinagar, GIFT City currently spans an integrated development area of 3.6 sq km. Plans are afoot to develop 5.76 sq km of built-up area comprising commercial zone (67%), residential area (22%) and social space (11%).

Initially developed under the Special Economic Zones Act of 2005, GIFT City was allowed to host the country’s first IFSC in 2019. The city’s commercial activities are under two distinctive zones – the GIFT SEZ (the non-IFSC area) and the GIFT IFSC. The latter became operational in 2020 after a bunch of favourable policy measures came into force, turning it into the new epicentre of AIFs and fintechs keen to tap into offshore markets without leaving Indian shores.

While GIFT IFSC makes it easier for foreign funds to directly enter the India market without using any pooled or feeder funds, Pai, founding partner of 3One4 Capital, which has also set up a subsidiary at GIFT IFSC, said that the IFSC has also made it easier for PEs to invest in overseas market without using any SPVs.

Unlike other regulators who dictate the terms and conditions, GIFT IFSC provides the playground without dictating the terms of game one needs to play, Pai added.

Earlier in December 2022, the board of the newly-formed Private Equity and Venture Capital CFO Association (PEVCCFOA) visited the International Financial Services Centre (IFSC) at Gujarat International Finance Tec-City (GIFT) to discuss policy and operational issues related to PE and VC funds being set up at the tech city.

The International Financial Services Centres Authority (IFSCA) held discussions with the board members on business opportunities in IFSC, initiatives taken for ease of doing business, and the recent regulatory changes, the association said in a statement.

FM Nirmala Sitharaman, as part of Union Budget 2023, also took several measures aimed at accelerating the growth of the Indian startup ecosystem. Notably, IFSC (International Financial Services Centre) banking units and foreign banks will now be permitted to provide acquisition financing, paving the way for strategic mergers and acquisitions for Indian startups and corporate entities. Additionally, a subsidiary of the EXIM bank will be established to facilitate trade refinancing.

In her Budget speech, Sitharaman also revealed plans to set up data embassies in GIFT IFSC (Gujarat International Finance Tec-City) for countries seeking digital continuity solutions. This initiative will provide a supportive legal, regulatory, and robust digital infrastructure at GIFT IFSC.

As more national and global corporations enter the scene, GIFT IFSC is rapidly gaining prominence as a globally competitive financial platform operating under a special offshore status, attracting overseas capital. Its goal to globalize India’s fast-evolving financial sector may further propel the country’s journey towards becoming a $5 Tn economy by 2026-27, as projected by the International Monetary Fund.

To expedite operations and innovation at GIFT, the government established a single-window regulatory structure for IFSCs through a 2019 Act. The International Financial Services Centres Authority (IFSCA) has since acted as a unified and agile financial regulator for GIFT IFSC, amalgamating the regulatory powers of key entities like the Reserve Bank of India, SEBI, IRDAI, and PFRDAI to resolve inter-regulatory matters.

To promote growth, various fiscal incentives have been provided, including zero-Goods and Services Tax (GST) for GIFT IFSC-registered firms.

Furthermore, GIFT IFSC boasts of a flexible regulatory framework to encourage the establishment of greenfield funds or tax-neutral relocation of funds from overseas jurisdictions. Notably, foreign investors have the advantage of transacting in USD instead of dealing in INR, streamlining the process and reducing bureaucratic delays.

Presented in partnership with Peak XV Partners, supported by Venture Catalysts, JSA, Samsung, IVCA Associates, Indian Angel Network, JIIF and Marwari Catalysts, MoneyX is aimed at bringing the driving forces of the Indian startup ecosystem under a single roof. 

The post GIFT IFSC Has Emerged As A New Challenger To Singapore & Mauritius, Says Official appeared first on Inc42 Media.

Speaking at the inaugural session of Inc42’s MoneyX, India’s largest invite-only conclave for startup investors,  the managing director of Peak XV Partners, Rajan Anandan, said that the funding winter is gone and the investment firm has more dry powder than ever.

“The funding winter is gone. The Indian startup funding is back to normal, and Peak XV has INR 20,000 Cr to invest in,” Anandan said, addressing early stage investors at the conclave.

He added that, as an early stage investor, one should be focussed on the founding team and market opportunity rather than valuations, which should be the last thing to worry about.

Anandan’s comments come at a time when Indian startups have been reeling under the ongoing funding winter since its onset in 2022. It is pertinent to note that Indian startups could secure only $5.4 Bn in funding in the first half of 2023 (H1 2023) in 462 deals.

According to an Inc42 report, Indian startups witnessed a 10% and 25% decline in funding amount and deals, respectively, in H1 2023 against $6 Bn raise in 617 deals in the second half of 2022.

On a year-on-year basis, startup funding saw a substantial 72% drop in H1 2023 compared to H1 2022 when Indian startups had raised $19 Bn across 900 funding deals.

Notable, the startup funding has largely returned to 2020 levels. In H1 2020, Indian startups managed to raise $5.2 Bn, which is a mere $200 Mn less than the $5.4 Bn raised in H1 2023.

Presented in partnership with Peak XV Partners, supported by Venture Catalysts, JSA, Samsung, IVCA Associates, Indian Angel Network, JIIF and Marwari Catalysts, MoneyX is aimed at bringing the driving forces of the Indian startup ecosystem under a single roof. 

The post There’s No Funding Winter Right Now: Peak XV Partners’ Rajan Anandan appeared first on Inc42 Media.

Nagendran Kandasamy, the founder of Throttle Aerospace Systems (TAS), a Bengaluru-based drone hardware and software maker, has stepped down from his role as CEO. Not only this, the entire leadership team, including COO Nischitha, CFO Girish Reddy, and CTO Shashi Kumar R, has also resigned from their respective positions.

Meanwhile, they continue to remain the shareholders of the company.

TAS is India’s first provisionally DGCA-approved drone maker for civil drones and has a license to manufacture military drones from the Ministry of Defence under the country’s new drone policy.

The company has designed and developed indigenous drones for multiple verticals which include agriculture, inspection, mapping, mining, monitoring, cargo payload, last-mile delivery and surveillance.

Kandasamy, along with Nischitha, Reddy and Kumar, holds 40% of the company’s equity.

It is worth noting that in May 2022, RattanIndia Enterprises, a diversified firm, acquired a 60% stake in Throttle Aerospace Systems for an undisclosed amount. This investment was made through NeoSky India Ltd, a wholly-owned subsidiary of RattanIndia.

Through its subsidiary, NeoSky, RattanIndia aims to provide comprehensive 360-degree drone solutions to customers, including drones as a product (DaaP), drones as a service (DaaS), and software as a service (SaaS).

What Exactly Happened

“It turned out to be a wrong marriage,” said one of the team members who resigned.

“While manufacturing drones was our forte, we were struggling financially. And, this is where RattanIndia came into the picture,” he added.

Having acquired the majority of shares, the management started interfering in every decision and creating various constraints using the majority. The executive team was not even allowed to take decisions for day-to-day functioning, the financial support to TAS was almost stopped, Inc42 learnt from sources.

The resignation spree followed the management’s decision to sack TAS CFO Reddy. The entire leadership team extended their full support to Reddy and resigned.

The management team wanted to depute its person and that’s how it all started.

With the resignation of its key members, it is believed that Sharath Chandra Gudlavalleti, who heads NeoSky, will also lead TAS.

Inc42 has reached out to RattanIndia Enterprises for comments on the latest developments. The story will be updated upon receiving a response from the company.

The post Exclusive: Leadership Exodus At Throttle Aerospace Systems; All Executives Step Down appeared first on Inc42 Media.

Three months after SBM Bank India suspended all its cobranded corporate and prepaid cards, the bank has finally started to respond to its corporate card users, assuring them that the cards will be operational by July 31, 2023.

While the bank refrained from responding to its customers’ queries for months after the suspension of their corporate cards, its decision to finally break its vow of silence and respond to its jittery corporate card customers has come following Inc42’s report on How SBM India’s Baffling Silence On Re-KYC Has Put Fintech Lenders, Users In A Tizzy. This has also provided some relief to its impacted customers and fintech card providers.

While a few users have reported receiving meaningful responses from the bank or their fintech partners, a larger resolution to their ongoing problem is still a work in progress.

Sharing his recent experience, serial entrepreneur and cofounder of KloudMate Pranab Buragohain said, “I just received a response from Kodo, mentioning that our prepaid balance amount had been credited back to us, but my account details on Kodo’s dashboard show otherwise.”

Buragohain is a Kodo prepaid card user. The card, which was issued to him by SBM Bank India, got defunct on March 31, 2023.

“There has been no update from the bank (or from Kodo, whose prepaid cards we use). The Re-KYC links shared by SBM Bank didn’t work either. We escalated it to Kodo, who termed it as a technical glitch. Kodo team has been trying to help us withdraw the funds, but to no avail. Surprisingly, we found no feature within their console to make the withdrawals directly on our own,” Buragohain had previously told Inc42.

What’s The Issue?

The issue stems from SBM Bank India’s failure to enforce the RBI’s re-KYC guidelines. The central bank issued these guidelines in 2021 to ensure the periodic updation of KYC data by regulated entities.

However, conducting the re-KYC process was the responsibility of issuing banks and not the fintech partners.

As a result, over eight Lakh corporate cardholders, registered with companies such as Enkash, Razorpay, Happay, Kodo, Karbon, Open, Velocity, and Volopay, among others, faced card suspension, thereby negatively impacting their businesses.

Notably, many startup founders use these corporate cards to pay for subscription services critical for their businesses, such as web services, cloud and other SaaS products. However, three months ago, all of them were left stranded with little information and no recourse to unblock their defunct cards. To avert the immediate crisis, many startup founders started using their personal credit cards to avoid the loss of subscriptions imperative for the sustenance of the operations of their ventures.

“This can’t be the solution as personal credit cards are not supposed to be used for the company’s expenses,” the founders told us.

Interestingly, most startups and SMEs are also finding it difficult to get a new corporate card. “This is because, unlike SBM Bank, they are asking us to open an FD first, which many may not be willing to do,” a startup founder said.

Customers Are Still In A Tizzy

Dr Suraj Dhirwani, the founder and CEO of TechnoMedix, a Mumbai-based healthcare IT and content creation company, has confirmed receiving multiple responses from SBM Bank India.

The bank has assured him that his corporate card services will resume by July 31, 2023.

“While the news was reported in April, it largely went unnoticed. Now that we have been suffering for months, Inc42’s article has managed to stir up awareness about this issue,” Dr Dhirwani said.

He added that many, including regulators, banks and fintech partners, seem to have turned a blind eye towards this issue, but now, it seems, the voice of many entrepreneurs and entities has started reaching their ears.

Moving on, another corporate card user, Deb Sethi, a Bengaluru-based Android developer, said that responding to his query the bank has now informed him that it was updating consumers’ data as per RBI guidelines, with the process expected to be completed by July 31, 2023.

Out of the 15 corporate and prepaid card users interviewed by Inc42, only four confirmed receiving a meaningful response from SBM Bank India or its fintech partners. The remaining 11 users stated that they had not received any response thus far.

Card users like cofounder and CEO of CredoHire Himanshu Kumar, Rohan Chaudhary of Unlearn Product, Ajay Patel of Atyantik Technologies, and Srinivas Gowda, a Prequin engineer, too, expressed their concerns over the lack of communication from the bank or its fintech partners.

Rohan Chaudhary shared that the last message he received regarding the corporate card was on April 28, requesting re-KYC. However, since completing the re-KYC process, he has not received any further communication.

Kalpesh Ahir, who operates the Aprozone iPhone accessories platform, said that despite multiple attempts to contact the bank, he has not received a single response. The sudden blocking of the card has resulted in a significant loss to his business.

“I have contacted them multiple times, but I haven’t received any response yet. Every time, they close the complaint by saying that they are continuously working to resolve the issue. Due to the sudden blocking of the card, my brand has suffered significant losses as the Facebook ads have stopped running. The ads were down for 7 to 8 days and we couldn’t make any sales during this time. It also takes a lot of time to set up everything again,” Ahir said.

Echoing similar sentiment, Kumar of CredoHire said, “We had a Razorpay-SBM India corporate card, which stopped working on April 1, and, despite the re-KYC, there has been no response from the bank. Responding to a query, the Razorpay team said that they have no clue when these cards would be operational again. This made us opt for a new corporate card from another bank.”

SBM Bank India’s Struggles In The Past

The recent suspension of corporate cards is one of the several instances when SBM Bank India has failed to comply with the RBI’s guidelines.

On January 23, 2023, the RBI directed SBM India to halt all LRS transactions due to material supervisory concerns. This decision immediately impacted all cobranded global cards issued by the bank. However, the ban was partially lifted to allow ATM/PoS activities.

In June 2022, although the RBI’s order to cease all credit lines extended over PPI (Prepaid Payment Instruments), SBM Bank India reportedly continued offering prepaid card services via PPI.

On October 15, 2019, the central bank imposed a penalty of INR 3 Cr on SBM Bank (India) for being non-compliant with regulatory norms set by SBM Bank (Mauritius). These norms included provisions issued by the RBI related to the ‘time-bound implementation and strengthening of SWIFT-related operational controls’ and the ‘cybersecurity framework in the banks’.

Such back-to-back instances highlight a pattern of SBM Bank India’s ineptitude in handling both regulatory and operational compliances, resulting in the unfortunate suffering of its customers.

Nevertheless, even though SBM Bank has finally broken its silence, a larger resolution to give respite to its customers seems hanging fire in the absence of any clarity from them.

The post SBM Bank Finally Breaks Silence On Re-KYC Issue appeared first on Inc42 Media.

On October 1, 2021, the Reserve Bank Of India (RBI) introduced the Recurring Payments Guidelines and later card tokenisation frameworks to help customers end unwanted subscriptions and secure their financial data. At the time, many suggested that the framework would be a highly disruptive intervention and 20 months on, it’s looking exactly like that.

It’s June 2023, and subscribers and platforms continue to face issues while making recurring payments via cards, the guidelines seem to have caused more pain than they solved. Messages such as the ones produced below have become all too common.

Not just that, the RBI’s Recurring Payments Guidelines have severely impacted SMEs and startups offering monthly or annual subscription-based services, OTT platforms, and international giants offering services in India, thereby impacting the overall Indian subscription economy, which boomed during the pandemic.

Speaking to Inc42, Nikhil Pahwa, founder and CEO of Medianama, averred, “Both as a consumer and as a business user of global digital services, I’ve found that recurring transactions fail often. We’ve also had situations where some global services no longer accept Indian credit cards, post the RBI guidelines related to recurring payments, as well as the tokenisation guidelines. As a consumer, I have had to re-enter my credit card details and enable payments for a few Indian services as well, and that’s an inconvenience I wish I didn’t have to deal with.”

Even a company like Google is not able to deal with the mess.

Whether it is Google Cloud or Workspace or other services by the global tech giant, customers are grappling with payment hurdles. “Google repeatedly declines the cards, despite the cards being fully active,” a founder running a stealth-mode SaaS startup told us.

“Since Google does not accept debit cards or UPI for recurring payments, I had to borrow a card from someone else just to make the Google payments,” the founder added.

This is undoubtedly not the ease of doing business that the Indian government has been touting for the past few years. And, in fact, a complete contrast from the fintech and payments reputation that India holds today.

For instance, Pranav Raj, cofounder and CEO of YC-backed open-source omnichannel customer engagement suite Chatwoot tweeted in frustration on February 8, 2023.

Pranay Kotasthane, deputy director at Takshshila Institution, wrote, “I’m genuinely surprised that this isn’t a big deal. The RBI increased transaction costs for people and small businesses. More than a year later, it’s still a problem. I spend the first day of every month just coordinating all subscription payments.”

There are multiple reasons behind the recurring payments failures, argues Pushpa Marwal, an analyst at Forrester Research.

“In the ever-evolving landscape of recurring transactions, it is imperative for banks to put the customer at the centre of their strategies…Banks must prioritize two factors. First, they need to focus on customer education and awareness. In this way, banks can build trust, empower consumers, and build lasting relationships. Secondly, they need to put the customer at the centre and adopt a unified channel approach that provides better insight into subscriptions. This will really help banks achieve sustainable growth in the subscription business,” Marwal told Inc42.

These guidelines have definitely impacted subscription businesses.

Simply put, the RBI wanted to introduce e-mandate guidelines, including additional security measures for recurring payments on India-issued credit and debit cards. UPI Autopay and NPCI eNACH were not impacted by these changes.

These measures say:

• Banks need to register cardholders and create an e-mandate through a one-time process, using additional factor authentication (AFA)
• Banks must alert cardholders at least 24 hours before charges take place and give them the ability to opt out of transactions
• Recurring transactions over INR 15,000 must go through AFA each time

What Changed After The Guidelines

In addition to this, the RBI also directed that from January 2022, no entity in the card payments chain other than card issuers or card networks will be allowed to store the actual card data. The central bank directed all entities, such as merchants, payment gateways, and PPIs to purge all the previously stored card data.

How The Well-Intentioned Move Backfired

The RBI’s Recurring Payments Guidelines and tokenisation move solved two big problems.

Firstly, they made online transactions a lot safer. In January 2021, it was widely reported that the card details of 10 Cr Indians were being sold on the dark web. The data was allegedly leaked from a compromised server of Juspay, the Bengaluru-based digital payments gateway. The tokenisation meant credit card data was no longer available with fintechs. Fintechs only had card details in an encrypted format that was unlocked for every transaction with a unique token.

Secondly, the RBI guaranteed that control remained with consumers. The AFA features, for instance, ensured no recurring payment transaction was happening without user consent. The guidelines put users at the helm, and in control of their future recurring payments. At any point in time they could cancel or edit their recurring payments. They no longer needed to reach out to each and every subscription platform for cancellations or modifications.

However, implementing the RBI’s guidelines had unintended consequences and backfired. The subscription market, which had been flourishing since the onset of the Covid pandemic, suffered immediate setbacks, with approximately 70% of recurring payments being declined, the very next month, as per reports and data that Inc42 has found.

Despite the RBI issuing these guidelines in 2019 and extending the implementation deadline by several months till October 2021, the banking and financial institutions as a whole were ill-prepared for the changes.

Unlike the NPCI’s eNACH, one recurring payments solution for all the member banks, under the RBI’s guidelines, the e-mandate was provided to individual banks separately. And, it is becoming more cumbersome to have a seamless experience when it comes to recurring payments.

Apart from SiHub, a platform co-developed by BillDesk and Visa Card that successfully onboarded leading banks like HDFC and SBI, most other banks and payment aggregators failed to comply with the guidelines, even six months after their release.

Razorpay and Mastercard attempted to address the situation by launching MandateHQ, another platform for e-mandates. However, it had limited participation from banks.

On October 1, 2021, Shashank Kumar, CTO of Razorpay, acknowledged the challenges in a tweet, stating that it would take three to six months for banks to integrate with MandateHQ and provide support for recurring payments to their consumers. While some banks managed to go live, others still required additional time.

Despite nearly two years to fix the problems, a significant number of subscribers continue to struggle with recurring payment options, especially when it comes to international platforms. For instance, Google, which offers various subscription services such as Google Cloud, YouTube Premium, and Google Workspace, does not offer auto-debit options for UPI and debit cards.

Gautam Pradhan, cofounder of Earthmetry, a data analytics firm, criticised the RBI’s move, describing it as “When you want to go from 0.0002% fraud to 0% and decide to upset 100% of the people.”

The guidelines originally intended to give consumers control and choice over their payments. However, the implementation has inadvertently restricted consumer choice and hindered payment flexibility.

Bharath Reddy, program manager of the Graduate Certificate in Public Policy (GCPP), at Takshashila Institution, highlighted the numerous challenges the RBI’s move created for businesses and customers. The most significant impact was the disruption in subscription revenue, particularly for media companies, OTT platforms, non-profits, and other entities that rely on monthly or periodic payments.

Reddy further noted that many companies, especially those without a substantial Indian customer base, have yet to comply with the guidelines. Most international merchants accept payments through credit cards or PayPal, neither of which is compatible with Indian credit cards. Consequently, Indian customers are limited in their payment options, resulting in a loss of choice for accessing certain products and services.

In summary, implementing the RBI’s guidelines had unintended consequences, leading to declined recurring payments in the subscription market. The lack of readiness among banks and financial institutions, along with limited compliance, has hindered consumers’ payment options and caused disruptions in subscription revenue for various industries.

Additionally, international platforms and companies without a significant Indian customer base have faced challenges in complying with the guidelines, limiting choices for Indian customers.

“The problem I have with the Reserve Bank of India is that they don’t appear to take into consideration the impact of their regressive regulations on merchants and consumers, and the increasing inconvenience this leads to. There was no impact assessment, no public consultation: just a diktat with a deadline, which eventually got pushed repeatedly because of lack of feasibility,” Pahwa said.

“We also have to take into account that the RBI has enforced these guidelines on credit cards, which have better customer service, fraud detection and accountability, and yet they’ve failed to do anything to enforce accountability in case of UPI, especially in terms of fraud detection and prevention. There’s a saying “if it ain’t broke, don’t fix it.” In case of the RBI, they broke something that was working — credit card payments — and have failed to fix something that is crying out loud for regulatory intervention — UPI,” he further elaborated.

Understanding The Indian Subscription Market

The subscription market in India encompasses various sectors, with utility subscriptions such as electricity, gas, cable, and internet being prominent. Additionally, there is a significant presence of B2B SaaS subscriptions, IT tools subscriptions, and subscriptions related to the media industry, including both print and digital media. Non-profit organisations like Alt News, Internet Freedom Foundation, and The Wire heavily rely on recurring transactions for their monthly or annual donations.

Regarding utility subscriptions, it is argued that the impact of the RBI guidelines was not substantial for the common man. According to the RBI, individuals in the lower-middle-income category in India pay an average of 42 utility bills per year, of which only three are typically paid online.

But India’s media and entertainment (M&E) market experienced grave challenges in its growth rate. The M&E sector includes segments such as OTT platforms, television, podcasts, online gaming, and digital media subscriptions.

As a result of the guidelines, there was a reduction of around 5 Mn TV subscriptions as per data sourced by Inc42, and the growth rate of OTT subscriptions slowed down.

FICCI-EY, in its 2022 report, initially projected a Compound Annual Growth Rate (CAGR) of 24% for digital subscriptions until 2024. However, this has now been trimmed to 11% CAGR until 2025. Similarly, the estimated number of OTT subscribing households has been adjusted from 60 Mn in 2024 to 52 Mn in 2025.

While various factors could contribute to these figures, analysts believe that recurring payment issues are one of the key reasons behind the lacklustre numbers.

In the case of B2B subscriptions, although the overall businesses may not have been impacted due to the essential nature of their services, payment failures have become a major concern for both buyers and sellers.

Prashant Ganti, head of product management for Zoho Finance and Operations Suite told Inc42, “Most of Zoho’s monthly plans fall within this limit, so our customers on monthly subscriptions were not affected. For customers who exceed this limit, we offer them the option to prepay for a specific period upfront.”

The company also sent email notifications and personally followed up with customers as their subscriptions neared the expiry date. This approach helped it retain customers, Ganti claimed.

The RBI’s Take

Rebutting the criticism around the recurring payments guidelines, RBI Governor Shaktikant Das said in June 2022 that the rules prioritise user convenience, safety, and security. This was when the recurring payments limit was enhanced from INR 5,000 to INR 15,000 per transaction.

“Under this framework, over 6.25 crore mandates have been registered in favour of a large number of domestic and over 3,400 international merchants,” he said.

In December 2022, the RBI extended the scope of the Bharat Bill Payment System (BBPS), an ‘anytime anywhere’ bill payments platform, to include all categories of payments and collections, both recurring and non-recurring. It also brought in support for inbound cross-border bill payments.

BBPS has onboarded over 20,500 billers and processes over 9.8 Cr transactions monthly.

In January 2023, RBI Deputy Governor T Rabi Shankar highlighted that financial entities traditionally subject to regulation understand that regulation serves the larger objective of systemic stability and development. Entities outside the financial space are still learning to adapt to a regulated environment. Their initial reaction to regulation is often objectionable, even creating a narrative of customer inconvenience, sometimes echoed by industry bodies.

Shankar added, “The norms prescribed for recurring payments were criticised as inconvenient to customers until a survey revealed that more than 80% of customers welcomed the move. RBI’s approach to regulatory aversion is to patiently ease in regulations, allowing the ecosystem adequate time to adjust.”

Ram Rastogi, former head of products at NPCI, also acknowledged that there were some issues initially. However, with the revised system now in place, including card tokens and banks periodically sending the required messages, the guidelines are being perfectly followed.

“Various forums exist where grievances can be communicated with the RBI… The RBI is very open to industry feedback. I haven’t seen any other regulator being so receptive to criticism worldwide,” said Rastogi

What’s The Way Forward

While the RBI has been firm about its stand on the Recurring Payment Guidelines, Takshashila Institution’s Reddy believes that there is no data that these guidelines have benefited customers.

“We hear about a lot of people who have been inconvenienced by it, and it is not due to a lack of awareness. There are still a host of issues that need to be sorted before a seamless experience can be offered to the end users,” Reddy said.

Other industry players also chimed in with the major pain points:

• The guidelines have been very poorly executed, without RBI supervision. The central bank needs to ensure the guidelines be properly followed and communicated with consumers
• To streamline, all stakeholders involved such as payment gateways, card networks, and banks must support the capabilities required to enable additional authorisation for recurring transactions
• More power to consumers allowing them to select which transactions need to be automated and which needs to be monitored manually
• Lower-cost interventions, such as requiring banks to provide consumers with the ability to view and manage their subscriptions, might have also addressed the issue without as many disruptions
• Most of the banks’ websites do not show the e-mandate option prominently. Whether it is available for all their credit and debit cards as well as for the internet banking. This needs to change

“The RBI could also consider providing customers with more control over how their money is being collected. For example, allowing them to configure the terms of auto-debit transactions like setting the transaction limits for each vendor, and selecting which subscriptions can renew automatically without manual intervention,” added Zoho’s Ganti.

He believes this would not only provide customers with greater control but also reduce the need for manual follow-ups and minimise involuntary churn for businesses.

The global subscription ecommerce market value is expected to reach $904.2 Bn by 2026. Businesses have started recognising the value of establishing long-term customer relationships as this is the most sustainable way to ensure steady revenue.

“Since we will see more businesses adopting recurring revenue models, the RBI can listen to their feedback and explore opportunities that improve the ease of doing business while keeping customer security and our financial system at the core. By having the right system in place, businesses can achieve compliance and improve customer experience,” Ganti added.

Inc42 spoke to over a dozen founders to find out whether they have ever exercised their e-mandate on the SiHub or MandateHQ platforms. A whopping 80% of them said they haven’t.

Clearly, there is a greater need to sensitise the ecosystem and the fintech industry when it comes to the guidelines. But so far, with the disconnect between banks, tech giants and subscription economy platforms, consumers are still feeling the pain.

The post Recurring Payment Conundrum: How Guidelines Have Shaken India’s Subscription Economy appeared first on Inc42 Media.

More than eight Lakh corporate credit card users from startup and SME sectors have hit a wall since April this year and witnessed a downward spiral without any respite. Initially, their plight hit the headlines as their corporate credit cards were blocked from midnight of March 31 without prior notice, citing the need to update KYC (know your customer) details as mandated by the Reserve Bank of India.

But what has thrown them in a tizzy is that in spite of completing the re-KYC process in April, the issuer bank, SBM India, has not given any assurance on when these cards will be reactivated.

The following screengrab from a recent email message to a fintech partner of a co-branded credit card has captured the user sentiment.

Such unresponsiveness is unprecedented in the country’s banking history, especially when card users had little time to comply with the KYC mandate.

What would you do if your cards got blocked after a three-hour notice late in the evening? That was the query we faced from all and sundry impacted by the cardblocks.

It was 9 pm on March 31, 2023, when Dr Suraj Dhirwani, founder and CEO of the Mumbai-based healthcare IT and content creation company TechnoMedix received an email message from SBM India Bank. The notification said his corporate credit cards would be temporarily on hold with effect from midnight of March 31, 2023.

It was just a three-hour window. The very next day (April 1) – the first day of FY24 – he had more than 15 subscriptions (Google Workspace, Google Domains, HostGator, ResellerClub, Canva, Grammarly, GoDaddy, Microsoft, Envato and more) lined up for recurring payments.

The timeframe also surprised the serial entrepreneur. According to the RBI guidelines, re-KYC needs to be done periodically. “But our Razorpay corporate credit card issued by SBM India is just six months old. Technically, it does not require any re-KYC,” he said.

“There has been no prior intimidation for this. With less than 24 hours to comply, no link mentioned for re-KYC, no warning, what sort of banking behaviour is this?” Dr Dhirwani immediately replied to the SBM, seeking much-needed clarification.

Meanwhile, more than 50 freelancers working for Dhirwani alerted the founder on April 1 that their Google Workspace was no longer functioning. A host of other services paid through regular subscriptions started to falter due to non-payment.

Dhirwani was not the only one affected. All co-branded corporate and prepaid cards from various fintechs such as Karbon, Kodo, EnKash, Happay, Open, Velocity and Razorpay issued through SBM India were suspended after March 31, impacting millions across India.

“All payments failed, and services would have been disrupted because of non-payment, just because a bank failed to do its job. We were affected by this, and now I have to switch to my personal credit card because of this mess created by SBM Bank (India) and Razorpay,” Rohan Chaudhary, another serial entrepreneur and founder of the Delhi-based career transition startup Unlearn Product, vented his frustration on LinkedIn.

Ajay Patel, a Kodo corporate card user for two years and cofounder of Vadodara-based startup Atyantik Technologies, which provides mobile application solutions to overseas clients, did not receive any SBM notification, though.

“I received a bunch of messages alerting me to payment failures on multiple subscriptions. That’s when I checked social media and learnt what happened,” he said.

“Our CA advised us not to make company payments using personal cards. And the Kodo card seemed promising and effective as I could activate it within minutes,” recalled Patel.

He used the card to make recurring payments for AWS and other third-party services.

Clearly, these payment stoppages have thrown the startup and SME fraternity into a state of panic.

“It doesn’t matter whether you use Kodo, Karbon, Razorpay or other fintechs’ corporate credit cards as you end up using an SBM card,” said a serial entrepreneur currently developing a fintech in stealth mode.

From Alliance To Alleged Non-Compliance In Three Years

One should not frown upon the overdependence of fintechs on SBM India, as it has happened for a valid business reason: Both have benefited from the alliance.

As several media reports point out, partnering with a variety of fintechs has helped SBM India tap into a fast-growing market and drive its retail business without spending a fortune. According to Inc42 data, it has partnered with more than 45 fintechs, including segment leaders such as Razorpay.

Thanks to these partnerships, SBM India recorded unprecedented growth by acquiring over 1.5 Mn credit card users by October 2022 — within three years of its operation — while keeping the NPA ratio (net NPAs to net advances) at 0.27%, well within limits. (More on that later).

Then there is the other side of the coin. The bank has always been a startup-friendly entity with minimum eligibility criteria, just like the Silicon Valley Bank (SVB) in its previous avatar. SMEs and small startups in India always find it challenging to obtain corporate credit cards from legacy players like SBI, HDFC, and ICICI bank. Though things have changed a bit by now.

Here is a case in point.

“We are an Imperia user (which requires an average monthly balance of INR 10 Lakhs in one’s savings account), but HDFC Bank did not issue us a corporate credit card,” said Dhirwani. “So, we had to opt for a Razorpay corporate card. Incidentally, Razorpay has been also our payments partner for the last couple of years.”

However, too thick an alliance with a single entity may not always bode well for the startup community or small and medium businesses, say experts. The recent collapse of SVB brings too many painful associations and similarities to the fore. Timely diversifications and an effective Plan B should be at the core of young and agile businesses compelled to cope with a volatile macroeconomic environment and a long funding winter.

Although a freeze on recurring payments may not be as disastrous as losing one’s entire deposit (which, thankfully, did not happen at SVB), such incidents are bound to hurt the reputation and hinder business growth.

This brings us back to the key issue that has disrupted ‘business as usual’ – the KYC non-compliance by SBM India.

When & why re-KYC raises its head: Adopting a risk-based approach, the Indian central bank issued in 2021 a set of KYC guidelines for all regulated entities (REs) to ensure periodic updation of KYC data. This is often referred to as the re-KYC process.

For entities (customers other than individuals), the RBI’s re-KYC guideline has two monitoring mandates. These include:

1. No change in KYC information: In case there is no change in KYC data, banks are required to obtain a self-declaration and a letter from an official authorised by the company.
2. Change in KYC information: In case of any change, banks shall undertake the KYC process applicable for onboarding a new LE (legal entity) customer.

For individuals, too, a periodic updation will be carried out. This will be held at least once in every two years for high-risk customers, once in every eight years for medium-risk customers and once in every 10 years for low-risk customers from the date of account opening/last KYC updation.

Did SBM India slip up on these guidelines and fail to conduct customer due diligence?

It is worth noting that the RBI, on January 23, 2023, the RBI directed SBM India to stop all LRS transactions, citing material supervisory concerns. Nevertheless, the ban was partially lifted, allowing ATM/PoS activities.

“There had been complaints about SBM India not conducting customer due diligence. We have found a slew of loopholes and irregularities in its banking operations. If the same was continued, it would have resulted in cyberfrauds and other frauds. For instance, despite the RBI guidelines, the bank does not have updated KYC details of its customers,” an RBI official told Inc42 on the condition of anonymity.

In fact, there were several compliance factors that SBM failed to meet in a timely manner.

This irked the central bank which runs a tight ship with compliance at its core.

But before we figure out what has led the bank to a risky path, one must go back to the beginning to understand SBM India’s phenomenal growth.

How A Fintech Network Drove The Rapid Rise Of SBM India  

The SBM Group, Mauritius, was the first foreign bank to acquire a banking licence in India on December 6, 2017, followed by DBS, Singapore, on October 4, 2018.

With just 12 branches in eight cities and three suburban areas, SBM India has successfully positioned itself as a fintech-first bank and currently serves 1 Mn customers from 500+ Indian cities via its digital channels. However, much of this expansion credit goes to its burgeoning fintech network and the customers acquired through these partners.

While legacy players like HDFC Bank, the State Bank of India and others still have reservations about collaborating with fintechs, SBM India has been at the forefront and open to partnering with every fintech company out there.

It has been a win-win for all stakeholders. The bank is now able to reach more customers and access relevant data for further growth without paying a fortune for customer acquisition. Fintechs, on the other hand, are piggybacking its services and digital framework to meet the banking requirements of businesses and individuals. Within three years of its operations, SBM has partnered with more than 45 fintechs.

The momentum continued for some time, and in October 2022, SBM India emerged as the third-largest credit card issuer, ahead of industry giants HDFC Bank and ICICI Bank.

Anubhav Jain, founder and CEO of the Bengaluru-based B2B payment solutions provider Rupifi, explained the thorough service integration as SBM Bank catered to fintechs’ needs. “If you buy a corporate credit card offered by Fintechs, nine out of 10 times, you will end up buying an SBM India card,” he said. Additionally, it has partnered with many fintechs to provide digital banking solutions.

The Turbulence: Will It Snowball Beyond Re-KYC?

Some experts blame the non-compliance allegation on the breakneck speed at which the bank has grown. With only around 350 employees in India, the bank might have found it difficult to meet KYC and other compliance norms on time. Moreover, credit card transactions at SBM India slumped by more than 76% after the bank deactivated all co-branded corporate credit cards.

If we compare the April data with that of November 2022, the transactions’ value has reduced by  81% and the number of cards too have reduced by 40%.

But there’s more. Take, for instance, the outcome of Q4 FY23 (January-March 2023), when the bank clocked a net loss of INR 6.3 Cr. Its profits remained stagnant over the past three years despite its fast-growing fintech network across the country and its accumulated advantages. From FY21 to FY23, SBM India registered net profits of INR 19 Cr, INR 16 Cr and INR 20 Cr, respectively.

Incidentally, the bank had struggled with compliance even before the RBI intervened in its forex and corporate card businesses in 2023. On October 15, 2019, the central bank imposed a penalty of INR 3 Cr on SBM Bank (India) for non-compliance with regulatory norms by SBM Bank (Mauritius). These included certain provisions issued by the RBI on ‘time-bound implementation and strengthening of SWIFT-related operational controls’ and ‘cybersecurity framework in the banks’.

As part of security and operational controls in SWIFT (Society for Worldwide Interbank Financial Telecommunication) environment, the RBI has issued instructions mandating banks to operate under a framework to red flag potential loan frauds, maintain a searchable database of potential frauds, re-verify certain title deeds and act in a time bound manner to stop these frauds.

In October 2018, SBM (Mauritius), India, was merged with SBM Bank (India) after the latter received a banking licence from the RBI. But this did little to get the SBM India house in order, as witnessed in 2023.

The situation worsened when the RBI, in one fell swoop, stopped the bank’s LRS transactions on January 23. Although its services have been partially restored, it is still unclear when the forex cards will be fully functional as before. Many of its fintech allies are said to have suspended their partnerships with SBM India after this unexpected roadblock, but there has been no official announcement yet.

Inc42 got in touch with the fintechs and SBM India. They have not responded to our queries at the time of publishing this article, but we will update the story as and when their comments come in.

If the forex card stoppage was a big blow, the midnight deactivation of corporate credit cards was worse. Jain of Rupifi, whose fintech tied up with Axis Bank for co-branded credit cards, narrowly escaped this mess. “Initially, we also contacted SBM India for the partnership but did not see a long term sustainability. Hence, we decided to go with Axis.”

He also had a fair idea of what was happening on the ground.

“Of late, SBM Bank has struggled with KYC issues and other regulatory hurdles. As most card fintechs use SBM Bank at the backend, this overnight card-blocking [due to KYC issues] has made things tough for startup founders who sought the services from their fintech peers,” said Jain.

According to several card users interviewed by Inc42, they trusted these credit cards from fintech companies because they already had a business relationship with them. The fintechs had marketed and introduced these cards to them, and they had no problem opting for those. But now that things have gone south, these fintechs are expressing their inability to address the issues.

It is not a breach of trust in any sense, but many think that fintech startups have gone overboard while piggybacking banks like SBM India.

According to the RBI guidelines, the co-branded credit/debit card shall explicitly indicate that the card has been issued under a co-branding arrangement. Also, the co-branding partner must not advertise/market the co-branded card as its ‘own’ product. Besides, in all marketing/advertising material, the name of the card issuer must be clearly shown.

In spite of these clear guidelines and the concerned bank’s name on the card, co-branded products are still promoted in a manner that suggests a meaningful affiliation with the fintech brand, which is not the case.

Who else stands to lose the most from this tricky situation? SBM India, of course.

The bank has reportedly been looking to raise growth capital to drive its localisation efforts. But now that it is under the RBI scanner and may see a reduction in its B2B client base and overall growth, funding against Tier I capital/equity may not be feasible soon.

As a result, it has raised back-to-back funding by issuing Tier II bonds, a debt financing instrument. SBM India raised INR 300 Cr, INR 125 Cr from NABARD under automatic refinance facility and by issuing Tier II bond in 2022 and INR 99 Cr from LIC in 2023.

According to experts, if the bank’s troubled run continues, SBM India, currently rated A+ (stable) by the rating agency ICRA, may face capital, credit and liquidity risks later.

Left In The Lurch, Aggrieved Card Users Approach The Banking Ombudsman 

In the past five months, the RBI restrictions on a couple of SBM India products have created widespread panic among users. In January, the ban on its forex transactions sent shockwaves to thousands holding Niyo, Vested and INDmoney co-branded forex cards. More importantly, the bank failed to convey the same to users, although it knew the RBI drill ahead of such restrictions.

Now, corporate and prepaid card users are forced into a similar situation.

Here is a quick look at a few mail messages highlighting the re-KYC delays and the growing concern of card users.

Srinivas Gowda, a senior software engineer working for the Bengaluru-based investment tech firm Preqin, had a prepaid card worth INR 10K to transact on Swiggy, Zomato and other platforms. He informed Inc42 that the prepaid card with more than INR 8K balance had been blocked since that fateful day.

Worse still, the bank did not send any link for the re-KYC procedure while blocking their cards. It did so only a month later.

Further, users who finally completed the re-KYC procedure have yet to get their cards reactivated. According to their fintech partners, the KYC has been under verification for 40 days or so.

What’s more frustrating is that the bank has never responded to their complaints.

“Nothing moves beyond generating a ticket number. Even the tickets aren’t generated so many times,” rued Gowda.

Card users complain to the banking ombudsman for resolution: Left with no choice, many card users have filed complaints under the RBI’s Banking Ombudsman Scheme (BOS).

“A person can file a complaint on the grievance redressal portal of the RBI, if a bank fails to act within 30 days,” said Dr Dhirwani of TechnoMedix.

According to the scheme, if a complaint is not settled by an agreement within a month, the Banking Ombudsman proceeds further to pass an award. But before that, it will give the complainant and the bank a reasonable opportunity to present their case. It is up to the complainant to accept the award in full and final settlement or reject it.

Fintechs Losing Money, Jeopardising Reputation Amid Regulatory Concerns

“The concept of activity-based regulation with the basic theme of ‘same activity, same regulation’ has gained currency. The fundamental point is that any entity providing banking services needs to be subject to similar regulation as banks,” – T. Rabi Shankar, deputy governor, the Reserve Bank of India

Time and again, the central bank has raised concerns over how fintechs often skip essential compliances and financial integrity requirements like KYC, AML/CFT (Anti-Money Laundering / Countering the Financing of Terrorism).

During his speech on ‘Fintech and Regulations’ at a Summit in January this year, the RBI’s deputy governor T. Rabi Shankar expressed his concern about the new challenges fintechs have brought. He emphasised the need for regulators to ensure that non-bank entities operating outside the regulatory perimeter for banks do not undermine the banks’ role, which could lead to financial instability.

At the same time, there is a need for these efficiency-inducing new technologies to be incentivised. However, the entity-based regulation of banks, with its focus on financial health parameters such as capital adequacy, leverage, liquidity, or financial integrity factors like KYC, AML/CFT, requires to be adapted to the presence of fintech entities which are not subject to the same regulatory requirements, added Shankar.

Thus, sooner or later, fintechs are bound to have greater scrutiny by the RBI either directly or indirectly through its regulated entities like banks. And, this may impact the fintech boom adversely in the short-term, believe experts.

The fintech market in India is estimated to reach $1.3 Tn by 2025, growing at a CAGR of 31%. Riding the wave of new-age technology integration and backing from local and global investor ecosystems, India today boasts 21 fintech unicorns and more than 4.2K active fintech startups.

But in the past year, this sector has hit the headlines for all the wrong reasons. First, how the RBI’s regulatory slap in the form of notification in June, 2022  hit hard fintechs like Slice, Uni and Postpe, putting them into the existential crisis mode.

Although the current crisis does not match the SVB collapse in scale or impact, several Indian fintechs have been hit equally hard. Think of Kodo, a Mumbai-based corporate card startup launched in 2019. Its flagship is a co-branded corporate credit card, and its only banking partner is SBM India. A failed partnership at this point may not augur well for many early and growth-stage startups that bank on a star product, unlike Razorpay, a unicorn with a wide range of products/services and a diversified client base.

Meanwhile, Karbon card has already issued a new business card called Card++ to appease its irate customers.

For many fintechs, this will be challenging, though, as legacy players are still highly selective about fintech partners.

A fintech founder, whose startup is currently in talks with Axis Bank to launch a new corporate card, also thinks it will be a difficult journey, at least for some time. After all, partnering with other banks will never be as easy as SBM India, which has relentlessly built its image as a fintech-first go-to bank catering to local businesses.

The road ahead is definitely bumpy. “But at stake is the reputation,” the founder said without wanting to be named.

[Edited by Sanghamitra Mandal]

The post How SBM India’s Baffling Silence On Re-KYC Has Put Fintech Lenders, Users In A Tizzy appeared first on Inc42 Media.

“There is $1 Bn-plus of deposits that Indian startups have in Silicon Valley Bank. As of this morning (March 16, 2023), about $200 Mn-odd of those deposits have moved to the GIFT IFSC,” Rajeev Chandrasekhar, MoS IT, Govt of India

India’s maiden IFSC (international financial services centre) at GIFT City, Gujarat, has lately created a lot of buzz as the newfound hub for alternative investment funds (AIFs), fintechs and a diverse range of international financial services.

Finance minister Nirmala Sitharaman also announced a series of measures in the Union Budget 2023 to accelerate the ecosystem’s growth. For instance, the IFSC banking units and foreign banks will now be able to provide acquisition financing, paving the path for strategic M&A deals for Indian startups and other corporate houses. Additionally, an EXIM bank subsidiary will be set up for trade refinancing.

During her Budget speech, Sitharaman further announced plans to set up data embassies in GIFT IFSC for countries “looking for digital continuity solutions”, which would enable a supportive legal, regulatory as well as a  robust digital infrastructure at GIFT IFSC.

As more and more national and global corporations come in, GIFT IFSC is rapidly emerging as a globally competitive financial platform operating under a special offshore status and attracting overseas capital. Its aim to ‘globalise’ the country’s fast-evolving financial sector may further boost India’s journey towards becoming a $5 Tn economy by 2026-27, as the International Monetary Fund forecasted.

But before we delve into the all-new growth narrative getting scripted at the offshore financial centre (OFC), a little recce will give us a fair idea of its evolution and benefits.

Located on the bank of the Sabarmati River, between the state’s industrial capital Ahmedabad (12 km) and political capital Gandhinagar (6 km), GIFT City currently spans an integrated development area of 3.6 sq km. Plans are also afoot to develop 5.76 sq km of built-up area comprising commercial zone (67%), residential area (22%) and social space (11%).

Initially developed under the Special Economic Zones Act of 2005, GIFT City was allowed to host the country’s first IFSC in 2019. Therefore, the city’s commercial activities remain under two distinctive zones – the GIFT SEZ (the non-IFSC area) and the GIFT IFSC. The latter became operational in 2020 after a bunch of favourable policy measures came into force to turn it into the new epicentre of AIFs and fintechs keen to tap into offshore markets without leaving Indian shores. (Read more about GIFT City, Gujarat, here.)

The government created a single-window regulatory structure for IFSCs via a 2019 Act to speed up operations and innovation. Since October 1, 2020, the International Financial Services Centres Authority (IFSCA) has worked as a ‘unified and agile’ financial regulator of GIFT IFSC and combined the power of the ‘big four’ – the RBI (India’s central bank), capital markets regulator SEBI, insurance regulator IRDAI and pension regulator PFRDAI – to iron out inter-regulatory issues.

Besides ensuring the ease of doing business at all levels, various fiscal incentives are granted to drive growth. Among these are zero Goods and Services Tax (GST) for GIFT IFSC-registered firms and a 100% tax holiday on profits for 10 straight years (out of 15).

In addition, a flexible regulatory framework is in place to encourage greenfield funds or tax-neutral relocation of funds from overseas jurisdictions to GIFT City IFSC.

Most importantly, provisions are there for foreign investors to transact in USD instead of dealing in INR. In the ordinary course of things, overseas investors need to book forex, fill in forms and do the conversion, a fairly cumbersome process. Add to that another 24-48 hours for due validation and approvals in India.

However, the IFSC has skipped this process and taken an investor-friendly route, making it a win-win for all stakeholders.

The outcome has been impressive. Thanks to growing transactions and renewed interests among international banks and investors, GIFT IFSC was ranked No. 1 on the Global Financial Centres Index (GFCI) in March 2022 among the 15 global centres likely to gain prominence in the next two to three years. Overall, it ranked 67th, while New York, London and Singapore claimed the top three slots, respectively.

“Tell me why you would go to Singapore, Mauritius, or elsewhere if you can access the same benefits here at the GIFT City IFSC,” queried Anil Joshi, managing partner at Unicorn India Ventures, a category 1 AIF.

Joshi has a point. Around 55 AIFs and 30 fintech companies have set up their subsidiaries at GIFT City IFSC in the past few years. Among them are some of the most active funds from India, including Blume Ventures, 3one4 Capital, Fireside Ventures, A91 Partners and Venture Catalysts.

Asked about these unique measures, Sumir Verma, the head of Merisis Opportunities Fund (a Cat I AIF) and founder & managing director of Merisis Advisors, said, “The GIFT IFSC initiative is a robust endeavour to help startups and AIFs register in India. The government has recognised their significant contributions to job creation and capital circulation. So, this initiative seeks to bring back globally targeted funds to India, with the advantage of an Indian domicile. This will bolster our economy and raise global perception that India is a conducive business hub.”

GIFT IFSC: Will It Be A ‘Singapore’ For ‘Flipping’ Startups?

Lately, a large number of Indian startups have shifted their headquarters abroad, especially to locations like Dubai (the UAE), Singapore and Mauritius sporting less stringent regulatory and tax systems. Over 40 out of 108 Indian unicorns have their headquarters out of the country in search of fewer taxes, better valuation, easy funding and good listing/exit options.

Of course, global aspirations and greater proximity to target markets could be a critical reason for flipping (transferring the full ownership, IP and data of an Indian company to a foreign entity while the former becomes a 100% subsidiary of the new entity). But most industry experts put it to a ‘more conducive’ business environment and regulatory structure.

Interestingly, a few foreign funds like Y Combinator reportedly encourage their portfolio companies from India to relocate to the US so that investments can be done in USD and funders can avoid additional administrative and legal costs.

Sanjeev Bikhchandani, founder and executive vice-chairman of the digital behemoth Info Edge that owns Naukri, Jeevansathi, Shiksha and 99acres (the holding company is currently listed on the New York Stock Exchange), earlier tweeted that Y Combinator’s push to flip India-incorporated startups to the US is an “institutionalised transfer of wealth”. He also likened the flipping of headquarters to the exploitation of Indian intellectual property (IP) by YC, as it benefits from the IP created by Indian founders.

Taking note of this trend, The Economic Survey, 2022-23, called for solution-focussed strategies and regulatory measures to help startups shift domicile to India.

It successfully took place when Walmart-owned PhonePe’s holding company shifted base from Singapore in 2023, while Razorpay and Meesho are reportedly planning a similar move.

But so far, ‘reverse flipping’ is a rare occurrence.

Nevertheless, India aims to speed up reverse flipping through various incentives offered at GIFT IFSC. It enables investors and startups to manage their financials in USD, provides a slew of tax benefits and fintech schemes, and helps tie up with global financial centres to support the global market base at the OFC.

Asked if the ‘startup brain drain’ can be reversed, Vaibhav Gupta, partner at the tax regulatory firm Dhruva Advisors, said, “With the withdrawal of treaty benefits in Mauritius and Singapore and availability of a 10-year tax holiday and other regulatory advantages, GIFT IFSC has become an attractive destination for setting up PE/VC funds. The finance minister has also announced a single-window clearance system. When implemented, it will go a long way.”

For a fund to set up a subsidiary at GIFT IFSC is now as easy as it is in Singapore or Mauritius, says Siddarth Pai, partner at 3one4 Capital. He has already set up a fund at the IFSC and is also a member of the GIFT IFSC expert committee.

“IFSCA will soon club all the required forms into one. Take the fund managers, for instance. Earlier, they were required to fill out three separate forms – one for the GIFT SEZ (for permission to set up the entity), one for the GIFT IFSCA (for recognition and approval of the same) and another for the capital markets regulator SEBI (for permission to operate as an AIF). Soon, you will only need to fill out one form and submit all necessary documents, which will automatically be sent to the concerned authorities. IFSCA is a dedicated authority for handling everything promptly, similar to how it is done in foreign jurisdictions like Mauritius or Singapore. The entire process will be on a par with those places, and it will only improve over time,” said Pai.

Also, the business landscape has changed significantly in those jurisdictions after the Covid-19 pandemic, according to Pai and Gupta (of Dhruva Advisors).

For instance, Mauritius and India signed a Comprehensive Economic Cooperation and Partnership Agreement in 2021 (CECPA was the first free trade agreement between the two nations). The former has implemented more stringent compliance measures ever since and witnessed a subsequent rise in costs. Therefore, it no longer enjoys the earlier status quo as a tax haven of choice.

“Singapore, too, has undergone considerable changes since Covid. It is now looking for investors of a certain calibre. If you are a large investor setting up a base in Singapore, it can be easier for you. Otherwise, GIFT provides Indian VCs the advantage of one local flight,” said Pai.

“At the least, the IFSCA is committed to offering all the features and benefits available across the IFSCs worldwide, including the ease of doing business and tax benefits like 0% GST, 0% capital gains tax and more,” he added.

It is worth noting that the GST exemption of 18% on all expenses helps save a lot for fund managers, considering that a regular fund has to go up 1.33x to return merely the principal to everyone.

GIFT IFSC also levies a 0% tax on capital gains if investments are done through IFSC stock exchanges. This is in sync with Singapore and New York, where there’s no capital gains tax for non-resident investors.

India currently charges a 20% tax on capital gains.

“If I put my money in a holding entity at GIFT IFSC, which invests in the stock exchange there, I won’t have to pay any tax on the resulting capital gains. It is an innovative way of attracting funds and retaining the capital at GIFT IFSC,” explained Pai.

Who Should Shift Base To GIFT IFSC

Which AIFs or investors should consider opening an office at GIFT IFSC?

According to Pai, the IFSC is looking to attract two types of investors.

There are people keen to invest overseas. For example, one has a family investment fund (FIF) and may want to invest in the US or elsewhere. In that case, they may consider a domicile of a foreign subsidiary and make downstream investments thereafter. Singapore has long been a popular choice for this. But GIFT IFSC has now emerged as a strong alternative with competitive advantages.

Secondly, foreign investors keen to invest in India may find GIFT IFSC suitable, especially if they prefer to hold a USD account.

Again, there are two ways to set up a base here. One can either open a branch or start a subsidiary at the IFSC.

“While opening a branch is easy, operating a subsidiary is much easier in the long run. That’s why we opted for a subsidiary instead of a branch,” said Pai.

Advantage Fintechs

Much like the investor community, fintech startups can also leverage the guidance, mentorship and financial support on offer. In a bid to build the OFC as a world-class fintech hub, the IFSCA has announced various grants for homegrown fintech startups recognised by DPIIT and seeking access to overseas markets. Besides, it will provide an inter-operable regulatory sandbox (IoRS) to enable the testing of innovative financial products and services. Foreign fintech companies keen to explore the Indian market can also approach the super regulator for approval and product/service testing.

Sitharaman had earlier urged the Gujarat state government to explore whether leading startups could relocate outside the IFSC but within the GIFT City to leverage additional advantages.

Of Opportunities & Relatable Growth: A New Landscape Unfolds

With more than 400 businesses registered at GIFT IFSC, it has seen significant growth across all financial sub-sectors in the past two years, including BFSI, fintechs and capital markets. The ecosystem also caters to IT/ITeS, aircraft & ship leasing, ancillary service providers and other related business units.

However, AIFs stand to gain the most as the OFC provides access to a competitive global market, along with other benefits, says Verma of Merisis Fund.

Funds in this jurisdiction enjoy various advantages, including a business-friendly tax regime, low operating costs, zero cap on outbound investment, no diversification limits and access to local fund administrators and custodians. Most importantly, reporting to a unified financial regulator has boosted the ease of doing business. While several large AIFs have already registered here to capitalise on these opportunities, new players can also reap the benefits of these advantages.

According to Joshi of Unicorn India, GIFT IFSC may not make a big difference for startups as they are more bothered about from where their capital comes, whether it comes from domestic shore or offshore. “But it is certainly going to make a big difference in the VC industry,” he observed.

“As fund managers, we are required to set up funds in Singapore, Mauritius or the Cayman Islands to attract investments in dollars and minimise compliance [costs]. If similar facilities and flexibility are available within the country [read GIFT IFSC], and the regulators understand our problems, our life will be much easier.”

Besides, GIFT IFSC has dedicated teams to look into the issues and resolve them. Therefore, AIFs, fintechs and all other industry stakeholders know exactly whom to approach instead of running round in circles.

This will save time, money and effort, thus enhancing business efficiency.

According to the IFSC’s latest annual report, out of the 24 AIFs registered till March 31, 2022, 10 were from Cat I and II, with total committed funds of $4,081 Mn. The remaining 14 were Cat III AIFs, with total committed funds of $1,072 Mn.

“IFSC will primarily attract Cat I and Cat II AIFs,” said Joshi. “Cat III AIFs are usually big, mostly hedge and realty funds. Hence, these will be fewer.”

The total number of AIFs has now gone past 55, with an overall commitment of more than $11 Bn. Moreover, there has been a consistent push to strengthen the IFSC ecosystem in every Union Budget since 2015.

Gupta of Dhruva Advisors said that the regulation regarding fund management under the IFSC framework has provisions for various fund types. Besides AIFs, FIF is another popular format for setting up single-family offices in GIFT City.

“As we all know, family offices have emerged as an alternative source of longer-term capital for startups and VC funds. FIFs will help professionalise those capital resources and raise more capital for VCs and startups,” he added.

The IFSCA signed two multilateral memorandums of understanding (MMoUs) and seven bilateral MoUs (BMoUs) with foreign regulators to strengthen its global reach. These will ensure a mutual exchange of information for product and service development at the Indian offshore centre.

The Indian regulator inked an MMoU with the International Organization of Securities Commissions (IOSCO) and another with the International Association of Insurance Supervisors (IAIS).

It signed the BMoUs with Dubai Financial Services Authority (DFSA), Qatar Financial Services Authority (QFCA), Abu Dhabi Global Market (ADGM), Financial Services Regulatory Authority (FSRA), Autorité des Marchés Financiers (AMF, France), Commission de Surveillance du Secteur Financier (CSSF, Luxembourg) and Finansinspektionen (FI, Sweden).

Additionally, it has partnered with the Monetary Authority of Singapore to fuel the next phase of fintech growth. The agreement will facilitate a joint regulatory sandbox for leveraging the existing ones to encourage tech experimentation. The tie-up will also allow fintech firms from one jurisdiction to enter other locations through a regulatory referral system.

The NSE IFSC-SGX Connect, a planned collaboration in trading stock index-based products, will likely be fully operational by June 2023. It will be pivotal in onshoring derivatives trading in Nifty products from Singapore Exchange to GIFT City IFSC and create a larger liquidity pool for the ecosystem.

Can GIFT IFSC Deliver On Promises, Grow Sustainably?

Despite the current achievements and global potential of India’s brand new IFSC, its parent project has been a ‘work in progress’ for 15 years. Regulatory hurdles and allegations of rampant corruption related to infrastructure projects had previously shaken up GIFT City. So much so that setting up shop in the country’s first and only smart city was no longer deemed lucrative by many enterprises and their employees.

Those dark days may well be over now. Launching an offshore financial centre that can compete with global powerhouses and lead fintech innovation is no mean accomplishment. This is bound to drive the entire project, but how long will this momentum continue?

Will GIFT IFSC continue to benefit from fiscal incentives for years to come, even when there is a change in the union government or drastic policy upheavals at the centre?

It is worth noting that the IFSC is still under construction, while the GIFT City project, scheduled to be completed by 2012, is not likely to end before 2030. Moreover, there were plans to connect GIFT IFSC with India’s financial capital Mumbai via a bullet train. This, too, has been pushed back to 2027 from the original timeline of 2023.

“Given that context, the stability of the IFSC regime is critical here. One can’t help wondering whether abrupt changes by future governments can disrupt the ecosystem,” said Gupta of Dhruva Advisors.

Opinions varied, though. Most investors think that the IFSC is too big to fail, and everything will be done to maintain India’s global reputation. A regime change may lead to building more IFSCs across the country, but there will be no backtracking on the current project.

Verma of Merisis concurred. “GIFT IFSC has been successful so far and will continue to be, given it’s a new enterprise. But certain issues must be addressed to provide better clarity to AIFs and boost the project’s overall impact in promoting economic growth. There can be challenges galore such as inadequate [physical] infrastructure, difficulty in INR conversion, long settlement periods or stringent rules around certain overseas transactions. Again, meeting all regulatory requirements may take time and delay operations.”

All these are valid points, but the elephant in the room must not elude us, either. GIFT City has never been the first choice for setting up an IFSC; it was always Mumbai’s iconic Bandra Kurla Complex (BKC). Had BKC been the coveted location, India could have skipped the INR 1 Lakh Cr bullet train project to ensure the seamless connectivity that has become the need of the hour, believe experts.

In fact, Mumbai would have been an excellent backup option for an OFC of global stature. Think of its top-notch physical and digital infra, diverse talent pool and luxury lifestyle offerings that inevitably attract the modern workforce. Neither Ahmedabad nor Gandhinagar can be compared with the city that never sleeps.

Also, GIFT IFSC is located in Gujarat, which is still a dry state. This does not sync well with the foreigners visiting there. “Discussions are on to keep GIFT City off local regulations. But nothing has been decided yet,” said Pai.

GIFT IFSC is currently subject to many such local laws. The authorities are still working to resolve some glaring conflicts, but this is bound to be a time-consuming process. But in spite of these glitches, big and small, can it be a game changer for Indian startups and investors and trigger more ‘ghar wapsi’ to drive long-term growth?

[Edited by Sanghamitra Mandal]

The post Can GIFT City Replace Singapore, Mauritius As Preferred Financial Hub For Startups & Investors? appeared first on Inc42 Media.

A few days ago the Central Board of Direct Taxes proposed a set of amendments pertaining to Section 56(2)(viib) of the Income Tax Act, 1961. This announcement brought a sense of relief to the Indian startup ecosystem and global investors, who hoped that the long-standing battle against the angel tax had finally come to an end.

Well, the nifty proposal comprising seven valuation methods and keeping six broad categories of non-resident investors outside the ambit of angel tax, among other things, was aimed at the same. However, with the devil in the details, The Finance Act of 2023 has yet again revived the ghost of the angel tax.

While adding more valuation methods and keeping a certain class of non-resident investors outside the ambit of angel tax and price-matching features are positive steps that have been welcomed by the industry, however, they do not solve the larger issue concerning angel tax.

This is also because a lot still depends on how assessing officers (AOs) exercise their power, and it is highly likely that a host of non-resident investors may end up coughing up taxes despite exemptions.

Before we get into the details, it is important to understand the core issue and how it has become an unending headache for startups and investors.

Angel Tax Was Meant To Keep Shell Companies & Black Money Circulation At Bay

Introduced in 2012, Section 56(2) (viib) of the I-T Act — income from other sources — now infamously called the angel tax, was meant to be an anti-abuse law to discourage shell companies and black money circulation.

The tax was payable on capital raised by unlisted companies if the value of the shares issued to investors exceeded their fair market value (FMV).

If the share value is less than the FMV, then the difference between the FMV and actual price is taken as “income from other sources” for angel investors, making them liable to pay an angel tax of 30.9% on the share premium issued by unlisted companies.

Let’s consider a scenario where a startup raises INR 2.5 Cr by issuing 20,000 shares at a price of INR 1,250 per share (a premium of INR 250 on each share). The fair market value (FMV) of these shares is determined to be INR 1,000.

In this case, as per the angel tax regulations, INR 50 Lakh [(1,250-1,000) X 20,000] of the funding raised would be considered income from other sources. Consequently, the company would be required to pay angel tax amounting to INR 15.45 lakh on the INR 2.5 Cr funding it received.

Until 2016, Section 56(2) (viib) was primarily unheard of among the startup community. But then some AOs started questioning the valuations of startups, directing them to shell out 30.9% in taxes.

But Startups Got Grilled In The Process

Between 2017 to 2019, several angel tax-related cases were reported widely. The cases would go on for several quarters with no clarity in sight. Most startups would hardly sustain that long and spend their funding money, time and efforts on fighting legal matters than developing products or focussing on businesses.

In 2019, Inc42 reported dozens of cases in which startups claimed refunds against the angel tax. Meanwhile, some startups even had to shut their shops or bribe AOs to keep surviving.

In November 2018, the Ministry of Consumer Affairs (MCA) issued notices to more than 2,000 startups that had raised money since 2013. The notices were mostly sent to the startups whose valuations had fallen after the first round of fundraising.

Government Comes To The Rescue

Amid uproar from the startup ecosystem, the DPIIT, in a notification issued on April 11, 2018, stated that certain shortlisted startups could skip the angel tax bump during their startup ride.

According to the notification, once a startup fulfils certain criteria, the inter-ministerial board would further analyse every startup and decide whether the entity under consideration was eligible for the exemption under the angel tax or not.

The threshold for startups to claim exemptions under the angel tax was:

1. The aggregate amount of paid-up share capital and share premium of the startup after the proposed issue of shares not to exceed $1.5 Mn (INR 10 Cr)
2. If the investor or proposed investor, who proposed to subscribe to the issue of shares of the startup has:
   1. The average returned income of INR 25 Lakh ($38K) or more for the preceding three financial years
   2. A net worth of INR 2 Cr ($300K) or more as of the last date of the preceding financial year
3. If the startup has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income-tax Rules, 1962

Clearly, angel tax exemption failed to do much for startups and investors, as they continued to get harassed by tax officials.

As a result, the DPIIT and CBDT issued a notification on February 19, 2019, saying, “All the startups are allowed to receive angel tax exemption regardless of their share premium values given that the aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of shares, if any, does not exceed INR 25 Cr.”

The CBDT also promised not to proceed against pending cases of startups pertaining to angel taxes.

However, there was a catch.

To qualify for the exemption, startups were required to fill Form 2, wherein they declare that they do not engage in acquiring assets such as land or buildings, stock-in-trade, loans and advances, motor vehicles, aircraft, yachts, or any other mode of transport with an actual cost exceeding INR 10 lakh, unless these assets are held by the startup for the purpose of plying, hiring, leasing, or as stock-in-trade, among other conditions.

As on June 21, 2019, a total of 944 startups applied for angel tax exemption, out of which the CBDT exempted 702 startups under this provision.

Most of the startups passed this in silence. Until February 2021, hardly 8% (3,612 startups) of then 44K recognised startups filed form 2 to avail exemptions under the angel tax.

Explaining the issue, 3one4 Capital partner Siddarth Pai said, “If you fill out the self-declaration form 2 then you may have to abide by the don’t do list of some 12 activities, with some being permissible basis one’s business model. The issue lies in three restrictions: loans & advances, shares & securities & capital contributions. This means salary advances, creating a subsidiary or JV, M&A all get impossible to execute. Even when regulations demand a subsidiary or alternative structure, one can’t undertake it due to these restrictions.”

“That’s how tightly they did. And in case you violated, you pay the tax when you represent and pay a fine that is two times your tax, along with interest & penalties. You would end up losing close to 85 to 90% of your money. Who will take that risk?” Pai added.

Finance Ministry Drops Another Bomb

Just as the Indian startups recorded the lowest quarter of funding in the last five years, finance minister Nirmala Sitharaman, during her budget speech earlier this year, proposed another amendment to Section 56(2) (viib) which brought non-resident investors under the ambit of the angel tax.

This majorly impacted foreign investments. While offshore funds invest in startups, it’s little compared to how much these funds invest in infrastructure and real estate projects in India.

Amid cold response from the investors, the CBDT in a set of proposed modifications to Rule 11UA has now stated that:

• The number of prescribed valuation methods be increased from existing two to seven
• Certain categories of non-resident investors are exempted, including sovereign wealth funds, pension funds, endowment funds, and broad-based pooled investment vehicles where the number of investors in such vehicles or funds is more than 50 and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies
• Price matching for resident and non-resident investors would be available with reference to investment by VCs or specified funds
• To account for forex fluctuations, bidding processes and variations in other economic indicators, which may affect the valuation of the unquoted equity shares during multiple rounds of investment, the ministry has proposed to provide a safe harbour of 10% variation in value

Now, the CBDT has issued a list of 21 countries from where non-resident investment in unlisted Indian startups will not attract Angel Tax. Interestingly, the list does not include countries like Singapore, Mauritius and the Netherlands.

Does The Proposed Amendment Solve The Issue?

Highly unlikely! Multiple investors that spoke with Inc42 highlighted concerns over how the government will determine the number of investors in an investment fund. In most cases, the number of investors is very less. Further, most investors invest via fund managers because they do not like to disclose their identity.

How does the government plan to count these investors? A master fund has many feeder funds, blocker funds and SPVs for its investments – which are legitimate under their respective regulations.

“Prominent funds & even corporate VCs may have a single investor – so how would one reach 50 investors? This may work for a mutual fund, but not a VC or PE Fund” Pai argued.

Also, many funds invest in Indian startups through their Singapore and Mauritius SPV. Since Singapore and Mauritius have not been included in the list of angel tax exemption list, these SPVs will come under the ambit of angel tax.

On price matching and allowing 10% safe harbour, Bhavin Shah, deals leader at PwC India, commented, “Almost all fresh investments by VC Funds in startups have historically been through compulsorily convertible preference shares. The relaxation provided under draft rules for price matching and 10% safe harbour is restricted to equity shares. It is important that these relaxations are extended to investments by way of CCPS as well.”

“For price matching, the draft rules provide for separate baskets for VCFs and offshore notified entities. The government may consider combining both these under a single basket if they invest in the same round,” Shah added.

Does It Solve The Valuation Issue?

No. The latest proposed draft rules don’t solve the valuation issues of the startups, said some of the AIF partners.

It’s the AOs’ prerogative to the valuation definition that becomes an issue. In most of the previous cases, AOs ask for previous valuation reports and if the startup in question has not performed as per the data suggested in valuation reports, AOs create an issue.

Valuation expert and professor at New York University Aswath Damodaran in his paper “Valuing Young, Start-up and Growth Companies: Estimation Issues and Valuation Challenges” states that it is almost impossible to evaluate an early-stage company.

Yet, in multiple cases, AOs not only refuse to accept the valuation estimated by designated CAs or merchant bankers but also start suggesting valuation methods.

In multiple cases, startup founders even bribe AOs to settle their cases.

India is perhaps the only country where for one funding of a company, three separate reports by three separate entities are filed to three separate regulators — MCA, Income Tax and the RBI under FEMA.

Pai suggested that an SOP for AOs to look at the source of funds to gauge if the premium is warranted would probably help smoothen the process. Valuation is subjective and premium is the consequence of legitimate business decisions.

According to data compiled by Inc42, Q4 FY 23 recorded a 75% and 54% YoY decline in startup funding and deal counts, respectively. (See the chart below)

As per reports, while BYJU’S, Swiggy and Meesho are facing down-round challenges, e-pharma unicorn PharmEasy too may raise funds with a 50% cut in valuation. Meanwhile, SoftBank, a prime backer of Ritesh Agarwal-led OYO, marked down the hospitality unicorn’s valuation by 20% on its books, from $3.4 Bn to $2.7 Bn.

Further, at a time when Series A to Series D funding rounds are mostly supported by SPVs and other non-resident funds, failure to get exemptions under Section 56(2) (viib) of the Income Tax Act, 1961, will only dampen the investment sentiment further.

“This step may hit the startups most between Series A and Series D as VCs need small reasons to delay the funding,” Pai said.

Among other suggestions, Anil Joshi, the managing partner of Unicorn India Ventures, suggested that the definition of startups which is valid for 10 years also keeps a large number of companies outside the ambit of benefiting from the exemptions formulated under the angel tax regime.

While the government needs to rethink its stand on angel tax, it also needs to understand the basics of Section 56(2)(viib), which, in the first place, was introduced as an anti-abuse law and not a tax-harvesting instrument.

The post Why The Angel Tax Battle Isn’t Over For Indian Startups Yet appeared first on Inc42 Media.

Time and again, Paytm founder Vijay Shekhar Sharma has been vocal about his ambitious vision of building India’s first $100 Bn technology company.

Building a groundbreaking technology startup in India is no easy task. But One97 Communications, the parent company of the Paytm mobile payment and financial services group, and its thriving digital banking platform, Paytm Payments Bank Ltd (PPBL), have managed to keep this dream alive, even when the going got tough.

For instance, One97 Communications clocked impressive growth numbers in the financial year that ended in March 2023, posting a 61% YoY revenue growth while reducing losses by 25%, from INR 2,396 Cr in FY22 to INR 1,776 Cr in FY23. It also capped its expense growth to 18% and reached its target for operational profitability.

On the other hand, Paytm Payments Bank has been profitable since FY19 (FY23 financials are not filed yet). It emerged as one of the top mobile banking service providers in India and ranked sixth globally in 2022 in terms of e-wallet users.

PPBL is the country’s largest (UPI) merchant-acquiring bank, enjoying 40% of the market share and generating revenue through government incentives, merchant subscriptions and upselling of financial products. Paytm has also onboarded more than 71 Lakh merchants who pay subscription fees to use its PoS devices like Soundbox, surpassing the combined number of subscribers serviced by other payments companies.

Interestingly, Walmart-owned PhonePe still holds an edge over Paytm in UPI transaction volume. But it is a relatively new entrant in the Soundbox market (that’s where the money is) and has only managed to onboard 20 Lakh+ merchants since 2022.

However, all is not hunky-dory with Sharma’s core businesses. The market cap of One97 Communications went south from $19 Bn (INR 1.56 Lakh Cr) to $5.5 Bn (INR 45K Cr), including a 70% free fall in its listing price three months after its INR 18,300 Cr IPO in November 2021. The stock market crash might have been caused by many foreign investors exiting amid concerns over sustained losses and the subsequent price downgrading by several brokerages.

Furthermore, Paytm Mall, an ecommerce venture set up by Sharma, saw a 99% valuation plunge from $3 Bn (INR 24.7K Cr) to $13 Mn (about INR 100 Cr) after Alibaba and Ant Financial offloaded their entire 43% stake at a meagre INR 42 Cr.

Another incident also shook One97 Communications’ associate company Paytm Payments Bank in March last year. On the 11th of that month, the Reserve Bank of India barred PPBL from onboarding new customers, citing “certain material supervisory concerns observed in the bank” (more on that later).

Among all the subsidiaries, Paytm Payments Bank, however has got a number of factors in its favour including its mobile-first services, a large consumer base of digital users, and a strong brand value. The range of products and revenue streams will increase manifold, once the company acquires a small finance bank’s license. However, for the long-term benefits, it must overcome the financial and regulatory challenges in the short term, believe experts.

Can Paytm Payments Bank be the entity, Sharma could bet on? Let’s take a look at the Payments Bank.

Paytm Payments Bank: Born With A Silver Spoon & Clocking Profits

Before we delve deeper into Paytm Payments Bank, the obstacles hindering its growth and the opportunities it can leverage to help Sharma realise his $100 Bn tech dream, let us take a quick look at the formation of payments banks in India and their unique role.

Following the RBI guidelines on payments bank licensing published on November 27, 2014, more than 40 applicants contended for the same. In 2015, the central bank gave in-principle approval to 11, including Dilip Shantilal Shanghvi of Sun Pharma and Vijay Shekhar Sharma of Paytm, among others.

While Shanghvi, Tech Mahindra and Cholamandalam dropped out of the race a year later, the RBI revoked its in-principle approval for Vodafone. With Aditya Birla Nuvo ceasing its payments bank operations in 2019, only six entities currently operate in this space. These include Airtel, Fino, India Post, NSDL, Jio and Paytm Payments Bank.

Unlike its peers, most of which started from scratch and struggled to grow, PPBL enjoyed a unique advantage. When it was launched in May 2017, Paytm, the digital payments business of the group, had more than 200 Mn wallet users. So, the parent company merged its wallet services with the newly introduced payments bank to give it a substantial head start in user volume.

Sharma aimed to onboard 500 Mn wallet users for PPBL by 2020 but could only reach 333 Mn by March, 2022. The onboarding of new customers has been halted since then.

Compared to the Paytm group, Airtel enjoyed a distinct advantage in 2017, with more than 285 Mn customers in India. But soon enough, the RBI-UIDAI found that the telco violated eKYC norms while signing up its subscribers for e-wallets. The central bank imposed a fine of INR 5 crore in 2018 and barred Airtel Payments Bank from enrolling new customers for nearly 10 months. Moreover, as a pure-play telco, the company found it difficult to position itself as a payments/fintech specialist.

Paytm Bank: New Avenues Of Revenue

As payments banks cannot directly offer loans or other credit products, lending and wealth management solutions remain out of bounds for PPBL. However, it has developed multiple channels to diversify its revenue scope. These include:

UPI incentives: This programme encourages acquirer banks to promote RuPay debit cards and low-value BHIM-UPI (P2M) transactions. As PPBL serves as an issuer, payment service provider (PSP) and acquirer, it benefits significantly from the scheme and received INR 133 Cr in FY23. 

Transaction charges: A 4.35% commission is charged on every transaction from a credit card to the wallet. Transactional charges are also levied for IMPS, NEFT and RTGS fund transfers.

Government deposits: The bank invests customer deposits in government bonds and earns better interest rates than what it offers on savings and business accounts, as well as fixed deposits.

Subscriptions for Paytm Soundbox, PoS machines: One 97 claims to have onboarded 7.1 Mn merchants. These Sounboxes have been integrated with Paytm Payments Bank wallets, UPI QR codes with merchant accounts. To set up a Soundbox, a merchant has to pay a one-time charge of INR 299 and a monthly fee of INR 125.

Here is a look at its financial report card since FY19.

For PPBL, The Devil Is In Compliance 

That PPBL was not in the red for four years in a row makes it reasonable to expect significant improvements in the revenue trajectory. However, a quick SWOT analysis reveals two critical concerns.

For one, mastering the digital payments space remains challenging, and nothing short of an intense diversification across real-money channels can make companies sustainable. Think of how PhonePe and Google Pay, still ruling the UPI transaction landscape, need to catch up with the Paytm group’s extensive range of payment and banking products for long-term success. Similarly, PPBL’s value proposition will remain severely restricted until it moves to the next growth stage and acquires the licence of a small finance bank (SFB).

This brings us to the second and more critical area – the RBI’s role as a stringent regulator and the impact of its directives on fintechs.

There are examples galore. When non-banks were directed not to load credit lines on pre-paid wallets and cards in 2022, many fintech players offering those services in association with banking and NBFC partners had to suspend their operations. According to Macquarie, such a step might have also affected the volume of loans disbursed by Paytm.

Again, in December 2022, the RBI asked Razorpay and Cashfree to pause onboarding new merchants as they must undergo systematic upgrades and make operational changes before obtaining their final payment aggregator (PA) licences. Therefore, it is not surprising that PPBL came under the RBI lens just before completing its five-year tenure as a payments bank post which it could have applied for an SFB licence.

Even if fintechs claim such scrutiny and time-consuming process improvements do not have any long-term impact on their businesses or growth plans, more often than not, such mandates may escalate into more critical issues. Here is a look at real-time and potential consequences that may arise if Paytm Payments Bank fails to cut through the current regulatory maze.

Zero user growth: After barring PPBL from onboarding new customers on March 11, 2022, the RBI directed the company to appoint an audit firm to conduct a comprehensive audit of its IT system, saying that “the action is based on certain material supervisory concerns observed in the bank”.

According to sources close to the development, the RBI is wary of how Paytm Payments Bank has been functioning in conjugation with One97 Communications’ subsidiaries.

“Whether the Bank has been managing its users’ data separately or it is transacted with other Paytm businesses frequently…since the bank is fully integrated with the Paytm platform, the entire transaction of Paytm Payments Bank is coming from One97 Communications. The RBI does not see this as a healthy practice and that’s why the IT audit. The Chinese funding issue is the other,” he added.

Onboarding of new customers by Paytm Payments Bank would be subject to specific permission to be granted by [the] RBI after reviewing reports of the IT auditors, the central bank notified.

But PPBL sat on the issue. By April 2022, the RBI sent another reminder, and IT auditors were approved and appointed in July. In November, the PPBL management received the auditors’ report and the central bank’s observations, which focussed on improving IT outsourcing processes and managing operational risks.

In its Q4 FY23 financial statements, One97 Communications stated, “Our associate company, PPBL, continues to work towards implementing various recommendations of [the] RBI as part of the IT review undertaken earlier during FY23. A significant part of implementation has been completed and submitted further for validation.”

But the net-net is far from heartening. Due to its failure to close the issue at the earliest,  the company has been unable to add a single user since the RBI mandate came into effect last year.

Alleged data leaks raised the spectre of Chinese intervention: Rumours had it that the RBI halted customer onboarding due to PPBL’s possible violation of data rules. According to a Bloomberg report, the central bank could probe whether the payments bank sent data to overseas servers to share it with Chinese entities with an indirect stake in the bank.

The bank, however, immediately and categorically denied these allegations. “Paytm Payments Bank is proud to be a completely homegrown bank, fully compliant with [the] RBI’s directions on data localisation. All of the bank’s data resides in India,” it said.

A look at the company’s shareholding pattern also reveals how keen Sharma is to avoid such controversies. He owns 51% in PPBL and has been its promoter from Day 1. But One97 Communications, the parent entity of the group that holds the remaining 49% (39%+10%), was never designated so.

The reason?

A former NPCI official explained, requesting anonymity. “Among the lead investors of One97 are Alibaba, SAIF Mauritius and SVF India Holding (Cayman). If Chinese investors back a company’s promoter, it will not be in the good books of the RBI.”

Alibaba recently offloaded its shares in One97.

Application for SFB licence on hold: After finishing its five-year term as a payments bank, the company intended to apply for an SFB licence in May 2022. But it has postponed its plans.

“Our top priority is obtaining the RBI’s approval to onboard new customers. Currently, there are no plans to apply for the SFB licence,” said a company official who did not want to be named.

According to the former NPCI official, there is another reason for this move. “One97 Communications has a 49% stake in PPBL, and FIIs own 70% of One97. Also, China’s Ant Financials owns more than 25% of One97, meaning 12% of the PPBL funding is under Chinese control. This won’t gain brownie points if the payments bank applies for an SFB licence,” he told Inc42.

One97 may offload its Chinese funds before applying for the licence. This might take a couple of years to keep the transactions smooth without impacting the company’s shares, he added.

Amid restrictions, PPBL may lose its top position: Although PPBL has been profitable for years, the numbers are rarely impressive, with its PAT ranging between INR 19 Cr and INR 37 Cr. Moreover, other payments banks like Airtel and Fino grew significantly in the last fiscal when PPBL was struggling to cope with regulatory issues.

For instance, Fino opened 29.7 Lakh accounts in FY23, but Paytm could not onboard a single user. Airtel, too, added 28.9 Mn users in FY22 and is expected to add more than 35 Mn users in FY23.

Will Paytm Payments Bank Hit The Jackpot? 

Despite many challenges, Paytm Payments Bank has the potential to be a game changer if its founder plays his cards right. Consider this. As of September 2022, Sharma and his Axis Trustee Services owned 8.91% and 4.77% of One97, respectively. This makes him a minority shareholder instead of the company’s promoter, although he is the company’s founder and a non-retiring director.

As the Indian government is reportedly putting pressure on the group to divest its Chinese investments due to the ongoing geopolitical conflict, Sharma’s minimum involvement, at least on the outside, is likely to help. After all, walking this tightrope means coping with the regulatory burden at every step while obtaining the board’s approval to make important decisions and secure funding.

In contrast, he holds a majority stake in the payments bank and remains the sole promoter, free to lead the company up any suitable growth path that can fulfil his billion-dollar tech dream.

Asked whether PPBL is on track to outshine the parent entity (One97), a banker (for two decades)-turned-VC told Inc42, “There are very few companies that ‘own’ their customers. Paytm is one of them. It has successfully retained its user base and consistently increased the number of repeat transactions, despite the emergence of new fintech apps like Google Pay, PhonePe, BharatPe, Amazon Pay, WhatsApp Pay, and more.”

The way its products gain traction is also impressive. For instance, Paytm UPI Lite, the latest from its stable, has more than 4.3 Mn users since its launch on February 22, 2023, and recorded 10 Mn transactions within the first 45 days. Paytm UPI and UPI Light will pave the way for the payments bank to acquire more customers once the RBI permission is fully restored.

Moreover, when retail banking (with its bells and whistles) becomes fully operational on mobile platforms, leading digital banks like PPBL are bound to attract more customers. In that scenario, legacy players may lose their competitive edge as they still lack inclusivity and a super-app-like experience that will bring banking to one’s fingertips.

Experts also think when PPBL acquires a small finance bank licence and subsequently gets the RBI nod for universal banking, all related business units of the group, including banking, Paytm Insurance, Paytm Money and Paytm First Games, will join forces to provide a more extensive range of services and a richer experience, surpassing what has been envisioned by Sachin Bansal’s Navi.

As a former Paytm KMP (key managerial personnel) said, “Barring regulatory compliances, the group has already cleared the road for the bank. And what it did with the wallets, it will also accomplish in the lending space.

When PPBL became operational, it had more than 200 Mn wallet users. It will be the same with lending. The company disbursed more than INR 23K Cr of loans in FY23. But it was only the distribution part of the business. When it acquires an SFB licence, the entire lending business would be transferred there,” he added.

The only glitch: Can it withstand the RBI’s regulatory whip, the typical growth throes most fintechs have suffered? The central bank has a rigorous approach to regulatory compliance. It not only investigates past violations by banks and financial institutions but also evaluates potential risks before granting approvals, especially when it is about 360-degree customer protection and convenience.

“It is nothing new,” said the former KMP quoted above. “The RBI barred Airtel Payments Bank from onboarding new consumers in 2018. And the company took 10 months to become compliant. Again, in 2020, it barred HDFC Bank from onboarding new credit card customers. And this time, the bank needed 15 months to meet all the requirements directed by the RBI. The ban was fully lifted by March 2022. It was the same with Mastercard, and the ban was lifted after a year.”

To grow big, the Paytm Payments Bank needs to align with the regulatory requirements, say the experts tracking the Indian fintech space.

However, nothing will fructify until the payments bank gets the RBI approval at every stage, opening the high growth road. If that happens, Sharma’s dream of a $100 Bn tech company may not elude him for long.

Edited by Sanghamitra Mandal

The post Can Paytm Payments Bank Be The Key To Vijay Shekhar Sharma’s $100 Bn Tech Company Dream? appeared first on Inc42 Media.

Artificial Intelligence (AI) is making remarkable advancements with each passing day, progressing from simply responding to preset commands to conversational AI, and now to generative AI. These strides have been fuelled by deep learning techniques, the emergence of large language models (LLM), and the introduction of generative adversarial networks (GAN).

While these are still early days, OpenAI’s LLM ChatGPT has already broken all records in terms of its adoption, with more than 1 Mn users within five days of its launch and 100 Mn users within two months. Just to set some context, TikTok and Instagram took nine months and 2.5 years to hit the 100 Mn user base mark.

At a time when AI adoption has spread like wildfire, the race to develop a more conscious AI has become more intense. While, on the one hand, we have US-based tech giants such as Google, Microsoft, Meta and AWS shaping and powering the new tech, China’s Baidu, on the other hand, claims to have built a style bot Ernie (similar to ChatGPT). Other tech giants with ambitious AI plans are Huawei, Alibaba and JD.

Given that thousands of companies are chasing the dream to develop more powerful AI that could rival human consciousness someday, many countries are scared that the technology could wander into evil, and therefore, have been actively exploring ways to regulate it.

So, amid the current scheme of things…

What Is India’s Stand On The Global Generative AI Revolution?

Unlike the race for internet adoption in the early 2000s, India was determined not to lag behind when it came to embracing the AI revolution.

Back in 2020, India, along with 15 countries, formed an alliance called the Global Partnership on Artificial Intelligence (GPAI) to come up with frameworks on how emerging technologies need to be harnessed in a responsible manner.

India is currently the council chair of the GPAI. With 29 member countries, GPAI is an international and multi-stakeholder initiative to guide the responsible development and use of AI, navigated by factors such as human rights, inclusion, diversity, innovation, and economic growth.

Besides multiple international partnerships on AI, the Indian government has also been working on building an AI ecosystem within the country.

Further, according to NITI Aayog, AI has the potential to add $1 Tn to India’s economy by 2035. That’s besides the potential for creating future job opportunities.

For context, Indian Railways alone has identified at least 90 use cases of AI. This includes signalling, overhead equipment, locomotive, carriage & wagon, material management, finance, human resource management and security. In manufacturing, 35+ use cases have been identified. Similarly, several use cases have been identified in healthcare, agriculture, smart cities, education, etc.

One can only imagine the other parts of the Indian economy that can leverage AI in a similar fashion to revamp and get ready for a more conscious AI-driven future.

According to the Stanford AI Index Report, 2023, Indian AI companies received $3.24 Bn in funding in 2022, securing India the fifth spot among the countries that received the most investments in AI. The top four countries were the US, China, the UK and Israel.

Between 2013 and 2022, Indian AI companies received $7.73 Bn, the sixth highest in the world.

According to various reports, the Indian government is also working on integrating ChatGPT into its chatbots such as Digital India Bhashini, which was launched in July 2022.

Digital India Bhashini aims to enable internet access and all sorts of digital services to core Indian languages. Thus, a person knowing only Hindi or any other local language can read and fetch all the available information on the internet in his/her local language.

With this initiative, the nation aims to create opportunities by making science and technology accessible to all through computer-aided translation and removing the dependency on English in technology development and research.

This is just one of the many baby steps that the Indian government has taken with regard to AI, and just one part of the National Programme for AI.

Building India-Specific AI: What Is There In India’s AI Treasure Trove?

So far, the Indian government has mainly focussed on developing conversational AI products mostly based on NLP and ML.

However, with the emergence and immediate popularity of ChatGPT, the Indian government is expected to integrate ChatGPT into various AI solutions to improve the user experience and tool efficiency.

On February 3, 2023, Rajeev Chandrasekhar, the Union Minister of State for Electronics and Information Technology, said in the parliament that the government was aware of the emergence of these technologies [generative AI] and their rapid proliferation in sectors like education, manufacturing, healthcare, finance, and others.

Among the key possible use cases that the Indian government is mulling on implementing are:

Using Generative AI To Make Education Affordable & Accessible: The Chat-GPT-based Digital India Bhashini will help students learn scientific and technical concepts in their own language.

Currently, most higher education books and research resources are available only in English. India’s plans for AI development and skilling intend to solve this problem for all students.

Besides, the generative AI-based tool will also help students learn in a non-judgemental environment. This enables students to ask questions on anything and everything and accordingly could also provide feedback on their responses without being judgemental about the same.

AI-Powered Tools To Help Farmers: Many companies, such as CISCO, Ninjacart, Jio Platforms, ITC and NCDEX, have already signed MoUs under the Digital Agriculture Mission and are conducting pilots to introduce digital technologies like blockchain and AI in the farm sector.

A ChatGPT-powered tool could, indeed, help farmers discover and know more about various government schemes in their local languages. The ChatGPT-based bot would also educate farmers in various areas like weather, rainfall, farm input and water utilisation, helping them make better decisions.

Building Smart Cities With AI: It is estimated that 70% of India’s GDP will come from urban India. As per the National Programme on AI, technology (AI) would be the core of all smart city systems. The government sees Generative AI helping citizens, transforming government services, empowering government employees, and optimising various processes.

As part of the smart cities mission, key use cases for AI and IoT deployments have been identified as public safety, environment, infrastructure, and transportation.

The Era Of Smart Manufacturing: In a labour-centric market like India, generative AI has its own advantages. A ChatGPT-based bot can be used to process natural language input from users, such as voice commands, and translate them into actionable instructions for manufacturing robots or machines.

Based on their feedback, the government plans to integrate ChatGPT into other services as well. The government may use generative or conversational AI to enhance the services it provides to its citizens.

India Stands Its Ground Despite Global Warning Bells 

Downplaying the need to regulate AI in India for now, Rajeev Chandrasekhar, MoS, MeitY, on April 5, 2023, stated in the Parliament that the technologies related to generative AI are evolving, and, currently, there is no specific regulation. However, the development and deployment of AI is governed by laws and policies related to privacy, data protection, intellectual property, and cyber security.

However, given the immense power and capability that generative AI offers, including the future possibility of replacing human intervention and the risks pertaining to data privacy, experts believe India needs to have a law to regulate AI.

Last month, Zoho cofounder Sridhar Vembu wrote an open letter, which was co-signed by the former NITI Aayog vice-chairman Rajiv Kumar and cofounder of iSPIRIT Foundation Sharad Sharma, urging the country’s policymakers, academicians and other stakeholders to debate the impact of AI on India.

Noting that AI could put millions of jobs at risk overnight, Vembu stated that adopting new technologies such as AI, without appropriate safeguards, could cause ‘unprecedented disruption of the existing social order’.

He added that the emerging tech could also be the ‘harbinger of chaotic and potentially catastrophic consequences for humanity’.

Vembu’s open letter came hot on the heels of tech experts, from across the globe, joining hands to urge AI labs to ‘immediately pause’ their work on technologies stronger than GPT-4 for at least six months.

In their open letter, the experts urged for regulation of AI technologies, citing ‘profound risks’ to society and humanity. The letter was signed by big names in the tech world, including the CEO of Tesla and Twitter Elon Musk, tech giant Apple cofounder Stever Wozniak, and many researchers and developers.

Furthermore, many developers have pointed out how ChatGPT could be tricked into guiding how to make a bomb and execute other unlawful activities. Takashi Yoshikawa, a senior malware analyst at the Tokyo-based security firm Mitsui Bussan Secure Directions, said that he tricked ChatGPT to share ransomware codes, which it did.

Wary of what potential threats could be lurking in the shadows, many countries have started preparing to govern the generative AI space.

Take China, for example, which has already released its draft measures to govern the generative AI space. The country intends to regulate the segment by the end of 2023.

Meanwhile, Italy has already banned ChatGPT amid a probe into a suspected breach of Europe’s strict privacy regulations. The EU is expected to soon come up with strict rules around generative AI and so is the UK.

Additionally, the Office of the Privacy Commissioner of Canada has initiated an investigation into OpenAI, the company behind ChatGPT, following a complaint alleging the unauthorised collection, use, and disclosure of personal information.

Another noteworthy incident occurred in the US when Joshua Browder, CEO of DoNotPay, claimed on Twitter that ChatGPT helped him retrieve $200 of unclaimed money from the California Government.

Given the increasing number of misadventures in the world of AI, the question arises, can India take the risk of letting AI expand unabated in the absence of law —  something that many experts deem a concern?

The post Inside India’s AI Ambitions: From Education To Farming, How Govt Is Cradling The Generative AI Boom appeared first on Inc42 Media.

Flipkart founder Sachin Bansal is all set to write a new chapter in India’s startup history with the upcoming IPO of his fintech venture Navi Technologies. But unlike other listed startup behemoths like Nykaa, Paytm (One97 Communications) or Zomato, Navi is betting on one of the oldest and most popular business segments – lending, to be precise.

For Navi, it has been a proven business model for years.

In contrast to other fintech startups like Paytm, BharatPe, Razorpay and PhonePe, which started as payment startups and later expanded into lending to achieve profitability, Navi Technologies was in the business of lending since the beginning and later entered other BFSI segments, including insurance and mutual fund, wealth management. However, lending remains the group’s core business.

Navi plans to raise INR 4,020 Cr through its IPO (and Pre-IPO placement), expected to hit the market later this year. The proceeds will be used to fund its growth initiatives and enhance the brand’s visibility and credibility in the public domain.

But will it be a cakewalk for Sachin Bansal?

The IPO comes at a time when Mamaearth, a D2C mammoth in the beauty and personal care space, is reportedly contemplating a delay in its public market listing. Moreover, storied retail brand FabIndia and southern jewellery chain Joyalukkas have already withdrawn their INR 4,000 Cr and INR 2,300 Cr IPOs, respectively.

Again, Fincare Small Finance Bank, which got an IPO go-ahead from SEBI in August 2021, postponed its listing and refiled the DRHP in August 2022. The market regulator has now returned the DRHP.

Worse still, most unlisted/pre-IPO shares traded in the grey market slumped by more than 50% due to uncertain market outlook and the underperformance of many newly listed or well-established companies. So, several IPO aspirants have kept their listing plans on hold.

Although the market condition is not favourable to push an IPO, there is clearly a sense of urgency to take the company public. Navi’s founder-promoter Sachin Bansal has been eyeing it for a year now, and the company will need to hit the primary market before the validity period of SEBI’s approval (which is 12 months from the date of approval) expires.

Also, for Navi, the IPO seems to be the only way to raise capital amid a harsh funding winter. It is worth mentioning that Navi has so far failed to raise capital from VCs. It also didn’t succeed in getting the universal banking license from the RBI.

Those who want to deep-dive further, please read our previous story on Navi: Decoding Navi And Sachin Bansal’s $100 Bn Ambition.

Before we explore the nitty-gritty of this IPO, its value proposition and viability, let us look at Navi’s IPO statistics currently available in its DRHP.

What’s The IPO Valuation Navi Is Targeting

Navi has not disclosed its IPO valuation yet, but the company is looking at $2-2.5 Bn, sources close to the developments have told Inc42.

“There are even possibilities that the company may touch the magical INR 20K Cr valuation in the RHP/final offer document while going for the IPO,” they added.

It is worth noting that Navi has submitted the DRHP for the holding company Navi Technologies, which runs the platform Navi.com. None of its subsidiaries, such as Navi Finserv (NBFC), Chaitanya Fin Credit (NBFC/microfinance institution) or Navi General Insurance, is going for the listing.

Santosh N, the managing partner, D&P Advisory India and a valuation expert, explained the methodology for valuing different types of companies. “If it is an NBFC, the valuation multiple on P/B (share price-to-book value ratio) typically ranges between 2-4x. But for technology platforms, the multiple could go higher as the expected growth is much higher.”

Then there are other factors like the promotor’s profile, total addressable market size (TAM) and more.

In such a scenario, an IPO valuation of $2 Bn will not be perceived as overvalued. In fact, it is moderately valued, given the whole gamut of BFSI solutions that Navi currently offers and plans to add, including all types of loans, insurance, trading, and so on.

“As the company wants to raise INR 670 Cr in pre-IPO placement, Sachin Bansal may dilute over 5% of Navi’s stake in the process,” sources told Inc42.

However, if the GMP (grey market premium) during pre-IPO fundraising does not go as expected, the valuation can be as low as $1.5 Bn, believe experts.

When Business Outlook Is The Biggest USP

Considering that most Indians still have limited access to credit, India’s digital lending is a goldmine for fintech companies to make money. According to Dublin-headquartered data analytics and consumer credit reporting firm Experian, India’s digital lending market, worth $270 Bn in 2022, is estimated to reach $350 Bn by the end of 2023.

In fact, the country has witnessed the digital lending segment grow at a CAGR of 39.5% in 10 years.

As Navi focuses on retail lending, a quick look at the retail lending data and market growth won’t be out of context here. In recent years, legacy banks across India witnessed a sizable buildup in retail loans, with their assets under management (AUM) growing at a CAGR of 15% between FY16 and FY21.

While personal loans and credit cards had the fastest growth rates during this period, home/housing loans emerged as the largest segment under retail lending.

According to a RedSeer report, the total size of the Indian retail loan outstanding (retail lending AUM) for banks stood at $407 Bn in FY21, more than double the amount recorded in FY16.

The RBI in its Monetary Policy Report, 2023 observed, “Retail loans remained the prime contributor to overall credit increase (y-o-y) in 2022-23. While credit to the housing sector recorded consistent expansion, vehicle loan growth strengthened further.”

In its lending survey, the central bank observed that bankers remain upbeat on loan demand during the second and third quarter of 2023-24 across the major categories of borrowers.

Fintech firms have helped transformed the lending landscape to cater to the financial needs of consumers. The NBFC retail lending AUM in India has grown at a CAGR of 25% during Financial Years 2016 to 2021 to reach approximately $100 Bn. One of the major contributors to this growth was the personal loans portfolio showing a CAGR of approximately 27%.

According to a report by Inc42 Plus, with India’s internet users set grow by 44% from 932 Mn in 2022 to 1.3 Bn in 2030, digital lending has immense potential.

If Navi Technologies keeps the basics such as unit economics and revenue intact which they have been despite the Covid-event of two years in their total life span of four years, the outcome would be favourable.

How Navi Sailed Through Regulatory Tides

Fintech startups in India have seen exponential growth, raising about $26 Bn across segments since 2014. Interestingly, the momentum continued even in 2021 and 2022 in spite of the pandemic, when more than $12 Bn of fintech funding flowed in, with the addition of 13 fintech unicorns.

But with unprecedented growth came a more stringent regulatory environment, especially in the digital lending space. To protect consumer interests, safeguard data, ensure cost transparency and further streamline digital lending operations, the government and the central bank introduced new digital lending guidelines (DLG), which landed several fintech players in a regulatory quagmire.

Take, for instance, the RBI directives prohibiting credit lines from being loaded into non-bank prepaid payment instruments (PPIs) like prepaid cards and digital wallets. Such measures regulated unbridled consumer lending and paved the path for fintechs to operate on a par with traditionally regulated businesses like banking and insurance.

Navi has played it safe all along. Unlike Slice or Uni Cards, which were in a hurry to launch co-branded credit cards, credit lines and other fintech products now requiring compliance tweaks, Bansal did not launch anything which was not time-tested.

Simply put, his company has primarily focussed on essential products which are legally compliant and always in demand. These include personal and home loans, microfinancing, insurance, mutual funds and more.

The startup has also managed non-performing assets (NPA) better than the national average. In its DRHP, the company stated that on December 31, 2021, the gross NPA to total AUM ratio for its personal loan business was 1.12%, while on March 31, 2021, the ratio stood at 4.96%. For its home loan business, the ratio was 0.00% as on March 31, 2021. For FY20 and FY21, this ratio for its microfinance business was 4.10% and 0.81%, respectively.

For context, the gross NPA-total AUM ratio of public sector banks is estimated to go down from 6.5% in September 2022 to 9.4% in September 2023.  This is despite the fact that in 2019, 10 public sector banks were merged to four which helped reduce the overall NPA ratio.

As for private banks, this is expected to rise from 3.3% to 5.8%, while foreign banks may see an increase from 2.5% to 4.1% under a severe stress scenario, according to the RBI.

“Navi’s listing I hope will be different from the other tech startups’ [Paytm, Nykaa ] IPOs we have seen so far,” said Sreedhar Prasad, Advisor and Investor.

According to him, NBFCs in India always performed well in the long run due to the country’s middle-class market with a high demand for loan products and a limited supply. “So, from the perspective of retail investors, a business model well linked to the country’s fabric should do well.”

There are other ways to measure Navi’s popularity. For instance, the fintech app has more than 10 Mn users and enjoys a rating of 4.1 out of 5 by 380K+ users on Google Play Store.

Inside Sachin Bansal’s BFSI Empire

Navi’s promising business model will continue to address the requirements of credit-starved Indians and extend financial inclusivity through a bouquet of products and services. But does the parent company (and its many subsidiaries) perform well enough to sail through the IPO? Let us explore Navi’s businesses for a better understanding.

Since its inception in December 2018, Navi Technologies (formerly BAC Acquisitions) has been actively acquiring several companies. Among these were Anmol Como Broking, Chaitanya Rural Intermediation Development Services or CRIDS (an NBFC), Essel MF Trustee and tech consulting firm MavenHive, which helped the parent firm obtain all essential licences in the fintech space and access consumer pools.

The company has not acquired ‘big’ names to save money and also to promote ‘Navi’ as the flagship brand built from scratch.

“Navi derives the brand value and credibility from Sachin Bansal, who built the biggest Indian startup and sold it at $16 Bn in the largest e-commerce deal ever struck anywhere in the world,” observed Sunil Bansal, founder and CEO of DCB Advisory, a Delhi-based firm helping corporate houses with investments, M&A and more.

Navi Technologies currently operates as a holding company with 10 subsidiaries, but its flagship has been Navi Finserv since the group introduced digital personal loans in June 2020. While Navi Finserv primarily focuses on loan products such as personal, vehicle and home loans, CRIDS (rebranded as Chaitanya India Fin Credit) is also registered as an NBFC with the RBI and specialises in microfinance.

Will Navi’s NBFC Businesses Pass Muster?

Under the RBI guidelines, NBFCs are required to maintain a minimum capital adequacy ratio (CAR) consisting of Tier I and Tier II capital. This must not be less than 15.00% of their aggregate risk-weighted assets on balance sheets and the risk-adjusted value of off-balance sheet items. As per the DRHP filed, Navi Finserv increased its CAR from 20.8% in 2020 to 38% in 2021. But in FY22, it dropped to 30%.

However, the CAR of Chaitanya Fin Credit could be a potential concern for the group. It steadily declined in the past three years and stood at 17.38% in FY2022, just above the cut-off mark.

Although both NBFCs saw a manifold rise in assets under management (AUM), Navi Finserv, the group’s flagship, reported a loss of INR 67 Cr in FY22. The company’s annual report attributed the loss to a rise in expenses, which escalated by 167%.

Here is another point to ponder. When it comes to auto loans, the fintech platform has not been able to build deep partnerships with OEMs like its competition Bajaj Finance.

Navi General Insurance, yet another key business, also failed to impress. The company had three different CEOs in the past four years, but its numbers remained stagnant.

The parent company also incurred a loss of INR 362 Cr in FY22 due to the lacklustre performance of its insurance business and Navi Finserv. The turnover of other subsidiaries was too small to impact Navi Technologies’ consolidated results.

Is Navi Technologies Racing Against Time?

According to the experts with whom we have spoken for this analysis, this may not be the ideal time for Navi to go public. But then, Navi could be compelled to proceed with the IPO as the only option to secure crucial funding.

Both Santosh N of D&P India and Prasad concurred, adding that even globally, it would not be a good time for tech companies to get listed.

While expressing concerns over the company’s recent losses, Prasad said, “However the unit economics for lending businesses need to be strong and predictable and not supposed to make losses. Losses in the initial days due to marketing should not be the way forward.”

However, Navi stated that it was on track to achieve positive unit economics.

“During the nine months ended December 31, 2021, 71.69% of all home loan customers and 52.67% of all retail health insurance customers were from our personal loan-interested user base. As a result, we are on track to achieve positive unit economics by improving customer lifetime value and reducing customer acquisition costs,” said the company in its DRHP.

Unit economics is not the only issue, though. Onboarding credible VCs is another area where Navi has struggled. Despite funding announcements, both IFC and Gaja Capital-backed out, and talks with late stage VCs like SoftBank did not materialise.

“Sachin has already burnt his fingers regarding the VCs. It’s not that investors did not want to invest in Navi. But they did not agree when Bansal tried to overrule certain terms and conditions of the term sheet,” a person close to one of the funding developments told Inc42.

“It would have been better if Navi had raised some funding from the VCs first. It would have brought more credibility to the company,” said Sunil Bansal of DCB Advisory.

Currently, Navi is all about Sachin Bansal. It is a one-man show. But it may not augur well for the company as Bansal has already been dragged into several court cases like the one involving alleged FEMA violations.

There are more areas of concern.

For instance, the fintech platform leans heavily on its mobile app, while competitors have adopted an omnichannel (more convenient and inclusive) approach. In spite of a dedicated web page, Navi forces users to download the app before accessing the loan services. In contrast, businesses like OTO Capital allow people to use web interfaces to avail of their services despite having dedicated apps.

Then again, its app logins have a sinusoidal pattern instead of showing a steady upward trajectory. Consider this. While 1.36 Mn people logged into the Navi app in November 2021, the number dropped to 1.34 Mn the following month. Likewise, the number of people who used the app in January 2022 was 1.45 Mn, but in February, it was down to 1.22 Mn.

According to mobile data analytics firm AppAnnie, among India’s top fintech apps, Navi’s ranking oscillated between 6 and 15 for the last one year, not exactly a sign of rock-solid customer trust.

Moreover, the platform uses traditional marketing tools like SMS and telemarketing to attract new users in a digital-first environment where people seek convenience and customisation.

Clearly, the house is not in order. But given its need for capital to maintain CAR and increase AUM, Navi is under pressure to act quickly and mitigate short-term risks.

Whether the IPO succeeds or not, we should wait for at least three years post-IPO, suggested Santosh N. As going for IPO is indeed the company’s long-term strategy and therefore, an overnight verdict on this must be avoided, he suggested.

As far as unlisted stocks are concerned, the ripple effect is not there. The demand queries are low. Manish Khanna, founder of Unlisted Assets said, “After the RBI declined Navi’s universal banking license, the confusion remains — whether the company wants to remain an NBFC primarily or would try to acquire a banking license again. Investors need more clarity.”

Thus, a lot would depend on how Navi performs in pre-IPO placement.

[Edited by Sanghamitra Mandal]

The post Navi’s IPO: Can The Business Model, Outlook Save The Day? appeared first on Inc42 Media.

Covid19 may have been over for many, but the pandemic-triggered market winter has only become more intense for the world’s third-largest startup ecosystem. Additionally, uncertainties emerging from issues like the Russia-Ukraine war, fears of an impending recession, interest rate hikes by the US Federal Reserve, and other global macroeconomic factors have only worsened the situation for startups across the globe, and India is no exception.

Back home, Indian startups are not only plagued with an ongoing funding winter but also have seen the stocks of many listed new-age ventures on a downward spiral, primarily impacting the sentiments of retail investors, among other stakeholders.

A case in point is the Paytm stock, which was listed at INR 2,150 apiece on the capital markets, and was seen trading at INR 634 a share on the National Stock Exchange (as of April 17, 2023), down 70%.

Not just this, the anxiety of uncertainties in the country’s startup ecosystem is such that many startups have deferred their IPO plans even after getting the green light from the market regulator SEBI.

It is pertinent to note that as many as 11 startups either filed draft red herring prospectus (DRHPs) or received the SEBI’s go-ahead for their IPO plans while only three startups, including Delhivery, Traxcn, and DroneAcharya, have floated their IPOs since the onset of the funding winter in 2022.

Startups which filed DRHPs or received the market regulator’s approval in 2022 include Pharmeasy, Droom Technology, Navi Technology, Yatra.com, Capillary Technologies, OYO, Paymate, Go Digit Insurance, OfBusiness, and Snapdeal. Interestingly, most of these startups have withdrawn their DRHPs with SEBI while some, including Go Digit, Navi Technologies and Paymate, still intend to make their public offers in 2023, with a few addendums to the DRHPs filed or with fresh ones.

Explaining the current market situation, Piyush Jhunjhunwala, the cofounder and CEO of Stockify, a platform that allows trading in unlisted stocks said, “Despite India doing better than the rest of the world in terms of economic growth, the Indian stock market has not been performing well for the past three months in comparison to many other global stock markets. Many of the global stock markets did better than the Indian counterparts.”

He added that the unlisted market mirrors the sentiments of the capital markets, hinting that tech stocks in the unlisted market have been impacted by significant margins as tech startups continue to bleed on the bourses.

Just like Paytm, Nykaa and Zomato, most startup stocks in their pre-IPO stage have been on a free fall, between 35% and 80%, for the last one to two years. For instance, Pharmeasy which filed DRHP with SEBI in Nov, 2021, has recorded a free fall of 80%, from INR 125 in November, 2021 to INR 25 in April, 2023.

Interestingly, at a time when all is not well, legacy companies like Tata Technologies, NSE India, Hero Fincorp and Orbis Financials and companies like Chennai Super Kings, a holding company of CSK cricket team in IPL have been in high demand in the unlisted market versus new-age pre-IPO stocks like boAt, MobiKwik and PharmEasy that are struggling to woo investors.

Before diving deeper into the factors that are impacting the demand of pre-IPO stocks, let’s understand how the Indian unlisted stock market is largely run.

Unlisted Market: An Overview 

Unlisted market refers to the unofficial transaction of unlisted stocks of companies that are either unlisted or have received SEBI’s approval to get listed.

Overall, there are as many as 5,312 companies listed on the BSE, Asia’s oldest stock exchange, and 2,113 companies listed on NSE, another leading stock exchange of India.

India houses almost 98K DPIIT-recognised startups and 43 Mn SMEs that remain unlisted. Therefore, the game of unlisted stocks that goes mostly unaccounted is in no way small.

“There are currently 200 brokers in the Indian market and the total transactions in the unlisted market could be to the tune of INR 10,000 Cr annually in retail,” said Jhunjhunwala of Stockify.

Manish Khanna, the founder of Unlisted Assets explained that these brokers could be classified as large and small. A lot of brokers who deal with listed shares have now started dealing with unlisted securities, too. Small brokers try to book unlisted shares based on the queries and demands they receive from their clientele.

“Large and institutional brokers usually maintain their own books and buy shares in advance. Their clientele is usually HNIs. By maintaining their own book, the buyers’ and sellers’ details don’t get disclosed,” said Khanna.

Unlike small brokers who could be focussing on more than 100 companies, big brokers focus on where the profits are concentrated. As a result, big brokers usually focus on 30-40 companies that are hyper-liquid and profitable.

Further, these brokers mostly use ESOPs and investors’ stocks to enable trading of unlisted stocks. Khanna puts the stocks available in the unlisted market in three baskets:

Most active inventory: The stocks that are frequently available and traded in the unlisted market

Pre-IPO stocks: These stocks are mostly traded during their pre-IPO timeline, when companies file their DRHPs and seek for a pre-IPO placement

Inactive stocks: The stocks that are mostly dead but could become active due to specific reasons

“Further, these stocks could be highly or very less liquid. Brokers keep the inventory accordingly. And, if the market is volatile, obviously, nobody would like to keep the inventory on their books,” Khanna said.

The Plight Of New-Age Stocks In The Unlisted Market

Most of the existing tech startup stocks are pre-IPO in nature and are struggling to maintain their reputation in the unlisted market.

Mobikwik, boAt and Pharmeasy have already postponed their IPO plans, while there are reports of Mamaearth going down the same path — although the company declines the same.

One of the key reasons behind these ventures deferring their IPO plans is their performance in the unlisted market, which is largely marred by their overvaluation and depleting financial health.

Avoiding getting into the fine prints of the startups named in the aforementioned graph, Khanna said, “The reason is basically what we foresee is the valuation disagreement. So, if you actually are looking for X and I’m offering something available at Y, there is a big mismatch.”

“The problem with these startups is that their primary rounds happened at much higher valuations and now the secondaries are happening at a deep discount of 40%-50%. Even though there is a 20%-25% discount available, investors don’t want to take a hit of over 50%,” Khanna added.

As a result, institutional deals have declined, impacting volume and eventually IPO plans of many startups. A lot also depends on the company’s financial health and its valuation – both or even one of the two, say market experts.

If you will refer to the graph above, you will find that despite being profitable for three consecutive years, boAt’s stock price in the unlisted market has currently fallen to INR 800 from INR 870 last year. This is mainly because investors feel it is overvalued. Initially, boAt had reportedly planned to go for an IPO at a valuation of around INR 15,000 Cr against grey market’s valuation of INR 11,000 Cr.

Now that boAt has raised INR 500 Cr at INR 11,470 Cr, it may perform better, believe experts.

However, in the case of Pharmeasy, experts believe that it has already hit rock bottom and will go only up from its existing share price of INR 25.

“Ixigo is expected to deliver 5X growth post-Covid 19 recovery in the travel sector. It is also expected to deliver profitability in FY23 as it is already cash flow positive. The share price is already in recovery mode and has, in fact, recovered by around INR 40 in the last three months, thanks to all the positive news. This could go higher,” said Jhunjhunwala.

Given that startups aren’t selling like hotcakes in the unlisted market, Jhunjhunwala sees limited volume trading, besides their overvaluation, as a key reason.

“Very limited volume trading is happening in the unlisted market in startups like Razorpay, Ola, BluSmart, BYJU’S, ClearTrip, Go Digit insurance, etc. as they are mostly held by promoters & big private equity/VC firms and limited stock is available to buy/sell in the unlisted market.”

“Many of these companies also have a lot of restrictions on share transfer in the private market (like ROFR) and also many company shares are held in physical form, which makes it difficult to trade due to the complex process of share transfer,” Jhunjhunwala added.

So, Who’s Ruling The Roost In The Unlisted Market?

At a time when startup stocks are feeling the heat even in the unlisted markets, there are corporates that have investors’ attention as they are seen giving decent returns.

Some of the companies that are currently on a roll in the grey market are Tata Technologies, NSE, CSK and Hero Fincorp.

Speaking about the high demand of these shares, Jhunjhunwala said that there are various reasons that have put these stocks on an upward spiral.

While the latest fundraising round worth INR 100 Cr and investments by ace investor Ashish Kacholia has helped move Orbis stocks from INR 69 to INR 82 in the last one year, Tata Technologies’ IPO news has bloated its shares from INR 550 in April 2022 to INR 800 in April 2023.

Similarly, CSK’s high volume trading is being witnessed due to expected future earnings of INR 2,500 Cr+ in the next five years due to a fair share of media sponsorship revenue from BCCI and a 100% jump vs the last five years. The company’s valuation is also quite reasonable at current prices of approx. INR 170 per share (m-cap INR 5,200 Cr). In the last three months, the price has moved from INR 150 to INR 170 levels, he explained.

On Hero Fincorp, Jhunjhunwala said that the high demand is mainly due to its recent round of funding ($267 Mn) from Apollo Management US-based PE firm and Hero MotoCorp, and its  collaboration with Cashinvoice to provide supply chain financing to MSME in India. Further, the company’s claims of achieving 47% revenue growth in Q3 FY23 has also helped it increase its price in the last three months — from INR 680 to INR 980.

Given the stark contrast, the question that arises is: Can tech startups strike the right balance between their valuations and performance?

If done well, the move could be a win-win for all – VCs, retail investors, and founders — before they [the startups] make their stock market debut. Else, deferred IPO plans, followed by a deep discount of 40-50% per share, will continue to impact investor sentiment amid an already-jittering startup economy.

Update | April 21, 2023 3:30 PM

The post Why Are Pre-IPO Startup Stocks Bleeding In The Unlisted Market? appeared first on Inc42 Media.

If the future of mobility is green (read predominantly electric), how far is India from that coveted milestone where electric vehicles will be sold on par with internal combustion engine (ICE) vehicles?

Unlike the US, where luxury car buyers snap up the Teslas and the Ford Mustangs (Mach-E) without batting an eyelid (even cost-efficient models are priced around INR 70 Lakhs or more), India is witnessing more of a mass market transformation with the focus firmly on affordable battery-electric vehicles and ground-up EV designs.

More than speed or other features, affordability is a crucial factor in a market like India, as validated by the number of two-wheelers and three-wheelers (mopeds/e-bikes and auto rickshaws, to be precise) sold compared to four-wheelers, luxe or otherwise.

But what has been widely lauded is the country’s ambitious goals to promote EV adoption at every level, bolstered by policymakers, homegrown automakers and the ubiquitous innovators – the Indian startups.

“The government intends to have EV sales penetration of 30% for private cars, 70% for commercial vehicles, 40% for buses and 80% for two- and three-wheelers by 2030,” Nitin Gadkari, minister of road transport and Highways, stated in October 2021, based on the Indian think tank NITI Aayog’s blueprint.

In general, the outcome has been commendable. Out of the 47 Lakh vehicles registered in 2023 (data up to March 19), more than 2.79 Lakh were EVs, accounting for nearly 6% of the total number.

Does this mean India is on track to achieve its 2030 EV goals? Not exactly, if we delve deeper and analyse more granular data.

Compared to total EV registrations (1,21,735) in November 2022, the data clocked during December 2022-February 2023 indicates a slowdown in EV sales across most categories, including 2W, 3W and e-buses. This is quite alarming as EV two-wheelers dominate the domestic market, given their affordability, accessibility and the rapidly increasing fuel prices across the country.

With an average top speed of 80 km per hour and 100 km per charge, the 2W range has been developed by more than 12 local manufacturers and is mostly priced under INR 1.5 Lakh ($1,800). Their sales accelerated in November last year, but then the numbers stopped going north except for Ola Electric.

Sales of EV three-wheelers, cars and e-buses also saw a slide in January this year. However, the 4W sub-segment recovered in February and posted a 27% rise, thanks to many entry-level car launches by Tata Motors, BYD, Citroën and Mahindra Electric.

But the question remains: What’s hindering the EV sector’s steady growth now that India has stopped courting Tesla and focussing on a homegrown EV ecosystem?

Interestingly, most EV stakeholders contacted by Inc42 for this story have blamed the stagnating numbers on how the authorities deal with compliance issues under FAME II, a project initially launched in 2015 to support and accelerate the EV industry in India. But before we get into what may have gone wrong in recent years, a quick look at the FAME template will help one understand the project’s scope and goals.

How The FAME Template Was Designed To Drive EV Growth

The Indian government launched the National Electric Mobility Mission Plan (NEMMP) in 2013 to achieve 6-7 Mn sales of electric and hybrid vehicles by 2020. As EV costs are 30-40% higher than their ICE counterparts, the government set up FAME, short for Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India, under NEMMP in March 2015 to promote EVs among Indians.

The first phase of FAME continued until March 31, 2019, and saw an allocation of INR 895 Cr, out of which INR 529 Cr was released. The remaining INR 366 CR was reallocated to the government’s FAME II scheme.

FAME I focussed on early market creation through demand incentives, in-house technology development and domestic production to help the industry reach self-sufficient economies of scale.

It provided demand incentives for adopting 2.8 Lakh EVs (2W, 3W and 4Ws) and 425 electric and hybrid buses, besides the development of 520 charging stations.

FAME II came into force in April 2019 with a budget of INR 10K Cr (including the remaining INR 366 Cr committed under FAME I) for three years. However, with the onset of the Covid-19 pandemic in 2020 and several socio-economic setbacks that followed, the FAME II subsidy period was extended to March 2024. Its focus areas included financial incentives for EV purchase, charging infrastructure development and all other related activities.

Barring the past few months, FAME II has played a pivotal role in the growth of the EV industry, and its subsidy schemes became an instant hit among buyers and OEMs.

Key Parameters To Meet FAME II Compliance 

Based on the feedback of industry stakeholders, FAME II was overhauled in June 2021 to ensure a faster proliferation of EVs by lowering upfront costs. While the government earlier offered an incentive of INR 10K per kWh (indicates energy consumed per hour) for two-wheelers, it was increased to INR 15K per kWh, with the maximum cap increased from 20% to 40% of the vehicle cost.

The maximum ex-factory prices for two-wheelers, three-wheelers and four-wheelers were kept unchanged at INR 1.5 Lakh, INR 5 Lakh and INR 15 Lakh, respectively, for manufacturers to avail of FAME II incentives.

It was a nudge in the right direction for the cost-conscious Indian market as sales of electric two-wheelers rose to more than 5K a week compared to the earlier weekly number of around 700.

EV makers were also required to use locally produced components such as battery packs, traction motors and controllers, vehicle control units, onboard chargers and instrument panels in a phased manner. All other components should be sourced locally to meet FAME II compliance to obtain subsidies.

This means OEMs must declare their domestic value addition (DVA), a metric indicating how much value an EV manufacturer has created locally for every EV unit. At least 50% of vehicle components must be sourced from India to qualify for the FAME II incentive scheme.

The Beginning Of A Bumpy Ride

Between April and September 2022, the ministry of heavy industries (MHI) received several letters from whistleblowers claiming that EV manufacturers such as Okinawa, Hero Electric, Ampere and Benling India flouted FAME II norms and imported the components from China which were supposed to be manufactured or assembled in India.

The ministry decided to start a probe. Speaking to the news agency PTI in November 2022, the minister for heavy industries, Mahendra Nath Pandey, confirmed the developments. “We are strictly investigating the matter. If our conditions have been flouted, requisite action will be taken,” he said.

“These very guidelines were notified only after consulting the key stakeholders. But by mid-2022, we noticed that at least 36 vehicle models registered under FAME II could be flouting the guidelines. They did not meet the 50% DVA requirement. Some of these players directly imported the components such as battery packs or got them imported through other vendors they work with. They then claimed these as made-in-India products. But these are supposed to be manufactured or assembled locally. This is not the way we want to achieve the numbers. This will not help build the ecosystem. There must be a stopcock and due investigation [to stop this],” an MHI official earlier told Inc42 on condition of anonymity.

The MHI has been probing more than 12 OEMs whose EV brands were granted subsidies under FAME II. Also, the Comptroller and Auditor General (CAG) is reportedly looking at their books to determine whether these players claimed incentives despite non-compliance regarding minimum localisation mandates.

During the ongoing FAME II probe, the total number of approved EV models declined from 152 in August 2022 to 130 in November, as per the FAME II dashboard.

FAME II Compliance Norms: Who Flouted What

Aware of the non-compliance issues regarding component localisation, performance and safety standards, the government stalled subsidies worth INR 1,100 Cr by October 2022. While subsidies for all EV models developed by Okinawa Autotech, Hero Electric, Victory Electric Vehicles, Thukral Electric and other OEMs now stand cancelled, a departmental inquiry by MHI has also been initiated against a few EV behemoths, including Ola Electric, Ather Energy, Ampere and Revolt Motors.

According to the MHI official who spoke to Inc42, Okinawa, Hero Electric, Victory, Thukral and Energy Electric are accused of flouting the latest PMP norms. On the other hand, players like Ola Electric and Ather Energy are accused of exceeding the price limits set by the government.

Here is a quick look at some of the accused EV OEMs, the norm/s they have allegedly flouted, and the probe status. 

Both Ola Electric and Ather have been called out for flouting the ex-factory price limit of INR 1.5 Lakh as their final pricing may exceed INR 2 Lakh.

Earlier, the Federation of Small Industries (FSI) wrote a letter to the MHI, alleging that to claim the FAME subsidy, Ather fraudulently “managed to bypass the subsidy eligibility limit of Rs 1.5 lakh set by the MHI by stealthy separating the ‘EV charger’ and the ‘intrinsic essential software’ that are integral parts of the vehicle”.

Inc42 could not independently verify these allegations but contacted the EV players under the government’s scanner for clarity and comments. Their responses will be included as and when we receive them.

MHI Fixing A Few Bugs In Real Time

Although a probe is underway, the government wants EV growth to stay on track. During the inquiry, the MHI found that getting a certification from the Automotive Research Association of India (ARAI) for would not be adequate, as the OEMs could change the DVA parameters in the next lot.

The ministry also took a proactive approach to bridge data gaps and break data silos. It held meetings with EV2W players on September 22 and 23 last year and released an API-based online data transfer system on October 1 to ensure that DVA and PMP compliance data can be updated in real-time.

With the help of the API, DVA will now be calculated for every batch of EV production, along with their chassis numbers. This will help OEMs avoid a separate audit for DVA evaluation.

Several representatives from Ola Electric and Ather Energy met key officials from the MHI earlier this year to discuss the price caps, but the ministry has yet to take a decision regarding pricing.

Will The Cost Of Non-Compliance Impact India’s 2030 EV Vision?

India is a unique use case where EV adoption is led by two-wheelers and three-wheelers. Nevertheless, production remains expensive, given the global chip shortage and a rise in material costs, especially the essential materials needed for EV batteries.

More importantly, the country focusses on pure-play electric vehicles instead of hybrids or plug-in hybrids, which means a surge in cell or battery mineral costs will push up prices. Therefore, sticking to a flat price label or a homegrown supply chain may not always be feasible for OEMs unless there is a robust support system at home. Time and again, such factors have resulted in non-compliance and a delay in the launch of multiple models.

India needs a support system first: Explaining the lack of component-making in India, especially for the EV industry, Mohandas Pai, Partner, Aarin Capital, and former CFO of Infosys, had earlier told Inc42, “The FAME [II] scheme has got stuck in a controversy. But you cannot penalise everybody after committing because a support system has not come up; it is not there in the country. This is very wrong.”

Aware of how pedantic policy revisions could hurt OEMs’ bottom line in a competitive market, companies like PuR Energy (Pure EV) decided not to apply for FAME II subsidies. Staying away from the current scheme has given them the flexibility to access the global supply chain and work with multiple suppliers at home and abroad.

Many stakeholders also think FAME II is ad hoc in nature, as it would have ideally taken more time and planning to build a robust, nationwide EV component supply chain. As for component makers, the problems are multilayered, from procurement to scaling up to maintaining quality and safety standards and more. Quite a few companies are also struggling with liquidity issues since the pandemic.

“There are several reasons why complying with FAME II guidelines has become so difficult,” said an EV startup founder who did not wish to be named.

“To begin with, we don’t have enough [EV] auto part manufacturers in India. Second, local vendors charge more than what we pay to Chinese companies. Then there are problems with quality consistency. Quality standards tend to differ even when you buy, say, five units of XYZ from the same supplier. This is not the case when we import auto parts. Finally, you have to keep the costs in check. The government has reduced the GST on auto parts, but it is still in the range of 12-18%, while the GST on the vehicle is 5%. This is also adding to the cost.”

Some EV manufacturers who previously sourced from domestic suppliers are reportedly importing from China due to lower prices.

For context, the government has already announced a couple of production-linked incentive (PLI) schemes to bridge these supply gaps. One of them, with an outlay of INR 25.9K Cr, is designed for the auto component sector. The other one, with an allocation of INR 18.1K Cr, is meant to bolster the ACC battery industry at a pan-India level.

Randheer Singh, director of electric mobility and a senior team member of the advanced chemistry cells (ACC) programme at NITI Aayog, told Inc42 when these schemes fructify in about two years, there would be supply chain efficiency, and the EV prices would automatically go down. Incidentally, Singh developed the EV report for the Indian government.

But until then, OEMs have limited options to meet DVA and PMP guidelines, and compliance may come at the cost of quality, experts say.

This is a scary thought, given the recent EV fire incidents, which spurred public outrage and had the EV players scrambling to contain the fallout.

Clearly, there needs to be an adequate support system in place first.

More subsidies, please; INR 10K Cr is not enough: Stakeholders are unhappy with FAME II allocations and constantly demanding a robust policy and better incentives to execute the 2030 plan.

“In 2017, China disbursed incentives worth INR 54.8K Cr+ in one year. Look at what we got then – INR 165 Cr! Now, they (MHI) are saying they will recover the subsidies extended under FAME II if companies are found non-compliant,” said a disgruntled founder who did not want to be named.

The EV industry would need more in subsidies, demanded SMEV, India’s premier EV lobby representing around 90 companies. In its presentation to the Rajya Sabha Secretariat in January 2023, SMEV claimed that India would require incentives worth at least INR 1.65 Lakh Cr in the next seven years to meet the 2030 target.

Although the government increased its Budget allocations significantly, from INR 2898 Cr in FY22-23 to INR 5,172 Cr in FY23-24, SMEV, in its presentation, demanded INR 9,084 Cr for FY24, considering that more than INR 1,100 Cr was pending for FY22.

In such a tricky situation, India’s ambitious plans to grow annual EV sales significantly by 2030 may hit a speed bump.

Singh of NITI Aayog is optimistic, though.

“There are various areas in an EV business. One is cell manufacturing, accounting for 40-45% of the total vehicle cost. Then, you have vehicle components and electronic parts. But the government has already launched two PLI schemes, and these areas will be taken care of in the next two years,” he said.

“The right time to assess the situation will be 2024. Once we have a clear idea of what more is required and where, decisions can be taken accordingly. I don’t think this is the right time to comment on the overall scenario,” he added.

However, the current scenario takes us back to NEMMP and its unrealised goals. Even after seven years, its plans to manufacture 6-7 Mn EVs from 2020 onwards fell flat. We only reached 0.125 Mn EVs in 2020, nearly a 50x slide from the target, despite the launch of FAME I in 2015 and its additional advantages.

Can we fix the bug in time?

[Edited by Sanghamitra Mandal]

The post Will FAME II Probe Into EV Non-Compliance Throw A Spanner In The Works, Hinder Growth? appeared first on Inc42 Media.

“The Information Technology Act, 2000 was framed and passed in 2000, before social media and before indeed the internet. The IT Act does not even mention the word internet. Clearly, we needed a modern law that could address the digital nagrik’s (citizen’s) requirements,” — Rajeev Chandrasekhar, MoS, MeitY.

While presenting the goal and design principles of the Digital India Bill during the Digital India Dialogues in Bengaluru earlier this month, Union minister Rajeev Chandrasekhar highlighted the challenges that The Information Technology Act, 2000, pose in regulating today’s massively evolved digitally empowered India. Some of the challenges he underlined were related to online criminalities, cybersecurity, hate speech, disinformation and fake news.

Deliberating on the need to have a whole new law, Chandrasekhar said, despite multiple amendments, the old law encompasses a very limited view of the complex forms of cybercrimes and cyberattacks, security breaches, catfishing, and phishing, etc.

Well, Chandrasekhar has a point here. The Information Technology Act of 2000 was simply meant to offer legal recognition of electronic records, transactions and electronic signatures over the electronic medium. However, the world today has gone through a paradigm shift in digital adoption compared to what it was almost two decades ago.

According to Rashmi Deshpande, partner, Business Chamber Law, the current Information Technology Act lacks comprehensive measures to protect the rights of users in ensuring their safety online.

“There is limited recognition of harms and cybercrimes, with inadequate awareness mechanisms in place. There are inadequate regulations to address emerging technology and the requirements of modern digital businesses, and regulatory approaches for handling harmful and illegal content are not well-defined,” Deshpande said.

She added that the Act also lacks adequate principles for data and privacy protection, a unified and coordinated institutional regulatory body with effective investigatory and enforceability mechanisms, and a swift adjudicatory process.

“Additionally, there is no coordinated mechanism for responding to cyber security incidents, and the safe harbour provision under the Act exempts intermediaries from any liability,” Deshpande said, adding that the Digital India Bill was the need of the hour.

Ahead of drafting the Digital India Bill, the Indian government has started the process of public consultation on the Bill.

Once enacted, the Bill aims to replace the IT Act, 2000 and address a whole lot of issues around the internet, which the existing IT Act does not.

Pointing out how the existing law fails to address the disputes and complaints around the internet, independent counsel and former metropolitan magistrate Bharat Chugh said, “The current IT Act, 2000, lacks a proper institutional regulatory body and adjudicatory mechanism. The lacuna in the existing law coupled with the new emerging challenges necessitated an urgent need for an adjudicatory mechanism for online civil and criminal offences that would resolve cyber and other related disputes.”

Having started consulting stakeholders earlier this month, the Indian government reportedly aims to introduce the Bill in the Monsoon or Winter Session this year.

While the Bill is yet to be drafted, let’s take a look at what it is all about and what exactly it aims to resolve and how.

What’s Behind The Digital India Bill?

Presenting how the Bill would be, Chandrasekhar has stated that the proposed Bill would be in sync with the Digital India goals 2026, and global standard cyber laws.

Digital India Bill aims to offer:

• Open internet
• Online safety and trust
• Accountability and quality of service
• Adjudicatory mechanism
• New technologies

According to the MeitY’s presentation, the Bill, along with sister laws including the DPDP Bill, National Data Governance policy and IPC amendments for cybercrimes, intends to:

• Ensure the internet in the country is open, safe, trusted and accountable
• Accelerate the growth of innovation and technology ecosystem
• Manage the complexities of the internet and rapid expansion of the types of intermediaries
• Create a framework for accelerating digitalisation and strengthening democracy and governance (G2C)
• Protect citizens’ rights
• Address emerging technologies and risks
• Be future-proof and future-ready

The Bill Aims To Regulate Tech Companies 

Promising to offer open internet, the Digital India Bill aims to free India’s internet from the hegemony of big techs. It aims to offer equal opportunities to Indian tech startups to grow in the areas that are otherwise dominated by big tech giants.

Interestingly, even Indian tech startups have been echoing a similar concern. They want the government to free the internet from big tech giants and create a level playing field, curbing the scope of monopoly or duopoly in the segment.

The debate around this gained weight in 2020 when tech behemoth Google decided to charge 30% commission from businesses selling digital goods/services through its Play Store. More than 50 Indian tech startups raised their concerns against this move and accused Google of turning to ‘unfair trade practices’.

Paytm founder and CEO Vijay Shekhar Sharma had then tweeted, “And Google Play Store fees: 30% (excluding GST) are costlier than a business tax on India’s internet ecosystem. It is all the margin in a mobile-android age company!”

Google’s Play Store policies require the app developers to exclusively and mandatorily use Google Play’s Billing System not only for receiving payments for apps distributed or sold through the Google Play Store but also for certain in-app purchases.

In October 2022, the Competition Commission of India (CCI) found Google to have violated fair trade practices at least six times, which attracted a penalty of $160 Mn for the search engine giant.

Back to the point, the Digital India Bill may seek to regulate algorithms being used by tech companies to resolve issues related to online safety and trust.

Further, the Bill would adjudicate user harm against revenge porn, cyber-flashing, dark web, women and children, defamation, cyber-bullying, doxing, salami attacks, etc.

Not only this, to keep issues related to fake news and misinformation at bay, the Bill aims to hold intermediaries accountable for what gets published on their platforms, unlike the IT Act, 2000 which has safe harbour provisions.

Depending on the type of intermediaries and the number of users it caters to, the intermediaries will be required to conduct digital audits and follow disclosure norms while collecting data.

The Bill classifies intermediaries as ecommerce platforms, digital media, search engines, gaming, AI, over-the-top (OTT) platforms, telecommunications service provider (TSPs), adtech platforms, Significant Social Media Intermediaries (SSMIs), and metaverse, among others. The Bill may have separate provisions for each of these categories.

“The Digital India Bill may prescribe specific compliances for intermediaries to curb fake information or news and impose strict requirements on AI’s development and deployment. The Bill plans to increase penalties for non-compliance, especially for cybercrimes and other violations. With this move, India aims to become a leader in digital innovation while ensuring the protection of its citizens,” Deshpande said.

Currently, social media intermediaries with more than 5 Mn users are mandated to publish monthly compliance reports under IT Rules 2021. The MeitY will also conduct quarterly compliance audits of these platforms.

The Apple Of Discord In The Bill 

Given the fact that the internet is horizontal in nature, the regulatory board’s activities are bound to interfere with areas of other regulatory authorities such as Telecom Authority of India (TRAI), The Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and proposed Data Protection Board of India.

Speaking with Inc42, MoS Chandrasekhar clarified, “We will certainly look at how multiple regulators can regulate sectors that may or may not have a digital presence. We have to discuss it through.”

Similar to how the government curbed the power of the proposed Data Protection Authority of India, which initially was intended to be independent of the executive and had more power.

It is pertinent to note that the Personal Data Protection Bill, 2018, recommended the appointment of the chairperson and the members of the Data Protection Authority by the Central government on the recommendation made by a selection committee comprising the Chief Justice of India (CJI) or a judge of the Supreme Court nominated by the CJI, who shall be the chairperson of the selection committee; the cabinet secretary; and an expert of repute, to be nominated by the CJI or a judge of the Supreme Court of India nominated by the Chief Justice of India, in consultation with the cabinet secretary.

However, in the latest Bill 2022, Data Protection Authority has been renamed to Data Protection Board, which would entirely be constructed by the Central government. The DPDP Bill, 2022, also authorises the Central government to exempt any state body, which it deems fit, to be exempted from it.

There are apprehensions among the stakeholders that the government may construct a regulatory body under the Digital India Bill, which would have limited powers and may even exempt the government.

It must be noted that several government platforms, such as government emarketplace (GeM), citizen-centric government communication platform mygov.in and so on, are run like intermediaries.

The Devil’s Advocate?

Many have raised doubts about whether the government would be able to maintain the transparency that it claims the Bill would offer.

According to Prateek Waghre, policy director at Internet Freedom Foundation, “Not only the Bill but also the process of making it should be transparent.”

“The government refused to publish the responses and feedback it received on the draft DPDP Bill. So, we are not aware of who participated in the feedback process and whether the Indian government took any note of this feedback,” Waghre said, adding that the government should make the entire Bill-making process more transparent.

He said that currently, under the IT Act and the Blocking Rules, the government can invoke a confidentiality clause and refrain from issuing any clarity on the process of taking down or blocking content on the internet.

While the Indian government claims to be seeking every stakeholder’s opinion on the draft Bill content and wants to make all intermediaries accountable, the question is will the government, under the Digital India Bill, make itself accountable while taking such decisions? Or, will the regulatory body take responsibility to ensure that there is transparency in its decisions?

Further, as the Bill is said to be evolvable in nature, Waghre fears that it could become something else in the process – something that happened with the frequent amendments to the IT Rules under the IT Act, 2000.

The Centre Could Be Walking On A Tightrope With The Bill

As of now, the Bill paints a rosy picture when it comes to offering an open and safe internet to users and making intermediaries accountable for the content, but there is a lot that needs to be tackled at the core.

Now, let’s substantiate the statement with an example. In December 2020, when Edward Snowden’s wife posted her image with their newborn on a social media platform, her account got blocked, categorising the image posted as child pornography.

The same year, Facebook’s AI inadvertently banned advertisements of numerous MSMEs. This hugely impacted their businesses as most of these were entirely dependent on Facebook.

While one could challenge these later, it could result in monetary losses by the time the issue is resolved.

Waghre said, “Currently under the IT Act, the government does not issue any report on the due process when any particular website or a post gets blocked. This does not inspire confidence among users about their claims of transparency. While the Indian government claims to be seeking every stakeholder’s opinion on the draft Bill content and wants to make all the intermediaries accountable, the question is will the government under the Digital India Bill make itself accountable while taking such decisions?”

Further, bursting fake news and misinformation has its own biases. There have been instances in the past when the Centre or state governments have asked social media platforms or ecommerce platforms to take down certain posts just because it didn’t suit the government’s narrative. Facebook and Twitter did not entertain all the cases and took the government to court.

In a lawsuit filed against the government in the Karnataka High Court, Twitter claimed, “Blocking of such information is a violation of the freedom of speech guaranteed to citizen-users of the platform. Further, the content at issue does not have any apparent proximate relationship to the grounds under Section 69A.”

Under the digital India Bill, the intermediaries may even be asked to share their algorithms with the regulatory board, which may make many uncomfortable.

Besides, once the Bill becomes an Act, intermediaries may be required to comply with not only the provisions of the Digital India Bill but also a host of other laws – DPDP Bill, New Telecom Bill, National Data Governance Framework, etc. This could defy the entire rationale behind the government’s efforts to promote ease of doing business.

Given the paradox, the government seems to be walking on a tightrope when it comes to striking the right balance between providing users access to safe and open internet and improving ease of doing business for intermediaries.

While the government aims to introduce the Bill in the upcoming Monsoon or Winter Session, experts have ample reasons to believe this could be delayed until the country’s general election next year.

The post Is The Digital India Bill Answer To The Outdated IT Act, 2000? Let’s Find Out appeared first on Inc42 Media.