All of a sudden, Indian startups are staring at a bleak spectre

Ashish Gurnani and Aashray Thatai, cofunders of Postfold, a New Delhi-based online men’s apparel startup, are on a tear. The business they founded a little over two years ago is seeing its customer base grow 20% every month. They are preparing to extend the brand beyond apparel and into accessories. For the duo — college mates, cofounders and soon to be brothers-in-law (Gurnani is marrying Thatai’s sister) — business was going swimmingly.However, like dozens of other young startups, they’re not just worried about managing warp-speed growth. Instead, they’re spending inordinate amounts of time keeping pace with a rapidly changing regulatory landscape. All of a sudden, companies and small startups that have been trying to carve our small niches are finding themselves caught up in a confounding maze of proposed laws and regulations.While large sectors such as ecommerce are worried about provisions in a draft law, other entrepreneurs ranging from cryptocurrency to online pharma are concerned that a wave of legislation — some implemented and others at various stages of consideration — will trip up India’s ascendant startup scene. “It is certainly important for governments and regulators to walk the fine line between regulating effectively and being regressive in policy,” says Priyanka Roy, founder of Sarqua Law in Mumbai.Entrepreneurs acknowledge that the government has a tough task at hand. While on the one hand the Narendra Modi-led government is committed to promoting entrepreneurship, it also has to worry about the effect these ventures are causing the brick-and-mortar economy. For example, in ecommerce, the rise of a range of tech-led startups has hobbled old businesses, causing many to shrink or shut. These businesspersons, in turn, have fought back, pushing the government to react. On August 28, the Union Ministry of Health and Welfare notified the registration of epharmacies in a bid to regulate startups in this space. In late September, the Union Government notified Section 52 of the GST Act that mandates tax collected at source for ecommerce companies.Sudden & UnpredictableWhat’s also concerning entrepreneurs is the unpredictable nature of regulation. While the Justice Srikrishna panel on data privacy was lauded for its intent of having public consultations in four cities, other sudden pronouncements such as the Reserve Bank of India’s snap announcement on cryptocurrencies in early July this year, with little consultation, has startups unnerved. While industry bodies such as IndiaTech provide the market with a voice, multiple entrepreneurs this writer interviewed say they spoke more for large and well-funded ventures, rather than fledglings, who are more numerous.“Startups like us spend a lot of time figuring out what can be done and what can’t,” says Gurnani of Postfold. “For a young company, this can be a time-consuming and costly affair.” For founders like him, allocating and prioritising resources in such a state of regulatory flux is proving challenging.On September 26, some 26,000 pharmacies in Bengaluru, India’s startup capital, downed their shutters to protest the rise of online competition and new regulation that did little to safeguard their old-world businesses. These online ventures, they stated, profiteered from flimsy legislation that provided limited checks and balances and ignored unfair discounts offered by these epharmacies. While the law provides for a maximum of 16% discounts, these firms cut prices as much as 60%, they allege. 66010522 Policy EnvironmentOnline pharma companies, on their part, worry that the new draft guidelines give state governments undue powers to cancel their licences. And they are unsure if they need to obtain licences from both state and central governments to continue operating. This atmosphere of eager regulation is worrying startups, who can’t survive or raise funds without a predictable policy environment. “Everyone is being hamstrung by lack of clarity and burdensome regulatory environment,” says Mishi Choudhary, legal director at Software Freedom Law Center.These regulatory headwinds come at a challenging time for many of these ventures. Over the past 12 months, the funding winter has thawed and investors are back at the table. Simultaneously, however, they are steering away from backing ventures where the legalities aren’t crystal clear. Take the example of bike taxis. In the past couple of years, it is estimated by investors and analysts that some 70 or 80 ventures sprouted in this space. Faced with this haze, almost all of them have been shuttered. “The GoI is unable to either protect the rights of its citizens or provide clear, easy-to-follow, supportive environment for businesses,” contends Choudhary, the lawyer.Being a tech entrepreneur isn’t an easy India. While finding a defensible niche for your idea may be a good start, negotiating the regulatory maze is turning out to be a bigger challenge than many founders initially estimate. “This can fundamentally change business models for startups,” says Anirudh Rastogi, founder of Ikigai Law, a tech- and startup-focused law firm in Delhi. “These firms have to deal with multiple regulators, ambiguity in laws and regulators often discovering nuances well after companies have begun operation.”Cost of ComplianceAccording to estimates from entrepreneurs and analysts, it could cost online pharma startups Rs 50,000 to register their businesses under the new norms. Then there’s the added cost of keeping digital records of each transaction and auditing them for inspections every two years. Data privacy is a costly business, too. According to one estimate from consultants E&Y, the world’s largest companies will spend just under $8 billion meeting stringent GDPR rules for Europe. Smaller firms will only add to this spending. Startups could fork out over Rs 10 lakh meeting these rules. And, with interpretation of these laws muddled, costs could only rise.One space that has spent the better part of the past four years stagnant, due to a regulatory clampdown, is drones, a hotbed of innovation elsewhere in the world. Unsettled by the prospect of these unmanned, remotely operated flying craft causing security headaches, their use was almost entirely banned. It was only in August 2018 that these restrictions were lifted, with more liberalised norms. Even then, more apparent use cases such as food delivery, remain illegal. “We can only wait and hope,” says Apurva Godbole, CEO and founder of Drona Aviation, a drone operator in Mumbai. “Currently, the rules are far from ideal.”Drone makers are hardly the only ones fettered by spotty regulation. In the fintech space, from peer-to-peer lending to bitcoin startups, regulation has hindered growth. In his new 10,000 square feet office in a Mumbai commercial complex, Vinay Bagri of Niyo, a Social Ventures and Prime Ventures-funded firm focussed on fintech, is preparing to see his business take off, even as fresh regulations are taking hold. “This uncertainty is compelling entrepreneurs to be more conservative with their plans,” he says. “They need to account for longer lead time to meet constantly changing rules and give time to regulators to update themselves.” 66010543 Light-Touch RegulationThe fintech space in particular is a lightning rod for regulation. “Look at the crypto trading regulations by RBI, pending in (the) SC,” says Choudhary of Software Freedom Law Center. “There’s a complete ban when the entire world is recognising its role in the new economy.” True to form, India’s largest crypto exchange, Zeb Pay, shut shop faced with these daunting regulations.Faircent, the Incofin Management and Muthoot Fincorp-funded peer-topeer finance startup, has been right in the middle of this firestorm. Over the past couple of years, this space, regarded as something of a wild west of the fintech market, has come under increasingly heavy regulatory scrutiny. According to Rajat Gandhi, the CEO and founder of Faircent, over 20 of his peers have been driven out of business in the past 24 months, with tighter rules coming into effect. Faircent started off in 2015, but it was only earlier this year that the firm got a regulatory nod officially to do business. 66010511 Despite this consternation over regulation, several investors and entrepreneurs believe there have been significant changes by the government on this front. “Consider the ride sharing market,” argues Siddarth Ladsariya, an angel investor in some 100 startups, including Ola, where he was an early backer. “Initially, companies faced intense opposition, but that’s softening, with liberalised rules around the corner.”The spice-trader-turned-angel investor is among a group of people who say regulation is a necessity for startups. Like him, Faircent’s Gandhi adds that regulation gives ventures a sense of respectability that in turn helps them be sticky with other stakeholders including employees and investors. Rather than crimping their growth with stringent norms, he suggests the government follow a principle-based rather than rule-based system to build rules. To safeguard user data, for instance, startups must be told to ensure data is protected, rather than insist on following an iron-clad list of rules around local hosting and audits of data. “It is equally necessary for businesses to be forward-thinking… they should expect regulation to evolve and be nimble enough to revamp business models around them,“ Roy of Farqua adds.

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