The Accidental Non-Billionaires

19 September, 2011

If Mark Zuckerberg, Larry Page, Sergey Brin, Jeff Bezos and so on had been Indian residents and had conceived of and started their respective companies in an IIT hostel room, or in a garage in Mumbai or at a Cafe Coffee Day outlet in Bangalore, would they be the billionaires several times over that they have become in such a short span of time? Would their companies have commanded valuations at such stratospheric multiples? Highly unlikely.

Conversely, if the founders of many of the promising Indian start-ups like Flipkart, Snapdeal and so on had started their companies in the USA, or even in markets like China, Israel, etc., would at least some of them be billionaires by now, running companies valued at several billion dollars, commanding astounding valuations? Quite possibly.

So what explains the huge gulf in the value creation between Indian start-ups and their overseas counterparts in comparable businesses? Is it a fundamental difference in the core strength of the ideas? I don’t think so, as Facebook and Google were not exactly new or innovative ideas, but rather, attempts to build better products, services or user experiences than some of their predecessors who were running similar businesses. Is it then, that Indian entrepreneurs are much poorer executors of ideas than their overseas counterparts? Again, I don’t believe so, as evidence does not appear to suggest so. To my mind, the differences that explain these disparities in success lie in a host of other critical factors which place the Indian entrepreneur at a relative disadvantage. Some of these critical factors have been discussed at length in various articles and blogs, and are well-understood. I will, therefore, mention in brief some of these factors (as I believe they do make a big difference), but I will focus the thrust of this article on one other critical factor that does not get talked about enough, which I believe to be a very key impediment to value creation by Indian entrepreneurs — the regulatory framework.

Some of these key factors, which put Indian entrepreneurs at a relative disadvantage, are discussed below:

1.    Size and maturity of the market: Undeniably, the domestic market that the US and Chinese companies cater to, for example, are huge in comparison to the Indian market. While India is a large emerging market which attracts increasing interest from several western companies, the fact of the matter is that India is a very price-sensitive market, and in most businesses, has been among the lowest ARPU holders in the world. Further, there are other factors like inadequate infrastructure, low Internet penetration and the fact that several business concepts are just taking root in India, which make it a challenging market for several businesses. In comparison, China and the USA have very deeply penetrated and mature markets which can be more easily tapped and new business offerings can be sold easily as well.

2.    The culture: The very culture in the Silicon Valley is supportive and encouraging of starting up. The legendary ‘start-up culture’ of the Valley manifests itself everywhere – from support infrastructure, availability of talent, education system and institutions which all encourage starting up, the ‘rock star’ status accorded to successful entrepreneurs (and equally important, the lack of stigma attached to unsuccessful ones), easy availability of venture funding, the availability and access to great mentors and so on. India, on the other hand, has been producing entrepreneurs with great ideas and passion, but we clearly haven’t yet managed to build an environment and framework which are meaningfully supportive of start-ups. For a decade, Bangalore has been referred to as the Silicon Valley of India, but if we were to be honest with ourselves, we would acknowledge in a jiffy that Bangalore (or any Indian city or state, for that matter) has a long way to go before it can be considered truly deserving of such a sobriquet.

3.    The regulatory framework: This is the bit on which I am going to spend some time. For any business that is in its nascent stage and indeed, to encourage entrepreneurship, all the above-mentioned factors are very important. But one cannot ignore the importance of the regulatory environment as a very powerful influencer. I am, in general, a deep admirer of our Indian legal system, which is founded on the notions of rule of law and due process. However, there are certain aspects of our regulatory framework which I do not admire and which, in my view, materially impede the growth of entrepreneurialism in India:

        Exchange control: As we all know, India has been an exchange-controlled economy for several decades now. Of course, India had moved away from the draconian FERA to the more globalisation-friendly FEMA about a decade ago. But we still have an exchange control regime that places several restrictions on capital account transactions. Proponents of exchange control will always point to India’s relative insulation from the 1997 Asian meltdown, and more recently, the global financial crisis, to make the case for continued exchange controls. And to some extent, they would be right. However, one doesn’t (or shouldn’t) stop sailing just because the seas get choppy every now and then – cyclicality and periodic volatility are inherent to free markets. While all nations should prepare themselves to deal with such cyclicality, they should not create permanent barriers which prevent ships from sailing in and out when the seas are calm.

Our exchange control laws place various restrictions on the ability of Indian entrepreneurs to attract foreign equity capital, their ability to raise low-cost debt, their ability to grow their businesses overseas, their treasury-management strategies and so on. To be fair, successive Indian governments over the past two decades had undertaken significant reforms to dismantle many of these restrictions and the benefits of such reforms are already evident. However, there still exist many restrictions that impede the growth of Indian businesses, which can be done away with. The Department of Industrial Policy and Promotion (a department under the Ministry of Industry and Commerce) recently came up with a white paper which suggested some sweeping (and sensible) reforms to India’s FDI policy. One hopes that such reform measures find momentum and are given effect sooner, than later.

        Listing norms: This is a major ‘non-billionaire’ factor! Indian listing regulations require that an Indian company must first list on an Indian stock exchange before it can list on an overseas stock exchange. The primary concern sought to be addressed by this requirement is that if good quality Indian companies were permitted to conduct their IPOs in overseas markets, that would adversely affect the growth of the Indian capital markets. While this may hold true to some extent and for a certain period, I think the Indian capital markets are strong enough to bounce back from such temporary setbacks. Stock exchanges worldwide have to compete effectively with each other for business and most of them do so remarkably well. So I don’t see why the Indian stock exchanges cannot do the same. In fact, being forced to compete with global stock exchanges for the attention of Indian companies would only foster innovation and enhancement of service of the Indian exchanges, thereby benefitting the Indian public.

The other frequently voiced concern about letting Indian companies to IPO overseas is that the Indian public would be deprived of an opportunity to invest in good quality Indian companies. Again, I think this concern can be very easily addressed by allowing Indian public shareholders to invest in overseas companies, including in stocks of Indian companies listed on overseas exchanges. The Liberalized Remittance Scheme of the RBI already permits Indian residents to invest up to $200,000 in a financial year outside India for permitted purposes. This can be extended to stocks of Indian companies listed on foreign exchanges as well, with possibly a higher limit.

If this requirement is changed, it would result in tremendous wealth creation potential for Indian entrepreneurs and shareholders, as several Indian companies, especially those in certain ‘premium’ sectors like technology, clean energy, pharma, etc., can command much better valuations if they have the flexibility of freely determining the exchange on which they will conduct their IPOs. The comparable case in point is that of Chinese companies, a large number of which have been able to list on the US exchanges at very attractive valuations, which they arguably could not have achieved, had they been forced to IPO in China. There is no reason why Indian companies cannot get comparable or perhaps even better valuations in overseas markets, if they were permitted to conduct their IPOs in non-Indian stock exchanges. Just to be clear, the case I am making is not that a listing on the Indian exchanges cannot create value for entrepreneurs but that, having the flexibility to decide the market to list in would be a very powerful tool in the hands of Indian entrepreneurs, which could result in tremendous wealth creation for Indian residents.

      Constantly shifting sands: A client of mine once told me jokingly that in India, if he asks five different law firms for their opinion on a regulatory issue, he gets five different views! Of course, he might be exaggerating a bit, but the fundamental point that he was making was not too far off the mark. I would probably re-phrase what he said to say that if he asked the SAME law firm for an opinion on the same issue during five different months, he would probably get five different answers each time! In other words, while it is very exciting to be part of a fast-evolving economy and the changes spawned by it, it is sometimes frustrating for an entrepreneur to have to deal with constantly changing legal positions and interpretations. Very often, nuanced legal interpretations are required of matters, which ought to be fairly straightforward stuff but which are not because of the way they are drafted. While entrepreneurs and investors can deal with laws or regulatory positions that they don’t like and can plan for them, the uncertainty of very frequently changing or confusingly drafted regulation creates a deep sense of uneasiness among the business community. This can often eat into their mind space, which really should be more productively occupied by matters relating to the growth of their businesses.

The above is not intended to be a comprehensive list of factors that prejudice the growth of Indian companies and entrepreneurs relative to their overseas counterparts. But I do believe that these are very critical factors, which, if addressed constructively, would yield rich dividends. The time to push for these changes is now because we have seen a healthy resurgence of interest in young and fast-growing companies in India. The momentum that has been gathered on this front in the form of more early-stage deals, more aggressive growth plans by young Indian companies, etc., should be effectively leveraged to push for an environment which fosters more entrepreneurship in India, and places Indian entrepreneurs on the same level playing field with their overseas counterparts.


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The Accidental Non-Billionaires

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