India must stop mass migration of startup entrepreneurs

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To stop mass migration by startup entrepreneurs, the government and the law enforcement agencies must start treating them with empathy and respect.

Migration by startup entrepreneurs: India is among the top 10 countries that witness a net outflow of high-net-worth individuals. The country is expected to lose another 8,000 dollar millionaires this year, a number exceeded by only Russia and China, according to Henley & Partners, a London-based advisory firm. In 2018, a Morgan Stanley report said 23,000 millionaires left India since 2014. Another report showed that 5,000 millionaires left the country in 2020 alone.

The flight of wealth is a serious blow to the country that has put in place a startup ecosystem to encourage entrepreneurship. Finance Minister Nirmala Sitharaman has expressed concern about startup enterprises moving out of India. She said the finance ministry is open to discussions with entrepreneurs about the problems they face in the country.

The moot question is why many entrepreneurs are leaving the country. India managed to create around 80,000 startup enterprises in the five years since the Narendra Modi government launched Startup India, one of its flagship programmes. Currently, India is home to 106 unicorns, or startups with more than $1 billion valuation.

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The most important problem here is that most of the investors in Indian startups come from abroad. Their top priorities are protecting their investments, easy exit routes, faster multiplication of valuation and lower taxes. Therefore, they shift their headquarters to low-tax jurisdictions and to countries offer ease of doing business. In India, the ease of doing business hasn’t improved despite desperate attempts by the Modi government.

The number of statutory filings and compliances are too high in India for the comfort of entrepreneurs and investors. Ownership changes and transfer of shares are governed by tough regulations in India. Repatriation of capital gains or share sale proceeds is difficult and time-consuming. Another big problem is the lax intellectual property laws. Indian startups funded by foreign investors will find certifications from an advanced country more helpful in attracting better valuations globally.

Top 10 countries by millionaire outflows

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Top 10 destinations of millionaire inflows

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Problems faced by startup entrepreneurs

The biggest challenge faced by startup entrepreneurs is that they are not treated with respect by the authorities. Most of the time, they are treated with suspicion by law enforcement agencies. Even minor breaches or omissions could land draconian punishments such as arrest. Minor business problems are treated like willful defaults and attract stringent punishments such as freezing of accounts / assets or sealing of premises by both state and Union government agencies.

The life of an entrepreneur is constantly under threat in India, a factor that encourages several startup founders to migrate once they become successful. Also, developed countries offer them access to cheaper loans and more efficient capital markets. These are some of the reasons why startups move out after enjoying the benefits such as innovation centres, seed capital and field/market testing. As the startups grow, they have the option of going global or stay back to perish.

What should the government do

The government should first support the entrepreneurs who want to stay in India rather than addressing the issues of people who wants to move out. This is the best way to prevent further migrations. The situation of Indian entrepreneurs is similar to that of students. India creates some of the best engineers and doctors and lose them to brain drain, simply because it doesn’t offer growth.

The flight of entrepreneurs must be prevented at any cost. The government must examine the situation, understand the problem and find solutions. This is not an issue where a solution can be arrived at through open discussions. These are problems the government can solve by showing a little bit of empathy towards entrepreneurs who face problems. Here are some practical steps the government could take to prevent mass migration by startup entrepreneurs.

  • Address the problems faced by entrepreneurs in terms of capital, costs, IP rights, patents, taxation, demand, exports, and investments.
  • Create state-wise, year-wise, databases.
  • Create easy exit routes for investors.
  • Help startups to scale up.
  • Improve ease of doing business.
  • Treat entrepreneurs with respect.
  • Stop criminalisation of offences.

These are some steps expected from the government which is already addressing some of them. Also, the Indian society must learn to respect entrepreneurs and startup owners. In India, a startup entrepreneur is mostly seen as a crook. In foreign countries, they are respected as creators of employment and wealth. A startup entrepreneur needs security, respect and an infrastructure conducive to growth.

Some entrepreneurs will eventually leave the country, but the government needs to focus on those who decides to stay back. Enable them, empower them, nurture them, show them empathy, and treat them with respect. This change in attitude will stop many entrepreneurs from migrating to foreign nations.

(KE Raghunathan is Founder Chairman of Association of Indian Entrepreneurs. Views are personal.)