One Reason Startups Are Moving Out of India

PM Narendra Modi says Make in India. But anyone who wants to, finds that their intellectual property is valued much more if the patent is filed in the US.

(This story originally appeared in The Economic Times on 10 April 2015.)

BENGALURU: Prime Minister Narendra Modi says Make in India. But anyone who wants to, finds that their intellectual property is valued much more if the patent is filed in the US, or anywhere else, but India.

Take the case of BITS Pilani graduate Sriram Kanuni, for instance, who decided to come back to India after spending 12 years with SAP in Germany. His family thought he was out of his mind, but he wanted to work for India and primarily serve Indian clients.

His core vision hasn't wavered five years down the line, but he has been forced to move a large part of his company's intellectual property (IP) to the US, just to get a better valuation for his next round of funding. And his is not an isolated case.

"Global investors seem to value companies with patents in the US much higher. Therefore, it makes more sense to shift patents out of India, in case you're looking to raise money or exit the company," Kanuni, who is the CEO and co-founder of Arteria Technologies, said.

Major Indian startups such as Flipkart, Myntra and ZipDial, which have either raised over a billion dollars or exited, already have their IPs outside the country. Experts say that is one of the reasons that attracted investors.

"If a company with its IP in India is acquired by an international firm, and post acquisition the buyer wishes to transfer the IP to a different jurisdiction, such transfer would need to be at a fair value decided by the government and the company is taxed at the rate of 34% on that," one of the bankers who was part of a large exit told ET.

"For tech-centric companies where the value of IP would comprise over 70–80% of their value, such high taxes can possibly make them unattractive for potential investors," they added.

With better valuation and exits in mind, startups are moving out their innovation to countries such as Singapore and the US, leaving behind very little intellectual property that the country can proudly call its own.

"You would want to incorporate somewhere with a respected reputation for maintaining legal protection when it comes to copyright and trademarks, especially with global licensees or partners," said Sharad Devarajan, co-founder and CEO of character entertainment company Graphic India, which is incorporated in Singapore.

"Incorporation in a country like the US where potential for M&A is higher, especially for core technology startups, will generally make it more attractive to potential buyers as it avoids a lot of legal and financial paperwork," said Brij Bhasin, India investment lead of Japanese venture capital firm Rebright Partners.

Investor concerns over IP are well founded. "Indian courts aren't uniform when it comes to developing jurisprudence around copyright and patent infringement," explained Sunil Abraham, executive director of Bengaluru-based research organisation Centre for Internet and Society.

"There is a high chance that a judge who doesn't understand the details would give an injunction. Then the loss of six months, etc, can be quite expensive, because in six months' time your competitor might eat into all of your market," he said.