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CSR status for funding incubators is a half-baked move

Mar 20 2013, 14:30   |   By SME Mentor

Gargi Banerjee

Acknowledging Gen Next was high on the agenda of Finance Minister P Chidambaram in the Union Budget 2013. Although rather constrained, given the state of the economy, he definitely won some brownie points from aspiring entrepreneurs. The latest budget proposes an amendment to the Companies Act so that corporate funding for budding start-ups in technology business incubators would be granted corporate social responsibility or CSR status. This facility, however, is applicable only to incubators that are attached to academic institutions such as business schools and technology institutions or those recognised by the Ministry of Micro, Small and Medium Enterprises.

Who Will Benefit?

Although the proposal appears appealing at face value, the sop actually hurts more than it helps. The truth is there are only 100-odd incubators attached to academic institutions in the country. Moreover, private sector incubators point out that only a handful of academic incubators are doing any meaningful work for aspiring entrepreneurs.

Academic Incubators Optimistic

First let's take a look at what the budget proposal means for academic institutions. Most of these incubators are cash-strapped as they have to survive on grants from the government or financial institutions. So, naturally, the prospect of greater funding, thanks to the budget proposal, has been met with optimism.

These incubators also believe the proposal, apart from providing easier access to funds, will encourage communication between industry and incubators and therefore bring about many successful start-ups in the near term. Poyni Bhatt, Chief Operating Officer, Society of Innovation and Entrepreneurship or SINE (the incubator at IIT Mumbai) says corporate firms will be more eager to support incubators. "We have had several corporates who were ready to give us the funds that we could use as venture capital but things did not work out because there was no regulatory framework within which we could use their funds." The new budget proposal will remove this impediment, Bhatt feels.

Private Incubators Sceptical

It's an entirely different scenario for private sector incubators. Prajakt Raut, co-founder of The Hatch, an incubator and accelerator, points out that unlike academic institution incubators, most private incubators are set up by industry people who themselves have vast experience in entrepreneurship.

"Most academic institution incubators do not have access to industry contacts and they simply lack the network or even business understanding that private incubators have. Infrastructure support and other resources that should be made available to promote the entrepreneurial spirit are all but lacking in academic institutions," Raut points out.

This is, perhaps, why most academic incubators have failed to churn out successful start-ups. Although there is no data pertaining to the performance of academic start-ups in India, anecdotal evidence suggests that merely 40 per cent of such incubatees are able to build sustainable business models. 

Silver Lining: Easier Access To Angel Funds

Therefore, although granting CSR status to corporate funding of incubators is a step in the right direction, it is unlikely to have any meaningful impact till the benefit is also extended to private sector incubators. However, Raut and others like him are excited about another budget proposal - that capital market regulator Securities and Exchange Board of India (SEBI) will soon chalk out the requirements and set limits under which angel investor pools can be recognised under Category I Alternative Investment Funds.

The Finance Minister has made amends for his predecessor's budget proposal that sought to introduce what came to be known as the 'start-up tax'. According to this previous proposal, income from investment in an unlisted or a private company would be taxable in the hands of their investors. Naturally, the move had drawn widespread protests.

Chidambaram has not only excluded angel investors and venture capitalists from the previous clause, he is now urging SEBI to prescribe limits for angel investor pools. "If limits are lowered and angel investors are allowed to come in with a minimum Rs 10 lakh to these pools, it will open up the floodgates and a lot of angel investors will be able to support aspiring entrepreneurs," Raut points out. For the sake of start-ups, we can only hope that these proposals materialise soon enough and do not get lost in translation.

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