SVB Debacle | Special bank services needed for India’s startup ecosystem

If private banks in the US can create special products for the startup sector, there is no reason why similar facilities are not provided by Indian banks

Ripples from the global banking crisis may have a muted impact in India, but the Silicon Valley Bank (SVB) debacle continues to resonate here. The reason being that the SVB had been the bank of choice for the tech and startup community not just in the United States, but around the world.

Rough estimates are that a billion dollars belonging to Indian startups had been deposited in it, and there was tremendous relief when the Joe Biden administration decided to give a lifeline to all depositors. The question has now risen as to where the startup founders will transfer these funds. The Union government is trying to encourage them to shift back home, but there are many considerations at play. The new ventures are not keen to land into more problems by returning to their home base.

It may be true that the Indian financial system is “strong and robust” as was pointed out by Minister of State for Information Technology Rajeev Chandrashekhar during a meeting with CEOs of 400 startups during the crisis. It may also be true that funds kept in Indian banks are probably much safer than in the hands of many smaller US banks that seem to be failing with depressing regularity. But there are reasons for 20 percent of the Indian startup community having shifted their domicile status abroad to enable access to foreign banks.

This process — moving headquarters to foreign countries — is known as ‘flipping’, and returning to India is termed ‘reverse flipping’. The latter process has not been painless for those who have tried it out, judging by the experience of the decacorn, PhonePe. It decided to return from Singapore last year, and was confronted with a tax bill of nearly Rs 8,000 crore. Despite such a heavy financial burden, this company still felt it was worthwhile as it looked forward to a listing on Indian bourses, and its primary business is through the UPI platform available in India.

For most startups, however, it is challenging to deal with the Indian banking and taxation systems. The complexities of documentation and compliance are difficult to manage for new ventures trying to run global operations. The entire process of making and receiving payments in dollars involves considerable red-tape. Accelerators such as the Y Combinator have even made foreign domicile status a condition for their investment. It must be noted that 60 startups mentored by this accelerator had their funds in the ill-fated SVB.

Besides, non-resident ventures have the advantage of lower taxation compared to resident entities. There are also hurdles in exits for investors currently as mergers and acquisitions clearances can take a long time.

Clearly, the only way for the government to lure startups back to India’s own banking system is to create a new regulatory ecosystem for this sector. It will have to provide an environment of comfort, especially for ventures looking to carry out global operations. For the time being, the option offered is to deposit funds in branches of banks at the Gujarat International Finance Tech-City (GIFT City), which has been designed as an international financial hub.

Reflecting the disinterest in returning to the Indian financial system, reports are that only about 20 per cent of SVB deposits have been brought to GIFT City. Instead, most startups have shifted to other US banks that provide services similar to the SVB for startups.

Given this backdrop and the suggestions made in this year’s Economic Survey to promote reverse flipping, it is time for the government to take positive steps in this direction. The Economic Survey has proposed simplifying startup certification as well as taxation for employee stock options (ESOP) and reducing the uncertainty of tax litigation. It also recommends easing procedures for capital flows like other countries with easier corporate laws. It similarly highlighted the need for improving India’s startup incubation and funding landscape.

Such measures are essential, otherwise there is a danger that intellectual property created within India will be going to other countries. Even taxes will be flowing to exchequers abroad.

In fact, it is time for a more innovative approach towards the entire startup ecosystem. If private banks in the US can create special products to meet the specific needs of this sector, there is no reason similar facilities cannot be provided by Indian banks. The SVB was offering products such as venture debt with support from venture capital firms. There is no reason Indian banks cannot provide comparable services, especially if it will keep the innovation value chain within the Indian economy.

(Sushma Ramachandran is a senior journalist).

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.