TV Mohandas Pai Lists 3 Lessons For Startups And Regulators To Learn From SVB Fallout
If they open bank accounts elsewhere, they must understand the risks and financial, regulatory and compliance frameworks there. India's banking backend is amongst the most robust and regulated in the world; markets like the US are not as tightly controlled
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The Silicon Valley Bank crisis provides a unique opportunity for all stakeholders of the Indian startup ecosystem to re-evaluate their strategies and strengthen the frameworks underlying the system.
The exposure of Indian startups to SVB is pretty significant, and caused by the pressure on Indian startups to re-domicile overseas by foreign investors who face difficulties moving capital in and out of the country. There are many lessons here for Indian startups and regulators alike.
Indian startups that opened bank accounts with SVB because they were domiciled outside India or had business interests outside must examine their overall strategy. Any startup with most of its business, human capital, and expansion interests in India must be registered here because it can implicitly understand the risk of doing business in India and have command over the resources here. If they open bank accounts elsewhere, they must understand the risks and financial, regulatory and compliance frameworks there. India's banking backend is amongst the most robust and regulated in the world; markets like the US are not as tightly controlled, which causes a cascade of problems, as seen in the SVB crisis and previous financial crises.
Regulators and government bodies must take several lessons from this crisis.
1. There is significant friction to the movement of foreign currencies in and out of India by investors and startups with global businesses. This is one of the primary reasons for the pressure to domicile overseas. To ease this for startups, RBI can create a solution similar to how Indian software services companies operate EEFC accounts, whereby foreign currencies can be maintained in Indian bank accounts and remitted directly when needed. There is an urgent need to offer this solution in the context of startups with global businesses, so they can move capital in and out in foreign currencies after following KYC and other procedures, thus eliminating the need to maintain foreign bank accounts.
2. To solve this issue for overseas investors, the solution would be to create a similar dispensation that foreign investors in Indian stock markets can avail. Foreign investors from all countries who are a member of IOSCO can participate freely in Indian stock markets by registering and completing KYC procedures with depositories regulated by RBI. Opening this framework up for investments in unlisted stock, including startups, will significantly reduce the procedural friction that the process is rife with today.
3. There is an urgent need to expand the availability of domestic capital into the startup ecosystem, the lack of which is causing Indian startups to accept foreign investments with stringent pre-conditions to re-domicile. Large institutional capital deployers like Indian insurance companies and pension funds must be empowered to invest part of their capital pools in the startup ecosystem via Fund-of-Funds.
Apart from the overall policy measures listed above, the current SVB crisis needs an immediate response. GIFT City, India's solution to the current export of Indian financial transactions overseas, must also step up. GIFT City and the Indian banks registered there must immediately allow all the Indian startups with SVB accounts to open an account, bring their money in, and remit it again for payroll and other overseas expenses without undue restrictions. GIFT City has the unique ability to be its own regulator, free from restrictions by RBI. This is a golden opportunity to scale up, respond to this crisis by assisting Indian startups, and become a steady partner of Indian ventures with global businesses.
By TV Mohandas Pai (Chairman, Aarin Capital) and Nisha Holla (Technology Fellow, C-CAMP)
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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