Thursday, 3 March 2011

Can scientists in India start/own companies?

Earlier they couldn't. Now they can.

Let's get a little bit of background on this issue, before coming to the current status. (If you are not a big fan of knowing the nitty-gritty of government rules and procedures, please skip to the last part of the post.) Majority of the research organizations and academic-research institutes (like IITs, IISc, etc.) are government funded organizations - what that means is, they derive majority (if not the whole) of their funding from the government through various ministries (like HRD, S&T etc.). They are not in the strictest of sense, government organizations. Majority of them are structured as autonomous bodies. For example, CSIR, which has a network of 38 labs around the country is registered as a society. But, all these organizations, have decided that their employees will be governed by the government rules and regulations - i.e., The Central Civil Services (Conduct) Rules, 1964.

So, if scientists who are part of these organizations, want to start a company, they would have to follow the CCS rules mentioned above. Let's see what the CCS rules says about govt. employees (scientists) participating in private companies. The CCS rules (1964) 15 (1e) specifies:

"... no Government servant shall, except with the previous sanction of the Government...take part except in the discharge of his official duties, in the registration, promotion or management of any bank or other company registered or required to be registered, under the Companies Act, 1956 (1 of 1956) or any other law for the time being in force, or of any co-operative society for commercial purposes"

So, this rule clearly states that scientists could have nothing to do with private companies. But, that is where some nuances start playing a role. The rule states scientists cannot be part of the management of companies - does that mean they can't be part of the board of the directors of private firms. Actually, they can. They just have to get the sanction/approval (as needed by the rule) of the governing bodies of their respective organizations.

But can they start companies? Not until recently. Scientists who wanted to start technology companies have done so by proxy, not through their own name. That changed in 2009. In early 2009, the government issued a notification that allows scientists working in publicly funded organizations to hold equity stakes in technology/scientific companies and spinoffs. This would enable a scientist who is interested in commercializing his/her technology to work towards spinning off the venture and promote such a company.

What roles can scientists play in these companies? Well, that is where the conflict-of-interest rules will have to come in. There are certain roles that the scientist could possibly play without being involved in the day-to-day operations of the company (like being part of the board of directors, or serving as a technology mentor etc.), without raising conflict of interest issues. Certain other roles like being part of the operating team while at the same time holding a full-time position in the research organization will raise conflict of interest alarm bells - and hence should be avoided.

Through the same notification, the government has allowed research institutes to hold equity positions in private firms. The equity positions could be held in lieu of the technology transferred by the institute to the company. Even though the government has specified that it can be done, has not given the mechanism through which it can be done. So, it will take a bit of time for these policies to evolve and be operationalized. This notification has opened lot of doors. One has to wait and watch if people start walking through the doorways, to new destinations.

The Social Network (Movie Review) - a must watch for entrepreneurs

Anyone who is interested in entrepreneurship, risk-taking, venture financing or social networking must watch "The Social Network". Apart from these reasons, it is just a great movie that tells an inspiring story in a superb way. It takes you through the world of new ventures, venture capitalists, venture financing, and gives a window into the world populated by people who are driven to get their ideas to the market. Sometimes at any cost.

It tells the story of the formation of Facebook. Starts when Mark Zuckerberg after being dumped by his girlfriend in a Cambridge bar, leaves his drink unfinished, jogs his way through the night wearing a GAP hoodie and his backpack, to reach his dorm room in Harvard to have some more beers and start blogging furiously about the cross-currents of thoughts running in his head - he makes scathingly insulting cracks at his ex-girlfriend, and in the process of emptying his mind on the cyberspace comes up with an idea for a website that compares and rates Harvard girls based on their appearance.

He completes coding and setting-up the website that same night and sends the link to all Harvard students. The traffic is so heavy on this site, it brings down the university network at 4.00 in the morning. For this, he gets noticed, and is offered the job of joining a team of students (two of them, brothers, with the last name Winklevoss) who are setting-up a social networking site at Harvard called Harvard Connections. He runs with the idea on his own, partners with his friend Eduardo for the money and sets-up Facebook.

The Harvard Connections team sues him for stealing their idea for the website. While the two sides sit across a posh table and go through lengthy, acrimonious depositions, the movie unfolds in the background. Mark and his friend Eduardo get Facebook going (complete with the subtitle of "A Mark Zuckerberg Production"), first exclusively for Harvard students and then expand it to other universities. The site grows spectacularly - and lets just say, things get interesting.

This is a semi-fictional film - the broad outlines are drawn from what is public information. Mark comes across as a socially inept, uber-talented nerd. He writes computer programs like be was born to write computer programs, with manic energy and drive and phenomenal stamina (36 hours coding sessions, anyone?). And there is an entire sub-section of students/programmers who derive their mojo from zoning out the rest of the world, wearing a head-phone to musically cue their brains and have an orgy with machines and … code.

Watch Mark in any social setting - he stands out (not always in a good way, nevertheless). Without exception, he is the most under-dressed guy in any room. Even when there is a feet of snow outside, he roams in his shorts and flippers. The conversations he has with people (who are not his friends or whom he likes) are like playing hopscotch in a landmine field - you never know when things are going to blow up. The first scene where Mark chats with his girlfriend in bar is a masterpiece of dialogue writing - the actors speak at breakneck pace, not just speak, think and dodge and dance with words. Issues crop up like a punching wall and Mark furiously talks, diverts, talks more until he has unwillingly traumatized his girlfriend in every which way possible. His mind works so fast, he is sort of befuddled that it has not led him to the right end. Thinking fast is great, but some pause, some compassion could help.

The film also subtly raises issues like conformity and its role in society building. Parents, family, society everyone who could influence you when you are being formed, tries to make you to conform to things. The more you conform, the better you are for. People sometime confuse discipline with conformity. Discipline to some extent is good. But most of us don't stop until we are way way into the super-safe, super-under-exiting zone of passivity and acceptance. In a world populated by mostly conformists, the non-conformists rule. Boundaries are meaningless to them. Mark is one such example.

A room full of men and women in suits trying to get a penny from a guy wearing a ill-fitting shirt, unkempt hair and bathroom flippers. That says something.

This is a beautifully crafted film as well. Watch the rowing competition held in England where the Winklevosses lose by a whisker. Spectacularly constructed - the cinematography, the editing, the sound effects, the choice of music - it is slightly eerie, it is odd, it is confusing, it is an experience -just breathtaking. Another scene that is superbly done is the scene where Sean Parker (the guy who created Napster) talks to Mark seated in a loud club about how big businesses are built, and how to dream big - the tension of those words, their implications - you can barely sit still watching the scene.

It gets pretty much everything right. The characters, their priorities, the acting, the world of start-ups, the atmosphere, the college experience. The movie is funny, it is gripping as only the best thrillers can be, it is smart, it is perceptive, it doesn't underestimate the audience's capabilities and it transports you. This is a story that deserves to be told, and deserves to be watched.

Doing business in India - how easy is it?

The World Bank periodically comes out with its own assessment on how easy or difficult is it to start, run or shut-down a business in countries across the world. The 2011 version of the Doing Business report is out there.(You can download the 273 page report for free.)

As with any report, one has to take this one too with a pinch of salt.  But there are some interesting pointers as to what are the factors that affect doing business in India. The report surveys 183 countries and ranks them. It measures these countries on the following indicators:
  1. Starting a business
  2. Dealing with construction permits
  3. Registering property
  4. Getting Credit
  5. Protecting Investors
  6. Paying taxes
  7. Trading across borders
  8. Enforcing contracts
  9. Closing a business
India stands 134th in a list of 183 countries surveyed in this report. Any guesses on the top 5 countries to do business? Well they are (from 1 to 5): Singapore, Hong Kong, New Zealand,  United Kingdom and United States.

Let's get into the details - that is where the fun is. In "Starting a business" category, the report lists the time required to start a business (in India you need an average of 29 days) and the minimum capital required to start a business (as a % of the income per capita of the country) as important factors. You need about 188% of India's per capita income to start a company. (I don't know how they arrived at at this number of 188%. Per capita income for India currently is about Rs. 44 K per-annum and it takes about one lakh rupees to start a pvt. ltd. company.) For people with means (read middle class folks, businessmen etc.) shelling out this amount is not that big of a deal. But, if you want to promote entrepreneurship amongst the common man, this amount is prohibitive. Also, having a long drawn out process for registering a company also doesn't help. The more transparent and straight forward these processes are, the better it is for a first time entrepreneur. (Companies Act, 1956 stipulates that for Private Limited Companies the minimum paid-up capital is Rs 1 lakh and Rs 5 lakh for public limited companies.)

Also, if starting a business becomes difficult, the unorganized/informal sector becomes very prevalent. That sort of takes away the main advantages of operating as a business (access to new forms of credit, protecting your personal assets by having limited liability companies, being able to scale by hiring people and streamlining operations without issues etc.)

Coming to the next issue of "Getting Credit". The report concentrates more on getting credit by providing security (or pledging assets). That only covers the bank loans and other such traditional lending mechanisms. Also, the report focuses on publicly available information on the credit worthiness of the entrepreneur/individual (like credit scores in the US). It recommends that governments create a public database of the credit history of people, and use it to streamline the loan giving process. It cites some examples of some countries/economies (like US) where movable assets can be used as security to get loans. Since many businesses have majority of their assets in movable form - it makes sense to allow this class of assets to be pledged against loans obtained. But, the report ignores completely non-traditional methods of obtaining credit (like government support, access to microfinance, etc.) in this section - a shortcoming that could be corrected.

 It deals with day-to-day issues like "Dealing with Construction Permits" (India ranks 177th! - it takes 195 days, 37 individual procedures and one has to spend over 2000% of India's per capita income to get a permit).  For comparison, in the US it takes 40 days and 12.8% of per capita income to get this done. India has a loooong way to go!

Another such indicator is "Registering Property". In India it takes 44 days (US: 12 days) to register a property and it costs about 7.4% of the value of the property to register it (US: 0.5% of the value). (Yes, I know, you might be steaming up a little now...such is life.)

The report also has sections on "Protecting Investors" and "Enforcing Contracts".  In protecting investors section, it looks at the transparency of related party transactions, liability of the company directors for self-dealing and ability of shareholders to sue the company directors for misconduct. India ranks 44 (not bad-uh!) in this category - but, given the clubby nature of corporate boards and the recent corporate governance scandals, one can only wonder. In "Enforcing Contracts" part -India ranks (hold you breath) 182. It takes on an average about 1420 days (no, I did not put an extra zero by mistake there) to settle commercial disputes through courts. (In the US, it takes about 300 days.) Such extraordinary delays lead to the parties engaging in dealings and settlements outside the legal framework (the less said about it the better). This factor also ties into why the creditors lend solely on immovable assets and other financiers hesitate to enter through the legal routes.

Now comes the best part - how long does it take to close-down/wind-up a business in India? Only 7 years. And you can recover about 16.3 cents on every dollar you put in the company. In the US, it takes about 1.5 years to shut down a company and you recover 88.6 cents on the dollar.

These reports have their own reasons to exist. But, they do provide some insights and identify issues that are worth addressing and rectifying. If not rectifying, at least to get a clear picture of what is what, and act accordingly. 

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