Government to launch development bank to assist start-ups, SME
The government has plans to launch a development bank to assist start-up companies and small and medium enterprises (SME), President Gotabaya Rajapaksa had said at a meeting with the IT sector leaders recently.
This came about when the participants at the meeting highlighted their challenges – especially in terms of raising capital and free flow of funds when funding start-ups.
“It was put forward at the meeting to maybe look at the model that Singapore has in place in terms of funding start-ups. There, if a bank lends to a start-up and it does not work out, then the government buys 75 per cent off the loss/hit,” Abbas Kamrudeen, Chairman Federation of IT Industry Sri Lanka (FITIS) told the Business Times. He said that the President had also mentioned linking angel investors in the country to better assist start-ups.
The challenge on start-ups raising cash was highlighted by the Business Times on February 16.
Jeevan Gnanam, CEO – St. Anthony’s Industries Group and Chairman Sri Lanka Association of Software and Services Companies (SLASSCOM) noted to the Business Times that angel investors need their tax written off. “This is done in Malaysia.” He also mentioned the limited liability company (LLC) structure which is one of the simplest forms of legal business structures for business operations should be revived. It was to be gazetted but is still in limbo. An LLC mostly gives a business owner peace of mind by giving protection from any kind of personal liability for business related debts.
Imal Kalutotage, CEO, nCinga Innovations noted that when start-ups look for funding from banks, they are more often than not asked for collateral or assets in exchange for working capital. “The Sri Lankan financial sector isn’t geared to support the start-up industry. The banks do not have the risk appetite. There aren’t many venture capitalists in the country. But when you compare with Singapore, it has higher valuations for start-ups,” he explained noting that many venture capitalists want to fund start-ups which are registered in Singapore.
Many start-ups say that while registering in Singapore gives companies regional as well as an Asian presence, firms latch onto the open policies in Singapore which makes it easier for businesses to operate. This is true for start-ups which need venture capital funding. There are no restrictions on the amount of capital that one can bring from their home country to invest in a Singaporean company. It imposes no restriction on repatriation of profits.
Mr. Kalutotage stressed that Sri Lanka as a country, needs to change this equation. He noted that basically the start-up industry wants more relaxed regulations around start-ups and their funding. “We also need a Venture Capital Act and maybe have a system like in Singapore where there is no capital gains tax for start-ups,” he noted.
Singapore has no restraint on movement of foreign currency in or out of that country and this effortless transfer of funds across borders provides exceptional flexibility to a business.
There is no capital gain tax, which means, the dividends paid by Singaporean companies to their investors is tax-free. Singapore is continuously ranked as top country for its Contract Enforcement and Intellectual Property Protection. Also, many start-ups say that Singapore is amongst the least bureaucratic countries in the world.
A separate meeting with start-ups and the President is due soon.