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May 30, 2021

Policy Reforms for Startups in Nepal

Photo courtesy: Helena Lopes (Pexels)
Startups have not only piqued the interest of the policymakers but have also captured the imagination of the Nepali youth. They are, however, fraught with risks and more often than not, fail. For example, in the USA, studies have found that over 90% of startups eventually fail. Around 21.5% of the startups fail within their first year. By the fifth year, half of all the startups are gone. The numbers are likely to be similar in Nepal.

In Nepal, in addition to the usual risks and uncertainties, startups also face severe regulatory hurdles that make their battle for survival even more precarious. Although creating a favorable environment for startups and entrepreneurship, in general, is a continuous and never-ending process, there are certain steps the government can take immediately to make life easier for novice entrepreneurs.

First, the policymakers need to change their perception that startups are only for well-educated and privileged people. This perception seems to have arisen partly because generally startups are associated with the information technology sector. If startups are to bring about a broader and more equitable economic change, then they must be accessible to the man in the street. What may seem like a very easy regulatory requirement for a person with access may actually be an insurmountable or a very costly obligation.  For instance, spending around two weeks and tens of thousands of rupees for company registration may not mean much to a city resident belonging to the middle class or upper class. The same provision may be highly discouraging to an aspiring entrepreneur without the means and the access.

Therefore, our policymakers must work towards streamlining the regulatory obligations during the registration, operation, and closure of the startups. After having to overcome huge red tapes while registering their business or having to pay thousands of rupees to a lawyer, the entrepreneurs tend to think that they are done with the regulatory obligations and now can focus on their energy on their business. This has led to many startups to default on the various regulatory obligations they are supposed to perform after starting the operation of their venture. They end up paying tens of thousands or even hundreds of thousands of rupees as fines to the Office of the Company Registrar. One can hardly meet a first-time entrepreneur who has not paid such fines, sometimes even to the detriment of their venture. The initial days of the startups are so full of uncertainty and the entrepreneurs are so occupied with ensuring their venture's survival that it is unreasonable to expect them to be making rounds of government offices rather than focusing on their venture.

The hoops startups are made to jump through while registering their businesses are, however, plain sailing compared to the hoops they have to jump through while shutting down the venture if it fails. If the startups follow the legal provisions to the letter, they can expect to spend years and tens of thousands of rupees just to shut down their company. This not only drains the energy of the entrepreneur, keeping her stuck and preventing her from engaging in a better idea or venture, but it also discourages entrepreneurs from actually starting companies. A difficult exit also means that the assets remain stuck in unproductive sectors rather than swiftly being transferred to more efficient sectors.

The government should streamline the exit process for the startups, more so for the startups that did not commence their commercial operations or whose operations got terminated early. Only about one-third of the total registered companies are estimated to be in operation currently. The need for a more streamlined exit process is currently more than ever as lots of startups and even well-established ventures are shutting down due to the COVID-19 pandemic. The government was headed in the right direction with the Companies (First Amendment) Act, 2074 (2017)  which had made a provision allowing companies that have been inoperative for years to shut down after paying a fee equivalent to 0.5 percent of their paid-up capital to the government. The provision was, however, made available only for two years since the commencement of the amended Act and made available to only companies that have not commenced business. The provision should be made available for an indefinite period and be extended to all companies.

For startups that succeed to survive and grow, the regulatory hurdle comes in the form of restrictions on foreign direct investment. The minimum floor of half a million dollars set by the government for foreign direct investment (FDI) has proved to be a huge obstacle for growth-oriented startups who are seeking not just the money but also the international networks and technology. Although Nepali startups are well-ready to take international investments and explore the international markets, the minimum floor of half a million dollars has meant that only a very few, if any, startups have been able to exploit the opportunity. All the investments below half a million dollars that could have helped the startups realize their national and international potential are simply denied to them. FDI is not just about money, it is also about the international networks and technologies. Because of this provision, the startups are having to rely on established Nepali investors with whom many of the startups are actually competing against which has the unintended consequence of enabling the same old faces, same old investors to control their would-be competitors and thereby making the economy the hostage of the same old business houses and investors. The often-cited reason for the minimum floor on FDI is to prevent the misuse of business visas by some foreigners who use FDI to get the visa and then engage in unwanted or outright illegal activities. This is, however, more a security issue rather than an issue of FDI. The government could simply remove the provision or come up with other monitoring and security measures to control such activities.

For innovative startups, the sword of "lack of policy/regulation framework" keeps hanging over their head. It is not just in Nepal where the policymakers and the regulations are trying to catch up with the rapid changes in the business models and technologies. However, Nepal is among the few places where such lack of policy framework is being used to kill the startups or at least prevent them from growing and keeping them in limbo. For instance, even after a huge controversy over ride-sharing services, all the government has done is a makeshift arrangement without actually providing the legal framework even after years. This has kept promising startups like Tootle/Pathao in constant uncertainty about their future. It is anyone's guess when the policy framework will be developed or when this issue will be the priority of our lawmakers. The government should develop a separate entity or legal framework governing such innovative startups before it is too late, and we lag too far behind the world which we already are to some extent.

-Surath Giri