Why is PM Modi Allowing DACOIT-y on Indian Digital Start-Ups?

It’s a shame that this is happening on an avowedly “nationalist” government’s beat, writes Raghav Bahl. 

(Photo: The Quint)

Our beloved prime minister has a thing for acronyms. Here’s one that he may not like: DACOIT, ie Digital America/China (are) Colonising and Obliterating Indian Tech!

Too caught up to read the whole story? Listen to it here:

Save India From Europe’s Fate (Digital Colony of the US)

With great gusto, Prime Minister Narendra Modi had promised to convert our country into a digital superpower, a Start-up India that would reconfigure the world with its tech smarts and savvy.

Unfortunately, the bitter truth is encapsulated in these wounding words of Bob Van Dijk, the CEO of Naspers (Africa’s biggest company, a media and internet conglomerate that is also the largest investor in China’s Tencent), in a 26 February 2018 interview to The Economic Times:

India needs to make sure that it builds an ecosystem for the success of local businesses. If I am blunt about it, I think Europe is a digital colony of the US. Europe has nothing. There’s no decision making in search, content, social or video, which basically means there is no ecosystem of capable internet entrepreneurs or professionals. It’s a disaster… if I were your prime minister, I would have that bent of mind. I don’t think it means throwing out foreign capital. You want foreign capital and you want skill. That’s smart. But in the process, you should try to avoid becoming the Europe of the internet, where the decisions are made, and all the key talent is, elsewhere, and all you have are the sales and execution there. I think that would be a very dangerous outcome.

Digital DACOITs Replace Chambal Bandits of the 1970s

Yes! Just as Chambal dacoits looted central India in the 1970s/80s, Shenzhen and Silicon Valley DACOITs are savaging our digital landscape in the 21st century. We have already resigned ourselves to the astonishing dominance of Google and Facebook, without even a shrug of resistance.

These American titans take nearly 90 percent of all digital ad dollars from India. They own the digital identities of over a billion Indians. They know what we search, buy, whom we date, where we live, what politics we follow, what we say, think, and everything we do!

It’s a shame that this is happening on an avowedly “nationalist” government’s beat.

But wait, don’t we also have an ‘Indian’ counter-weight to every foreign invader in areas other than search and social? Just look at the reality:

If there’s an Amazon, there’s a Flipkart too, founded by local boys Sachin and Binny Bansal(s), right? Well, except for the fact that China’s Tencent and other foreign investors own 70 percent, while the Bansal boys are down to 10 percent. And we now hear of Walmart swooping in for the final kill.

So what, you will counter. See how Bhavish Aggarwal and Ankit Bhati’s Ola has taken the fight to America’s Uber; isn’t a homegrown start-up that’s socking it to the mighty denizen of San Francisco?

Yes, but Ola is now 60 percent owned by a clutch of foreign investors, including the unstoppable Softbank (Japanese), which is also the largest investor in China’s Alibaba. Talk about promiscuous parentage!

Hold on, don’t fret, we still have our own giant-killer, Vijay Shekhar Sharma and his PayTm. Oh really? Do you know that Alibaba owns 60 percent of PayTm’s parent company, and Vijay’s stake is in the teens? So who will eventually call the shots here? You must be utterly naive to believe that it would be anybody other than Alibaba founder, Jack Ma.

A DACOIT-ised Digital Ecosystem

The stark truth is that India’s digital economy has been DACOIT-ised completely; to quote Mohandas Pai, “of the eight ‘Indian’ unicorns (start-ups valued at over $1 billion), seven are domiciled overseas, largely owned by foreign capital with most founders reduced to being ‘managers’ dictated to by overseas investors and overseas capital”.

Even otherwise, these ‘Indian’ companies are puny and incredibly vulnerable: Tencent, with a market cap of half a trillion dollars, is training its sights on Hike, Practo, Byju’s and MakeMyTrip (in addition to Flipkart and Ola); while Alibaba, with a $450 billion market cap, has got Zomato and TicketNew (plus PayTm) in its line of fire.

RIP Indian Digital Companies. Our government has permitted a daylight DACOIT-y on you.

Value Creating Dichotomy Between Ownership & Control

I know the defenders of the faith will trot out one last argument. Jack Ma owns only 8 percent in Alibaba. It’s almost the same with Pony Ma in Tencent, right? Heck, even Mark Zuckerberg owns only 20 percent of Facebook. So what are you fretting about? Please stop pillorying Prime Minister Modi’s revolutionary policies. He can do no wrong.

Alas, if only the defenders stopped being prickly, and began searching for practical solutions, because those are smack in front of them. Jack Ma owns economic benefits of 8 percent, but controls Alibaba almost 100 percent via an innovative structure called Variable Interest Entities (VIEs), which are trusts/contracts listed on foreign bourses. Zuckerberg does the same via differential voting rights vested in his Class A shares which allow him to unambiguously control Facebook.

Simply put, America and China enable their iconic founders to raise astronomical amounts of capital – cleverly, and ironically, Chinese companies scoop up landfills of dollars on American stock exchanges to build Chinese assets – even as they are assured of retaining control via specially designed financial instruments, structures, incentives, and rights.

But Indian Entrepreneurs Are Trussed Up…

As opposed to such aggressive institutional backing, Indian entrepreneurs are trussed up in archaic laws.

Not allowed to issue differential voting shares. Not allowed to issue non-voting stock. Severely constrained in issuing and pricing cross border quasi equity/debt structures, perpetual bonds, warrants, convertibles, puts, calls, tracking stocks or options. Cannot list on overseas exchanges unless the entity is listed in India (there has lately been a marginal, grudging relaxation of this).

Clearly, there is just no effective legal framework in India that separates ownership and control via differential rights of two shareholders of the same entity.

Mantra Should be to Empower & Liberate

Whenever I have tried to explain this critical difference between ownership and control to officials at the RBI, the SEBI, Niti Aayog and Ministry of Finance, I have encountered blank expressions, followed by suspicion and disapproval. They just don’t get it.

That if people like Vijay or Bhavish or Sachin (and dozens of other talented, hungry entrepreneurs) give hundreds of billions of dollars of “economic ownership” to foreign investors, even as they maintain “voting control” with their minority stakes, they can create Indian digital behemoths without ceding to American and Chinese acquirers.

We will then see the blossoming of a genuinely digital India, with homegrown rivals to Facebook, Google, Alibaba, Amazon and Tencent.

Frankly, it’s still not too late. Over the next decade, we could see a 13x growth in the e-commerce market, 4x in digital payments, and 4x in smart internet users. That’s a humongous growth which could be harnessed and controlled by local entrepreneurs, provided the blank expressions on Indian policy makers’ faces are replaced by a can-do spirit to empower and liberate the architects of digital India.

Otherwise, Prime Minister Modi and his team of pedantic bureaucrats will only encourage the ongoing DACOIT-y (ie, Digital America/China Colonising & Obliterating Indian Tech).

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