Why Modi Says ‘Beat TikTok’ But IAS Officers Say ‘Won’t Happen’
TikTok Ban: Raghav Bahl explains via satire, whether or not Digital India / Start-Up India can really take off now.
Mark-II and Zhang-II (nicknames for Anand Kumar and Venkatesh Shetty, respectively) were thick pals and roommates at IIT. Their typically tiny, somewhat unkempt hostel room was unusually quiet for a Monday evening, as both worked diligently to complete H1-B documents for the critical interview next morning.
Both were headed to Menlo Park in Silicon Valley to work with their heroes.
Yes, you’ve probably guessed it by now – Mark-II was excited about elbow-butting Mark Zuckerberg at Facebook, and Zhang-II couldn’t wait to hi-five Zhang Yiming (the charismatic founder of TikTok) at Bytedance.
Mark-II and Zhang-II were hugely popular on campus for FaceTok, a video sharing social media app they had created for a closed-circuit download within the institute. Their app was a dramatic innovation over the standalone versions of Facebook and TikTok, with personalisation, search, wallet, exchange, and several artificial intelligence features that were almost a generation ahead.
Ironically, their unique app was born out of a passionate disagreement – that is, who is a greater tech-icon?
Mark-II worshipped Zuck, but Zhang-II thought Facebook was ‘old and clunky’. Zhang-II was starry-eyed about Yiming, but Mark-II thought TikTok was ‘low-brow’. So, one made FaceTok ‘young and sleek’, the other made it ‘high-brow’. Net net, FaceTok was ready to storm the world.
But there was a big glitch. Facebook/Instagram and TikTok dominated the Indian market, effectively shutting it for a newbie – until 8 PM on Monday, 29 June 2020, when their phones buzzed with crazy WhatsApp messages:
“India Has Banned TikTok!”
Would Modi Govt Give Wings To The Dreams Of Two Young Entrepreneurs?
They had immense faith that Prime Minister Modi’s government, forever talking about Digital India and Start-Up India, would do whatever it took to give wings to their dream.
Under the new Superior Rights (SR) rules, they would get 10x voting on their equity, just as Mark Zuckerberg has on his stock in Facebook. Then they would pick up Rs 300 crore at a premium of Rs 1000/share from a clutch of eager investors – perhaps the same bunch of Sequoia, KKR, SoftBank, General Atlantic, Hillhouse – who had backed Zhang Yiming at Bytedance. And three years later, they would do an IPO at a USD 3 billion (Rs 22,000 crore plus) market cap on Nasdaq.
Voila! Because of SR shares, they would still own/control 51 percent of FaceTok, cartwheeling into the league of young global billionaires. Shaking with nervous energy, they abandoned half-filled H1-B applications and dialled their Investment Advisor (IA).
Thorns In The Path Of Young Turks
Mark-II: Hey, you heard the news? TikTok’s been banned. So, we now wanna launch FaceTok in India and pick up Rs 300 crore of private equity in the first round. C’mon, that’s just USD 40 million, so should be easy, right?
IA (curiously, his tone was subdued): Great news boys, but you need to clear a few preliminary hurdles. Since you will carry news on your app, you may – and I say ‘may’ because the policy has not been clarified for several months – fall in the ‘maximum 25 percent FDI’ category. Next, a bunch of government secretaries will have to certify that you are a genuinely tech savvy outfit which deserves all the policy concessions. These could take weeks, perhaps months.
‘Superior Rights’ Shares: What’s The Big Deal?
Mark-II (impatiently): C’mon IA, who is going to black-ball us in Prime Minister Modi’s Digital India? We shall get this done. What else?
IA (still sounding morose): I imagine that both of you are hell-bent on getting Superior Rights (SR) shares, so that you can maintain ownership/control as you rapidly dilute capital, right? But I am not sure that Zhang-II will be eligible. You see, his wife belongs to that large land-and-infrastructure-owning family from Hyderabad, and his sister is married to a Russian tech billionaire. Between them, their net-worth could be well above Rs 500 crore, and that disqualifies Zhang-II, since in India, a ‘promoter group’ is legally defined as ‘spouse, siblings and parents’. Their wealth must be pooled together to estimate Zhang-II’s net-worth...
Zhang-II (furious): But I am estranged from my sister; and my wife does not take even a penny from her family. Why should their wealth come in the way of my ambition!
IA (apologetically): Sorry, in India, rules are rules, my friend. In any case, you are aware about the other restrictions on SR equity, right? You can only keep them while you are working ‘full time’ in the company – if you quit, your shares automatically convert to ordinary shares with 1x voting rights. Likewise, if you acquire or merge with other companies or lose control. In any case, after listing, your SR shares get almost fully neutralised. Even with 51 percent control, you can nominate just half the board members, while the other half are independents. All board committees will have two-third independent directors, while the audit committee will be entirely independent. There are several ‘coat tail’ provisions under which your SR shares will have only one vote, not the 10x that you think you have. And there is a sunset clause – five years after listing, your SR shares shall compulsorily become ordinary shares unless other shareholders vote to extend your privilege.
Can One Sell ‘Superior Rights’ Shares?
Mark-II (angrily): What! Are you nuts? Just when the company has grown large and valuable, I lose the fruits of my lifetime’s effort? Which fool will hold on to these shares? I will sell it before the sunset clause kicks in.
IA (cutting in): Oh, you did not know? You can’t sell SR shares. The minute you transfer them, they become ordinary shares, ab initio. Also, it sounds cruel, but when you die, your family cannot inherit SR shares. These extra voting rights die with you…
Mark-II and Zhang-II (yelling angrily, in unison): Stoppppp! I can neither sell nor transfer nor use as currency to acquire other apps nor bequeath to my family, who would have sacrificed to build the company along with me. So, these so-called Superior Rights (SR) shares are just as good or bad as Ordinary Shares (OR) with 1x voting rights.
IA (nodding): Now get ready for the pièce de résistance – Angel Tax! Since you will have very low revenues and would be making losses for a long time, the chances are very high that the income tax officer will not accept a Rs 1000 premium on your first placement. He will classify your ‘unearned premium’ as ‘income’ and slap you with a Rs 100 crore tax (plus penalties) on the Rs 300 crore equity raise.
Has PM Modi Really ‘Killed’ Angel Taxes?
Mark-II (lapsing into colloquial Hindi): No way! Rs 25 crore? Pacchis crore, sirf pacchis crore – iska main achar daloonga kya (what will I do with this niggardly sum)? Our ambition is much bigger. We are talking about raising hundreds of millions of dollars to create an app worth tens of billions of dollars…
Everybody now fell silent. There was very little left to say.
IA slowly disconnected the call. Mark-II and Zhang-II pensively got back to completing their H1-B applications. Silicon Valley seemed a much surer bet right now. Go there, get a Green Card, and then launch an ‘American’ company… pick up sackfuls of dollars without getting caught up in family’s net-worth calculations, tax traps, CBI enquiries, sunset clauses and what-not.
Even in satire, what’s been asserted above about various regulations is completely factual and accurate. Several moons ago, I had described policy infirmities that had condemned our first-generation entrepreneurs to DACOITY, that is, Digital America and China were Obliterating Indian Tech.
In response to that scathing criticism, several IAS officers had reached out and promised change. In fact, our bureaucrats were chuffed when Superior Rights (SR) shares were ‘permitted’, and Angel Taxes were ‘banned’. As I have explained above, these ‘incentives’ are grudging, half-hearted, squeamish, and too tiny to make a substantial difference on the ground.
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