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It's not about services only

Software product firms insist they don't get enough weightage at Nasscom. They intend to change that by forming a breakaway association - iSpirt

Pradeesh Chandran & Shivani Shinde  |  Mumbai 

Last month, when news came out that 30 some product have broken out of Nasscom to form another association called iSpirt, the Indian IT industry was taken by surprise. The news led to a raging debate within the $100 billion industry, but the undercurrents for the formation of such an organisation have been present for the last three to four years. "The demand to have a dedicated body or a think-tank working for the software product company was felt even as Nasscom formed the Nasscom Product Forum some four years back," says a senior industry executive who is a member of both Nasscom and iSpirt.

In February, a group of 30 product entrepreneurs including Nasscom Product Forum head Sharad Sharma, Tally Solutions co-founder Bharat Goenka and Naveen Tewari of InMobi joined hands to form a 'think-tank' called the Indian Software Product Industry Round Table, or iSpirt. The key objective of the new group is to focus more on the problems faced by the software product of the country. Sharma insists that the new association is no competition to Nasscom. "Our needs and the challenges we face are different from the services We are not competing with Nasscom; we are complementary to Nasccom. We believe that with this think-tank we will get a louder voice in policy-making and other initiatives," says he. The idea behind iSpirt is to point out the nuances about this industry to policy makers, industry as a whole and the public.

iSpirt has three main focus areas. One, it will work towards changing policies specific to the product companies. Two, many small and medium businesses fail to expand geographically -" iSpirt will help them do so. And three, it will create a dedicated platform to discuss the issues faced by the software product industry. According to Nasscom's strategic review of 2013, the software product exports in 2013 would be around $1.6 billion, and the domestic software product market is set to grow to Rs 20,500 crore. Compare this to the $76 billion exports revenue from the IT services industry.

One other focus of iSpirt will be to address the merger and acquisition challenges that exist through a self-help program called M&A Connect. Right now there is a valuation penalty associated with being an Indian product company. This is because M&A folks in Silicon Valley are wary about IP and post-acquisition integration issues.

"At Nasscom the product companies do not have the same weightage as the services companies. The policy interventions Nasscom is trying to make is more in favour of the services industry. Any time a policy intervention is required, it is 100 per cent going to be in favour of the services industry because any minor policy intervention will have a significant impact on the economy. On the other hand, the impact of any policy intervention in the product segment cannot be measured," says Goenka who is a founder member of iSpirt.

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The new group believes that India has the potential to create a brilliant product company with a market value of around $1 trillion. Hanuman Tripathi, Founder & Group Managing Director, Infrasoft Technologies, a banking solutions company, who has been associated with Nasscom since 1996 and also is one of the first 20 Founding Members of iSpirt, said: "Twenty years back, India had to create an outsourcing story. Had Nasscom focussed on our Product Story then, I doubt if we would have become a $100 billion industry as we are today".

It's been just about four weeks since iSpirt was formed, so it is early to talk about its plans. Kunal Bajaj, Director, One97, and advisor to iSpirt, says: "We will complete four weeks on March 4 and we have started our work for the sector. It is too early to talk about the governance structure and other initiatives of the body."

To highlight its demands and concern, the group has come out with three blueprints. These deal with issues like a proper structure of tax on the product companies, creating a level playing field for the Indian software products companies in the government sector, need for the promotion of investment in start-up product companies and enhancing research activities and intellectual property. The first blueprint talks about the existing confusion related to taxation and the problems faced by the industry. It is a fact that the Indian tax authorities are a little confused about software products and services. Many point out that the Indian officials understand 'shrink wrapped products that come on CD and other IT services, but anything other than this attracts both VAT and service tax.

"The law distinctly talks about separate tax frameworks for 'goods' (products) and 'services'. The central government has the right to tax manufacturing' and services', while the states have the right to tax trade (which is purchasing and selling). For a variety of reasons, the umbrella word 'software' fails to cleanly fall into either of these categories, and that has over time led to multiple policy interventions with varying degrees of 'adding confusion' and 'removing confusion'," says the blueprint. "The inherent intangibility of software is really behind the conundrum, and the industry at large has failed to provide the policy makers with adequately clean ways to define and tax the transactions associated with it. We believe that the new generation of Indian software products will have a big impact on improving government, labour, and social productivity. It will make governance more data-driven, small businesses exponentially more productive, and communities more connected," Goenka said in the paper.

The second blueprint talks about how there is a need to promote 'made in India' products. Hareish Gur of Newgen Technologies said in the paper that 'made in India' software products are increasingly not being allowed to participate in government and PSU tenders, due to cartelisation and restrictive trade practices by foreign companies and consultants. Gur feels that India must learn from China. "It has created a whole telecom product industry on the back of its domestic market. In contrast, India bought $24 billion of telecom products last year and less than 5 per cent of that came from Indian companies. We cannot afford to miss the software product opportunity. It is vital that we have the right government and PSU buying policies in this area," Gur adds.

The third blueprint deals with ownership structure of Indian companies and promotion of investments. The paper talks about how difficult it has become to start a product company in India. Indian entrepreneurs spend significant time on product development and are building patentable products for the global market. However, as soon as a world class product starts gaining traction, venture investors and professionals advise entrepreneurs to move the holding company, if not the entire business, outside India. "Over the last year, India has lost dozens of its most promising software product start-up businesses which have migrated to more friendly jurisdictions," point out Nitin Singhal of Fresco Global and Kunal Bajaj, advisor to iSpirt Founder Circle.

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Moreover, recent controversies around ownership structures, M&A and retroactive changes to policies in these areas have highlighted the challenges investors face while investing in Indian product businesses, and there is now growing nervousness amongst international investors investing in India. "An investor (especially a non-resident) looking at investing in or starting a business gets scared. Incorporating a company in India can take up to three months, ridiculous amount of paperwork and $1,000. Compare that to 10 minutes in UK with no paperwork and a total cost of $20. Add to this the maze of rules they have to go through regarding venture capital and foreign investment; there are no restrictions in most major economies," says Singhal.

Most members of iSpirt say they are not competing with Nasscom. But they do feel that Nasscom has become a huge organiastion and asking it to focus on products firm will not be logical. Out of the 30 companies in iSpirt, 17 are still members with Nasscom. "Nasscom over the years has become a thriving powerful trade platform that has several agenda items and priorities, software products is also one of them. iSpirit is not conceived to be a Trade Platform, but planned to be a large scale Think Tank that will promote building of IP out of India and propagate building trust in Indian Software Products story," says Tripathi. Add to this Nasscom has a membership base of over 1,300. Tripathi says that the last Nasscom Product Conclave saw participation from 1,300 companies, up from just 30-40 three or four years back.

Moreover, on Monday Nasscom will come out with a blueprint that will talk about its future course. It has been created by a committee headed by Infosys founder N.R. Narayana Murthy. One of the themes being discussed is the new product firms in India.

Key points on the iSpirt agenda
  • Clarity on taxation of software products required
  • Made in India software products need to be promoted systematically
  • Indian software product companies need to get their fair share of government businesses
  • Rules for doing business in India for software product firms need to be simplified, or else, the businesses will fly abroad.

First Published: Sat, March 02 2013. 20:20 IST