A lot has already been written, with a sense of awe, about the six-year-old startup PharmEasy’s acquisition of the 25-year-old listed diagnostic company Thyrocare—David pummeling Goliath though admittedly it was a friendly acquisition to be sure. It has by now become a pattern. Successful startups in India have by and large been started by techies living up to India’s justly built image of being a software powerhouse.
But they have been disparagingly and teasingly called paper tigers (or are they paperless tigers?) because of their sky-high valuations built on mere funding by deep-pocketed foreign investors rather than profits, and their massive scale without revenue generation. With online technology becoming such a critical aspect of everyday life and transactions especially in the COVID-19 era, startups are looking to snap up non-tech businesses in a bid to demonstrate revenue growth along with scale.
PharmEasy recently raised $323 million in its Series E round from Prosus Ventures, TPG Growth as well as existing investors Temasek, CDPQ, LGT Lightrock, Eight Roads & Think Investments, at a valuation of $1.5 billion, becoming India’s first healthtech unicorn. It spurted to $1.8 billion after a $20 million secondary transaction from Facebook cofounder Eduardo Saverin’s B Capital. Flush with funds it went about realising its dream of being a comprehensive healthcare service provider—consultation, diagnostic, pharmacy and hospital. The Rs 4,546 crore deal to acquire Thyrocare is the first step in that direction. More action can follow.
Growth can be both organic and inorganic. There is no shame in growing inorganically. But the moot question is whether this path is kosher for a startup. The Indian government policy among other things requires a startup to be formed afresh and not by splitting an existing business. This has been the standard refrain in almost all the tax-holiday provisions in the income-tax Act. One can understand because the government wants fresh investments in plants and machinery to take place as well as to generate fresh employment opportunities in return for the tax incentives. Startups enjoy a three-year income tax holiday and its investor’s immunity from capital gains tax besides getting immunity from the dreaded angel tax if the startup is recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).
Tech startups flush with funds now have an envious opportunity—ramp up their business model with brick and mortar acquisitions. This in a way gives foreign investors an opportunity to acquire successful Indian businesses through startups and their parent companies as vividly brought out by the fact that Thyrocare promoter Dr A Velumani is investing Rs 1,500 crore for a 4.96 percent stake in API Holdings Pvt. Ltd, the parent company of PharmEasy. If you can’t beat them join them is the adage. Dr Velumani is thus ploughing back a sliver of his generous sale proceeds into the acquirer if not his tormentor.
The government needs to reexamine its policy in light of this recent development. Well-run Indian companies may be coveted by the deep-pocketed startups and their foreign investors. The tax exemptions (including the three-year income tax holiday) in hindsight thus would turn out to be undeserving and unmerited as it was a handholding gesture from the government.
A David who can fall Goliath needs no handholding and thus should be required to pay back the tax that was exempted earlier. And the threat of attracting angel tax under section 56(2) (viib) of the income tax Act which has been held back once again as a handholding gesture must be acted upon. It says if an investor in a startup has paid more than the fair value for its shares, the excess will be taxed as income from other sources. The object was to deter the laundering of black money. The phenomenal valuations put on startup shares fuelled this suspicion.
Another aspect the government must look into is the conflict of interest. PharmEasy now would contrive its app to promote Thyrocare to the exclusion of its competitors the way Amazon favors (allegedly) its own associates in its avowedly marketplace model on its e-commerce portal.
—S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own
(Edited by : Ajay Vaishnav)