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For the 30-year Indian start-up founder, the last weekend was one of the longest in his life. Droopy eyes and a stubble after 48 hours of staying awake, the youngster, like most founder and investors in India’s startup ecosystem, spent these two days closeted in one meeting after the other. Lawyers were involved. So were accountants. His business was among the hundreds of young Indian businesses that were grappling with the fallout of the beleaguered Silicon Valley Bank, which broke over the weekend and then events unfolded over the following week.
From long sleepless nights to uncertainty over when the funds would be accessible, Indian start-up founders had a nightmare in the aftermath of the collapse of SVB, with number of them pushed to the brink and back, staring at mass layoffs and, in some cases, extinction.
As the debacle unfolded, leading up to the US government shutting down SVB last Friday, start-ups were facing a myriad of problems. Most prominent, among them, was access to immediate working capital crucial for day to day functioning of the firms including creating payrolls. There were other issues too.
An angel investor, requesting anonymity, said that a founder had raised a big amount as part of their Series A round and the money had hit their SVB account just a few hours before the bank collapsed.
“This was the lifeblood of this particular business. It needed the cash to continue to run operations, and without access to it immediately, the company would likely have collapsed,” the investor said. He wished to remain anonymous and did not reveal the name of the start-up given the optics around the information.
“I did not sleep for almost two days. I was constantly on calls with lawyers and accountants to figure out a way to save the company,” a founder had earlier told The Indian Express. His business had almost $3 million in its SVB account.
SVB had traditionally been the default banking partner for most start-ups because of its legacy in technology and experience of banking high-growth and high-burn companies. Basically, it dealt with businesses that traditional banks typically stay away from given the perceived risk of failure and lent to start-ups when other sources of funding were hard to come by.
Aside from offering traditional banking services like checking accounts and credit cards, SVB was also a pioneer of an investment instrument called venture debt, a type of loan offered by banks and other lenders to issue loans – with backing from venture capital firms – to high-growth and high-risk businesses such as start-ups.
Based on the goodwill of having been there for these businesses when traditional banks stayed away, SVB received huge deposits during the tech boom of 2020-21. As of December 2022, SVB had $209 billion in total assets and about $175 billion in total deposits.
It invested the bulk of the proceeds in long-term US Treasury bonds while interest rates were low, and kept only a small volume of deposits on hand. This strategy to earn returns worked until the Federal Reserve, the US central bank, started to raise interest rates last year to cool runaway inflation.
At the same time, startup funding began drying up, which put pressure on many of the bank’s clients, who started to withdraw their money. To honour the requests, SVB was forced to sell some of its investments at a time when their value had declined, losing almost $2 billion in the process.
That triggered mass withdrawal requests to the tune of $42 billion in a single day as depositors rushed to redeem their parked funds. But not everyone was successful.
However, last Sunday, the US Fed devised a plan and said that it will make available additional loans to eligible depository institutions to help assure that banks have the ability to meet the needs of all their depositors. This allowed Indian start-ups to access a large chunk of their money stuck at SVB. The next step was to find a new home, a new bank for parking it.
The crisis has put a spotlight on Indian banks, with the government even urging start-ups to deposit their money in some of them. The Ministry of Electronics and IT (MeitY), earlier this week, had sent a letter to the Finance Ministry, emphasising the need to devise a plan on how the Reserve Bank of India (RBI) can get domestic banks to offer loans to these start-ups, this paper had first reported.
According to an analysis by global financial major Jefferies, Indian banks are well placed in terms of quality of deposits and also the possible impact of mark-to-market losses on held-to-maturity books.
However, even as Indian banks appear seemingly safe from the global banking crisis that is currently unfolding, with major banks like Credit Suisse needing a rescue from the Swiss government, start-ups in particular are not exactly flocking to deposit their money in them. Some of them have deposited a portion of their money in branches of banks at the Gujarat International Finance Tech-City or GIFT city, but not everyone has chosen GIFT city banks.
By some estimates, only about 20 per cent of the money that Indian start-ups collectively had in their SVB accounts was brought back to banks at GIFT city. Minister of State for Electronics and IT Rajeev Chandrasekhar, who held a meeting with more than 400 Indian start-ups after the SVB debacle, said that there was close to $1 billion that Indian start-ups had in their SVB accounts, of which only $200 million had been transferred back to India.
GIFT city has been conceptualised to be an international financial hub. It aims to be the financial and IT hub for the country. Fintech platforms have partnered with banks such as RBL, ICICI and Kotak to set up these US$ banks in GIFT City.
A number of start-ups, especially the larger ones, which had several million in their accounts, chose to move their money to other US-based banks that are known to offer similar services as SVB such as Brex and Mercury. The latter, for instance, quickly created a new product called Vault which insured up to $5 million worth of deposits per account. That is significantly higher than the typical insured amount in most banks, which is around $250,000.
“We’re all just wiring to another US bank account and then deciding what to do. I’ve heard of other companies succeeding with wires. And we’ve so far had a great experience switching to Brex since we already had their credit card,” another founder had earlier told this paper.
Start-ups that this paper spoke to said that one of the biggest reasons that they were apprehensive about transferring their SVB money back to India was the reliance of GIFT city banks on SWIFT, a wire transfer system used by banks globally. They said that SWIFT transfers are not just expensive, but also compliance heavy, requiring a six-point “know-your-customer” disclosure.
In what was a sprint race for businesses to withdraw as much of money as possible from their SVB accounts, a number of them did not want to be bogged down by time consuming compliance measures. Moving money within the US was a much faster and cheaper option.
“In fact, when this news came in, one of my companies whose payroll was linked to this (SVB) account, just doubled the payroll and also prepaid some credit card payments. She took most of the money out,” a person who mentors start-ups, told this paper.
Many sector analysts believe that start-ups are wary of moving their money to India as there is a lot of uncertainty around regulations.
“The problem in moving money to India is the inconsistency in regulations. Is there going to be some cap on moving funds? Will there be some back and forth between banks while moving funds?
“Also moving money out of India is becoming increasingly difficult. Gift City is supposed to be for opening foreign accounts but I would just worry about what happens if things (regulations) just change. What if there is an increase in tax on LRS (liberalised remittance scheme)? As of today, it is okay that there is no tax on money being moved to Gift City, but what if they change it tomorrow,” said a start-up founder, requesting anonymity.
In the past also the start-up community has sought reduction in capital gains tax.
“If there is some advantage (on capital gains), people will put money in India and invest in Indian companies and not necessarily want to have holding companies structures built in jurisdictions where exit is possible or for that matter capital gains is limited,” said another start-up founder.
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