How TIE Can Work Best to Be a Change Agent for Indian Covernment Policies

Joshi ¢ At TiE we found that official committees on policy matters do not seem to work; they are more fanfare than content. The most effective way we have found to change government policy is to host conferences on various topics and issues at Stanford University. Each year we host an India Economic Policy Conference. Last year, it was on financial markets and privatization . In prior years , the topics were telecommunications policy and venture and tax structure, particularly in relation to venture capital.

Next year, we may focus on the federal-state relationship in India. This will get us in to the geopolitical issues, because part of India's problems also stem from the fact that the Indian states often feel they do not enjoy sufficient autonomy.

In these conferences, we typically invite world-class speakers . For example, last year's invitees included former Clinton administration Treasury Secretary Larry Sommers, former Reagan administration Secretary of State George Schultz, and several faculty members from the business school at Stanford. The Indian invitees included the finance minister and other high-level government decision makers as well as economists, journalists , and entrepreneurs. These are the people who affect policy changes. The decision-makers go home from these conferences well armed with facts and figures that allow them to persuade their colleagues in parliamentary debates and other venues .

Each year so far, the outcome of the conference has been instrumental in helping with some concrete changes in Indian economic policies.

Government officials need the backup information and rationale to protect the bureaucracy and the politicians . For example, how they might deal with the flak for shutting down public-sector companies or the reaction of the traditionally protected domestic companies. The prevailing perspective is that you cannot shut down factories since they employ thousands of people, even though they have lost money consistently for the last 30 years. Well, this makes for heated debates within the government and among the public.

The sensible analysis tells us that we need to deal with these problems separately. You cannot sustain a nonprofitable venture that uses public funds and has no hope of turnaround . Nor can you have high unemployment rates, because that destabilizes the nation. The answer invariably revolves around encouraging the private sector to go after new business and entrepreneurial opportunities. Government needs to get out of the way.

Gilo ¢ The issue of privatization is a big one in Israel. The government directly or indirectly still employs one-third of the labor force.

Joshi ¢ In India, the numbers are significantly higher, because the government is still making bread and steel .

Gilo ¢ It's really amazing to hear the similarities of the two countries . What I found effective in Israel is that every couple of years, we deal with one of the issues. For the past few years, we have been fighting with the government on tax structure or tax payment of venture capital. The regulations were structured to make it unattractive, especially for a foreign venture value fund, to invest in Israel, since they already have to pay taxes in their home country. The Israeli government officials think, "Why should we give up the taxes?" The answer is because they invest in the U.S., they pay taxes in the U.S. They don't pay taxes in Israel. I'm sure in India, it's the same kind of situation.

We have to convince government officials of the benefits of having additional capital coming into the country, generating jobs and stimulating the economy. So what if taxes go out? You get those funds back in a different way. That kind of thing is difficult to change in Israel. In fact, there were significant venture capital firms who decided not to come to Israel.

The answer revolves around encouraging the private sector to go after new business and entrepreneurial opportunities.

In the mid 1980s, Israel was not structured for stock options at all. Every time you got stock options you got the tax hit on the day you got the option. The poor employees never had any money to pay taxes; they were penalized for getting the stock option. It took many years to get the government to change the stock options regulations. We approached individual bureaucrats, patiently working through different organizations within the high-tech industry and chambers of commerce. And finally we got those changes through.

Once we got these changes through, the Israeli government became smarter . They just looked at what had been done here in Silicon Valley and adopted it. The initial response was, "We got revenues from tax money. Why shouldn't we get it for stock options?" Not knowing and understanding unique technology markets, governments have to make these changes to be competitive.

Joshi ¢ The concept of stock options didn't exist in India until 1997. These were first introduced when Indian companies such as Infosys (a major Indian software company) first listed on the Nasdaq in the U.S. Since knowledge workers move back and forth between the two countries, the Indian high-tech workers were saying, "Wait a minute, we do what the U.S. workers do, but they get much higher salaries and have options on the company's stock. So, at the urging of the global companies, the government had to adopt stock options in a hurry.

Gilo ¢ In Israel, it started with people like me. I was based in the United States for more than 20 years. I gave stock options to the U.S. employees, because here you have no choice if you want to be competitive. And I felt very strange because most of our employees were in Israel. The technology was in Israel, and the U.S. staff was mostly management, marketing, and sales positions . How can most of the people who make the greatest contribution, the innovations and the technology, not get stock options, while over here, every secretary had stock options? It didn't seem fair.

I fought to change it. And we did fund it before stock options were in effect in Israel; we did phantom plans with all kinds of mechanisms. We could write a whole book on how we can circumvent the tax issues presented by stock options, until we have stock options to give to people.