Startup- India: What’s it all about

Starting off in any sphere can be a challenge, the same is no different for an entity planning to enter the commercial environment. Intense preparation, structuring and foresight is required to emerge victorious in today’s cut throat and competitive backdrop. In addition, financial assistance, infrastructure, legal safeguards, intellectual property rights and myriad requirements arise as the entity grows.

In order to aid and support such entities namely startups, the Ministry of Commerce and Industry through the Department of Industrial Policy and Promotion (“DIPP”) vide notification dated February 17, 2016 (“Notification”) introduced the ‘Startup India’ initiative. The objective of the initiative is to promote the startup environment in India and give it a much needed boost.

To be identified as a ‘startup’, DIPP laid down certain criterion such as:

(i)                 an enterprise/ entity will be a startup only up to five years from the date of being registered. After the completion of five years the entity shall cease to be called a startup; or

(ii)               if the turnover[1] for any of the financial year of such an entity exceeds INR 25 crore [250 Million] the entity shall cease to be called a startup; and

(iii)      if the entity is working towards innovation, development, deployment or commercialization of innovative product, processes or services driven by technology or intellectual property the entity will be considered as a startup. The focus of such a startup should be to advance upon/ further i.e. develop and make financially viable:

a.       a novel product or service or process;

b.   enhance existing product or service or process, that will lead to increase in value/ worth of customers or workflow. The mere act of developing product or service or process having no commercial viability or are undifferentiated or have no scope of increasing the value for customers or workflow, will not be considered as a startup.

It is pertinent to note that, any entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘startup’.

An entity means and includes a private limited company, or a registered partnership firm or a limited liability partnership, as defined by their governing legislations.

In order to facilitate the growth of startups in India, Startups can undertake the process of registration online via the mobile application or the web portal, by submitting the application form along with the requisite documentation. To make the startup environment more conducive, registered startups have been provided many incentives subject to certain conditions, such as:

Benefits/ Incentive

Reserve Bank of India (“RBI”): ·         Startups allowed to receive foreign venture capital investment and transfer of shares from Foreign Venture Capital Investors to other residents or non-residents; ·         Permitting (in case of transfer of ownership of a startup) receipt of the consideration amount on a deferred basis and also enabling escrow arrangement or indemnity arrangement up to a period of 18 months; ·         Enabling online submission of A2 forms for outward remittances on the basis of the form alone or with documents. ·         Startups allowed to raise External Commercial Borrowings (“ECB”) within the parameters designed by RBI; ·         Foreign Venture Capital Investors (“FVCI”) registered under the Securities and Exchange Board of India (FVCI) Regulations, 2000, will not require any approval from Reserve Bank of India and can invest in startups;

Income Tax Act, 1961, after obtaining Certificate of eligibility from the Inter-Ministerial Board: ·         For computing the gross total income of a startup the profits and gains derived from eligible business will not be included in the computation for any 3 out of 5 consecutive years that is it a startup.

Intellectual Property Rights (“IPR”): ·         To avail the facilitating Startups Intellectual Property Protection (“SIPP”) scheme obtaining Certificate of eligibility from the Inter-Ministerial Board is not required.

Companies Act, 2013: ·         Startups are permitted to issue sweat equity shares upto 50% of their paid up capital for the first 5 years from the date of incorporation; ·         Startups can issue stock options to their promoters and to directors who hold more than 10% of the startups equity shares for the first 5 years from the date of incorporation.

Under 8 Labor laws: ·         Furnishing of returns made electronic; ·         No inspection for startups for the 1st year of incorporation if self certification completed.

Insolvency and Bankruptcy Code, 2016(“IB Code”): ·         In case of a debt undertaken by the startup for which default committed, the creditor can invoke corporate insolvency resolution process against the startup leading to a time bound insolvency proceeding.

Apprentice Act: ·         Self-certification with compliances; ·         Furnishing of returns made electronic; ·         No inspection for startups for the 1st year of incorporation.

Environment Laws: ·         If a startup falls within the category of a ‘White Industry’ which is non polluting, it will not require Environmental Clearance.

Similarly, individuals and entities are being induced to provide assistance to startups and are known as ‘Angel Investors’ or ‘Incubators’.  An angel investor is typically an entrepreneur who is a high net worth individual and usually an accredited investor and helps promising entrepreneurs by providing them with financial access and advice. Whereas an incubator is more of an organization, which in addition to access to finance provides pre-incubation services, technology development, infrastructure, networking and mentoring, personnel assistance and the like to the startup.

As per DIPP’s Notification, for the purpose registration of the startups, an incubator can issue a recommendation/ support/ endorsement letter to a startup, only if the incubator is:

(i)                 Established in a post graduate college in India; or

(ii)               Funded by the Government of India (“GoI”) or any state government; or

(iii)             Recognized by GoI.

To be recognized as an incubator by GoI, the incubator must make an application through Startup India mobile application or web portal and be a registered entity[2]. Further the incubator must meet certain prescribed parameters such as:

•  Established for a minimum of 2 years, not applicable to incubators that have received a sanction letter from the Central/ State government;
•  Minimum of 20 incubatees on rolls or graduated;
• Minimum of 5000 sq. ft. of carpet area;
• At least 3 months of interaction between incubates and mentors.

An incubator can avail the following benefits if registered with the GoI:

Benefits/ Incentive

Tax benefits under the Income Tax Act: ·         Certain Capital gains arising out of a transfer of long term capital asset (made within 6 months), will not be charged, if investments made in units of a specified fund subject to certain conditions.

Further the GoI, has set up the Atal Innovation Mission (“AIM”) with the aim of establishing the Atal Incubation Centre (“AIC”) and Established Incubation Centers. The AIM’s objective is to support startups by setting up AIC’s that would assist and maintain startups. Academic/ R&D Institutes, Technology/ Industrial Parks, Companies, individuals or a group of individuals are eligible to apply for the scheme to establish AICs either individually or in collaboration.

An applicant under the fund would be provided with financial support in the form of a Grant-in-aid, the maximum amount of such a grant is INR 10 crores (100 million) for a period not exceeding 5 years. Further such an applicant has to provide at least 10,000 sq.ft. of built up space with a lease period of minimum 9 years.

With regard to Established Incubation Centers, a Grant-in-aid of INR 10 crores (100 million) to top performing Established Incubation Center, so selected basis the Key Performance Indicators (“KPI”). Eligibility for selection is registration in India as a legal entity in public, private or public-private partnership mode and operation for a minimum of three years.

Another development for the benefit of startups is the establishment of the "Fund of Funds for Startups" (FFS). It will contribute to various Alternative Investment Funds (AIF) (registered with Securities and Exchange Board of India (SEBI)) and extend funding support to startups. The corpus of FFS is INR 10,000 crore, which will act as a catalyst for equity investment and debt investment.

From perusal of the above, it is evident that the GoI is dedicated to the development of startups and incubators in India. Further, it is apparent that by providing a stable and predictable source of funding for startups large scale investments and job creation in India will automatically get facilitated.

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[1] Turnover defined in section 2(91) of the Companies Act, 2013 as “aggregate value of the realization of the amount made from the sale supply or distribution of goods or on account of services rendered, or both, by the company during the financial year.”

[2] Registered as: a society under the Societies Registration Act, 1860; or a section 8 Company under the Companies Act, 2013; or a Private Limited Company under the Companies Act, 2013; or a Public Company under the Companies Act, 2013; or a Limited Liability Partnership under the Limited Liability Partnership Act, 2008