Startups in India: The laws that are, and you need to know
Various types of startup entities are governed by separate laws, though there are certain common laws which are to be complied with
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Startups are the future of India. The rapid advancement in many sectors has led to a spurt in the numbers and quality of startups in India. It can be incorporated in various forms such as company including a one-person company, limited-liability partnership or a partnership firm. Each type of entity is governed by separate laws, though there are certain common laws which are to be complied with.
Other than laws relating to the incorporation, tax laws, labour legislations, environmental laws, securities laws, contract law, intellectual property laws and various other kind of laws are required to be adhered to. Startups should also be aware of dispute settlement mechanism which includes litigation, arbitration, mediation, conciliation and negotiation.
The Government of India has come up with a comprehensive policy on encouraging startups in India through various policies and regulations. An incorporated private limited company or a partnership firm registered under the Partnership Act, 1932 or a limited liability partnership under the Limited Liability Partnership Act, 2008 in India can be considered as a ‘Startup’ till seven years from the date of its incorporation/ registration for getting the benefits under the Government of India schemes.
Startups in the biotechnology sector have been provided an extended period of three more years from its incorporation. But there are certain further stipulations like the turnover for any of the financial years since incorporation has not exceeded ₹25 crores (as per the Companies Act) and further the entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Certain startups which are incorporated between the 1st day of April, 2016 and the 1st day of April, 2019 (now extended by two more years to 1st day of April, 2021) are also eligible for tax benefits. A certificate of an eligible business from the Inter-Ministerial Board of Certification of Department of Industrial Policy and Promotion is a perquisite for availing the benefits. The definition of “eligible business” under the Income Tax Act has been now expanded to mean a business carried out by an eligible startup engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation.
To ease the labour law compliances the Ministry of Labour & Employment has allowed the startups to self-certify compliance under various Labour Laws (including The Payment of Gratuity Act, 1972, The Employee’s State Insurance Act, 1948, The Contract Labour (Regulation And Abolition) Act, 1970, Employees' Provident Funds & Miscellaneous Provisions Act, 1952, The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 and The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979) and has increased the tenure of compliance of self-certification under the Labour laws from 3 to 5 years. Also certain type of Startups will not require certain environment clearances under some Environmental Acts.
Under the Startups Intellectual Property Protection, reduced patent fees (rebate up to 80 percent of the regular fees) for the patent applicants will certainly boost innovation. New amended Trademark Rules provide 50 percent rebate in trademarks filing fee to startups. Provision of patent and trademark facilitators is also a welcome step. For fast tracking the insolvency resolution process, the Ministry of Corporate Affairs has notified sections 55 to 58 of the Insolvency and Bankruptcy Code, 2016, and the fast track process includes a Startup (other than the partnership firm) as per the government policy.
To further encourage investments in startups by Foreign Venture Capital Investors (FVCI), the regulatory provisions have been accordingly amended such as Schedule 6 of Foreign Exchange Management (Transfer or Issue of security by a person resident outside India) Regulations, 2000 and Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Third Amendment) Regulations, 2016. A FVCI may contribute up to 100 percent of the capital of an Indian company engaged in any activity mentioned in Schedule 6 of Notification No. FEMA 20/2000, including startups irrespective of the sector in which it is engaged, under the automatic route. Start-ups can issue equity or equity-linked instruments or debt instruments to FVCI against receipt of foreign remittance, as per the FEMA Regulation.
Those Indian startups having an overseas subsidiary can open a foreign currency account with a bank outside India for the purpose of crediting to the account the foreign exchange earnings out of exports/sales made by the said startup or its overseas subsidiary. The balances which represent exports from India shall be repatriated to India within the period prescribed for realisation of exports, in Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 dated January 12, 2016.
The Reserve Bank of India (RBI) has also allowed the Indian Startups to raise funds through ‘Convertible Note’ which means an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into equity shares of the startup company, within a period not exceeding five years from the date of issue on the occurrence of certain specified events as per the other terms and conditions agreed to. A person resident outside India can purchase these convertible notes issued by an Indian startup company for an amount of ₹25 lakh or more in a single tranche. But a startup engaged in a sector where investment by a person resident outside India requires government approval can issue convertible notes to a person resident outside India only with such approval. Again issue of equity shares against such convertible notes has to be in compliance with the entry route, sectoral caps and pricing guidelines.
A sound knowledge of all the legal intricacies in starting and managing the startups can help a long way to scale up the startups which will in turn result in the overall growth of the Indian economy.