Startups in India : Legal and Economic Perspective

Before one starts a business venture and also during its operations, it is imperative to know the External Business Environment where it operates. External Business Environment consists of Political, Economic, Technological, Legal and Ecological Environment which encompass aspects like government policy to tax holidays. All these are out of control of the Business but have a major impact on the everyday operations as well as the overall functioning and growth of the Business. In the Startup Business Environment in India, a startup needs to keep track of the Regulatory Environment, Tax Regimes, Legal Issues, and necessary Compliances to be met which would ensure the smooth running and allow startups to avail all the benefits that the Government is offering to make startups in India a success.
According to the Startup Action Plan launched by the PM on January 16th, 2016:
A startup is an entity registered in India; it may be a Private Limited Company, Limited Liability Partnership or a Partnership and is deemed to be a startup when:
• Less than 5 years of existence
• Turnover not exceeding more than 25 Crores
• Involved in innovation, development, deployment, or commercialization of new product and services are driven by technology or Intellectual Property
• Working on a new product or service
• Significantly improves an existing product, service or process that will create and all value for customers of the workflow.

PROCESS OF RECOGNITION OF A STARTUP:
To be accorded the status of a startup, and to enjoy the legal rights and avail the benefits of the same, the Business needs to acquire a certification from the Inter-Ministerial Board of Certification which comprises of the Joint Secretary, Department of Industrial Policy and Promotion(DIPP) and Representatives of the Department of Science and Technology and Department of Biotechnology. For the same, an application needs to be made with the following documents:
• In the prescribed format by DIPP, a RECOMMENDATION needs to be obtained by the startup from any incubator established in a post-grad college in India, Or,
• From an incubator which is funded by the Government as a means to give impetus to innovation, a LETTER OF SUPPORT needs to be obtained, Or,
• In the prescribed format by DIPP, a RECOMMENDATION needs to be obtained by the startup from any incubator recognized by the Government of India, Or,
• A LETTER OF FUNDING from a SEBI-recognized Incubation Fund/ Angel Network/ Private Equity Fund/ Accelerator/ Angel Fund of not less than 20% in Equity appreciating the innovative streak in the business, OR,
• A LETTER OF FUNDING from the Central or State Government under a scheme promoting innovation, Or,
• A patent filed and published in the Journal by the Indian Patent Office in the section related to the industry wherein the business operates.

Upon successful submission of the application, a real-time recognition number and a Certificate of Recognition would be issued to the Applicant which would rest in the entity all the rights and liabilities of a Startup.

LEGAL RIGHTS OF A STARTUP:

• TAX EXEMPTIONS
• SELF CERTIFICATION
• PATENT PROTECTION
• EMPLOYEE CONTRACTS
• INTELLECTUAL PROPERTY RIGHTS
• AGREEMENTS WITH THIRD PARTIES
• ESOPs

TAX EXEMPTIONS:

In order to encourage startups, and to support startups to grow, the Government of India has provided tax exemptions to startups. 100% profits are to be deducted while calculating the income of the Startups. The Startup can claim this exemption for three consecutive years out of the initial five years, however, the Minimum Alternate Tax is still applicable and this qualifies the Startups to pay a tax.
Capital raised from the sale of long-term assets is exempted from tax if such capital is invested in other funds o used to purchase computers or computer software. Furthermore, tax exemptions have also been provided upon investments made by resident investors. A patent developed and registered in India is charged at a discounted rate of 10% at the income it generates worldwide.

SELF CERTIFICATION:
In order to save the startups from being caught up in the net of various compliances required with a business venture, the Government has proposed that for the initial three years of the existence of a startup, there would be no inspections unless there is a complaint and the startups can self-certify themselves on the mobile app and web portal created for the purpose. These compliances encompass the following laws:

• The Building and Other Construction Workers (Regulation of Employment & Conditions of Service) Act, 1996
• Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
• Payment of Gratuity Act, 1972
• Contract Labour (Regulation and Abolition) Act, 1970
• Employees’ Provident Fund and Miscellaneous Provisions Act, 1952
• Employees’ State Insurance Act, 1948
• Water (Prevention & Control of Pollution) Act, 1974
• Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003
• Air (Prevention & Control of Pollution) Act, 1981

PATENT PROTECTION:
The Patent Regime under the Government of India has been tweaked and modified to adjust to the needs of the Startups:
• Patent Applications by Startups are to be fast-tracked to ensure quick disposal;
• Facilitators are to be entrusted responsibility for providing startups
• (a) general advisory on intellectual prop¬erty rights;
• (b) filing and disposal of applications dealing with patents, trademark, and design.
• Filing of Patents by a Startup would be charged at an 80% discounted rate.

EMPLOYEE CONTRACTS:

It is advisable to the Employer of Startups to include other agreements and contracts along with the offer letter to the employees defining in a clear and precise manner the rules and regulations which are to govern employer-employee relationship:
• Employment Contract
• Non-Competition And Non-Solicitation Agreements
• Con¬fidentiality And Invention Assignment Agreement
• Anti-Sexual Harassment Policy
• Employee Handbook

INTELLECTUAL PROPERTY RIGHTS:

The Startup should be clear regarding the laws relating to these provisions as the works of indigenous innovation and development needs to be protected:
• PATENTS
• COPYRIGHTS
• TRADEMARKS
• TRADE SECRETS

ESOPs:
Startup is as the name suggests starting just yet and in this situation, the cash flow situation needs to be improved unless they are in a comfortable position with a steady cash inflow situation. In these circumstances, Startups can control their costs by substituting cash benefits with ESOPs. However, with ESOPs, a concrete approval of the investors and shareholders and adequate information to the employees to avoid any shortcomings arising out of this move.

AGREEMENTS WITH THIRD PARTIES:
Startups, in order to function smoothly, need to be aware of and enter into these various third-party contracts at various stages of the Business Cycle:
• Software License Agreement
• Software Development/Services
• Work for Hire Agreement
• Equipment/ Technology Lease
• Online Agreements
• Strategic Alliance Agreements
• Outsourcing Agreements
• Customer Contracts
• Distribution Agreements
• Vendor/ Supplier Contracts
• Contractor Agreements
• Leases
• Insurance Agreements

ANNUAL COMPLIANCES OF STARTUPS:
Once a startup has been incorporated it is entitled to a slew of benefits on virtue of being a startup for a period of seven years after its commencement, however, there are a few mandatory compliances that the startups need to meet in order to ensure the smooth functioning of the startup and avoid legal backlash. It is imperative to note here that since most of the Startups are in the form of Private limited companies, that end has been more exhaustively discussed.
• REGISTERED OFFICE: Within 30 days of receiving the Certificate of Incorporation from the Registrar of Companies upon completing the procedure vis-à-vis Form 1, 18 and 32, the Startup is required to have a registered office for receiving and sending notices, acknowledgements and other official communication and is required to file with the Registrar of Companies apropos Form INC-22 a verification of the same. Further, if the incorporation is done as per the new SPICe(Simplified Proforma for Incorporating Company Electronically) forms, this compliance is not necessary.
However if a startup defaults on this compliance, a penalty of Rs. 1000 per day not exceeding more than 1 lakh shall be levied.

• FIRST BOARD MEETING: In order to promote Corporate Governance, the Ministry of Corporate Affairs has made it mandatory for Startups to conduct the first meeting of Board of Directors within 30 days of its incorporation and all in all 4 Board of Director Meeting need to be held every year not exceeding a time gap of 120 days between each. However as most of the start-ups are classified as small companies, they are required to have two board meetings a year. Furthermore, Minutes of the meeting are to be recorded and filed with the Registrar of Companies.

• APPOINTMENT OF AUDITORS: Section 139(6) of Companies Act, 2013, the first Auditor of to be appointed by either Board of Directors and upon their failure by the members within 90 days of the incorporation of the company. The first Auditor is bound to remain in office until the first Annual General Meeting has been held. The Auditors are generally appointed for 5year apropos Form ADT-1 has to be filed for this purpose. The purpose of appointment of an Audit is to ensure Accountability and Transparency in the Accounts and Finance of the Startup.

• ONE ANNUAL GENERAL MEETING (AGM): Other then the 4 Board of Director meetings to be held every year, at least one Annual General Meeting has to be held every year in order to approve the financial statements, declaration of dividends, appointment, re-appointment and remuneration of Board of directors and Auditors, discuss resolutions and business transactions, both in the ordinary course of business and special transactions. This Annual General Meeting is to be held either at the Registered Office or in the same village, town, city where the registered office is situated.

• FILING OF ANNUAL RETURN: For every financial year, even though startups are exempted from taxes for the first 3 years, the startups are required to file annual returns with the Registrar of Companies as per Form MGT-7 and claim their exemptions. This has to be done within 60 days of the Annual General Meeting which is mandatorily held at least once a year.

• STATUTORY AUDIT BY AUDITOR: Before the filing of Annual Financial Statements, it is essential to get the same audited a Chartered Accountant at the end of every financial year upon which the Auditor would provide an Audit Report and the Audited Financial Statements for the filing with the Registrar of Companies.

• FILING OF FINANCIAL STATEMENTS: Subsequent to the statutory audit by the Chartered Accountant and the subsequent report by the Auditor, the Audited Financial Statements, that is, the Balance Sheet and the Profit and Loss Account need to be filed with the Registrar of companies apropos Form AOC-4.

• DIRECTOR’S REPORT: Every director is required to prepare a Director’s Report as per Section 134 of the Companies Act, 2013 and also need to report about their roles in other companies as well, to be submitted with the Registrar of Companies every year.

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L&P Editorial Team

The Law & Practice Blog's editorial team.

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