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STARTUPS: INDIA

 

  1. INTRODUCTION

A startup is a company that is just at the stage of commencement and is to develop and expand, it is still in the first stages of operation, and is usually financed by an individual or small group of individuals. A startup could be a capitalist business enterprise or a new business, a partnership or temporary business. It is a young and dynamic company built on technology and innovation wherein the founders attempt to make the most of developing a product or service for which they believe there is a demand.

Stages of a Start-Up:

  • Discovery: a startup first has to identify a potential idea for a big target market;
  • Validation: The service or product which is discovered then hits the market, looking for the first clients ready to pay for it;
  • Maintenance: Profit maximization and facing the difficulties consequential of the aspect that the business has achieved;
  • Sale or Renewal: The decision which is to either sell the startup or obtain more of such resources that the startup will need to keep continue growing;
  • Efficiency: The entrepreneur begins to outline his/her business model and looks for ways to increase its customer base;
  • Scale: Pushing the growth of the business aggressively while increasing its capacity to grow in a sustainable manner.

 

  1. STRUCTURE

Startups primarily are set up by the founders / promot­ers based on the location in which they are based, with­out taking into account other concerns which are applicable in setting up of the business. Following are some of the factors rele­vant in determining a location for setting up of a Startup:
 

  1. Location of business

One of the important considerations is where the startup expects to do its business. A startup that is focused towards local customers should rather be close to the place where it intends to operate and do business. On the contrary, where a startup intends to do business and expand across the globe , then it will have to ensure that its setup is properly well thought-out.
 

  1. Presence of management team / founders

The other primary concern is the presence of a management team where they aim to operate, as it may not be very cost effective for a startup setup which is in the US, to have its management team operating out of India.
 

  1. Ease of doing business

Seeking licenses to do certain kinds of business with ease and efficiency, of registering for intellectual property rights and the capacity to obtain the relevant licenses which are required to set up a business are also some of the concerns that should be taken into account at the time of choosing a location for the startup.
 

  1. Regulatory and tax considerations

One must also look into that the startup is obliging with applicable regulatory laws. Although primarily tax may not act as a vital concern for setting up a business but as it grows and starts making profits, it may be important to have an efficiently planned structure of its affairs. It must be noted that if this is not thought through (on at least a preliminary level), then re-structuring at a later stage may prove to be expensive and distressed with the possible risk of being subjected to additional taxes. However, if a startup initially foresees the global operations and a global market, than the location and the organization of the startup could be determined depending upon the nature of its business and the target market of the startup.

 

  1. PROCEDURE

An eligible start-up is defined as the following few entities:

  • Private Limited Company (The Companies Act,2013)
  • Registered Partnership Firm (The Indian Partnership Act,1932)
  • Limited Liability Partnership (The Limited Liability Partnership Act,2008)

Please note that one-person companies are also eligible under the Start-up India Initiative.

 

 

OPC (Single Person Company)

Private Limited Company

Partnership Firm

Limited Liability Partnership

No. of Directors

1

2

2

2

Capital

13,000 INR

15,000 INR

7,000 INR

9,000 INR

 

  • In order for a “start-up” to be considered qualified for the initiative, it needs to meet the following necessities:
  • An entity is considered as a startup company for up-to 5 years from the date of its incorporation/ registration;
  • Its turnover for any of the financial years has not exceeded INR 25 crore;
  • It is working towards innovation, development, operation or commercialization of new products, services determined by technology or intellectual property;
  • It is supported by a commendation (innovative nature of the business), or by an incubator funded by Government of India, or is funded by Government of India, or is granted a patent or trademark in association with nature of business
     
  • Step by Step guide:

For registering a startup or a new business in India the first and foremost rules that one has to go by,  are some official procedures that a startup or a company has to follow in order to register itself in the Indian official records. A company can be registered through the online method.The registration includes some must follow rules and some registration steps like Digital Signature Certificate (DSC), Director Identity Number (DIN) and filing for an e-form.

There are four major steps involved:

  1. Acquiring Digital Signature Certificate(DSC);
  2. Acquiring Director Identification Number(DIN);
  3. Filing an e-Form or New user registration;
  4. Incorporate the company.

It’s necessary to first get the startup registered in order to run its business without any legal complication in future..

According to Section 3 of Companies Act a company means, ‘a legal entity formed and registered under Companies Act 1956’. Under the ministry of corporate affairs, every company is to be registered by the registrar of companies for the state in which the company has is corporate office. Under the companies act there are two types of companies called private and public companies. When it comes to registration of the company, every firm has the following two options to be formed as:

  1. Private company; or
  2. Public company.

The main differences between Private and Public companies are:

  • The minimum number of board members required in a private company are 2 and in a public company are 7;
  • A private company can have maximum of only 50 members, but there is no limitation for a public company it can have any number of members;
  • A private company can commence its business as soon as it is incorporated, but for a public company it can’t commence its business until it gets its business commencement certificate;
  • A private company can’t sell its shares to anyone or make any invitation to people regarding sale of company shares, but a public company can invite people to buy its shares by issuing a prospectus;
  • A private company can have two directors, but a public company should have at least three directors;

The registration procedure is a 4 Step process:
 

Step 1: Acquire Director Identification Number (DIN)

This is the first step in the process of registration, where each director of the company should obtain their identification number. As per the amendment act 2006, acquiring a DIN is now obligatory for every director of the company. To get a DIN, one needs to file an e-Form DIN-1. Register yourself on MCA Website first and get a login id. After filling DIN-1 Form, one should upload the filled form and has to pay the applicable fees.

  • After getting generated DIN one need to inform their company about DIN. The director can inform his company about the DIN by using the DIN-2 Form.
  • The company should then inform the Registrar of Corporates (ROC) about DIN of all director’s through the DIN-3 Form.
  • If there is any change to be made in the DIN or there is a need for any update like change of address, personal details etc., then director should get this change by submitting the e-Form DIN-4 Form.
     

Step 2: Acquire Digital Signature Certificate (DSC):

In order to make sure the security or authenticity of documents filed electronically, the Information Act 2000 demands a valid digital signature to be affixed on the documents submitted electronically. This is the only and safest way that one can submit their documents electronically.

The digital signature certificate should be acquired by only those agencies which are appointed by the controller of certification agencies (CCA). One should not use DSC given by any other agency which is not approved.

If one already has a digital signature then they can use the same and there is no need to apply for another. But one has to check the digital signature validity, agencies issue DSC’s with one or two year validity and after expiry one has to renew it.
 

Step 3: Create an account on MCA Portal – New user registration

This step is to have a registered user account on MCA Portal for filing an e-Form, for online fee payment, for different transactions as registered and business user. Creating an account is totally free of cost.
 

Step 4: Apply for the company to be registered.

This is the final major step in a registration of a company which includes, incorporating the company name, registering the office address and notice for appointment of company directors, manager and secretary. This involves:

  • Form-1:
    • Form-1A: this is an application form for availability or in case of change of a company name. Once a company applies for new name, the MCA will suggest four different options for your company name; one has to choose one among them. To do the same one has to fill Form-1A and submit.
    • Form-1: This is for application or for declaration of incorporation of a company, in this form one has to fill the same name which it chose in application of form-1A.
  • Form-18:
    • This form is for notice of the location of a new company office or change of address of previously registered office.
  • Form-32:
    • For a new company, this form is for notice of appointment of new Directors, Managers and Secretary.
    • For an existing company, this form is for change of Directors, Manger, Secretary or company head.

After submitting these forms and once the application has been approved by MCA, applicant will receive a confirmation email regarding the application for incorporation of a new company, and the status of the form will get changed to Approved.
 

  • List of documents for registration of a company:
  1. DIN of all the directors of a proposed company.
  2. DSC – Digital Signature Certificate
  3. Original copy of the formal letter issued by ROC regarding availability of the Company name.
  4. Form-1 for incorporation of a company.
  5. Form-18 for situation or address of the proposed company.
  6. Form-32 for particulars of proposed directors, managers and secretary.
     
  • Formalities to be followed while incorporation of a company:
  1. Obtain a TAN card
  2. Obtain a Permanent account number (PAN) from Income Tax Department of India
  3. If required: Documents obeying shop and establishment acts.
  4. If required: For foreign trade, Registration documents of import export code from Director General of foreign trade.
  5. If required: Registration documents of Software technologies Parks of India (STPI).
  6. If required: RBI approval for foreign companies investing in India and FIPB approval.
  7. Both Indian and foreign directors of the company need to have valid Digital Signature Certificates from an authorized agency.
     
  • Registration of Start-up

Option 1: An entity can register itself through MCA or Registrar of Firms using the existing process and later register itself on the Startup India portal and mobile app as a “Startup” to avail the benefits.

Option 2: An entity can register itself through the Startup India portal and mobile app by its flawless process. This facility is made available in the second phase of the Startup India portal and mobile app launch, by following steps:

  1. Log in to Startup India Portal;
  2. Choose your legal entity;
  3. Input your incorporation/registration number;
  4. Input your incorporation/registration date;
  5. Input PAN number (optional);
  6. Input your address with postal code & state;
  7. Input authorized representative details;
  8. Input director(s)/partner(s) details;
  9. Choose and upload supporting documents and self-certification;
  10. Incorporation/registration certificate of company/LLP/Partnership;
  11. Registration to avail tax and IPR;
  12. Certify the official notification terms and conditions.
     
  • Startups are required to submit a simple application with any of following documents:
  1. A recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator established in a postgraduate college in India; or
  2. A letter of support by any incubator which is funded (in relation to the project) from the Government of India or any State Government as part of any particular scheme to promote innovation; or
  3. A recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any incubator recognized by Government of India; or
  4. A letter of funding of not less than 20% in equity, by any Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network etc. which is duly registered with Securities and Exchange Board of India (SEBI) and which endorses the innovative nature of the business.; or
  5. A letter of funding by Government of India or any State Government as part of any specified scheme of the government which was formed to promote innovation; or
  6. A patent filed and published in the Journal by the Indian Patent Office in areas associated with the nature of business this is being promoted.


Department of Industrial Policy and Promotion may, until such mobile app/portal is launched make alternative arrangement of recognizing a startup. Once such application with the relevant documents is uploaded, a real-time recognition number will be issued to the startup. But, if on subsequent verification, such recognition is found to be obtained without uploading the document or uploading any other document or a forged document, the concerned applicant/ startup shall be liable to a fine which shall be fifty per cent of paid up capital of the startup but shall not be less than Rupees 25,000.

 

  1. DOCUMENTATION

Once a startup has been incorporated, certain basic doc­umentation is required to be formulated to ensure that the busi­ness can be carried out proficiently.
 

  • Confidentiality & Non-Dis­closure Agreement

A non-disclosure agreement (“NDA”) is an agreement, in which one party agrees to provide access to its confiden­tial information to a second party about its business or products, and the second party in return agrees not to share/disclose this information with anyone else for a specified period of time.

 

  • Offer Letter/ Employ­ment Agreements

In India, it is a general practice that the employer issues an offer letter to its employee at the time of their selection. This document briefly outlines the terms and condi­tions of employment, including probationary period, compensation and other documents which are required to be produced at the time of joining.. While drafting such documents, it is critical to make sure that all applicable employment laws are being complied with.

 

  • Non-Competition & Non-Solicitation Agree­ments

Employers may choose to enter into Non-Competition and Non-Solicitation Agreements with their employees and these obligations may also be included in their employment agreement.
 

  • Intellectual Property Assignment Agreement

In India the Copyright Act, 1957 specifies that usually an employer is the owner of a copyrightable article created by an employee during the course of and within the scope of employment. How­ever, there are other forms of intellectual property rights which still need to be assigned specifically. For this, a “Con­fidentiality and Invention Assignment Agreement” is in general entered into between an employee and the employer.

 

  • HR Policy / Employee Handbook

It is recommended that the employer should clearly set out the various policies and procedures which will be applicable to employ­ees, as stated out by the company and should also circulate such policies to the employees periodi­cally.. Hence, it is suggested that the employee handbook to be drafted in accordance with all the applicable national and state laws.

In recent times, the law has mandated that explicit ‘anti-sexual harassment policy’ should be drafted in accordance with the, Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.

 

  • ESOPs

Employee stock option plans (“ESOPs”), are designed to give an employee some stock in the employer’s company.  They may be given either after completion of certain number of years of employment or may vest directly upon joining. In order to employ and keep hold of the top performers, the company could use these ESOPs as an incentive to its poten­tial employees, by offering stock options to them. This is a very popular strategy with companies which cannot afford to provide large pay packages in order to attract the right level of employee.

 

  • Other Agreements

The startup in order to conduct its activities will have to deal with competition in the market. Accordingly, in order to deal with them as clients, suppliers or partners, the startup has to enter into certain agreements with them specifying the standard, which has to be met by both the startup and the other parties in order to conduct the business.

 

  1. STARTUP IN INDIA

The Government of India has announced ‘Startup India’ initiative for creating a favorable environment for startups in India.. To bring uniformity in the identified enterprises, an entity shall be considered as a ‘start-up’:

  1. For up to five years from the date of its incorporation/registration,
  2. If its turnover for any of the financial years has not exceeded Rupees 25 crore, and
  3. It is working towards innovation, development, operation or commercialization of new products or services which is driven by technology or intellectual property;

An entity is considered to be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property if it aims to develop and commercialize:

  • A new product or service or process, or
  • A significantly improved existing product or service or process, which will create or add value for customers or workflow.

 

  1. STEPS TAKEN BY THE GOVERNMENT
  1. Policy initiatives

In September 2014, Prime Minister Mr. Narendra Modi unveiled a big initiative, called ‘Make in India’, to promote the manufacturing sector by promoting the companies to invest in the sector. The intent of the campaign was to attract foreign investment and to encourage the domestic companies to participate in the manufacturing and thereby contributing to the growth story of India. The government also took various steps to build an environment which is favorable for doing business in the country. For example, an online system for getting environment clearances, filling income tax returns and extension of validity of industrial licenses to three years have been put in place. The government has also increased the Foreign Direct Investment (FDI) limit for most of the sectors.
 

  1. Digital India

In July 2015, the PM announced the ‘Digital India’ initiative, which aims to connect all rural areas by developing their digital communications. This translates into a huge business opportunity for the startups.
 

  1. Standup India

. In August 2015, PM announced a new campaign called ‘Standup India’, which is to help the startups with funding by banks and encourage entrepreneurship among youth of India. He also requested all the banks to fund at least one startup founded by tribals and dalits.
 

  1. Startup Exchange

The SEBI announced a new set of listing norms for startups, including e-Commerce ventures planning to raise funds from listing on stock exchanges. These new norms will provide relaxations in disclosure related requirements, takeover and Alternative Investment Fund regulations for IT, data analytics, and intellectual property, bio-technology or nano-technology companies.
 

  1. Self-utilization and Talent-utilization (SETU)

The government is planning to set up a mechanism called Self-utilization and Talent-utilization (SETU), to provide technical assistance and incubation to startups. In 2015 Union Budget, Finance Minister, Mr. Arun Jaitley announced INR 1,000 crore for support of startups.
 

  1. Tax Exemption on Capital Gains

Due to the high risk nature of their business, Startups are not able to attract investment at initial stage.. With this intention, exemptions are being given to persons who have capital gains during the year, if they have invested such capital gains in the funding of a startup.
 

  1. Tax Exemption to Startups for 3 years

With a view to motivate the expansion and growth of Startups in India and provide them with a spirited platform, it is very important that the profits of a Startup are exempted from income-tax for a period of 3 years. This fiscal exemption shall aid growth of business and meet the capital requirements during the initial years of its operation. This exemption shall be available subject to non-distribution of dividend by the Startup.
 

  1. Tax Exemption on Investments above Fair Market Value

Under The Income Tax Act, 1961, a Startup which receives any consideration for issue of shares which exceeds the Fair Market Value (FMV) of such shares, such excess consideration is taxable in the hands of recipient as Income from Other Sources. In the perspective of Startups, where the idea is at a conceptualization or advance stage, it is often difficult to establish the FMV of such shares. In majority of the cases, FMV is also notably lower than the value at which the capital investment is made, this results into the tax being levied under section 56(2) (vii) (b).
 

  1. APPLICABLE EMPLOYMENT LAWS
     

Set out below is an overview of the key employment legislations in India:

  • Shops and Commer­cial Establishments Acts
  • Contract Labour (reg­ulation and Abolition) Act, 1970
  • Maternity Benefit Act, 1961
  • Sexual Harassment of Women at Work­place (Prevention, Prohibition and Redressal) Act, 2013
  • Minimum Wages Act, 1948
  • Equal Remuneration Act, 1976
  • Payment of Bonus Act, 1956
  • Payment of Gratuity Act, 1972
  • Employees’ Provident Fund and Miscellaneous Provisions Act, 1952
  • The Apprentices Act,1961
  • Employment Exchanges (Compul­sory Notification of Vacancies) Act, 1959
  • Child Labour (Prohibi­tion and Regulation) Act, 1986
  • Industrial Disputes Act, 1947
     

Gautam Khurana
25 October 2016

 

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