STARTUP INDIA | GOVERNMENT ANNOUNCES ACTION PLAN

 At the Global Workshop for Start-ups in Delhi, the Modi Government very recently announced a historic Action Plan to promote and provide conducive environment for Start-ups. The primary objective of the Action Plan is to (i) ease the process for young Indians to begin, sustain and develop home-grown businesses; and (ii) driving sustainable economic growth and generating large scale employment opportunities. At this stage this is merely an Action Plan and still has to get translated into law. The following are the key announcements made by the government through the Action Plan:

1. Definition of Start-up: A start-up means an Indian entity (i.e. private limited company; registered partnership firm; or limited liability partnership): (i) incorporated or formed in the preceding five years; (ii) with an annual turnover not exceeding Rs 25 crore in any preceding financial year; and (iii) working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.Caveats: (i) The Start-up must not be formed by splitting up or reconstruction, of a business already in existence; and (ii) An entity once recognized as a Start-up shall cease to be one if five years have elapsed since its incorporation or if its annual turnover exceeds Rs 25 crore.
   
   
2. Compliance regime based on self-certification: In order to simplify the regulatory compliance, start-ups have been exempted from labour and environmental inspections in most circumstances and they can now self-certify compliance through the start-up mobile application for certain labour and environmental laws. No labour inspections shall be conducted for a period of three years for a start-up unless a strong and verifiable complaint is received and approved by a senior labour official. In the case of environmental laws, a start-up which fall under the ‘white category’ (as defined by the Central Pollution Control Board) can self-certify compliance and only random checks shall be carried out in such cases.
   
   
3. Tax Exemption on Capital Gains Tax: Tax exemptions shall be given to persons who have capital gains during the year, if they have invested such capital gains in the Fund of Funds, i.e. it will not invest directly into start-ups, recognized by the Government. In addition, existing capital gain tax exemption for investments in newly formed manufacturing MSMEs by individuals shall be extended to all start-ups.
   
   
4. Tax Exemptions to start-ups for 3 years: In order to facilitate the growth of start-ups and enable them to meet their working capital requirements in the initial years, the Government has decided to exempt start-ups from paying income-tax for a period of 3 years.
   
   
5. Tax Exemption on Investments at above Fair Market Value: Currently, investments made by venture capital funds in start-ups are exempted from income tax. The Action Plan states that the same shall be extended to investments made by incubators in the start-ups.
   
   
6. Start-up Mobile App and Portal: The Government is launching a Start-up Mobile Application, which shall be made available on 1 April 2016, enabling entrepreneurs to register their start-ups on the Application through a single form, thereby enabling them to circumvent lengthy regulatory processes.
   
   
7. Patent Protection: In order to protect the Intellectual Property Rights (IPR(s)) of the start-ups, the Government aims to institute a panel of facilitators who shall assist start-ups with the filing and protection of patents, providing advice on different IPRs, etc. Under this scheme, the Central Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a start-up may file, and the start-ups shall bear the cost of only the statutory fees payable. Start-ups shall also be provided an 80% rebate in filing of patents vis-a-vis other companies.
   
   
8. Relaxation in public procurement criteria: A tender is floated by a Government entity / PSU generally has eligibility condition specifies either 'prior experience' or 'prior turnover'. Such a stipulation prohibits/ impedes Start-ups from participating in such tenders. The Government shall exempt start-ups in the manufacturing sector from the criteria of prior experience/ turnover without any relaxation in quality standards or technical parameters. However, the start-ups will have to demonstrate the requisite capability to execute the project as per the Government requirements and should have their own manufacturing facility in India.
   
   
9. Ease of Exit: Insolvency and Bankruptcy Bill, 2015 provides for certain start-ups to be wound up within a period of 90 days from making of an application for winding up on a fast track basis. This shall make it easier for failed start-ups to exit the market and allocate capital to more productive avenues.
   
   
10. Start-up India Hub: The Government plans to institute a Start-up India Hub to help start-ups to network with the Government organizations, venture capital’s, etc., to assist and advise start-ups and to conduct mentorship programmes. Thus, Start-up India Hub will be a single all encompassing point of contact for start-ups, providing handholding and assistance.
    
    
11. Funding Support of Rs 10,000 crores: In order to provide funding support to start-ups, the Government will set up a fund with an initial corpus of Rs 2,500 crores and a total corpus of Rs 10,000 crore over a period 4 years, managed by select professionals from the private sector . The fund will be in the nature of Fund of Funds i.e. it will not invest directly into start-ups, but shall participate in the capital of SEBI registered Venture Funds.
    
    
12. Credit Guarantee Fund for Start-ups: To encourage banks and other lenders to provide Venture Debts to start-ups, a credit guarantee mechanism through National Credit Guarantee Trust Company / Small Industries Development Bank of India is being envisaged with a budgetary corpus of Rs 500 crore per year for the next 4 years.
    
    
13. Start-up Fests: The Government plans to hold both national and international start-up fests to enable entrepreneurs to showcase their work and network with other stakeholders from the start-up ecosystem.
    
    
14. Other Initiatives and Promotion: Besides the above benefits, the Government has also announced other series of incentives which include (i) Atal Innovation Mission for Entrepreneurship promotion, innovation promotion, etc.; (ii) Harnessing Private Sector Expertise for Incubator Set-up; (iii) Setting up of Innovation Centres for promoting research and development; (iv) Setting up of Research Parks with various IITs ; (v) Promotion of Start-ups in the Biotechnology Sector; (vi) Innovation Focused Programmes for students; (vii) Carrying out Annual Incubator Challenge for creation and identifying of world class incubators in India; etc.

MHCO COMMENT:

Modi Government’s Start-up India Action Plan will certainly bolster innovation and encourage young Indians to set up businesses. However, it will be interesting to see how the language of Action Plan gets transferred into a government notification and law. If the Government is able to successfully implement the Action Plan, it will certainly bode well for economic growth and growing investor confidence in India.

This update was released on 20 January 2016.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)

AMENDMENTS | COMPANIES INCORPORATION RULES

The Ministry of Corporate Affairs (MCA) has notified the Companies Incorporation (Third Amendment) Rules, 2016 vide a notification in the official gazette on 27 July 2016. This update captures some of the important changes brought about by the amendment:

• Eligibly to Incorporate One Person Company: Earlier the rules stated that no person shall be eligible to incorporate more than a single One Person Company or become nominee in more than one such company. However, the new rules now state that 'A natural person shall not be member of more than a One Person Company at any point of time and the said person shall not be a nominee of more than a one Person Company'. Therefore an individual may now incorporate multiple One Person Companies, subject to renouncing membership of the earlier companies or cessation of the corporate existence of the earlier One Person Companies.

• DIN Verification: In case a subscriber to the memorandum possesses a valid Director Identification Number (DIN) and the particulars provided therein are up to date, on the date of application and the declaration to this effect is given in the application, the proof of identity and residence of such subscribers, need not be attached.

• Certified Resolution: Partnership firms are no longer required to submit to the Registrar the certified true copy of the resolution agreed to by all the partners specifying inter alia the authorization to subscribe to the memorandum of association of the proposed company and to make investment in the proposed company, the number of shares proposed to be subscribed in the body corporate, and the name of the partner authorized to subscribe to the Memorandum.

• Online Business: Every company which has a website for conducting online business or otherwise, shall disclose/publish its name, address of its registered office, the Corporate Identity Number, Telephone number, fax number if any, email and the name of the person who may be contacted in case of any queries or grievances on the home page of the said website. The Central Government may as and when required, notify the other documents on which the name of the company shall be printed.

• Shifting of registered office: A company was not allowed to shift its registered office if any inquiry, inspection or investigation had been initiated against the company or any prosecution was pending against the company under the Act. However, the amendment states that if on completion of such inquiry, inspection or investigation no prosecution is envisaged or no prosecution is pending, shifting of registered office shall be allowed. The same is applicable to the shifting of the registered office of a Company from one state to another.

• No Change of Name in the Event of Default: Henceforth, the change of name shall not be allowed to a company which has not filed annual returns or financial statements due for filing with the Registrar or which has failed to pay or repay matured deposits or debentures or interest thereon. However, the change of name shall be allowed upon filing of the necessary documents or payment or repayment of matured deposits or debentures or interest thereon as the case may be.

• Unlimited Liability to Limited Liability: The Rules also prescribe the procedure for conversion of a company with unlimited liability into one with limited liability, which includes inter-alia, (a) the passing of a special resolution, (b) publication of notice in newspapers seeking objections to the conversion and (c) thereafter making an application to the ROC along with the documents prescribed by the rules, which includes, a copy of the altered memorandum and articles, declaration of solvency signed by two directors, NOC from secured creditors, Auditor's certificate, etc.

Further, this converted company shall not change its name for a period of one year from the date of such conversion. The company shall also refrain from declaring or distributing any dividend without satisfying past debts, liabilities, obligations or contracts incurred or entered into before conversion.

It is important to note that an Unlimited Liability Company shall not be eligible for conversion into a company limited by shares or guarantee in case- (a) its net worth is negative, or (b) an application is pending under the provisions of the Companies Act 1956 or the Companies Act, 2013 for striking off its name, or (c) the company is in default of any of its Annual Returns or financial statements under the provisions of the Companies Act, 1956 or the Companies 4ct,2013, or (d) a petition for winding up is pending against the company, or (e) the company has not received amount due on calls in arrears, from its directors, for a period of not less than six months from the due date; or (f) an inquiry, inspection or investigation is pending against the company. 

MHCO COMMENT

We believe this amendment to the Rules have been made with the intention to mitigate the practical difficulty faced by people in incorporating companies and with the intent of increasing transparency and accountability in corporate governance.

This article was released on 4 August 2016.