STARTUP-INDIA | RELAXATION OF NORMS

In early 2016, the Department of Industrial Policy and Promotion (DIPP) had notified an Action Plan to promote and provide a conducive environment for Start-ups (Old Notification). The primary objective of the Action Plan was to (i) ease the process for young Indians to begin, sustain and develop home-grown businesses; and (ii) drive sustainable economic growth and generate large scale employment opportunities. We had provided a detail legal update on the same which can be read on our blog here.

DIPP has recently issued a notification (New Notification) broadening the definition of startups as well as granting certain exemptions which were not provided under the Old Notification and superseding the earlier notification defining startups.  Ministry of Corporate Affairs (MCA) has also issued a notification dated 13 June 2017, inter alia granting an exemption to Startups, incorporated as private companies, from compliance with certain provisions of the Companies Act, 2013.

DEFINITION: Under the New Notification, an entity shall be considered  a Startup if (a) it is incorporated as a Private Limited Company under Companies Act 2013 (Companies Act); registered as a Partnership Firm under Indian Partnership Act, 1932; or a Limited Liability Partnership under the Limited Liability Partnership Act, 2008 (LLP Act); and (b) the date of its incorporation does not exceed 7 years and in case of a startup in the biotechnology sector, 10 years; and (c) its annual turnover (under Companies Act) does not exceed Rs 25 crores in any of the previous financial years; and (d) it 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.

The incorporation period for a Startup has been increased from 5 years under the Old Notification to 7 years and  10 years for Startups in the biotechnology sector. Further, the definition of Startup now includes any entity which has a scalable business model with a high potential of employment generation or wealth creation.

RECOGNITION: The process of recognition as a Startup has to be done through an online application over a mobile app / portal set up by the DIPP along with the Certificate of Incorporation and other relevant documents. Further, self certification has been introduced for compliance of the Startup with labour laws. Under the New Notification, Startups also have to submit a write-up about the nature of business highlighting how is it working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.

Under the Old Notification, the documents such as recommendation and letter of support from an incubator which is funded by the Government of India and established in a post graduate college in India have been scrapped and are no longer required.

TAX BENEFITS: Under the New Notification, for claiming tax exemptions, a Startup should (a) be a private limited company under the Companies Act, or a limited liability partnership under the LLP Act which is incorporated on or after the 1st day of April 2016 but before the 1st day of April 2019; and (b) be working towards innovation, development or improvement of products or processes or services, or should be a scalable business model with a high potential of employment generation or wealth creation; and (c) obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification as constituted by Department of Industrial Policy and Promotion from time to time.

Under the New Notification, innovativeness of the product or service shall be considered from a domestic standpoint, whereas the Old Notification did not give clarity on whether it shall be from a domestic or international standpoint.

EXEMPTIONS | COMPANIES ACT: Startup companies, no longer need to comply with the procedural requirements mandated by the Act, while accepting deposits from its members, for a period of 5 years from the date of its incorporation. Annual returns of startup companies need to be signed by the company secretary of the company, or if there is no company secretary, the signature of a  single director is sufficient. Startup companies are required to conduct only one board meeting every 6 months, provided that the gap between 2 meetings is not less than 90 days.

MHCO COMMENT: The Government through these initiatives aims to empower Startups to grow through innovation and design. The end objective is to build a strong eco-system for nurturing innovation and Startups in the country that will drive sustainable economic growth and generate large scale employment opportunities. 

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 legalupdates@mhcolaw.com for any assistance.

ENFORCEMENT OF FOREIGN AWARDS AND FEMA| ASSURED RETURNS ON EXIT OPTIONS

Recently, the Delhi High Court, in the cases of Cruz City vs. Unitech (“Unitech case”) and NTT Docomo vs. Tata Sons (“Docomo case”), had the opportunity to adjudicate on whether enforcement of a foreign award, granting sums stipulated in a contract between the parties, was in violation of Foreign Exchange Management Act (“FEMA”) and the guidelines issued by RBI as an assured return on an investment. Both, the Unitech case and the Docomo case have very similar facts

Unitech case

In the Unitech case, Cruz City had, by way of a shareholders agreement, entered into a joint venture with a subsidiary of Unitech (Burley) for the purpose of pursuing a real estate project in India. The said shareholders agreement had been confirmed by Burley and Unitech.

Burley was obliged under the said shareholders agreement to purchase all the equity shares of Cruz City in the joint venture at a purchase price that yielded a post tax IRR of 15% if construction of the real estate project was delayed beyond a specified period.

In addition to the aforesaid shareholders agreement, Burley and Unitech had also executed Keepwell Agreements with Cruz City under which Unitech had undertaken to cause Burley to pay the amounts pursuant to the exercise of put option by Cruz City and to make sufficient funds available to Burley.

On the failure to commence the real estate project within the specified time, Cruz City initiated arbitration against Unitech and Burley before the London Court of International Arbitration (“LCIA”) for enforcing the obligations undertaken by Burley under the Keepwell Agreement. The Arbitral Tribunal passed an award in favour of Cruz City. Pursuant thereto, Cruz City filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) for enforcement of the award passed by the LCIA.

Docomo Case

On 25 March 2009, Docomo, Tata and Tata Teleservices Ltd. entered into a shareholders agreement. Under the shareholders agreement, Tata undertook to find a buyer for Docomo’s shares at a specified sale price if Tata Teleservices failed to meet certain key performance indicators.

In the event that Tata was unable to find a buyer, it was obliged to purchase Docomo’s shares in Tata Teleservices. Consequent thereto, TTSL failed to satisfy the Second Key Performance Indicator, pursuant to which, Docomo initiated arbitration against Tata before the LCIA for enforcing the obligations undertaken by Tata under the shareholders agreement.

Thereafter, the LCIA heard both the parties and eventually passed an award in favour of Docomo, pursuant to which Docomo moved the Delhi High Court for enforcement of the award passed by the LCIA.

During the course of the proceedings, the parties had agreed to settle the dispute. However, before the court could decree the settlement terms, RBI intervened in the matter.

In both the cases, Unitech and RBI had taken a plea that the foreign award should not be enforced on the basis that the same was in violation of the rules laid down under FEMA.

With respect thereto, the Delhi High Court, in the Unitech case, rejected the plea of Unitech on the grounds that the put option provided to Cruz City was not an open ended assured exit option. Furthermore, the Court drawing a distinction between put option with assured return and put option as a remedy for breach, held that:

“Optionality clauses granting assured returns on FDI are proscribed. However, it is doubtful whether the said circular would be applicable to cases where a foreign investor found its claim in breach of contract. Plainly, if an investment is made on representations which are breached, the investor would be entitled to its remedies including damages. The aforesaid circulars proscribe assured return instruments brought in India under the guise of equity. However, in the present case, Cruz City is only seeking to enforce its obligations against Burley, an overseas entity.”

Thus, the Court, in the Unitech case, had held that the assured return rate stipulated under the shareholders agreement was, in fact, a put option providing a remedy for breach and thus, would not be hit by FEMA.

Following suit, the Delhi High court in the Docomo case, rejected RBI’s contentions relating to ‘assured return’ under FEMA as not sustainable by re-iterating its view that the said ‘assured return’ was more in the nature of damages and thus, would not be hit by FEMA.

The Court, in its judgment, held that FEMA did not contain any absolute prohibition on contractual obligations and therefore, the obligation on Tata was more in the nature of downside protection rather than an assured return. 

MHCO COMMENT:     

The Delhi High Court, in both its judgments, was very clear in its view  that obligations, as aforesaid, would not be hit by FEMA as they were in the nature of damages. We are of the opinion that these judgments would have considerable impact not just on future proceedings involving the enforcement of foreign arbitral awards, but also on RBI’s position on remittance of amounts granted under such awards. As the Delhi High Court has rightly put it, these judgements would, “indisputably have an impact on the foreign direct investment flows and the strategic relationships between the countries where the parties to a contract are located.”

 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 legalupdates@mhcolaw.com for any assistance.