21 June 2017

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.