Recent initiatives in respect of startups - Startup India action plan

13.06.2016

On 16th January 2016, Prime Minister Narendra Modi unveiled the Startup India Action Plan at an event conducted by the Department of Industrial Policy and Promotion. The Action Plan aims to take various steps for the growth and development of startups and to initiate a strong eco-system for nurturing innovation in order to accelerate economic growth and generate employment opportunities. It also aims to boost digital entrepreneurship at the grassroot level. The Action Plan contains various positive initiatives for startups covering legal, financial and other challenges faced by them in starting up and day to day operations.

For the purposes of various Government schemes and initiatives, an entity is considered as a startup shall mean an entity (including a private limited company, an LLP or a registered partnership firm (i) incorporated in India for not more than 5 years; (ii) with an annual turnover as defined in the Companies’ Act, 2013 not exceeding Rs. 250,000,000 in any financial year and (iii) working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property . However, an entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘startup’. It has been clarified that an entity which is merely developing products, processes, or services which either do not have the potential of commercialisation or which have no or limited incremental value for customers or workflow or developing undifferentiated products or services or processes shall not be considered an eligible under this definition. The Department of Industrial Policy and Promotion has been appointed to grant eligibility certificates to entities for this purpose through a mobile app or a portal being developed for the purpose. Eligible entities would be required to submit one of the following documents in order to obtain the eligibility certificate to be categorised as a ‘startup’:

a) 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

b) a letter of support by any incubator which is funded (in relation to the project) from Government of India or any State Government as part of any specified scheme to promote innovation; or

c) 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

d) a letter of funding of not less than 20 per cent in equity by any Incubation Fund,/Angel Fund/Private Equity Fund/Accelerator/Angel Network duly registered with Securities and Exchange Board of India that endorses innovative nature of the business. Department of Industrial Policy and Promotion may include any such fund in a negative list for such reasons as it may deem fit; or

e) a letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; or

f) a patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.

Key highlights of the Start-up India Action Plan and steps taken in that direction so far are discussed below. It should however be noted that appropriate notifications/legislations for the implementation of the action plan set out below are required to be notified, which is being done by the Government of India gradually.

  • Self-certification

    • Startups shall be allowed to self-certify under a number of labour and environment laws to reduce compliance burden.
    • The self-certification will apply to labour laws such as the Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996, the Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979, the Payment of Gratuity Act, 1972, the Contract Labour (Regulation and Abolition) Act, 1970, the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees’ State Insurance Act, 1948.
    • No inspections shall be carried out under the aforesaid labour laws for a 3 years unless the authorities have received credible and verifiable compliant of violation.
      • Accordingly, the Ministry of Labour and Employment, Government of India has advised all States and Union Territories that:
        o For the first year of setting up of startups such establishments may not be inspected under any of the 4 labour legislations mentioned namely Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996, the Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979, the Payment of Gratuity Act, 1972, the Contract Labour (Regulation and Abolition) Act, 1970. These startups may be asked to submit an online self-declaration instead.
      • Startups may be allowed to submit self-certified returns on the Shram Suvidha Portal (as is being done under Shram Suvidha Portal under these Acts for the Central sphere) under aforesaid Acts. From the 2nd year until the 3rd year of setting up the unit, such startups may be taken up for inspection only when very credible and verifiable complaint of violation is filed in writing and the approval has been obtained from at least one level senior to the inspecting officer.
    • The self-certification will apply to environment laws such as the Water (Prevention & Control of Pollution) Act, 1974, the Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003 and the Air (Prevention & Control of Pollution) Act, 1981.
    • Startups which are categorised under the “white category” by the Central Pollution Control Board would be able to self-certify and subject to random checks only
       
  • Start-up India hub

    • A single contact point for the entire startup ecosystem in India is proposed to be established to enable exchange of knowledge, provide access to funding and mentoring, feasibility testing, business structuring advisory, enhancement of marketing skills, technology commercialization and management evaluation.
    • To help the entrepreneurs to collaborate with the Central Government and State Government, Indian and foreign venture capitalists, angel networks, banks, legal partners and consultants, universities and R&D institutions
       
  • Register through app

    • An online portal and a mobile application, has been launched to help startups to register for recognition under this scheme. The same are available at http://startupindia.gov.in/index.php.
    • The app would facilitate application, tracking the status of registration, downloading registration certificates, compliance, obtaining clearances and approvals.
       
  • Patent protection

    • A scheme for startup Intellectual Property Protection (SIPP) has been rolled out to facilitate filing of Patents, Trademarks and Designs by innovative startups.
    • A fast-track system for patent examination at lower costs is being conceptualised by the central government.
    • Further, 80 per cent rebate shall be given on patent filing.
    • A startup wishing to avail of SIPP scheme benefits is required to obtain a certificate from the Startup Certification Board comprising of a) the Joint Secretary, Department of Industrial Policy and Promotion; b) Representative of Department of Science and Technology; and c) Representative of Department of Bio-technology.
    • Facilitators (lawyers, patent agents and trademark agents etc) have been identified in order to provide services relating to registration of trademarks, patents and designs. These facilitators would be paid fees on fixed scale by the Government of India for the services rendered to certified startups except for advisory which shall be pro bono. However, statutory fees shall be payable by startups themselves.
       
  • Public procurement related relaxation of rules

    • Pursuant to the intention in the Action Plan, the Ministry of Micro, Small and Medium Enterprises, Government of India has written to all Central Ministries, Departments, Central Public Sector Units and all other concerned departments relaxing the conditions pertaining to prior turnover and prior experience with respect to Micro, Small and Medium Scale Enterprises (MSMEs) subject to meeting quality and technical specifications.
    • With effect from 1st April 2015, 20% of total procurement by Central Ministries, Departments, Central Public Sector Units has been reserved for MSMEs which also usually cover startups.
       
  • Faster exit

    • The Insolvency and Bankruptcy Code, 2016 (“Insolvency Code”) was passed by the Lok Sabha (Lower House) and Rajya Sabha (Upper House) of the Indian Parliament on 5th May 2016 and 11th May 2016 respectively and has received the President of India’s assent on 28th May 2016. The Insolvency Code will become effective from such date as the Central Government may notify.
    • The Action Plan envisages bringing into force a fast track corporate insolvency resolution process for startups to facilitate quick winding up of affairs in the event of failure of the business of the startup.
    • The Insolvency Code allows such corporate debtors (a) which have assets and income below a level as may be notified by the Central Government; or (b) with such class of creditors or such amount of debt as may be notified by the Central Government; or (c) such other category of corporate persons as may be notified by the Central Government as the Central Government may notify to make an application for fast track corporate insolvency resolution process.
    • Fast track corporate insolvency resolution process is required to be completed within a period of 90 days from the date of commencement of insolvency i.e. date of admission of proceedings before the appropriate authority.
       
  • Rs 100,000,000,000  fund

    • The government will develop a fund which is referred to as Fund of Funds, with an initial corpus of Rs 25,000,000,000 and a total corpus of Rs 100,000,000,000 over 4 years, to support upcoming start-up enterprises.
    • The Life Insurance Corporation of India will play a major role in developing this corpus.
    • A committee of private professionals selected from the start-up industry will manage the fund.
    • The fund is proposed to be sector agnostic.

  • National Credit Guarantee Trust Company

    • A National Credit Guarantee Trust Company (NCGTC) is being conceptualised with a budget of of Rs 5,000,000,000 per year for the next four years to support the flow of funds to startups in the form of venture debt by establishing a credit guarantee mechanism.
       
  • No Capital Gains Tax

    • Investment in Fund of Funds shall be given capital gains tax exemption. In this respect the Finance Bill, 2016 has announced that an exemption from capital gains tax would be provided if the long term capital gains proceeds are invested by an assessee in units of such specified fund, as may be notified by the Central Government in this behalf, subject to the condition that the amount remains invested for three years failing which the exemption shall be withdrawn. The investment in the units of the specified fund shall be allowed up to Rs. 50,00,000.
    • The Finance Bill, 2016 proposes to provide exemption from capital gains tax from (i) transfer of residential property if such capital gains are invested in subscription of shares of a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 subject to other conditions specified therein; and (ii) if such capital gains are invested in subscription of shares of a company which qualifies to be an eligible start-up subject to the condition that the individual or HUF holds more than fifty per cent shares of the company and such company utilises the amount invested in shares to purchase new asset before due date of filing of return by the investor. At present, investments in newly formed manufacturing MSMEs are exempt from capital gains tax provided the capital gains are invested in “new assets”. The same exemption is intended to be extended to investment in startups such that “new assets” would include “computer” or “computer software” to incentivize investment in technology driven startups.
       
  • No Income Tax for three years

    • It is proposed to provide a deduction of one hundred percent of the profits and gains derived by an eligible start-up from a business involving innovation development, deployment or commercialization of new products, processes or services driven by technology or intellectual property towards Income Tax for Assessment Year 2017-18 provided no dividend is announced during these years.
       
  • Tax exemption for investments of higher value

    • In case of an investment by incubators in startups where the consideration exceeds the fair market value, it is intended that no tax shall be payable by startups on the difference between the actual price and the fair market value under the head Income from Other Sources as is currently applicable under the Income Tax Act, 1961.
       
  • Other measures

    • Innovation-related study plans for students in over 5 lakh schools.
    • Besides, there will also be an annual incubator grand challenge to develop world class incubators.
    • The Atal Innovation Mission will be launched to boost innovation and encourage talented youths.
      • Atal Innovation Mission is proposed to:
      • Establish sector specific incubators.
      • Establish of 500 tinkering labs.
      • Provide Pre-incubation training.
      • Provide seed funding to high growth startups.
    • A private-public partnership model is being considered for 35 new incubators and 31 innovation centres at national institutes.
    • Further, these 35 incubators will be set up with a grant of 50% provided by the Government.
    • The government plans to set up 7 new research parks, including six in the Indian Institute of Technology campuses and one in the Indian Institute of Science campus with an investment of Rs 1,000,000,000 each.
    • These new incubators shall focus on the expertise of academic/research institutions.
    • The government intends to further establish five new biotech clusters, 50 new bio incubators, 150 technology transfer offices and 20 bio-connect offices in the country.
    • Further, a Biotech Equity Fund is proposed to be established to provide financial assistance to young Biotech startups.
    • The government will introduce innovation-related programmes for students in over 5 lakh schools.

 

Regulatory Relaxations by Reserve Bank of India (RBI) for startups-

Recently, RBI has indicated some regulatory steps to be taken for ensuring ease of doing business for the growth of startups in line with the Action Plan. The regulatory relaxations announced by RBI (some of which have already been implemented as indicated below) are as follows-

  • Enabling startups to receive foreign venture capital investment irrespective of the sector in which they are engaged.
  • Allowing transfer of shares from foreign venture capital investors (FVCI) to other residents or non-residents.
  • Permitting, in case of transfer of ownership of a startups, receipt of the consideration amount on a deferred basis as also enabling escrow arrangement or indemnity arrangement up to a period of 18 months;
  • Allowing online submission of Form A2 for outward remittances, with minimal documentation.
  • Simplifying the process for dealing with delayed reporting of Foreign Direct Investment (FDI) related transaction by building a penalty structure into the regulations itself.
  • Permitting startups to avail rupee loans under the External Commercial Borrowings regulations with relaxations in respect of eligible lenders, etc..
  • Issuance of innovative FDI instruments like convertible notes by startups.
  • Streamlining of overseas investment operations for the start-ups.

Some of the issues which are already permitted but which need specific clarifications are also proposed to be clarified:

  • Cashless issue of shares through sweat equity or against any legitimate dues of the start-up. In this respect the RBI issued a circular clarifying that:
    • The RBI has already permitted Indian companies to issue cashless sweat equity, subject to conditions, inter-alia, that the scheme has been drawn either in terms of regulations issued under the Securities Exchange Board of India Act, 1992 in respect of listed companies or the Companies (Share Capital and Debentures) Rules, 2014 notified by the Central Government under the Companies Act 2013 in respect of other companies.
    • RBI has already permitted Indian companies to issue equity shares against any other funds payable by the investee company (e.g. payments for use or acquisition of intellectual property rights, for import of goods, payment of dividends, interest payments, consultancy fees, etc.), remittance of which does not require prior permission of the Government of India or Reserve Bank of India under Foreign Exchange Management Act, 1999 subject to conditions relating to adherence to FDI policy including sectoral caps, pricing guidelines, etc. and applicable tax laws.
  • Collection of payments by startups on behalf of their overseas subsidiaries. In this respect the RBI issued a circular clarifying that:
    • A start-up in India with an overseas subsidiary is permitted to open foreign currency account abroad to pool the foreign exchange earnings out of the exports/sales made by the concerned start-up;
    • The overseas subsidiary of the start-up is also permitted to pool its receivables arising from the transactions with the residents in India as well as the transactions with the non-residents abroad into the said foreign currency account opened abroad in the name of the start-up;
    • The balances in the said foreign currency account as due to the Indian start-up should be repatriated to India within a period as applicable to realisation of export proceeds (currently nine months);
    • A start-up is also permitted to avail of the facility for realising the receivables of its overseas subsidiary or making the above repatriation through Online Payment Gateway Service Providers (OPGSPs) for value not exceeding USD 10,000 (US Dollar ten thousand) or up to such limit as may be permitted by the Reserve Bank of India from time to time under this facility; and
    • To facilitate the above arrangement, an appropriate contractual arrangement between the start-up, its overseas subsidiary and the customers concerned should be in place.

Further, the Reserve Bank has created a dedicated mailbox to provide assistance and guidance to the start-up sector.

Any questions? Please contact: Gerald Reger