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2016: An Avant-garde Year for Startups The Startup Action Plan not only aspires to build an inspiring environment for young entrepreneurs but also attempts to widen access to finances and create a support system for them.

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Ever since the Startup Action Plan was launched in the month of January 2016, there has been a surge in the activities surrounding the Startup mechanism-both legal and financial. The Startup Action Plan not only aspires to build an inspiring environment for young entrepreneurs but also attempts to widen access to finances and create a support system for them.

To sum it up here are the SOPs granted specifically to Startups till date.

Relaxed norms of Public Procurement:

Startups in the manufacturing sector are exempted from the criteria of "prior experience/turnover", whenever a tender is floated by a government entity or a PSU, without any relaxation in quality standards or technical parameters.

Tax Exemptions:

Provision for tax exemption on capital gains have been granted if the money is invested in funds provided by the Government, Three-year tax holiday has been introduced for Startups that are incorporated between April 1, 2016 and March 31, 2019 is provided. Further, Tax exemption on investments above Fair Market Value has been introduced for investments made by any domestic angel investors in Startups.

Intellectual Property:

Start-up India Intellectual Property Protection ("SIPP") Scheme is brought in place which provides for fast-tracking of patent applications, panel of facilitators to assist in filing, where government bears the cost of such facilitation, 80% rebate is provided on filing of patents, filing procedures have been simplified and fees for filing Patents has been significantly reduced.

Labour Law:

Self-certifying compliances under the following labour laws has been permitted:

  1. The Industrial Disputes Act, 1947;
  2. The Trade Unions Act, 1926;
  3. The Building and Other Constructions Workers' (Regulation of Employment and Conditions of Service) Act, 1996;
  4. The Industrial Employment (Standing Orders) Act, 1946;
  5. The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979;
  6. The Payment of Gratuity Act, 1972;
  7. The Contract Labour (Regulation and Abolition) Act, 1970;
  8. The Employees' Provident Funds and Miscellaneous Provisions Act, 1952;
  9. The Employees' State Insurance Act, 1948;
  10. Apprenticeship Act 1961.

Faster Exits:

In light of the Insolvency and Bankruptcy Code, 2016, the Startups can now be wound up within a period of 90 days from making an application for winding up on a fast track basis;

Other Facilities

A hub to act as a single point of contact has been created for Startups i.e. Start-up mobile application is brought in place for the greater convenience of entrepreneurs.A "fund of funds" of INR 10,000 crores for Startups has been established which is managed by Small Industries Development Bank of India;

Other Relaxations:

Start-up enterprises are enabled, irrespective of the sector in which they are engaged, to receive foreign venture capital investment and also explicitly enabling transfer of shares from Foreign Venture Capital Investors to other residents or non-residents.Startup, having an overseas subsidiary, have been permitted to open a foreign currency account with a bank outside India for the purpose of crediting to the account the foreign exchange earnings out of exports/sales made by the said Start-up or its overseas subsidiary; Repatriation of the balances in such accounts is to be within the period prescribed for realization of exports;

Also, Startups are permitted to borrow upto a limit of USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both through External Commercial Borrowing;Foreign Venture Capital Funds (FVCF) registered with SEBI [which has obtained registration under the Securities and Exchange Board of India (FVCI) Regulations, 2000] are allowed to invest in Indian Startups without RBI approval.

Companies Act, 2013:

In relation to relaxations under the Companies Act, 2013, Sweat Equity Shares can be issued up to 50% of paid-up capital up to 5 years from the date of incorporation/registration and ESOP can be issued to the promoters and to directors who, directly or indirectly, holds more than 10% of the outstanding equity shares of the Company;Startups are permitted to receive an amount of

INR 25,00,000 or more by way of a convertible note (convertible into equity shares or repayable within a period not exceeding 5 years from the date of issue) in a single tranche, from a person.

SEBI's role to encourage start-ups:

Another significant move to make the start-up environment more conducive was when SEBI announced that it proposes to ease norms of listing for Startups, thus bolstering the entrepreneurship. While we wait for the extant policy to be released, some of the noteworthy points proposed are:

  • Relaxing norms pertaining to pricing, disclosures and usage of funds to start-ups willing to get listed on the ITP.
  • In the case of start-ups listing on Institutional Trading Platform, the lock-in period will be 6 months which will be uniformly applicable to all categories of pre-IPO shareholders as opposed to a lock-in period of three years for (pre-IPO) shareholders holding more than 20% and one year for all other investors.
  • The definition of QIBs is widened to include non-banking financial companies and family offices or trusts and other entities that register themselves with SEBI with a minimum net worth of INR 500 crore.

It is encouraging to see that regulatory body is open to improving liquidity and cash flow for smaller enterprises, certain requirements such as the minimum number of allottees and an individual limit of 25% on the post issue capital should be revisited.

Few challenges that may arise:

Most of the Start ups are bootstrapped and have difficulty in raising funds in their nascent stage for which the Government has endeavored to make necessary liberations for them under various laws.

With the implementation of Companies Act, 2013, most of the provisions now, also apply to private companies (which was not the case with the previous act). As a result, the bandwidths of time and cost on compliances of the various provisions of the Companies Act and the stringent fillings have increased. A little leeway for Startups in the initial years of business, in this regards, may be looked forward to.

The plan has been laid down by the Central Government but the implementation would require the co-operation of the State Government. How much would the Startups actually benefit, only time will tell. Other than the finances and filings, another hindrance that may serve as a thorn may be the lack of fast track resolution for commercial disputes. Although, alternate dispute

resolutions such asArbitration are touted to be the replacement for commercial litigation, it is common knowledge that in reality, the price tag to it is still very high.

Nonetheless, the concessions granted to Startups this year are revolutionary; some may even look at it as a sigh of relief!

Going forward and forecasting 2017:

Going forward 2017 will also be beneficial for Startups. We witnessed an increase in the e-commerce business for goods and services in 2016.Gradually we are also seeing that banks are going the e-commerce way. Ever since the launch of Digital India, going digital isn't a choice anymore. With the current economic whirlwind of Demonetization, there is an evident onset of India going digital. We have digital wallets, which only sometime back was thought to be filled with skepticism, is now a necessity. Even your local panipuri-wala has a digital wallet service. It can be forecasted that technology will be adapted on a full scale. With the change in the Government rules and regulation, there will be a rise in Startups that addresses the change and assists the citizen in adapting to a different India.

Start-ups, indeed, closed the business for the calendar year 2016 on a high note!

Purvi Kapadia & Zil Shah

( Partner & Associate at Rajani Associates)

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