Five regulatory considerations startups should keep in mind before doing business in India
Startups in India prefer incorporating a private limited company as it is easier to raise funds from investors.
In the recent past, the Indian Government has been proactive in encouraging startups, and according to the ‘Ease of Doing Business Index of 2018’ created by the World Bank, India currently ranks 100 out of 190 countries. It shows how easy or difficult it is for an entrepreneur to open and run a small to medium-size business when complying with relevant regulations. It measures and tracks changes in regulations affecting 11 areas in the life cycle of a business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and labour market regulation.
India’s rank has significantly improved due to various reforms that have been brought about by the current Government, including setting up of the Atal Innovation Mission and NITI Aayog. Several benefits for eligible startups have been provided by the Indian government, including but not limited to compliance regime based on self-certification, providing legal support and fast-tracking patent examination at lower costs, relaxed norms for public procurement, tax exemption on capital gains, tax exemption for three years, providing funding support, and separate institutional trading platforms have been provided by stock exchanges for listing of startups.
It is often felt that startups face numerous legal and regulatory challenges in order to grow into successful organizations.
Here are five key legal and regulatory considerations which startups need to consider before doing business in India:
Business structure: In India, a startup business may be set up either as a limited liability partnership or as a private limited company depending on the nature of the business, tax efficiency, corporate flexibility, cost of formation, compliance requirements and so on. Typically, we have seen that startups in India prefer incorporating a private limited company as it is easier to raise funds from investors.
Licenses and registrations: There are a number of licenses and registrations which are required to be obtained in order to carry out business in India depending on the nature of business of the startup and the entity that is incorporated i.e. Permanent Account Number (PAN), Importer Exporter Code (IEC), Tax Deduction and Collection Account Number (TAN), Goods and Service Tax (GST), Shops and Commercial Establishment certificate, employment related registrations depending on the number of employees, certificate from the Inter-Ministerial Board of Certification (IMBC) for tax benefits and so on.
Intellectual Property (IP): For most technology-centric startups, IP is very important. IP includes copyright, trademarks, patents, design, software development codes, programs, research findings, algorithms etc. and it is imperative that a startup protects these effectively from the very beginning as IP rights may also be licensed and/or sold and thus have financial implications as well.
Contract management: A startup would need to enter into various written contracts to make them legally binding and enforceable, i.e. service agreements with vendors, distribution agreements with distributors, employment agreements with employees, consultancy agreements with consultants, non-disclosure agreement (NDA) with various third parties for protection of confidential information, leave and license or lease agreements for use of premises, shareholder agreements (including subscription agreements and/or share transfer agreements) with investors, partnership agreement between partners, IP-related agreements for protection or assignment of IP, etc. As a startup should ideally try to mitigate risks which it may face from any commercial arrangement that it would be entering into, it is essential that these agreements are not one side and are negotiated properly. Also, startups should keep in mind that most agreements need to be stamped and registered (if required) prior to execution.
Compliance requirements: There are a number of reporting requirements that a startup would need to comply with depending on the nature of the entity that is incorporated and the investment that is made. In the event that the entity is a company, various filings/reportings would need to be made with the relevant registrar of companies and the company would have to comply with the Indian Companies Act, 2013 (including with respect to number of members, directors, shareholder meetings, board meetings, quorum for meetings, annual filings etc.). In the event the entity is a limited liability partnership, then various filings/reportings would need to be made with the relevant registrar of companies and the partnership would have to comply with the Limited Liability Partnership Act, 2008 (including with respect appointment of designated partners, annual filings etc.). Also, in case of foreign investment, relevant filings/reportings would need to be made to the Reserve Bank of India etc.
Keeping the above in mind, entrepreneurs must explore the website https://www.startupindia.gov.in/, set up by the Indian Government to boost startups in India.
(The author is Partner, Indian Law Partners, Mumbai. With additional inputs from Pranay Kapoor, Associate, Indian law Partners)
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