Start-Up Advisory (Part 2 of 3): Startup India-The Game Play of Company Law.
This is Part-II of the compilation series on Start-up Advisory where authors have guided its readers to the basic tenets of Startup as a concept with little concise cream of technicalities. In this part of the series, the authors will make their readers familiar with provisions of Company Law vis-a-vis Start-up.
WHAT IS STARTUP? -
There are 2 basic key elements to identity a startup;
The words “entity” means a private limited company as defined in the Companies Act, 2013, or a registered partnership firm registered under Section 59 of the Partnership Act, 1932 or a limited liability partnership under the Limited Liability Partnership Act, 2002.
The words “Turnover” is as defined under the Companies Act, 2013.
Therefore, Entity + Basic Conditions = STARTUP
An entity shall be considered as a ‘startup’-
(a) Up to five years from the date of its incorporation/registration,
(b) If its turnover for any of the financial years has not exceeded Rupees 25 crore, and
(c) It is working towards innovation, development, deployment or commercialization of new products, processes, or services driven by technology or intellectual property;
WHAT IS NOT A STARTUP? -
1. Any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘startup’.
2. An entity shall cease to be a startup on completion of five years from the date of its incorporation/registration or if its turnover for any previous year exceeds Rupees 25 crore.
WHAT IS THE PROCESS OF RECOGNITION AS STARTUP? -
The process of recognition as a ‘startup’ is managed electronically. Startups will be required to submit a simple application with any of following documents:
(a) a recommendation (with regard to innovative nature of business), in a format specified by the Department of Industrial Policy and Promotion, from any Incubator established in a post-graduate 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 the 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 percent 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. 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.
The Department of Industrial Policy and Promotion may, until such mobile app/portal is launched, make alternative arrangement of recognizing a ‘startup’. Once such application with relevant documents is uploaded, a real-time recognition number will be issued to the startup.
The government has already launched iMADE, an application development platform aimed at producing 1,000,000 applications and PMMY, the MUDRA Bank, a new institution set up for development and refinancing activities relating to micro units with a refinance Fund of Rs. 200 billion
WHAT ARE THE BENEFITS TO STARTUP UNDER COMPANIES ACT, 2013? -
1. An amount of twenty-five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding ten years from the date of issue) in a single tranche, from a person shall not be treated as a deposit. (amended on Sept 07, 2020).
2. The provisions of clauses (a) to (e) of Section 73 of the Act shall not apply to a start-up company for five years from the date of its incorporation.
3. The upper limit on the acceptance of deposits has been enhanced to 35% of net worth instead of earlier 25%;
4. Start-ups are allowed to issue Employee Stock Options to promoters working as employees;
5. The limits with regard to sweat equity that can be issued by a start-up company from 25% of paid up capital to 50% of paid up capital;
6. The annual return of a start-up company may be signed by the company secretary, or where there is no company secretary, by the director of the company.
7. For start-ups, convening at least one meeting of the board of directors in each half of a calendar year with the gap between the two meetings of not less than Ninety (90) days is sufficient to meet the requirement of Section 173 (5) of the Act.
WHAT ARE OTHER IMPORTANT POINTS FOR A START-UP? -
1. Registrations and business licenses: Post incorporation of a business entity in India, some necessary registrations are required and mandated by law. Some examples are Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN), GST registration, et al. Business licenses are permits issued by government authority that allow startups to start/continue to operate a particular business within its territorial jurisdiction lawfully. Some examples are Food safety license, Health/Trade license, Shops & Establishment License, etc.
2. Founder agreements: The agreement should represent a clear understanding between the founders on all key issues related to the startup. It should have clear clauses detailing the founder equity split with vesting \ assignment of all intellectual property in favor of the startup, termination of a promoter and exit process, etc.
3. Employment contracts: Employment contracts are certainly valuable to the employees as clauses may be inserted with respect to safeguard and protect the interest of the startup – such as non- compete clause, non-solicitation clause, assignment of intellectual property rights.
4. Employee Stock Option Pool (ESOP): ESOPs create a sense of ownership amongst employees. It is important to note that ESOPs are not shares. They are structured in a way that they are option to buy shares at a discounted price and can be exercised only after a certain vesting period which is decided by the company granting the ESOPs.
5. Third Party Agreements: Clauses related to breach termination and dispute resolution should be well negotiated and captured in all third-party agreements.
6. Compliance management: For the sustainable growth of any business that the startup is in compliance with legal, secretarial, accounting, taxation, employee related and other associated compliances. The consequences of noncompliance can be levy of punitive fines on the startup.
The Government intention is very positive about enriching the entrepreneurship in India. The legislative reforms, policy introductions, and ease in dispute resolutions for newly emerging seeds born out of charm to lead the economy are in true consonance with the objective to keep the skillfulness shine & lucrative in letter and spirit. On this note, the startups in India received their green signal in plethora of provisions under Companies Act, 2013 and various incidental provisions which form part of succeeding volume of this series.
 2(68)private company" means which by its articles],— (i) restricts the right to transfer its shares; (ii) except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that — (A) persons who are in the employment of the company; and (B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company.
 2(91) "turnover" means the gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.
 Rule 2 sub rule 1 ,clause c , sub clause (xvii) of Companies (Acceptance of Deposits) Amendment Rules, 2020.
(Authored by Mr. Shubham Budhiraja, Ms. Akshita Goyal and Ms. Shivangi Chawla, all interns at S&D Legal Associates)