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Start-up India: Important Benefits and Some Concerns

November 30, 2016     by Kamini Goyal

The Government of India has taken various measures to improve the ease of doing business. On 16th January 2016, Prime Minister Narendra Modi announced bunch of benefits and schemes to promote start up ecosystem in India and is also building an exciting and enabling environment for these Startups, with the launch of the “Startup India” movement.

Start up initiative launched by the government is a significant step. The Government of India (GoI) is significantly taking steps in easing the norms and is working towards implementing the “Start up Plan of Action.”

Start-up India Hub:

An all-India hub has been created as a single contact point for start -up foundations in India, helping entrepreneurs to exchange knowledge and access financial aid. The hub has been able to resolve various queries received from Startups through telephone, email and Twitter.

For contact details of startup India, please visit: Startup India Connect

Important Benefits:

 The action plan is largely optimistic since it shows a very positive intent by the government. Some of the highlights of the plan are: –

S. No Benefits Governing Provision             Explanation
1. Tax Exemptions for start ups Finance Act, 2016
  • The Finance Act, 2016 has made provision for start ups to get income tax exemption for three years in a block of five years, if they are incorporated between 1st April 2016 and 31st March 2019.

REQUIREMENT: –

To avail these benefits one must get a Certificate of eligibility from the Inter-Ministerial Board of DIPP.

  • Tax exemption on investments above Fair Market Value has been introduced for investments made in Startups.

For more information, please read Notification related to Tax Exemption on Investments above Fair Market Value

2. Self Certification of various compliances Self Certification of Various labour and environmental laws Regulatory formalities requiring compliance with various labour and environmental laws are time consuming and difficult in nature.

 

Accordingly, the process of conducting inspections has been made more meaningful and simple.  

  1. Start ups shall be allowed to self-certify compliance with 9 labour and environmental laws.
  2. In case of labour laws, no inspections will be conducted for a period of three years.
  3. In case of environmental laws, Start-ups which fall under the ‘white category’ (as defined by the Central Pollution Control Board) would be able to self certify compliance and only random checks would be carried out in such cases.

Some Concern :

There are a few unexplained points under the plan, for example, the government seems to have given only one, narrow definition for start-ups. This needs to be changed because it excludes many innovative businesses. For definition of Start-up, please visit Start-up Action Plan. Some major concerns have been summarised herein below:

S. No Particulars Relevant Provision Remarks
1. Issue of sweat equity shares Section 54 and Rule 8(4) of Companies (Share Capital and Debentures) Rules, 2014

 

MCA notification dated 19th July, 2016. Please read,

Companies (Share Capital and Debentures) Third Amendment Rules, 2016

MCA vide its notification dated 19th July, 2016 has allowed a start-up Company to issue sweat equity shares not exceeding 50% of its paid up capital upto 5 years from the date of incorporation, as against. 25% in other cases.

 

Therefore it turns out to be advantageous for the start ups which are now able to raise their capital beyond this ceiling by the way of issue of sweat equity shares to its directors, promoters upto 50% of its Paid up share capital etc.

2. Issue of ESOP to promoters Rule 12 of Companies (Share Capital and Debentures) Rules, 2014

MCA notification dated 19th July, 2016. Please read,

Companies (Share Capital and Debentures) Third Amendment Rules, 2016

The mentioned rule restricts the issue of ESOPs to promoters or promoter directors even if they are employees of the Company.

However, in order to promote start ups, an amendment rule vide insertion of Proviso to the clause (c) of the sub-rule (1) of Rule 12 provides that the above mentioned category of persons would also be eligible for ESOPs upto 5 years from the date of incorporation or registration of such start-ups.

3. Acceptance of deposits by Private Companies from its members Section 73 and Notification dated 5th June, 2015 Amount shall not exceed: –

100% of their (Paid up capital and Free reserves).

Since acceptance of deposits from members enables the start ups to raise the funds without any additional compliance costs, the limitation detailed above hinders the smooth raising of funds.

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