Legislative Reforms For Start Ups In India



A start up is a company which is in the initial stages of establishing a marketplace for itself. It is founded by entrepreneurs who find a certain product or service lacking in the market and come up with innovative ideas to fulfill that demand.

According to an economic survey in 2021-22, India has over 61,400 startups recognized by Department for Promotion of Industry and Internal Trade (DPIIT), with at least 14,000 recognized during fiscal 2022. Startups have been encouraged in the media and entertainment industry with shows like Shark Tank India wherein investors hear pitches from founders who require funding from them in return for equity (a percentage of ownership).

With the soar in formation of startups, the government has taken various measures to ensure ease of business to these budding entities.

  1. Startup India’ is one such initiative by the Government of India to support innovation of products and services. The government has devised action plans, schemes, and incentives in order to simplify compliance for startups. For the purpose of Startup India, startup is an entity incorporated or registered in India not prior to five years, with annual turnover not exceeding INR 25 crore in the preceding financial year. Startup India provides the following benefits to a startup:
    1. Startup Intellectual Property Protection: The Startup Intellectual Property Protection (SIPP) scheme is developed to facilitate filing of patents, trademarks and designs by startup and protect their intellectual properties.
    2. Compliance regime based on self-certification: Regulatory compliances relating to labour and environment laws are difficult to manage for a startup in its formative years. Startups are therefore allowed to self-certify compliance with certain labour and environment laws. Random checks or inspection may be carried out upon receipt of verifiable complaint.
    3. Startup India Hub: Startup India Hub will be a common platform for budding entrepreneurs to exchange ideas.
    4. Winding up: A significant percentage of startups fail to succeed. Upon this failure, the compliances required to be followed for winding up may be an added pressure. Accordingly, startups meeting such criteria as may be specified may be wound up within a period of 90 days from making of an application for winding up on a fast-track basis.
    5. Tax exemption on capital gains: With a view to encourage investment in startups, exemption is given to persons who have capital gains during the year and have invested in Fund of Funds (a fund created by the government to aide startups).
    6. Income tax exemption for 3 years: Cash constrains are faced by startups during their formative years. Apart from significant investment made different challenges are faced everyday relating to technology, competition, etc. The profits from startups are exempted from income tax for the period of initial 3 years, subject to non-distribution of dividend.
    7. Tax exemption on investments above FMV:Under Section 56 (2) (vii) (b) of the Income Tax Act, 1961, excess consideration received for issue of shares higher than the fair market value (FMV) is taxable as Income from Other Sources. Investments in startups is exempted by this provision.
  2. According to the Companies (Share Capital and Debenture) Rules, 2014, Employee Stock Options can be granted to an employee who is a promoter or a person belonging to the promoter group or a director holding more than 10% of the equity shares of a startup company for a period of 10 years from date of incorporation.
  3. According to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Third Amendment) Regulations, 2016, a Foreign Venture Capital Investor (FVCA) may purchase equity or equity linked instruments or debt instruments issued by a startup, irrespective of the sector in which it is engaged, without prior approval of RBI.
  4. The Department for Promotion of Industry and Internal Trade modified the existing FDI policy for conversion of convertible notes (debt instruments) issued by a startup company into equity shares of such company within a period of five years to increase the mandatory period of conversion from five years to ten years. A person resident outside India can purchase these convertible notes issued by an Indian startup company for an amount of INR 25,00,000 or more in a single tranche after attaining requisite approvals where required.

In India, startups have arisen in the previous two decades, and the related ecosystem has grown rapidly. Despite this, the entrepreneurs face tremendous difficulties at various steps. Overcoming such difficulties requires the combined efforts of law makers, government agencies, and the entrepreneurs themselves.

Startups are an upcoming vital part of the larger economy. They are projected to gain from law reforms that improve overall economic circumstances as well as investments in digital and physical infrastructure (for example, internet access, roads and public transit, power, and energy). In terms of the regulatory framework, it is thought that granting exemptions of existing regulations to startups and eliminating inefficiencies within the bureaucracy are critical to making it easier for startups to do business.

Although investments in startups in India have increased significantly in recent years, the ecosystem still needs resources. Investors prefer to support more established firms; more money is needed to assist the growing ones in developing prototypes.

Governmental schemes to set up a seed fund and give grants to startups are considered as effective initiatives. In addition, more startups should be acquired by large, established companies. Moreover, the phenomenon that successful entrepreneurs supporting promising younger startups, which is common in mature startup ecosystems and initiated beautifully by Shark Tank India this year, needs to further gather pace.


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