Legal Compliances and Regulations for Start-ups: Indian Outlook

Legal Compliances and Regulations for Start-ups: Indian Outlook

The Indian economic system has benefitted magnificently through Start-ups ever since its introduction. With the pooling of resources within the country and through aids provided by the Government, India has performed tremendously well. Such has been the growth that India has around 30 Unicorns with many more adding to the list at present. 
A Start-up operates in a volatile business environment and statutory compliances play a key role in their struggle to survive the highly competitive market climate. This article shall discuss certain staple compliances which are imperative to adhere to in order to make the market position of a Start-up concrete in the Indian economic setup.

For a Start-up to be eligible in the view of a government, it is essential that it:
(i) Is registered as a Company, Partnership Firm, or a Limited Liability Partnership ("LLP"), 
(ii) Has a turnover of less than INR 100 Crores in the previous financial year, and 
(iii) Shall not be an entity formed by splitting up or reconstruction of an existing enterprise. 
The primary stage which brings the Start-up into existence is its registration. Therefore, in order to operate freely and avail the status of a "Start-up", registering the entity is indispensable. The registration process of a Start-up can be encapsulated in the following points:
(i) Incorporation of the Business Entity which, involves several steps further. 
(ii) Registration as a Start-up on the Start-Up India Website in order to get promoted and avail benefits out of State and Central Policies.
(iii) Availing recognition from the Department for Promotion of Industry and Internal Trade ("DPIIT") in order to secure various perquisites under the taxation policy, intellectual property rights protection, and many others. 
(iv) Filling in the required details in the Start-up Recognition form. It is important to keep documentation such as Director Details, Certificate of Incorporation, PAN Number, etc. during the registration process. 
(v) Having furnished the above details and verified the information submitted, the Start-up receives a recognition number along with a DPIIT certificated for recognition as a Start-up.

Licensing Obligation
Before a business, no matter what kind, is up and running, it needs to procure certain licenses and approvals from the regulating authorities. Failing to comply with these norms would lead to unnecessary lawsuits and tarnish the brand in the infant stage. These licenses vary with the type of business activity a Start-up is operating in. For instance, a Start-up operating in the food industry would require a Food Safety License issued by the Food Safety and Standards Authority of India ("FSSAI"); a company dealing with coaching services will have to present a Shop and Establishment Certificate. Hence, it is advisable that thorough research is done in this aspect or hire professionals who would be able to carry out this mandatory license compliance work for the Start-up. 

Contractual Obligation    
A Start-up belongs to the same genus as the business entity. If we are to represent the classification of business organizations, a Start-up, and a Business Entity are likely to fall within the same portion. Like any other Business Entity, whether Sole Proprietorship or Partnership, a Start-up can also be diced into multiple variations. 
A Start-up involves more than one mind while it operates, therefore it is advisable to adhere to a contract that spells out the objectives, activities, profit-sharing, liabilities, and duties of the people associated with the Start-up. Such pre-existing contracts minimize the possibility of a potential feud in the near future. Hence, a valid and robust contract is of great essence in order to fuel a Start-up and function without any fuss of litigation, midway, or after the termination of the Contract.

Company Law Compliances
Under circumstances where a Start-up is in the form of a Private Limited Company, it shall be registered under the Companies Act, 2013 and adhere to the provisions contained therein. Some of the norms to be observed under the Companies Act, 2013 are:
(i) Annual General Meeting
(ii) Board Meeting 
(iii) Appointment of an auditor
(iv) Other Compliances such as filing annual return details to the Registrar of Companies ("RoC"), filing of financial statement for each year with the RoC, filing form MBP-1 by the directors with the RoC.   
Labour Law Compliances
All operations of a Start-up begin with the founders incepting the idea and recruiting people to accomplish the collective vision and transforming the idea into a reality. The entire cycle of production of service is driven through the recruitment process. Employers play a vital role in this process by working and protecting the basic rights of their employees. Therefore, the Start-up has to keep a tab of all the statutes made in connection with Labour Laws. Previous legislations provided security to labours and employees such as The Industrial Disputes Act, 1947; The Trade Unit Act, 1926; The Employees Provident Funds and Miscellaneous Provisions Act, 1952; The Employees State Insurance Act, 1948.
However, with the enactment of 4 new Labour Codes [Code of Social Security, 2020; Industrial relations Code, 2020; Code on Wages, 2020; and Code on The Occupational Safety, Health and Working Conditions, 2020] ("Codes"), there is need for people who are thorough with the compliances under the new Codes and can help Start-up with the same.
Start-ups are required to submit a self-declaration in order to be exempted from the labour inspection conducted during the nurturing years. 

Taxation Compliances 
The taxation policy is an indispensable aspect of the numerous compliances which every individual and business has to adhere to. In order to bolster a Start-up friendly economic environment, the government came up with certain relaxations related to taxation. 
(i) Provision of 100% tax rebate for Start-ups incorporated after 1st April 2016.
(ii) Exemption from tax on Long-Term Capital Gains ("LTCG")
(iii) Tax exemptions on investments above the fair market value 
(iv) Tax exemptions to Start-ups operating as individual/HUF on LTCG from equity shareholding
(v) GST Regulation: The GST regime was introduced with keeping the Start-ups in focus mainly. It was brought into action to eradicate all indirect taxes and bring forward a unified tax system. Through the GST apparatus, the government has increased the ceiling turnover for registration under GST. Any business whose turnover exceeds INR 40 lakhs in a financial year is required to register under GST. This limit is INR 20 lakh for service providers. GST returns through the Input Tax Credit system introduced by the new taxation policy have made it possible for sellers to nullify their purchases with their sales. It is logistically easier with simplified calculations contrary to the prior regime. Therefore, the GST regime has put into light major advantages for Start-ups which can be availed with ease. 

Intellectual Property Compliances
A Start-up is synonymous with innovation. It involves innovation in every tier of its functioning. From the very existence, an innovative step is a part and parcel of a Start-up. Ranging from the name under which it operates to the protection of its product, it has a paramount role to play in a Start-up. Complying with intellectual property regulations is crucial for Start-ups as IP protection to their business or product does not allow any dominant player to seize the product. Therefore, timely registration of trademark and copyrights, having a confidentiality clause in the parent contract helps in reducing the chances of an infringement issue. Start-ups are given benefits under the Start-up India Policy wherein they can register their patents, trademarks, designs, etc by only paying a statutory fee.

RBI Guidelines for Start-ups
The RBI plays a prominent role to provide Start-ups a conducive environment for carrying out their business with ease. In order to promote and encourage novice entrepreneurs, the RBI issues guidelines that promoted guidelines that relaxed external commercial borrowing policies. 
This has been a welcome step for young entrepreneurs to develop their Start-ups. A recent introduction of the Additional Factor Authentication (AFA) and other rules to enhance security while making online payments by the RBI is sure to disrupt the functioning of various Start-ups. Therefore, keeping a closer look for RBI Guidelines is essential in order to gain first-mover advantages.     

Other Compliances
There have been instances where Start-ups require tailor-made solutions for a particular circumstance or industry-specific results in which they operate. Even though Start-ups belong to the same genus, they have different compliances to adhere to in different stages of their functioning. If it is to be considered that a Start-up has expanded its horizon into the Import and Export domain, it has to mandatorily comply with the Foreign Exchange Management Act ("FEMA") Regulations. In case of a merger, unfair means of gaining a monopoly in the market, or abuse of dominant power, the role of the Competition Commission of India ("CCI") is brought to light. Start-ups have to comply with the thresholds provided in the Competition Regulation.  
When we put it in simpler terms, every Start-up operating is unique and innovative in nature, likewise, they require separate solutions for separate obstacles. There is no standard format that illustrates which rules are to be followed by Start-ups.  

The above-stated compliances are just a glimpse into the plethora of complex obligations while opening up a Start-up to operate in a full-fledged manner. There are even more intricacies involved while the entity starts functioning in full form. As iterated earlier, the ever-changing economic environment makes it difficult to cope up with the changes and focus on the core objective of the business. It is vital for the longevity of a Start-up to outsource its legal requirements. 

The above article solely remits information and discusses relevant issues, it shall in no way be used for soliciting legal solutions. The information and/or observations contained in this article do not constitute legal advice and should not be acted upon in any specific situation without appropriate legal advice.

This article has been co-authored by Shweta Pandey (Knowledge Partner) and Rishabh Shukla (Founder, BizRegime)