Acknowledging
that entrepreneurship is a key driving factor for the Indian economy, the
Government of India has introduced several schemes and legislation's for
creating a conducive environment for entrepreneurs.
Below are 10 key regulatory considerations which
potential entrepreneurs could consider before starting a business in India:
1. Structure
A business entity can be incorporated/registered as a
private limited company or a partnership firm or a limited liability
partnership (LLP) in India, depending on several factors such as ease of fund
infusion, regulatory supervision and tax efficiency.
The requirements for formation of the entity would vary
depending on the nature of the entity i.e. shareholders and directors in a
private company, designated partners and partners in a LLP and partners in a
partnership firm.
2. Start-ups
An entrepreneur may classify
his/her business as a start-up as start-ups have been granted several
incentives and exemptions under schemes, various laws, including tax and
foreign exchange regulations.
As per the notification issued
by the Department for Promotion of Industry and Internal Trade, an entity would
be considered a ‘start-up’ if:
- upto a
period of 10 years from the date of incorporation/registration, it is
incorporated as a private limited company or registered as a partnership
firm or an LLP in India;
- its
turnover for any of the financial years since incorporation/ registration
has not exceeded Rs. 100 crore; and
- it is
working towards innovation, development or improvement of products or
processes or services, or if it is a scalable business model with a high
potential of employment generation or wealth creation.
3. Registration
and licenses
The entity would need to
obtain certain registrations in order to carry out business in India (depending
upon the nature of the entity and number of employees) such as PAN, TAN, GST,
shop and establishment license, registration under labour laws for
gratuity/provident fund, and so on and this would entail dealing with different
government authorities.
4. Compliance's
The start-up entity would need
to ensure periodic compliance with several laws and regulations (including
various corporate, tax and labour laws).
The nature of the entity would
determine the volume and frequency of compliance, that is, a private company
needs to adhere to more reporting and filings requirements than an LLP and a
public company more than a private company.
5. Intellectual
Property (IP)
It is of utmost importance
that the new business ensures that its IP in its brand, logo, software, and
product and so on is registered with the Trade Mark Registry and is adequately
protected.
6. Foreign Direct
Investment
Investment in an Indian entity
from overseas would be governed by the foreign exchange laws of India including
the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
Start-ups are additionally
permitted to issue convertible notes which are debt instruments either
repayable at the option of the holder or which are convertible into equity
shares within 5 years upon occurrence of a specified event.
7. External
Commercial Borrowings
Indian entities eligible to
receive foreign direct investment are also permitted to receive external
commercial borrowings (ECB) from overseas, subject to conditions laid down by
the Reserve Bank of India.
There are several relaxations
provided to start-ups for raising capital from overseas especially with respect
to average maturity and end usage. However, LLPs may not be able to raise ECBs.
8. Contract
Management
Watertight contracts (which
are adequately stamped and registered, where necessary) with vendors,
distributors, lessors and employees (including non-compete and non-solicitation
obligations) are imperative in order to protect the business. Further,
non-disclosure agreements would be necessary in order to protect sensitive and
confidential information.
9. Tax
Tax efficiency should be
considered before incorporating a business.
Start-ups have been granted
certain tax exemptions such as a tax holiday for a prescribed period and angel
tax exemption.
10. Government
Support
Depending on the business sector the Central and
the State Governments have issued schemes and policies for new businesses or
start-ups in order to boost an environment for growth and it is important to
explore these to assist the business.
