Navigating the Holding-Subsidiary Dilemma in Indian Start-ups: Understanding Definitions, Benefits, and Practical Challenges
Introduction:
India’s dynamic start-up ecosystem has been a driving force for economic growth and innovation. However, the definition of start-ups, as outlined by the Department for Promotion of Industry and Internal Trade (DPIIT), introduces some challenges, especially for holding subsidiaries. This article explores the start-up definition, highlights the benefits of registration, and delves into the challenges faced by holding subsidiaries in practical scenarios.
Start-up Definition in DPIIT Notification[1]:
The DPIIT’s definition of a start-up encompasses entities[2] within ten years of incorporation, with an annual turnover upto INR 100 crore, actively engaged in innovation, development, improvement, or with a high potential of employment/wealth generation.
Notably, entities formed through the splitting or reconstruction of existing businesses are excluded from this definition.
Benefits of Start-up Registration:
Registering as a start-up in India unlocks various advantages, such as:
1. Funding Opportunities: Recognition facilitates easier access to funding from diverse sources, including government initiatives.
2. Angel AIF Funds: Start-ups become eligible to receive funding from Angel Alternative Investment Funds (AIFs), offering vital financial support in their journey.
3. Self-certification: Indian startups can easily comply with 6 Labor Laws and 3 Environmental Laws by self-certification online. They get a 5-year break from labor inspections and, for environmental rules, only face random checks if they fall under the ‘white category,’ making it simpler for them to do business.
4. Cost reduction for patent application: Indian startups benefit from accelerated patent processing, guided by government-funded facilitators. These facilitators aid in filing intellectual property applications and provide advice on protection globally. Moreover, startups receive an 80% rebate on patent filing fees, while the government covers the entire cost of facilitator fees.
5. Tax Exemptions: Start-ups enjoy income tax exemptions, providing financial relief for the initial years of operation.
6. Easier Public Procurement Norms: Startups get a chance to sell products/services directly to the Government on the online platform Government e-Marketplace (GeM). They are exempted from prior experience/turnover criteria in manufacturing, encouraging collaboration with the Government. Additionally, recognized startups don’t need to submit Earnest Money Deposit (EMD) for government tenders.
Guidelines and Practical Challenges for Holding Subsidiaries:
The DPIIT issued revised guidelines[3] for recognition of startups on June 21, 2021. These guidelines interalia explicitly exclude holding-subsidiaries from the start-up recognition.
However, it is worthwhile to note that many start-ups adopt holding-subsidiary structures due to strategic reasons such as:
1. Strategic Intellectual Property (IP) Management: One compelling reason for adopting a holding-subsidiary structure is to segregate responsibilities efficiently. By having the holding company exclusively manage valuable IP assets, such as patents, trademarks, and copyrights, it ensures focused oversight and protection. Meanwhile, the subsidiary, as the operational entity, can concentrate on day-to-day activities, fostering operational agility and strategic expansion.
2. Operational Efficiency: Holding subsidiaries help in the efficient management of diverse business operations, allowing for specialization and focus.
3. Risk Mitigation: Separating business units into subsidiaries can mitigate risks and liabilities, safeguarding the overall corporate structure.
4. Strategic Expansion: Holding-subsidiary structures facilitate strategic expansion, enabling companies to enter new markets or industries with dedicated entities.
Exclusion of holding-subsidiary from the start-up recognition leads to practical challenges and disadvantage to such entities, such as:
1. Competitive Disadvantage: Holding subsidiaries, crucial for corporate strategies, face a competitive disadvantage due to their exclusion from start-up benefits.
2. Limited Government Support: Lack of official recognition hampers holding subsidiaries’ ability to attract investments and limits their growth potential, as they miss out on government support.
3. Strategic Constraints: Holding subsidiaries, vital for managing diversified business operations, face strategic constraints without official start-up status.
Conclusion: The revised guidelines were uploaded discreetly on the Start Up India website without formal notification. This has led to surprising unawareness among stakeholders even till date. Also, the lack of clarity on the derecognition procedure raises concerns about potential challenges for existing startups. It is vital for policymakers to consider the broader benefits that holding-subsidiary structures offer, including synergies and risk-sharing. Striking a balance is essential to encourage diverse business models while supporting genuine startups. Government advisories should promote a nuanced approach and foster collaboration to refine regulations, ensuring a dynamic and resilient startup landscape that drives economic growth and innovation.
The author is a Partner at Mohit Vijay and Associates, Chartered Accountant and can be reached at prachi@mpvassociates.com.
Disclaimer: This article is for general information purpose only and does not constitute any advice. Please get in touch with your consultant before taking any step(s). We shall not be responsible for any loss incurred due to step(s) taken basis the information shared in this article.
[1] Gazette Notification No. G.S.R. 127(E) dated February 19,2019
[2] Companies and Limited Liability Partnership Firms
[3] https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/Revised%20Guidelines%20for%20recognition%20of%20Startups%2021.06.2021.pdf
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