Relaxed Regulatory Norms for Start-ups

In last article “Startup India Campaign,” we have discussed how the startup India campaign being run by the government so far. In this article we are discussing the steps taken by the government to boost the startup ecosystem in the country. DIPP had notified the definition of Startup and procedure for recognition of Startup. Startup India Hub had also been formulated for the assistance of startups by providing advisory services on financing, business structuring and improving management skills.

There are various regulations under which procedures and compliance norms being simplified for the startups by the government. Here we are discussing the relaxations given to startups under various statues:

1) Incentive for Startup under the Apprenticeship Act- In order to create more employment opportunities through Startups ecosystem, Government of India has decided to incentivize Startups by provision of ease in regulatory compliances.

The Apprenticeship Act, 1961 has been amended to make it more user friendly to industry. Highlights of the key amendments are as below:

• Establishment has been allowed for selection of trades and self-regulation of engagement of apprentices in a band of minimum 2.5% to maximum 10% of total strength of establishment including contractual workers.
• The procedure for furnishing regular information through returns have been simplified by providing them through apprenticeship portal apprenticeship.gov.in
• In the first year of setting up of startups, inspection by an officer may be completely dispensed with against self declaration.
• From the Second year onwards up to the next three years, start-ups may be taken up for inspection only when very credible and verifiable complaint of violation has been filed in writing and the approval has been obtained from concerned Apprenticeship Adviser.

2) Regulatory Relaxation for Startups by RBI- The Reserve Bank has already created a dedicated mailbox to provide assistance and guidance to the start-up sector. Further, electronic reporting of investment and subsequent transactions to be made on e-Biz platform only. Submission of physical forms had been discontinued.

The following regulatory changes for easing the cross-border transactions, particularly relating to the operations of the startup enterprises are proposed to be made, in consultation with the Government of India.

• Enabling start-up enterprises, irrespective of the sector in which they are engaged, to receive foreign venture capital investment and also explicitly enabling transfer of shares from Foreign Venture Capital Investors to other residents or non-residents;
• Permitting, in case of transfer of ownership of a start-up enterprises, receipt of the consideration amount on a deferred basis as also enabling escrow arrangement or indemnity arrangement up to a period of 18 months;
• Enabling online submission of A2 forms for outward remittances on the basis of the form alone or with document(s) upload/submission, depending on the nature of remittance; and
• Simplifying the process for dealing with delayed reporting of Foreign Direct Investment (FDI) related transaction by building a penalty structure into the regulations itself.

In addition, the following proposals are under consideration, in consultation with the Government of India.

• Permitting start-up enterprises to access rupee loans under External Commercial Borrowing (ECB) framework with relaxations in respect of eligible lenders, etc.;
• Issuance of innovative FDI instruments like convertible notes by start-up enterprises; and
• Streamlining of overseas investment operations for the start-up enterprises.

Certain other issues that are permissible under the existing regime shall be clarified

• Issue of shares without cash payment through sweat equity or against any legitimate payment owed by the company remittance of which does not require any permission under FEMA; and
• Collection of payments by start-up enterprises on behalf of their subsidiaries abroad
  

3) RBI Notification on Foreign Exchange Management for Startups- Following changes are notified in FEMA with respect to regulatory relaxations for Startups.

• Indian startup, having an overseas subsidiary, may open a foreign currency account with a bank outside India for the purpose of crediting to the account the foreign exchange earnings out of exports/sales made by the said startup or its overseas subsidiary. The balances held in such accounts, to the extent they represent exports from India, shall be repatriated to India within the period prescribed for realization of exports, in Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 dated January 12, 2016, as amended from time to time.
• In addition, payments received in foreign exchange by an Indian startup arising out of sales/ export made by the startup or its overseas subsidiaries will be a permissible credit to the Exchange Earners Foreign Currency (EEFC) account maintained in India by the startup.

4) Compliance Regime based on Self-certification-

• As per the notification issued by Ministry of Labour & Employment, Startups as defined by DIPP may be allowed to self certify compliance with the various labour laws.
• In the first year of setting up of the startups, these startups may not be inspected under various labour laws and these startups may be asked to submit an online declaration instead.
• Ministry of Labour & Employment has issued the format for the self declaration, which can be used by the Startups for submitting the self declaration during the first year.
  

All these incentives are part of the Startup India Campaign. Government of India is focused to promote the Startup ecosystem in the country to incentivize the entrepreneurs in setting up new startup ventures and thus catalyze the creation of employment, opportunities through them. In this connection, various incentives and ease in regulatory compliance provisions are being conceptualized.

However It is worth to note that all these benefits are available to only those startups which meet the criteria of the Startup definition as being issued by DIPP on 17^th February, 2016 and recognized as startup by DIPP.As per the status report issued by the DIPP on 18th August, 2016, 882 applications have been received so far for recognition as startup out of which 266 had the required documents and have been recognized as Startups by DIPP.

(Submitted by – Tarun Kumar (B.Com, ACA) Mobile: +91-888-282-8112- Email-ID: catarunkumar92@gmail.com)