Before exploring the circumstances, scenarios, and strategies for exiting a business, let’s first understand the startup journey in India. With its young, tech-savvy population and supportive government initiatives, India has emerged as a significant hub for startups. Over the past decade, the ecosystem has flourished, driven by demographic advantages, robust funding options, and inspiring success stories. However, despite the promising environment, startups face considerable risks. Recognizing the need for efficient exit routes, the Insolvency and Bankruptcy Code (IBC) 2016 has introduced reforms to facilitate smoother transitions and fresh starts.
Demographic Advantage: India has one of the youngest populations in the world which is tech-savvy, ambitious and eager to grab the entrepreneurial opportunities.
Government Initiatives: Government plays a very important role in its country’s growth. Various government initiatives like Startup India, Make in India, Digital India and Atal Innovation Mission have provided a conducive environment for startups. These programme offers various benefits like: Tax benefits, simplified regulations etc.
Funding: There are multiple options available in the market to fund the startups like angel investors, venture capital etc. Investors globally are also keen to invest in the Indian startups as they see the vast potential in the Indian Market.
Growing Market Size, Advanced Technology and Supportive Ecosystem: India is a growing economy with large consumer base which provides a bog opportunities to the startups. The advancement of Internet, mobile technology ,social media etc. has opened up new avenues for startups. Supportive ecosystem is also there to motivates the new young entrepreneurs like Co-work space etc.
Success Stories: The success of startups like Paytm, Zomato, Flipkart etc. has inspired the new generations. These stories demonstrate the protentional for high returns on investment in the Indian market.
Starting a Business involves a substantial investment of money, time and other resources which always has its own opportunity cost Like:
- Financial Risk
- Time Investment
- Resource and Infrastructure Allocation
- Mental and Physical Stress
Every opportunity carries a risk with it and sometime this risk converts into failure of business but exiting from the business were not easy earlier as it was very lengthy process and has to pass multiple level of legal and other compliances. With the introduction of IBC 2016 it has made it easier for the entrepreneurs to manage the risks associated with the business failure and consider the fresh starts. Here’s an overview of how IBC has facilitated smoother exits and fresh starts for businesses:
The Insolvency and Bankruptcy Code (IBC):
This was enacted in 2016, was a landmark reform aimed at addressing the complexities and inefficiencies in India’s insolvency framework. The Key Objectives are:
- Consolidate and Amend Laws related to Insolvency and Bankruptcy.
- Timely Resolution of insolvency process by maximizing the value of assets.
- Promote Entrepreneurs by providing a robust insolvency resolution framework
- Protect Interests of all the stakeholders.
Exiting Route for Startup/ Small Businesses:
1. Fresh Start Process: This process is under IBC is a significant reform that provides a vital lifeline to financially distressed individuals and small entrepreneurs. It allows individuals to overcome financial hardship and start from beginning if its falls under following eligibility criteria:
- Income Threshold: The debtor’s gross annual income must not exceed Rs.60,000.
- Asset Threshold: The aggregate value of assets must not exceed Rs.20,000.
- Debt Threshold: The aggregate value of qualifying debt must not exceed Rs.35,000.
- No Prior Fresh Start: The debtor must not be beneficiary of this process in last12 months.
- Status: The debtor must be a resident of India and not an undischarged insolvent.
Benefits of Fresh Start Process:
- Debt Relief
- Mental Relief
- Encourage Entrepreneurship
- Efficiency and Speed
Under this process the adjudicating authority shall pass a discharge order, discharging the debtor in respect of the qualifying debt, discharge of penalties, penal interest and other sums owed under any contract, from the date of the application for fresh start to the date of discharge order. A discharge order discharges the debtor alone, and is recorded in the financial history of the debtor.
2. Fast Track Insolvency and Resolution Plan:
This process under IBC is designed to expediate the resolution process under IBC. This process aims to complete the process faster than normal CIRP Process. There is a step-by step process to get the understanding and execution of the Fast Track Insolvency and Resolution Process under the IBC :
Eligible Corporate Debtors:
These Regulations shall apply to such corporate debtors or categories of corporate persons, as the case may be, as are notified by the Central Government under section 55(2). The provisions of Fast Track Corporate Insolvency Resolution Process shall be applicable on the following class of corporate persons: –
1. Small Company- As defined u/s (85) of section 2 of the Companies Act, 2013.
a) Small Company means a company other than a public company :Paid up capital of which does not exceed Rs.50 lacs or such higher amount as may be prescribed which shall not be more than Rs.5 Crores; or
b) Turnover of which as per its last Profit & Loss account does not exceed Rs.2 crores or such higher amount as may be prescribed which shall not be more than Rs.20 Crores.
Provided that this clause shall not apply to :-
i) A Holding company or a subsidiary company
ii) A company registered under section 8; or
iii) A company or body corporate governed by special Act.
2) Start-ups: As per DIPP notification no. 180 (E) dated 17.02.2016, an entity shall be considered as a ‘startup
a) Upto 5 Years from the date of its incorporation/registration.
b) If its turnover for any F.Ys has not exceeded Rs.25 crores, and
c) It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;
Provided that any such entity formed by splitting up or reconstructing of a business already in existence shall not be considered a startup;
Fast Track Process Period
Fast Track CIRP for certain categories of Corporate Debtors, as mentioned above , where the resolution process needs to be completed within 90 days, with the provision for one-time extension up to 45days.
The conclusion of the Fast track corporate insolvency resolution process aims to streamline the exit for small corporate debtors from lengthy and complex insolvency procedures. This approach enables them to restart with the new insights and reduces the fear of challenging exit and legal complications, thereby preventing demotivation and encouraging entrepreneurial resilience.
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