Abstract
Being your own boss and working on your own terms is something every individual having free will wishes for, but for that dream to become a reality is something that requires a lot of perseverance and hardwork. In the economic sphere, owning a business fulfils that dream to a great extent. With the advent of colonisation, and India being one of the primary Britain colonies, the British introduced government jobs and hence since then, the practice took over the Indian demography which had a deteriorating impact on the startup sector of India. However, over the last five years India has become one of the top five startup ecosystems in the world alongside USA, China, UK and Israel. This author aims to explore the origin and evolution of Startups in India, analysis of the legal framework governing Indian startups, some key legislations introduced by the government, legal challenges faced by Indian startups and recommendations to improve the legal framework for the benefit of the startups.
Keywords
Startups, Laws, Capital, Growth, Development, Legislations, Policies, Economy, Investment, Government, Venture, Funds, Legal framework, Intellectual Property
Introduction
The journey of Indian startups began over four decades ago, when India possessed a large segment of young ‘english-speaking’ population, IT service companies such as Tata Consultancy Services (TCS), Infosys and Wipro harnessed these young minds to provide cost effective services to clients across the globe. Today, this industry nearly employs 4 million people and generates $150 Billion revenue. Several other startups such as ICICI and HDFC banks revolutionised the Indian banking sector and currently stands in the top five Indian banks. India today shelters a large segment of ‘ Angel Investors’ who have contributed immensely to the growth and development of startups. India ranked fourth globally in tech venture capital (VC) investments recording US$ 24.1 billion in 2022. According to a report by Startup Genome, India has 429 scale-up companies with a total VC investment of US$ 127 billion and a cumulative tech value investment of US$ 446 billion. Moreover, India ranks fourth globally in terms of start-ups that have secured over US$ 50 million in disclosed venture capital (VC) investment. Since, startups now play a key role in the economic sphere, it becomes essential to provide them a legal framework which enhances the efficiency and increases easiness to conduct business operations in a smooth and efficient manner. Other than laws which are relating to incorporation, labour laws, tax laws, securities laws, contract laws, intellectual property laws should also be adhered to. The startups should also equip themselves with the knowledge of dispute settlement mechanisms such as mediation, arbitration, negotiation and conciliation. The government of India has come up with several key legislations and policies with a view to encourage startups in India and push India towards a self- sustaining and self-generating economy.
Research Methodology
The nature of the paper is descriptive and is based on secondary sources that include websites- both government and private, online journals, published articles and related research papers in order to gain a comprehensive understanding of startups and their legal implications in India.
Review of Literature
According to Rishabh Gulshan and Yashraj Erande,
India’s startup ecosystem is not a recent phenomenon and has been prevalent since the last four decades. They praised and appreciated IT companies like TCS, Infosys and Wipro as they provided mass employment to the young English speaking population of India. They also provided a statistic, that nearly 40% founders and leaders come from premier engineering colleges and business schools such as IITs, IIMs, and ISBIs. They also compared the ‘Startup Nation’ Israel and its work to India’s and how Israel spends a disproportionate amount of time on research and development, they possess a ‘lean- startup strategy’ and have prior professional and military work experience. They also suggested some measures which can be implemented such as SIDBI- run Electronic Development Fund (EDF), incentives to startups, corporate venturing and some progressive policies.
According to Nandini Mansinghka,
Nandini Mansinghka’s article “ How India’s Early stage startup ecosystem became an investment hotspot” highlights some key reasons behind the booming of startups which include recognition of significance of startups, availability of potential, startup specific initiatives, startup-corporate collaborations and others. The author also highlighted some areas that require work such as a deep focus on education and upskilling, focus on increasing domestic funding, foreign domiciliation and so on.
Definition and Historical Background
A startup, derived from the English “to start up” (to found, to set in motion), is more than just a newly founded company. It is characterised by an innovative business idea that has the potential to revolutionise existing markets or even create entirely new markets. Some of the salient features of a startup include innovation, scalability, labour- intensive, strategic, potential of expansion and many more. Historically, Indian startups can be traced back to the existence of the caste system in India with the large class of mercantile community (Baniya or Vaishya) and hence startups have always been in the Indian blood. However, since the last four decades Indian startups have picked up pace in a rejuvenating way such that this growth is infinite. According to the recent data by #startupIndia, India had about 50,000 startups in 2018, around 9000 of them are technology led startups and 1300 new tech startups launched in 2019 itself; implying that around 2-3 startups are born every day.
Legal Framework
When understanding about the legal framework governing Indian startups, there are several laws and legislations governing them, these include licensing business, labour laws, taxation laws, Companies Act 2013, Intellectual Property Rights laws, Indian Contract Act 1872, accounting laws and several others. Various regulatory bodies such as RBI, SEBI, MCA etc. play a key role in regulating startups in various ways such as regulation of payment systems, capital market access, investor protection, corporate governance, foreign exchange management and several other ways.
Startup India Initiative
One of the major landmark steps taken by the Government of India is the ‘ Startup India Initiative’ which was launched by the Government Of India (GOI) on 16th January, 2016 for nurturing startups that will drive the economy of India and generate large employment opportunities. It aims to empower and encourage innovation and provide opportunities to each segment of the Indian society to broaden their horizons and create something that makes them stand out in a crowd. Some of the salient features of this Initiative include:
(i) Simplification and Handholding
(ii) Funding support and Incentives
(iii) Industry Academia Partnership and Incubation
(iv) Credit Guarantee Fund
Key measures taken under the ‘Startup Action Plan’ include Startup India Portal and mobile app, Startup India Hub, Atal Innovation Mission, Self- Certification and IPR benefits. This landmark initiative has brought several positive implications on the landscape of Indian startups that ultimately plays a key role in expanding Indian markets globally, increasing Foreign Direct Investment (FDI), generating mass employment, encouraging entrepreneurship, fostering economic growth and ultimately combating serious issues of poverty and unemployment.
Startup India Seed Fund Scheme (2016)
Startup India Seed fund Scheme is a key initiative launched by the Department of Promotion of Industry and Internal Trade (DPIIT) which aims to provide financial provisions and incentives to startups for product trials, commercialisation, market entries etc. This initiative is expected to benefit by helping in creating a robust startup ecosystem in tier 2 and tier 3 regions.
Major engagements of DPIIT : –
- Business Reform Action Plan (BRAP)
- Industrial Corridors
- Invest India
- Make in India initiative
Role Of Intellectual Property Rights (IPR)
Intellectual Property rights play a key role for startups all over the world. Brainstorming creative business ideas which generate capital and make place in national and international markets is a work that requires a lot of effort, critical thinking and understanding of the market needs. Hence, to protect this unique intellectual property, IPR laws prove beneficial. Registering your idea and protecting it through patents, trademarks, trade secrets, and copyrights ensures that the creators of the property, have sole ownership over their work and can reap commercial benefits.Key legislations governing this area includes, The Patents Act 1970, The TradeMarks Act 1999 and The Copyright Act 1957. Government initiatives include National IPR Policy 2016 and various schemes to strengthen IPR protection. Intellectual Property Appellate Board (IPAB) and various courts handle disputes and settle cases related to IPR.
Funding and Investment regulations
Funding for a startup in India comprises several stages, where each stage caters to different needs of the business. These stages include:
- Self-funding- This is where the founders generally use their own savings and resources to fund the business.
- Pre- seed funding- This is a stage of early investors where people other than the founder, such as friends, family, and Angel Investors (AI) provide funds for the business.
- Seed stage funding- This is also referred to as the first official round of external funding provided by Angel Investors, and early stage Capital Ventures.
- Series ‘A’ funding- This is a stage where Venture Capital firms provide funds to scale up the business.
- Series ‘B’ funding- Both Venture Capital firms as well as Private Equity (PE) firms provide funds to expand the market reach of the business and improvise scalability.
- Series ‘C’ and beyond – This funding is primarily for market dominance provided by strategic investors and last stage Capital Venture firms.
- Mezzanine Funding- This is a short bridge or gap before IPO which is funded by the existing investors.
- Initial Public Offering (IPO)- The company offers shares to the public in a stock exchange to gain a border investor base.
- Post- IPO – This consists of the additional funding after the company goes public.
Hence, raising funds for a startup involves several stages and requires the involvement of a large number of people, people around- be it investors or consumers play a significant role for the growth and development of a startup.
Investment regulations for startups in India includes
- Government of India’s consolidated FDI policy where 100% FDI is permitted in most of the sectors under the automatic route and some require government approvals.
- Securities and Exchange Board of India (SEBI) provides conditions for IPOs and guidelines for the issuance of securities.
- Angel Tax Provisions where tax is applied on funds received by angel investors that stand above fair-market value and some exemptions for recognized startups.
- The Government of India’s Startup India Initiative provides various provisions of tax exemptions and issuance of funds.
Labour Laws and Employment Regulations
Labour is often one of the most overlooked factors of production which is at the same time, one of the most significant for the process of production. Several philosophers like Karl Mrx and Fredrich Engels have advocated for labour rights for many years. Growth of startups is important for the nation’s economy but it should never occur at the expense of labour rights and dignity. Several guidelines such as safe working conditions, reasonable working hours, job security and others should be adhered to by businesses. Several laws govern the provisions for Labour rights and employment conditions, these include, The Minimum Wages Act (1948), The Payment of Wages Act (1936), The Payment of Bonus Act (1965), The Employees’ Provident Funds and Miscellaneous Provisions Act 1952), The Equal Remuneration Act (1976) and several others. They ensure minimum wages, safe working conditions and other basic requirements of labour in their work environment.
Comparative Analysis
When analysing and comparing India’s legal framework with that of other nations such as the USA and the UK, we see several differences.
India
India holds several advantages for startups such as a large and diverse pool of talent, and according to a recent statistic there has been an increase in the number of women entrepreneurs to 14% up from 10% in the previous year and Bangalore has been listed as one of the world’s five fastest growing startup cities. However, challenges like lack of access to seed stage funding as well shortage of investors and advisors pose difficulties in the face of Indian Startups.
USA
USA is currently the world’s number one startup ecosystem and its success can be attributed to various factors such as government support and flexible regulations, entrepreneurial mindset of the people and a highly developed venture capital industry. Even with being a success, there are always some limitations holding nations back from achieving their full potential. These in the case of the USA are intense competition in major tech hubs, high cost of living and operating expenses and USA’s immigration policies and visa issues.
UK
The UK with its liberal and diverse population is also a major hub to startups. What makes it distinguished and successful is its dynamic job market, central location to European markets, and convenience of the company formation process. Several government initiatives like Seed Enterprise investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) have also contributed immensely. However, it also faces its issues of exorbitant prices and cost of living that hampers the growth and development of startups.
Comparison of India, USA and UK
Even though USA still holds its position of being the number one currently, statistically speaking India currently has twice the number of new startups as compared to the USA.According to Heritage Institute, trade freedom in India has grown from 14 per cent to 71 per cent from 1996 to 2016, while in the US, this has grown from 78.4 percent to 87 percent from 1995 to 2016. Also startups find it easier to cater to the needs of India’s growing middle class rather than the high-end demands of the population of the UK and USA.As per the report of World Bank’s Ease of Doing Business Index, India is ranked 62 out of 190 countries. This shows that the Indian government still needs to improvise and work for the development of startups. India shows immense potential in the future and with the present growth rate will soon emerge as the number one hub for startup ecosystems.
Contemporary Challenges and Issues
Even though the Indian startup is blooming with bright colours, in the legal arena it still faces several challenges and limitations, hindering the process of it achieving its full potential. Following are the challenges faced currently by Indian startups in the legal arena: –
(i) Lack of Information – There is still a lot of confusion and misinformation that surrounds the legal processes of opening and handling a startup which every founder and entrepreneur must be aware of.
(ii) Complex procedures- Opening and setting up a startup as well as keeping it running- the startup must comply with complex legal procedures from company registration to intellectual property.
(iii) Limited legal support- There is still a lack in legal support and services available to Indian startups and hence this area requires special attention as well.
(iv) Failing to obtain necessary licences and permissions – Due to lack of information, startups may fail to obtain the necessary licences and permits required by the startup as per the law, which may even lead to closing down of the business and other serious legal proceedings.
(v) Neglecting Tax Compliance- Missing tax deadlines or failing to comply with tax regulations can lead to serious fines and penalties which may prove to be a financial burden on the business.
(vi) Neglecting Labour Compliance – Complying with the existing labour laws applicable to the guidelines is necessary to ensure that labour rights are not infringed.
(vii) Less awareness of Intellectual Property – In several instances, startups and businesses often fail to secure patents and trademarks for their companies which may lead to someone else stealing their ideas and innovation.
Suggestions
Based on the contemporary challenges and issues faced by Indian startups in the legal arena, several suggestions and measures can be traced out to help these startups avoid legal issues faced by them : –
(i) Spreading Awareness – Awareness regarding legal procedures that startups have to comply with will make establishing and running a business a bit easier.
(ii) Simplifying Complex Procedures- Startups in India today require to comply with complex procedures which makes it difficult for them to run a business, hence simplifying procedures of obtaining licences and permits may make their work easier and would also attract a large number of people to entrepreneurship.
(iii) Incentives on Tax Laws- Reducing penalties and granting tax incentives would provide a relief to startups- especially those facing financial pressures in the run.
(iv) Easy Market Access- Startups must have easy access to domestic as well as international markets to expand their market reach and accessibility so that their products and services can be available everywhere. Access to such markets can be made easy by government regulations.
(v) Easy Funding Access- India’s primary problem lies in the early seed funding stage where investors and venture capitalists still hesitate and are concerned to provide funds due to fear of failure which may hamper even an excellent idea, product or service.
(vi) Investor Protection- Investors hesitate to invest because there are still limited laws related to investor protection and hence there exists lack of security which prevents investments and funds to the businesses. Hence, comprehensive investor protection laws would make a way for a large flow of funds for the growth and expansion of startups.
Conclusion
The pessimists would say, ‘ the glass is half empty’, whereas optimists would say ‘ the glass is half full’ – it all depends on the perspective if we tend to currently look at the credibility and effectiveness of the legal framework for startups in India.
India has come a long way in its journey of becoming the world’s third largest startup ecosystem, and still has to make efforts to be the number one. The government is constantly working and taking several steps to foster startups and create a conducive environment for young and talented entrepreneurs to achieve greater heights.
Name: Isha Patel
College: Dr. D.Y Patil Law College, Pune