START-UP INDIA ACTION PLAN
The Start-up India Action Plan launched by the Prime Minister, Mr Narendra Modi, on 16th January have kindled the spirit of adventure among the country’s youth. They can now go ahead with their dream ventures, taking advantage of the friendly ecosystem of easy registrations, liberal finance, tax benefits and a simplified regulatory system. The diversity of business activity they adopt will boost economic growth, and trigger creation of thousands of new jobs. The Action Plan could not have come at a more opportune time. The country’s manufacturing sector faced a slump, while the prospective young entrepreneurs looked towards the Government for ease of doing business. The Action Plan has done more than answering the current situation. It has ended an era of doubt and fear for the young entrepreneurs. They need not sit on the fence any longer and they can take the risk which they wanted to. In the generous package of a protective environment unveiled by the Action Plan, the young entrepreneurs can see a friendly Government, eager to give them a helping hand. The budding entrepreneurs are getting nurturing support, a stronger incubation network and even an easy exit route. The most assuring among the Government announcements was the Prime Minister’s speech which is sure to galvanise the Start-up movement. He said those wanting to launch their own Start-ups were not driven by money-motive but had a desire to bring about a change. It was this spirit of adventure that the society had to respond to, he said. The country would welcome a Start-up even if it created five jobs only, be it related to agriculture, medical technology, handicraft sectors, and not necessarily IT, he said. The objective should be to solve a problem; the subject of business should not bother an entrepreneur, the Prime Minister said.
The Action Plan features which drew applause for the Prime Minister included self-certification-based compliance system, no inspections for three years, cheaper patents, offer of public procurement, Start-up Fests and special schemes for women. Mr. Modi asked the youth not to worry about failures.
An analysis of the Start-up Action Plan shows that it has more than met the expectations of the Start-up sector. While some features like tax rebates will be effective with the next Budget, the Action Plan should bring cheer on the issue of finance and credit also. India may already hold the third position globally in Start-ups, but the Action Plan has brought more confidence in the sector.
Definition of Start-up: A strong point of the Action Plan is a clear definition of what a Start-up is.The document says a Start-up is “an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding Rs 25 crore in any preceding financial year, and working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or
intellectual property.” A Start-up would cease to be a Start-up the day it completes five years from the date of incorporation or registration.
The definition makes it clear that a Start-up should have something new to offer by way of product or service, and this effort should involve technology or intellectual property, confirming thereby the spirit and achievement of innovation of the young entrepreneur. To keep any doubts away, the Action Plan says that an entity “should not be formed by splitting up, or reconstruction, of a business already in existence.” This means that an entity to take benefit of the scheme has to be new and original, and existing units cannot be broken into smaller entities to take advantage of the scheme.
Certification: A Start-up shall be eligible for tax benefits only after it has obtained certification validating the innovative nature of the business fromthe Inter-Ministerial Board, set up for such purpose by the Department of Industrial Policy and Promotion (DIPP). The validations will not absolve entities of liability in case of misrepresentation. The DIPP will also specify a format for recommendations by incubators on the innovative content of the business.
Ease of procedures: After definition of a Start up, another expectation from the Action Plan was the ease of procedures for registering a new venture or closing it, together with a simplified compliance regime. The Action Plan has met this expectation and reduced the Start-ups’ regulatory burden, thereby allowing them to focus on their core business and keep compliance cost low.
Registration: To commence operations, Start-ups require registration with relevant regulatory authorities. Delays or lack of clarity in the registration process may lead to delays in establishment and operations of Start-ups, thereby reducing the ability of the business to get bank loans, employ workers and generate incomes. Enabling registration process in an easy and timely manner can reduce this burden significantly, the Action Plan has noted.
The Start-ups even suffer from the uncertainty regarding the exact regulatory requirements to set up their operations. Toensure that such information is readily available, a checklist of required licenses covering labour licensing, environmental clearances etc will be made available. Currently, the Start-up ecosystem in India also lacks formal platforms for Start-ups to connect and collaborate with other ecosystem partners.
To meet all these requirements the Government shall introduce a Mobile App to provide on-the-go accessibility for registering Start-ups with relevant agencies of the Government. A simple form shall be made available for the same. The Mobile App shall
have back-end integration with the Ministry of Corporate Affairs and the Registrar of Firms for seamless information exchange and processing of the registration application. The app will facilitate tracking the status of the registration application, downloading of the registration certificate ,to file for compliances and obtaining information on various clearances/approvals/ registrations, etc. As required,
To facilitate application for various schemes being undertaken under the Startup India Action Plan, the App shall be made available from 1st April, 2016 on all leading mobile/smart devices’ platforms. A Start-up portal will also be set up with similar functionalities (being offered through the mobile app) using a richer web-based User Interface.
Self- Certification Compliance
Recognising that regulatory formalities requiring compliance with various labour and environment laws are time consuming and difficult in nature, with new and small firms, often unaware of nuances of the issues, subjected to intrusive action by regulatory agencies, the Action Plan has made the compliance regime for Start-ups friendly and flexible. Accordingly, the process of conducting inspections is being kept simple and more meaningful. The Start-ups will be allowed to self-certify compliance (through the Start-up mobile app) with nine labour and environment laws. In case of the labour laws, no inspections will be conducted for a period of three years. Start-ups may be inspected on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer.
In case of environment laws, Start-ups which fall under the ‘white category’ as defined by the Central Pollution Control Board (CPCB)) would be able to self certify compliance and only random checks would be carried out in such cases.
Intellectual Property Rights: In another thoughtful feature, the Action Plan offers legal support and fast tracking of patent examination at lower costs with the objective to promote awareness and adoption of Intellectual Property Rights (IPRs)by Start-ups and facilitate them in protecting and commercializing the IPRs. The Government will provide access to high quality Intellectual Property services and resources, including fast track examination of patent applications and rebate in fees.
IPRs are emerging as a strategic business tool for any business organization to enhance industrial competitiveness. Startups with limited resources and manpower, can sustain in this highly competitive world only through continuous growth and evelopment oriented innovations;for this, it is equally crucia that they protect their IPRs. The scheme for Start-up Intellectual Property Protection (SIPP) shall facilitate filing of Patents, Trademarks and Designs by innovative Start-ups.
Various measures being taken in this regard include fast-tracking of Start-up patent applications. for examination and disposal, so that they can realize the value of their IPRs at the earliest possible.
For effective implementation the scheme, a panel of “facilitators” shall be empanelled by the Controller General of Patents, Designs and Trademarks (CGPDTM), who shall also regulate their conduct and functions. Under this scheme, the Central Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a Start-up may file, and the Start-ups shall bear the cost of only the statutory fees payable. Start-ups shall be provided an 80 per cent rebate in filing of patents vis-à-vis other companies. This will help them spare costs in the crucial formative years.
Public Procurement: The Start-ups will benefit from relaxed norms for public procurement. The idea is to provide an equal platform to Start-ups (in the manufacturing sector) vis-à-vis the experienced entrepreneurs/ companies in public procurement.
Typically, whenever a tender is floated by a Government entity or by a PSU, very often the eligibility condition specifies either “prior experience” or “prior turnover”. Such a stipulation prohibits/impedes Start-ups from participating in such tenders. At present,
effective 1st April, 2015 Central Government, State Government and PSUs have to mandatorily procure at least 20 per cent from the Micro Small and Medium Enterprises (MSME).
In order to promote Government shall exempt Startups (in the manufacturing sector) from the criteria of “prior experience/turnover” without any relaxation in quality standards or technical parameters. The Startups will also have to demonstrate requisite capability to execute the project as per the requirements and should have their own manufacturing facility in India.
Exit Process: To meet a major demand of the sector, the Action Plan makes it easier for Start-ups to wind up their operations. The Action Plan says given the innovative nature of Start-ups, a significant percentage fail to succeed. In the event of a business failure, it is critical to reallocate capital and resources to more productive avenues and accordingly a swift and simple process has been proposed for Start-ups to wind-up operations. This will promote entrepreneurs to experiment with new and innovative ideas, without having the fear of facing a complex and long-drawn exit process where their capital remain interminably stuck.
The Insolvency and Bankruptcy Bill (IBB) 2015, tabled in the Lok Sabha in December 2015 has provisions for the fast track and/or voluntaryclosure of businesses. In terms
of the IBB, Start-ups with simple debt structures or those meeting such criteria as may be specified may be wound up within a period of 90 days from making of an application for winding up on a fast track basis.
In such instances insolvency professional shall be appointed for the Start-up, who shall be in charge of the company for liquidatingits assets and paying its creditors within six months of such appointment.
In order to provide funding support to Startups, Government will set up a fund with an initial corpus of Rs 2,500 crore and a total corpus of Rs 10,000 croreover a period four years (i.e. Rs.2,500 crore per year) . The Fund will be in the nature of Fund of Funds, which means that it will not invest directly into Start-ups, but shall participate in the capital of SEBI-registered Venture Funds.
The Start-ups will have fund too. The idea is to catalyse entrepreneurship by providing credit to innovators across all sections of society. To overcome traditional Indian stigma associated with failure of Start-up enterprises in general and to envourage experimentation among Start-up entrepreneurs through disruptive businessmodels, credit guarantee comfort would help flow of Venture Debt from the formal Banking System.
Debt funding to Start-ups is also perceived as high risk area and to encourage Banks and other lenders to provide VentureDebts to Startups, Credit guarantee mechanism through National Credit Guarantee Trust Company (NCGTC)/ SIDBI is being envisaged
with a budgetary Corpus of Rs 500 crore per year for the next four years. This measure will surely open new sources of funding for the Start-ups.
Exemption from Capital Gains Tax: The Start-ups will have the benefit of capital gains tax exemption. The idea is to promote investments into Start-ups by mobilizing the capital gains arising from sale of capital assets. Due to their high risk nature, Start-ups are not able to attract investment in their initial stage.
Exemption shall be given to persons who have capital gains during the year, if they have invested such capital gains in the Fund of Funds recognized by the Government. This will augment the funds available to various VCs/AIFs for investment in Startups.
In addition, existing capital gain tax exemption for investmentin newly formed manufacturing MSMEs by individuals shall be extended to all Start-ups.
Exemption from Income Tax: To promote the growth of Startups and address working capital requirements, the Start-ups will have income tax exemption for three years. The Action Plan says innovation is the essence of every Start-up. Young minds kindle
new ideas every day to think beyond conventional strategies of the existing corporate world. This fiscal exemption will surely facilitate growth of business and meet the working capital requirements during the initial years of operations. The exemption shall be available subject to non-distribution of dividend by the Start-up.
Start-up Fests : The Action Plan has included a unique feature of Start-up Fests to showcase their innovation and to provide national and international visibility to the Start-up ecosystem in India. For this, the Government has proposed Start-up fests at national and international stages. These fests would provide a platform to Start-ups in India to showcase their ideas and work with a larger audience comprising potential investors, mentors and fellow Start-ups. As part of “Make in Ind ia” initiative, Government proposes to hold one Fest at the national level annually to enable all the stakeholders of Start-up ecosystem to come together on one platform and one Fest at the international level annually in an international city known for its Start-up ecosystem.
Innovation and Self Employment : The Action Planhas also announced the launch of the Atal Innovation Mission (AIM) and Self-Employment and Talent Utilisation (SETU)
Programme to serve as a platform for promotion of world-class Innovation Hubs, Grand Challenges, Start-up businesses and other self-employment activities, particularly in technology driven areas. The Atal Innovation Mission (AIM) shall have two core functions: Entrepreneurship promotion through SETU, wherein innovators would be supported and mentored to become successful entrepreneurs; and Innovation Promotion to provide a platform where innovative ideas are generated. The main components proposed to be undertaken as part of the mission include establishment of 500 Tinkering Labs.
Incubators: The Start-up industry’s complaint of absence of sufficient incubators is being answered by the Government. For professional management of Government sponsored or funded incubators, Government will create a policy and framework for setting-up of incubators across the country in public private partnership. India currently lacks availability of incubation facilities across various parts of the country.Incubation facilities typically include physical infrastructure, provision of mentorship support, access to networks, access to market, etc. Of all these features, physical infrastructure entails large capital investments which can generally be facilitated by the Government. However, requisite skills for operating an incubator are pivotal as well, for which expertise of the private sector needs to be leveraged.
Considering this, Government shall encourage setting up of 35 new incubators in existing institutions. Funding support of 40 per cent (subject to a maximum of Rs 10 crore) shall be provided by Central Government for establishment of new incubators, for
which 40 per cent funding by the respective State Government and 20 per cent funding by the private sector has been committed. The incubator shall be managed and operated by the private sector.
There will be 35 more new private sector incubators (in existing institutions) for which a grant of 50 per cent (subject to a maximum of Rs 10 crore) shall be provided by Central
Government. These incubators shall also be managed and operated by the private sector. The funding for setting up of the incubators shall be provided by NITI Aayog as part of Atal Innovation Mission.
World Class Incubators: The sector needs to be leveraged. Action Plan seeks to support creation of successful world class incubators in India through Annual Incubator Grand Challenge. The Government isproposing to make forward looking investments towards building world class incubators. In its first phase, the aim is to establish 10 such incubators. To enable this, Government of India shall identifyand select 10 incubators who have the potential to become world class. These incubators would be given Rs 10 crore each as financial assistance which may be used for ramping up the quality of service offerings.
Biotechnology Sector: The Action Plan outlines the Government plan to encourage Start-ups in the Biotechnology sector. The Biotechnology sector in India is on a strong, growth trajectory. The Department of Biotechnology endeavors to scale up the number of Start-ups in the sector by nurturing approximately 300-500 new Start-ups each year to have around 2,000 Start-ups by 2020. To promote Start-ups in the sector, the Department shall be implementing several measures along with its PSU, the Biotechnology Research Assistance Council(BIRAC), like Bio-incubators, Seed Fund and Equity Funding.
Scientific Research: There is plenty in the Action Plan to encourage scientific research. The Government will set up seven new Research Parks at six IITs and the Indian Institute of Science, Bangalore with an initial investment of Rs 100 crore each.
The Research Parks shall be modeled based on the Research Park set up at IIT Madras. To promote research and innovation among young students, the Government shall implement several measures including an Innovation Core program to target school kids with an outreach to 10 lakh innovations from five lakh schools.
The start up India campaign is a long awaited dream of a youthful nation to realize its potential of creativity and innovation. The initiative would boost entrepreneurship, creating more jobs and opportunities for the vibrant young population of the country.
(Author is Senior Journalist and an expert in labour laws and employment issues