Is it what it is?

Narendra Modi’s action plan for boosting startup entrepreneurship has taken the country by storm. The Government’s objective is to fill gaps in the economy for the growth of startups and will aim to boost digital entrepreneurship at the grassroots. The government is expected to earmark around Rs. 2,000 crore for this initiative.

An action plan for startups in India? That sounds like good news for you, right? Lets take this decision after going through the nitties-gritties of the action plan.

Compliance Regime has been simplified

The Action Plan recognizes that the regulatory burden on the startups is high and this hinders their growth. The startups can now self-certify compliance with 9 labour and environment laws. These are:

Labour Laws:

• The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996
• The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
• The Payment of Gratuity Act, 1972
• The Contract Labour (Regulation and Abolition) Act, 1970
• The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
• The Employees’ State Insurance Act, 1948

Environment Laws:

• The Water (Prevention & Control of Pollution) Act, 1974
• The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003
• The Air (Prevention & Control of Pollution) Act, 1981

Further, no inspections shall be conducted for a period of 3 years.

Registration process has been simplified

All of us will agree that the registration process for a company is cumbersome and confusing.  Often, lack of clarity in the process leads to delay and increased costs. The Government has taken certain overhauling steps to tackle this problem of registration. The Government will roll out a mobile app from April 01, 2016 which will give startups on-the-go accessibility for:

• Registering Startups with relevant agencies of the Government along with the tracking of status of the registration application.
• Filing for compliances and obtaining information on various clearances/ approvals/ registrations required
• Collaborating with all relevant stakeholders (including venture funds, incubators, academia, mentors etc.)

IPR Related Benefits

A startup’s most important asset is its Intellectual Property.  Hence, the Action Plan has taken many steps to facilitate filing of Patents, Trademarks and Designs. The applications shall now be fast-tracked for examination and disposal. 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.

The most remarkable step undertaken by the Government is the decision to bear the entire fees of the facilitators for any number of patents, trademarks or designs that a Startup may file. An additional 80% rebate in filing of patents will also be granted.

Exit Route simplified

The exit routes for the startups are now faster. Startups with simple debt structures can now wound within a period of 90 days from making of an application for winding up.

Magnum Corpus: A corpus of 10,000 crores and a Credit Guarantee Fund

The Government has earmarked Rs. 10,000 crores for a fund with an initial corpus of INR 2,500 crore and a total corpus of INR 10,000 crore over a period 4 years (i.e. INR 2,500 crore per year). The Fund will not invest directly into Startups, but shall invest in SEBI registered Venture Funds.

A Credit Guarantee fund through National Credit Guarantee Trust Company has been established with a budgetary Corpus of INR 500 crore per year for the next four years.

Tax Exemptions

The present capital gains exemption shall be extended to startups who have invested such capital gains in the Fund of Funds recognized by the Government. Further, capital gain tax exemption to those investing in in new manufacturing MSMEs by individuals shall be extended to all Startups. In order to facilitiate growth of a startup, it will be exempted from Income Tax for three years.

While the Government’s attempt to boost entrepreneurship in the country should be applauded, there are some drawbacks, which, though inadvertent, will affect the way this action plan will operate.
A Startup shall be eligible for tax benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purpose. While the membership and eligibility criteria of this Board is unclear, we have all the reasons to suspect that this will be a government body. All of us who have experiences with dealing with a government body will testify that it is nothing less than a nightmare.

The corpus established by the Government can only invest in SEBI registered Venture Funds. Let us hope that the government, unlike the way it usually functions, will be able to cut through the red-tapism and make smart investment decisions.

One of the key elements of the definition of startup is

‘working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.’

Arguably, this will restrict the number of new businesses that can take advantage of the benefits. Moreoever, due to its vague wording, it remains to be seen how the Inter-Ministerial Board will scrutinize the startups and see if they fit this criterion.

Further, most of the registration procedures are actually managed by the State Governments.  Therefore, unless a change is brought to the attitudes of the state governments, the Action Plan will not succeed. Along with this, there is also a need to amend the existing laws so that they reflect the relevant changes that the Action Plan has promised.

The Credit Guarantee Fund will also invite unintended consequences. A credit give should be able to assess a business’s ability before it decides to grant credit to it.  They should not be forced to grant credit to startups.

Even though there are some shortcomings in the Action Plan, we must congratulate and welcome this move. There are some great benefits that a startup will now have. The Government has recognized the strength of startups and entrepreneurship and has attempted to boost them. We hope this Action Plan is means to an end and not the end itself.