FEATURED | Start-Up India Action Plan: Key Takeaways
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FEATURED | Start-Up India Action Plan: Key Takeaways

Abridged Report - Start-Up India Action Plan 

To promote a culture of entrepreneurship, the Government of India on Jan 16, 2015 announced a slew of incentives including INR 10,000-crore (1 USD = INR 67.69 / INR 1 Cr = INR 1,00,00,000) corpus for innovation-driven enterprises, a three-year break from paying income tax on profits plus a Rs 500-crore per year credit guarantee mechanism, and on top of that, exemption from capital gains tax for start-ups. After a full day of discussions at the launch of the ‘Start-up India’ programme attended by hundreds of young entrepreneurs, India's Prime Minister Narendra Modi unveiled his government’s action plan to help entrepreneurs, and asked them to play a transformative role in India’s development.

FEATURED |  Start-Up India Action Plan: Key Takeaways

Image Attribute: Release of Start-Up India Action Plan at Vigyan Bhavan, New Delhi 
Source: iamwire.com

Compliance Regime based on Self-Certification

Regulatory formalities requiring compliance with various labor and environment laws are time consuming and difficult in nature. Often, new and small firms are unaware of nuances of the issues and can be subjected to intrusive action by regulatory agencies.

In order to make compliance for Start-ups friendly and flexible, simplifications are required in the regulatory regime. Accordingly, the process of conducting inspections shall be made more meaningful and simple. Start-ups shall be allowed to self-certify compliance (through the Start-up mobile app) with 9 labour and environment laws.

In case of the labour laws, no inspections will be conducted for a period of 3 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.

The Creation of “Start-Up India Hub”:

The “Start-up India Hub” will be a key stakeholder in this ecosystem and will:

Work in a hub and spoke model and collaborate with Central & State governments, Indian and foreign VCs, angel networks, banks, incubators, legal partners, consultants, universities and R&D institutions

Assist Start-ups through their lifecycle with specific focus on important aspects like obtaining financing, feasibility testing, business structuring advisory, and enhancement of marketing skills, technology commercialization and management evaluation

Organize mentorship programs in collaboration with government organizations, incubation centers, educational institutions and private organizations who aspire to foster innovation.

Fast Tracking of Patent Filing and Intellectual Property Right Protection:

The scheme for Start-up Intellectual Property Protection (SIPP) will encourage the filing of Patents, Trademarks and Designs by innovative Start-ups. Various measures mentioned in this regard include:

Fast Tracking of Patent Filing

To this end, the patent application of Startups shall be fast-tracked for examination and disposal, so that they can realize the value of their IPRs at the earliest possible.

Panel of facilitators to assist in filing of IP applications:

For effective implementation of 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. Facilitators will be responsible for providing general advisory on different IPRs as also information on protecting and promoting IPRs in other countries. They shall also provide assistance in filing and disposal of the IP applications related to patents, trademarks and designs under relevant Acts, including appearing on behalf of Start-ups at hearings and contesting opposition, if any, by other parties, till final disposal of the IPR application.

Government to bear facilitation cost:

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.

Rebate on filing of application:

Start-ups shall be provided an 80% rebate in filing of patents vis-a-vis other companies. This will help them pare costs in the crucial formative years. The scheme is being launched initially on a pilot basis for 1 year; based on the experience gained, further steps shall be taken.

Relaxed Norms of Public Procurement for Start-ups

At present, effective April 1, 2015 Central Government, State Government and PSUs have to mandatorily procure at least 20% from the Micro Small and Medium Enterprise (MSME). In order to promote Start-ups, Government will exempt Start-ups (in the manufacturing sector) from the criteria of “prior experience/ turnover” without any relaxation in quality standards or technical parameters. The Start-ups will also have to demonstrate requisite capability to execute the project as per the requirements and should have their own manufacturing facility in India.

Providing Funding Support through a Fund of Funds with a Corpus of INR 10,000 crore:

In order to provide funding support to Start-ups, Government will set up 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 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.

Key features of the Fund of Funds are highlighted below:
  • The Fund of Funds shall be managed by a Board with private professionals drawn from industry bodies, academia, and successful Start-ups
  •  Life Insurance Corporation (LIC) shall be a co-investor in the Fund of Funds
  • The Fund of Funds shall contribute to a maximum of 50% of the stated daughter fund size. In order to be able to receive the contribution, the daughter fund should have already raised the balance 50% or more of the stated fund size as the case maybe. The Fund of Funds shall have representation on the governance structure/ board of the venture fund based on the contribution made.
  • The Fund shall ensure support to a broad mix of sectors such as manufacturing, agriculture, health, education, etc.
Credit Guarantee Fund for Start-ups:

In order to overcome traditional Indian stigma associated with failure of Start-up enterprises in general and to encourage experimentation among Start-up entrepreneurs through disruptive business models, 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 Venture Debts to Start-ups, Credit guarantee mechanism through National Credit Guarantee Trust Company (NCGTC)/ SIDBI is being envisaged with a budgetary Corpus of INR 500 crore per year for the next four years.

Tax Exemption of Capital Gains:

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 Start-ups.

In addition, existing capital gain tax exemption for investment in newly formed manufacturing MSMEs by individuals shall be extended to all Start-ups. Currently, such an entity needs to purchase “new assets” with the capital gain received to avail such an exemption. Investment in ‘computer or computer software’ (as used in core business activity) shall also be considered as purchase of ‘new assets’ in order to promote technology driven Start-ups.

Tax Exemption to Start-ups for 3 years

With a view to stimulate the development of Start-ups in India and provide them a competitive platform, it is imperative that the profits of Start-up initiatives are exempted from income-tax for a period of 3 years. This fiscal exemption shall 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.

Tax Exemption on Investments above Fair Market Value

Under The Income Tax Act, 1961, where a Start-up (company) receives any consideration for issue of shares which exceeds the Fair Market Value (FMV) of such shares, such excess consideration is taxable in the hands of recipient as Income from Other Sources. In the context of Start-ups, where the idea is at a conceptualization or development stage, it is often difficult to determine the FMV of such shares. In majority of the cases, FMV is also significantly lower than the value at which the capital investment is made. This results into the tax being levied under section 56(2) (viib). Currently, investment by venture capital funds in Start-ups is exempted from operations of this provision. The same shall be extended to investment made by incubators in the Start-ups.

Building New Start-Up Centers across the Country:

In order to augment the incubation and R&D efforts in the country, the Government will set up/ scale up 31 centres (to provide facilities for over 1,200 new Start-ups) of innovation and entrepreneurship at national institutes, including:

Setting-up 13 Start-up centres: Annual funding support of INR 50 Lakhs (shared 50:50 by DST and MHRD) shall be provided for three years for encouraging student driven Start-ups from the host institute.

Setting-up/ Scaling-up 18 Technology Business Incubators (TBIs) at NITs/IITs/IIMs etc. as per funding model of DST with MHRD providing smooth approvals for TBI to have separate society and built up space

 Building New Start-Up Centers across the Country:

Setting up of 7 New Research Parks Modeled on the Research Park Setup at IIT Madras:

The Government also announced to set up 7 new Research Parks in institutes indicated below with an initial investment of INR 100 crore each. The Research Parks shall be modeled based on the Research Park setup at IIT Madras.

The guiding principles behind the park include:
  • Creating a collaborative environment between industry and academia through joint research projects and consulting assignments.
  • Creating a self-sustaining and technologically fertile environment.
  • Encouraging and enabling R&D activities and Start-ups that are aligned to potential needs of the industry.
  • Providing world class infrastructure for R&D activities and incubation.
  • Enabling development of high quality personnel and motivating professional growth for researchers in companies through part time Masters and PhD Programs.
Launch of Atal Innovation Mission (AIM) with Self-Employment and Talent Utilization (SETU) Program

The Atal Innovation Mission (AIM) shall have two core functions:

Entrepreneurship promotion through Self-Employment and Talent Utilization (SETU), wherein innovators would be supported and mentored to become successful entrepreneurs
  • Establishment of sector specific Incubators including in PPP mode (refer #14 of this Action Plan)
  • Establishment of 500 Tinkering Labs
  • Pre-incubation training to potential entrepreneurs in various technology areas in collaboration with various academic institutions having expertise in the field
  • Strengthening of incubation facilities in existing incubators and mentoring of Start-ups
  • Seed funding to potentially successful and high growth Start-ups
Innovation promotion: to provide a platform where innovative ideas are generated. The main components proposed to be undertaken as part of the mission include:
  • Institution of Innovation Awards (3 per state/UT) and 3 National level awards
  • Providing support to State Innovation Councils for awareness creation and organizing state level workshops/conferences
  • Launch of Grand Innovation Challenge Awards for finding ultra-low cost solutions to India’s pressing and intractable problems.
At Last, but not the least - Faster Exit for Start-ups:

Given the innovative nature of Start-ups, a significant percentage of them 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 2015 (“IBB”), tabled in the Lok Sabha (Lower House of Indian Parliament) in December 2015 has provisions for the fast track and / or voluntary closure 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, an insolvency professional shall be appointed for the Start-up, who shall be in charge of the company (the promoters and management shall no longer run the company) for liquidating its assets and paying its creditors within six months of such appointment.

On appointment of the insolvency professional, the liquidator shall be responsible for the swift closure of the business, sale of assets and repayment of creditors in accordance with the distribution waterfall set out in the IBB. This process will respect the concept of limited liability. 

Source: Department of Industrial Policy and Promotions, Government of India , 
Download the Action Plan - LINK