Benefits Available to “Eligible Startups”

India is home to the 3rd largest eco-system for startups in the world. With a tough economic period that the world and India has traversed, the moment for our startups to shine is here, turning this time into an opportunity can be the best outcome for our startups.

Defining “Eligible Startup” / “DPIIT Recognised Startup”. A Startup is an “Entity” fulfilling the conditions as laid down in the Notification1 issued by Department for Promotion of Industry and Internal Trade (DPIIT) as under Entity is incorporated as a Private Limited Company or Limited Liability Partnership (LLP) or Registered as a Partnership Firm in India and satisfies following 3 conditions:

• Less than ten years from the date of its incorporation/ registration.
• Turnover2 of the Entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees (INR 100 Crore).
• Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation Note: A startup ceases to be an Eligible Startup if does not fulfill the above the criteria or the startup is an entity formed by splitting up or reconstruction of a business already in existence.

Process for Registration as an “Eligible Startup” / “DPIIT Recognised Startup“

1. Register on www.startupindia.gov.in as “Startup“.
2. Initiate an application for recognition as an “Eligible Startup” on the portal.
3. Submit a write up about the nature of business highlighting how it is working towards innovation, development or improvement of products or services or scalability in terms of employment generation or wealth creation.
4. Submit the online application along with Certificate of Incorporation and with other relevant details as required in the application.
5. Receive DIPP Recognition Certificate over the registered e-mail ID or rejection of recognition by providing reasons therein As on 15th December 2022, 85,769 startups have been given “Eligible Startup” recognition by DPIIT Further guidelines have been issued for recognition of startups on 5th July 2021.

Startups and professionals are advised to refer to these guidelines in addition to the above Income Tax, Regulatory and Other Benefits to an “Eligible Startup“.

I. Income Tax Benefits

1. Angel Tax Exemption[Section 56 (2)(viib)] 1.
2. Income Tax Deduction [Section 80-IAC].
3. Set-Off and Carry Forward of Losses by Eligible Startups [Section 79].
4. Capital Gain Exemption on Transfer of Residential Property [Section 54GB] [Only for startups that have received Section 80- IAC Recognition].
5. Deferment of tax liability on ESOPs [Sections 156, 191 and 192 [Only for startups that have received Section 80- IAC Recognition].
6. Capital Gains Exemption for Investing in Units of Funds [Section 54EE].
7. Additional Tax Deduction for “Eligible Employees” [Section 80JJAA].
8. Constitution of Start-up Cell.

II. Regulatory Benefits

• A. Companies Act, 2013
  1. Exemption from preparation of Cash Flow Statement.
  2. Board Meetings per year.
  3. Acceptance of Deposits.
  4. Sweat Equity Shares.
  5. Employee Stock Option Plan (ESOP).
  6. Issuing optionally Convertible Note.
  7. Certification of MGT 7 (Annual Return) by Practicing Company Secretary.
• B. Foreign Exchange Management Act, 2013
  1. Issuing Optionally Convertible Note.
  2. Relaxed External Commercial Borrowing Guidelines (ECB’s).
  3. Relaxation on opening of foreign Bank Account.
  4. Investment by a Foreign Venture Capital Investor (FVCI) registered under SEBI (FVCI) Regulations, 2000.
• C. Labour Laws

Eligible Startups are allowed to self-certify compliance for 9 Labour Laws and follow a simple procedure for selfcertification.

• D. SEBI Differential Voting Rights

SEBI has approved a framework of shares with differential voting rights for tech startups which will allow startup founders to have a greater control over their ventures. An issuer company having superior voting rights shares (SR shares) would be permitted to do an initial public offering (IPO) of only ordinary shares to be listed on the Main Board, subject to fulfilment of eligibility requirements of the SEBI (Issue of Capital and Disclosure Requirements) Regulations and other Specified Conditions. The total voting rights of SR shareholders (including ordinary shares), post listing, shall not exceed 74%.

• E. Environment Law Compliances

In case of environment laws, Eligible Startups which fall under the “White Category” as defined by the Central Pollution Control Board (CPCB) would be able to selfcertify compliance and only random checks would be carried out in such cases. Compliance norms relating to Environmental laws have been eased in order to reduce the regulatory burden on Startups thereby allowing them to focus on their core business and keep compliance costs low. Eligible Startups will be allowed to self-certify for environment laws such as: a. Water (Prevention & Control of Pollution) Act, 1974 b. Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003 c. Air (Prevention & Control of Pollution) Act, 1981.

• F. Insolvency and Bankruptcy Code, 2016

Fast Track Process under IBC Code shall apply to Eligible Startup. For Eligible Startups, Insolvency Resolution process be completed within 90 days as against 180 days for other companies.

• G. Intellectual Property Scheme for facilitating Startups

Intellectual Property Protection20 Intellectual Property Rights such as Trademarks, Patents and Copyrights are a way of protecting innovative new ideas. However, filing a patent is an expensive and time consuming process which can be difficult for many startups.

III. Financial Benefits

1. Funds of Funds To provide equity funding support for development and growth of innovation driven enterprises, the government has set aside a corpus fund of 10,000 crores managed by SEBI. The Fund is in the nature of Fund of Funds, which means that the Government participates in the capital of SEBI registered Venture Funds, who further invest in Startups. Easier Public Procurement Norms.
2. Public procurement refers to the process by which governments and state-owned enterprises purchase goods and services from the private sector. Helping Eligible Startups to participate in the “public procurement” process and allow them to access another potential market for their products.
   • Opportunity to list product on Government e-Marketplace.
   • EMD Exemption.
   • Exemption from Prior Experience/Turnover.

On one side, creditors don’t give leeway in payment on the other side, debtors take their own sweet time to pay, disregarding the payment terms. The plight becomes unbearable, with unsold inventories further skewing the liquidity position. The problem statement is significant, but the solutions are simple and require continuous rigour.

Working capital management requires hawkish eyes on each element. Various strategic and tactical decisions must be taken to optimize the working capital and ensure it works for the company’s benefit. The working capital may be positive or negative depending on the company’s nature. Nevertheless, each element requires careful consideration.

• Receivables Management
• Inventory Management
• Trade Payables

Three steps Mantra:

I. Continuous Rigor

Startups suffer from the steroid shot effect. There are knee-jerk reactions when a setback has seen by the companies. Once the situation improves, the business returns to the old operation style. Receivable management, Inventory optimization, payable management and other current assets and liabilities management require continuous rigour from the finance team. Any advances need to be checked with the reason for such payment. Robust control of the receivables with a specific focus on aged debtors ensures improving DSO. Adequate inventory control reduces slow-moving/non-moving inventories, shortening the inventory life cycle.

II. Sharp Matrix and Review Mechanism

“What is not measured, not improve” It is quint essential for the companies to create a sharp matrix and have a periodic review with the business team to ensure the key results are achieved as the way envisaged. The input data needs to be dependable to rely on the given matrix. Startups suffer from information silos and sub-optimal ways of capturing adequate data. Once the data is captured correctly, the appropriate matrix can be created to track the progress and monitor the performance. Quick Action: Review without actions does not make sense. With the dynamic environment, founders need to immediately arrest the depletion of optimal cash flow and the company’s working capital. In the case of bill discounting features, the amount must be funded by the company if discounted invoices are not processed on the agreed time. The non-compliance leads to penalties and may jeopardize the credit limit offered by the bank. Similarly, delay in followup and taking quick strategic and tactical level intervention may lead to more significant issues.

III. Fund Utilization Conundrum

There are situations where startups find it difficult to manage their current needs and end up deploying the growth capital in their operation working capital needs. Once done, it enters a conundrum wherein growth gets tapered, and the money blocked in working capital is not released. The situation can be on the reverse side as well. In such cases, illiquid and not profitmaking assets are created in the company and lead to a skewed cash position. So, startups need to clearly plan short-term and long-term needs and distinctly approach the problem. To sum up, Startups are always sandwiched between suppliers who follow up continuously for payment on one side and customers who postpone the payment for multiple reasons on the other side. The negative gap creates fund crunch situations and leads to numerous suboptimal calls the founders take. The founders must evaluate business activities and critical drivers and link them to the company’s working capital. Each activity directly or indirectly impacts the company’s short- and long term fund needs.