START-UPS IN INDIA

1. Issues and Challenges faced by start-ups

2. Government incentives and schemes, Applicable Laws
3. Risk Management, Financing
4. IP perspective
5. Legal Start-ups

ISSUES AND CHALLENGES FACED BY START-UPS

 Every startup brings with it a set of challenges. If not taken care of, these challenges could have serious
repercussions.
 According to a research, 50 million new startups are being launched every year? Out of those 50 million
startups, 90 percent of startups fail.
 The world of startups is violent and at times unpredictable. That’s why startups struggle for multiple
reasons.

1. FINDING THE RIGHT TALENT

As a growing startup, you need people who can wear multiple hats and are willing to
work together with synergy and teamwork in a team. Thus, hiring the right talent from a
pool of credible candidates is a quite a challenge.

2. MONEY
 The first and most common type of challenge is to gather the money to launch a startup and keep it
running. Capital is essential for hiring staff, getting an office space, development of a product, and
for marketing as well. People forget to take such costs into account and start spending as soon as
some cash flows in. It results in cost-cutting, shedding of staff, and eventually going into losses.
 Getting your business funded is one of the main issues that all business faces and have to tackle in
order to survive. While you might have initial money saved up to start a business, they don’t
survive for long and you cannot just rely on the next sales check to arrive so you can pay the bills
and take care of the next step in business. A steady flow of cash is essential for small business to
survive and you always need to have extra funds to take care of rainy and in-between days. Many
entrepreneurs struggle to make ends meet and at times don’t even pay themselves so they can clear
 the invoices in time. What you can do is plan your finances better so there are no
delayed invoicing and you have enough gap in between getting the money, clearing the invoice
and paying your employees (including yourself) salaries. For this, you need to make sure you have
a well-prepared business plan in advance and that includes funds set aside to weather the worst-
case scenario. Remember you are new so you will have limited availability of funds, and thus you
have less room for error. You will also not make a profit right away so have enough funds set
aside before you start and add it in your business plan and budget accordingly.

3. LACK OF PLANNING AND VISUALIZING

Planning is an essential component of startup culture. It is surprising how lightly people
take it and forget to cover important things like budget, resources, and potential risks as a
part of their business plan. As a result, they falter and fail.

4. TIME MANAGEMENT
Even 24 hours in a day aren’t always enough when you are working or leading a startup.
There are always clients to be called, meetings to be arranged, and decisions to be taken.
Thus, one must learn how to manage time in the most effective way. Start with
prioritizing tasks at hand and rank them in order of their importance. Give a deadline for
each task so that they can be completed on an estimated time-frame.

5. DEALING WITH COMPETITORS

Despite your great product and services, the startup world is quite fierce and competitive.
With so many companies fighting for the same spot, it could be challenging to stay ahead
of the competition. Despite your great product and services, the startup world is quite
fierce and competitive. With so many companies fighting for the same spot, it could be
challenging to stay ahead of the competition.
6. WINNING THE TRUST OF CUSTOMERS
For any business, the ultimate challenge is to strike a chord with its target audience and
win their trust. If you wish to cement your position in the marketplace, it is absolutely
essential to have a highly satisfied and loyal customer base. Try coming up with
customer-friendly policies and work towards providing top-notch services and customer
experience. It could be hard initially, but with regular feedback from them, you can
understand their needs. This information is helpful to create a strategy that aligns with
your vision and their interests.

https://yourstory.com/2020/05/india-reforms-21st-century-world-power?
utm_pageloadtype=scroll

GOVERNMENT INCENTIVES AND SCHEMES, APPLICABLE LAWS

GOVERNMENT INCENTIVES

Prime Minister Narendra Modi proclaimed the Startup India campaign in 2016 to boost
entrepreneurship in India. The action plan aimed at promoting bank financing for
startups, simplifying the incorporation of startup process and grant of various tax
exemptions and other benefits to startups.

But all the benefits and exemptions are available to the startups only if they come under
the criteria of an ‘Eligible Startup’.

ELIGIBILITY FOR STARTUP INDIA

As per the Startup India Action plan, the followings conditions must be fulfilled in order
to be eligible as Startup:

 Being incorporated or registered in India for less than seven years and for biotechnology startups
up to 10 years from its date of incorporation.
 Annual turnover not exceeding Rs 25 Crores in any of the preceding financial years.
 Aims to work towards innovation, development, deployment or commercialization of new
products, processes or services driven by technology or intellectual property.
 It is not formed by splitting up or reconstruction of a business already in existence.
  It must obtain certification from the Inter-Ministerial Board setup for such a purpose.
 It can be incorporated as a private limited company, registered partnership firm or a limited
liability partnership.

TAX EXEMPTIONS ALLOWED TO ELIGIBLE STARTUPS UNDER STARTUP INDIA

PROGRAM

1. 3 year tax holiday in a block of seven years

The Startup incorporated after April 1, 2016, is eligible for getting 100% tax rebate on
profit for a period of three years in a block of seven years provided that annual turnover
does not exceed Rs 25 Crores in any financial year. This will help the startups to meet
their working capital requirements during their initial years of operation.

2. Exemption from tax on Long-term capital gains:

A new section 54 EE has been inserted in the Income Tax Act for the eligible startups to
exempt their tax on a long-term capital gain if such a long-term capital gain or a part
thereof is invested in a fund notified by Central Government within a period of six
months from the date of transfer of the asset. The maximum amount that can be invested
in the long-term specified asset is Rs 50 lakh. Such amount shall be remain invested in
the specified fund for a period of 3 years. If withdrawn before 3 years, then exemption
will be revoked in the year in which money is withdrawn.

3. Tax exemption on investments above the fair market value

The government has exempted the tax being levied on investments above the fair market
value in eligible startups. Such investments include investments made by resident angel
investors, family or funds which are not registered as venture capital funds. Also, the
investments made by incubators above fair market value are exempt.
4. Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups
u/s 54GB.

The existing provisions u/s 54GB allows the exemption from tax on long-term capital
gains on the sale of a residential property if such gains are invested in the small or
medium enterprises as defined under the Micro, Small and Medium Enterprises Act,
2006. But now this section has been amended to include exemption on capital gains
invested in eligible start-ups also.

Thus, if an individual or HUF sells a residential property and invests the capital gains to
subscribe the 50% or more equity shares of the eligible startups, then tax on long term
capital will be exempt provided that such shares are not sold or transferred within 5 years
from the date of its acquisition. The startups shall also use the amount invested to
purchase assets and should not transfer asset purchased within 5 years from the date of its
purchase.

This exemption will boost the investment in eligible startups and will promote their
growth and expansion.

5. Set off of carry forward losses and capital gains allowed in case of a change in Shareholding pattern

The carry forward of losses in respect of eligible start-ups is allowed if  all the
shareholders of such company who held shares carrying voting power on the last day of
the year in which the loss was incurred continue to hold shares on the last day of previous
year in which such loss is to be carry forward. The restriction of  holding of 51 per cent
of voting rights to be remaining unchanged u/s 79 has been relaxed in case of eligible
startups.

GOVERNMENT SCHEMES

1. Startup Scheme 1: Support for International Patent Protection in Electronics & Information
Technology (SIP-EIT)
 Fiscal Incentives: Reimbursement will be limited to a total of INR 15 Lakhs per invention
or 50% of the total expenses incurred in filing and processing of the patent application up
to grant, whichever is lesser.

2. Startup Scheme 3: Software Technology Park (STP) Scheme

Fiscal Incentives: Sales in the DTA up to 50% of the FOB value of exports is permissible
and depreciation on computers at accelerated rates up to 100% over 5 years is
permissible.

3. Startup Scheme 8: The Venture Capital Assistance Scheme

Fiscal Incentives: The quantum of SFAC Venture Capital Assistance will depend on the
project cost and will be the lowest of the following:

 26% of the promoter’s equity.

 INR 50 Lakhs

For projects located in North-Eastern Region, Hilly States (Uttarakhand, Himachal

Pradesh, and Jammu & Kashmir) and in all cases in any part of the country where the
project is promoted by a registered Farmer Producers Organization, the quantum of
venture capital will be the lowest of the following:

 40% of the promoter’s equity.

 INR 50 Lakhs
4. Ministry Of Micro, Small And Medium Enterprises (MSME)

 Credit Guarantee

 Fiscal Incentives: Both term loans and/or working capital facility up to INR 100 Lakhs per
borrowing unit are being provided. The guarantee cover provided is up to 75% of the credit
facility up to INR 50 Lakhs (85% for loans up to INR 5 Lakhs provided to micro enterprises, 80%
for MSEs owned/operated by women and all loans to NER including Sikkim) with a uniform
guarantee at 50% for the entire amount if the credit exposure is above INR 50 Lakhs and up to
INR 100 Lakhs.

Performance & Credit Rating Scheme

  Fiscal Incentives: The incentives are proportional to the turnover of the MSMEs. For instance, up
to INR 50 Lakhs, 75% of the rating fee or INR 25,000 (whichever is less) will be contributed
under the scheme. For turnover above INR 50 Lakhs to INR 200 Lakhs, 75% of the fee or INR
30,000 (whichever is less) while for turnover more than INR 200 Lakhs, 75% of the fee or INR
40,000 (whichever is less).

MSME Market Development Assistance

 Fiscal Incentives: 75% of air fare by economy class and 50% space rental charges for micro &
small manufacturing enterprises of General category entrepreneurs will get reimbursed under this
scheme. For women/SC/ST entrepreneurs & entrepreneurs from North Eastern Region, 100%
space, rent, and economy class airfare will be reimbursed. The total subsidy on air fare & space
rental charges will be restricted to INR 1.25 Lakhs per unit.

 Startups are the future of India. The rapid advancement in many sectors has led to a spurt in the numbers
and quality of startups in India.
 Other than laws relating to the incorporation, tax laws, labour legislations, environmental laws, securities
laws, contract law, intellectual property laws and various other kind of laws are required to be adhered to.
Startups should also be aware of dispute settlement mechanism which includes litigation, arbitration,
mediation, conciliation and negotiation.
 The Government of India has come up with a comprehensive policy on encouraging startups in India
through various policies and regulations. An incorporated private limited company or a partnership firm
registered under the Partnership Act, 1932 or a limited liability partnership under the Limited Liability
Partnership Act, 2008 in India can be considered as a ‘Startup’ till seven years from the date of its
incorporation/ registration for getting the benefits under the Government of India schemes.
 Certain startups which are incorporated between the 1st day of April, 2016 and the 1st day of April, 2019
(now extended by two more years to 1st day of April, 2021) are also eligible for tax benefits. A certificate
of an eligible business from the Inter-Ministerial Board of Certification of Department of Industrial Policy
and Promotion is a perquisite for availing the benefits. The definition of “eligible business” under the
Income Tax Act has been now expanded to mean a business carried out by an eligible startup engaged in
innovation, development or improvement of products or processes or services or a scalable business model
with a high potential of employment generation or wealth creation.
 To further encourage investments in startups by Foreign Venture Capital Investors (FVCI), the regulatory
provisions have been accordingly amended such as Schedule 6 of Foreign Exchange Management (Transfer
or Issue of security by a person resident outside India) Regulations, 2000 and Foreign Exchange
 Management (Transfer or Issue of Security by a Person Resident outside India) (Third Amendment)
Regulations, 2016. A FVCI may contribute up to 100 percent of the capital of an Indian company engaged
in any activity mentioned in Schedule 6 of Notification No. FEMA 20/2000, including startups irrespective
of the sector in which it is engaged, under the automatic route. Start-ups can issue equity or equity-linked
instruments or debt instruments to FVCI against receipt of foreign remittance, as per the FEMA Regulation.
 The Reserve Bank of India (RBI) has also allowed the Indian Startups to raise funds through ‘Convertible
Note’ which means an instrument issued by a startup company evidencing receipt of money initially as
debt, which is repayable at the option of the holder, or which is convertible into equity shares of the startup
company, within a period not exceeding five years from the date of issue on the occurrence of certain
specified events as per the other terms and conditions agreed to. A person resident outside India can
purchase these convertible notes issued by an Indian startup company for an amount of ₹25 lakh or more in
a single tranche. But a startup engaged in a sector where investment by a person resident outside India
requires government approval can issue convertible notes to a person resident outside India only with such
approval. Again issue of equity shares against such convertible notes has to be in compliance with the entry
route, sectoral caps and pricing guidelines. https://www.forbesindia.com/blog/economy-policy/startups-in-
india-the-laws-that-are-and-you-need-to-know/
 Beware of Labour Laws
Irrespective of the size of the establishment, you need to adhere to the labour laws. These laws could be
with regard to minimum wages, gratuity, PF payment, weekly holidays, maternity benefits, sexual
harassment, payment of bonus and so on. A startup registered under startup India programme have the
option to complete self-declaration for 9 labours laws within 1 year and get an exemption from the labour
inspection. The 9 laws are as follows: The Industrial Disputes Act, 1947 The Trade Unit Act, 1926
Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act,
1996 The Industrial Employment (Standing Orders) Act, 1946 The Inter-State Migrant Workmen
(Regulation of Employment and 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. In order to continue with
the exemption, the startup can file the self-declaration for the second and third year as well. Also, if a
startup has a well-defined employee policy, then that can provide an edge over other startups. This policy
could help in talent acquisition and retention. Moreover, this could boost employee’s morale and overall
productivity.
 Protection of Intellectual Property Rights
If you have a secret sauce or an algorithm in this high-tech world, then it is important that you
should take note of this law. According to this, you can patent your innovative product or an
improved process of making something, or a trademark than gives you exclusive right over selling
under a specific name. All this comes under Intellectual Property rights.A Startup can leverage the
‘Scheme for Startups Intellectual Property Protection’ (SIPP) under the ‘Startup India
 programme’. This scheme was set up to protect & commercialize your intellectual property. The
facilitators of the scheme are empanelled by the Controller General of Patents, Trademarks and
Design. This panel of facilitators also helps the startup by providing advisory services, assisting in
patent filing and disposal of patent application. This is done in addition to various other services at
a minimum charge.
https://yourstory.com/mystory/7-basic-laws-every-startup-entrepreneur-should-kno

 There are so much metaphorical similarities between this Oscar winning movie and an
Entrepreneur’s life:
Starting up is like Stammering:
Lionel the speech specialist makes a very important point in the early part of the movie when he
states that, "no child is born with a stammer". Various circumstances lead people to stammering
after they are born.
I believe that Starting Up and the attempt to become an Entrepreneur is almost like living with
perfect speech and then going out of your way to ‘learn’ how to stammer. 
 Most of the people in the world live regular, typical and if I may add, ‘normal’ lives. Then there
comes the Entrepreneur who on the onset behaves and sounds different. She ditches her
professional life for a chance at doing something that may never succeed. The cozy ensconces of a
Monday-Friday working week are forsaken for a mad all-day, all-year, all-hours working frenzy
timetable. Her personal life takes a big hit, where friends and family are sidelined. 
https://www.monsterindia.com/career-advice/the-entrepreneur-s-speech-6851.html
 Make in India
 LEGAL SCHEMES
What are the legal requirements for any startups to stay in business for the long run? The
Government of India encourages the person to start a new business. There was a scheme
initiated by the Government known as Startup India. There is an official website
called www.startupindia.gov.in where they provide every kind of legal information
regarding Startups such as List of Facilitators for Patents, self-certification, etc. In this
official website they mention: 

The Government of India initiated the Startup India as a flagship movement, with the
purpose of building a strong and effective ecosystem that is conducive or ideal for the
growth of startup businesses, driving sustainable economic growth and generating large
scale employment opportunities. Through this initiative, the Government aims at
empowering startups to grow through design and innovation.

The Startups shall self-certify compliance in respect of following labor laws:

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

So before starting any Startup, one must fulfil the above mentioned law for self-certification and
also one must also keep in mind the following rules:

 Hire a lawyer
It is always a good idea to hire a lawyer or any professional who knows all the required documents and knows
well about Startup India scheme.

 Research online
One must research everything regarding the Startup online. There are few laws and regulations which the
founder must go through:
 SEBI
According to the Wikipedia “The Securities and Exchange Board of India is the regulator for the securities
market in India. It was established in 1988 and given statutory powers on 30 January 1992 through the SEBI
Act, 1992.” There are some regulations which a Startup needs to pass legally which come under the SEBI
regulations. They keep updating the regulations so it’s better to research them.

 Founder’s Agreement
This agreement is created before forming the company. This agreement is done between group of individuals
which defines their role, duties and their responsibilities in the company. This is a very important agreement
that needs to get signed after reading it properly.
 
 Investor agreements
There are investors who are interested in investing a company. The contract designed for the investor is called
as an investor agreement. This contract defines the role, power and share percentage of an investor in the
company.

 IT Laws
Information Technology laws help in protection of the company from the hackers or any security breach. It
helps in maintaining the privacy and security of a company. In this technologically era people want to deal with
a company where they can trust that their data is secured. It is really important to follow the IT laws for any
startup as the data is everything for them.

 Labour Laws of India

Every Startup company will require to hire employees. So they must be aware of this law and must mention it in
HR policies. Matters related to concern of employees are handled through this law (also known as Labour Laws
in India - (Indian) Industrial Disputes Act, 1947). It has been enacted for the settlement of industrial disputes in
any industrial environment. It is very helpful in case where an employee has some disagreement with the
employer. 

 Intellectual property rights

This law focuses on the subject like Patents Act, the Copyright Act, etc. It covers the topic like trademarks,
protection against any unfair competition. It protects all the property of a company. Owning this right is very
important for a company. 

There are a few more legal laws which are essential for Startups. One must consult their lawyer
to cover all the legal requirements for their company. 
 https://www.lawyered.in/legal-disrupt/articles/ultimate-legal-guide-startups/\

'Start-up India is synonymous with Stand-up India' was the sentence that resonated with
some of the top CEOs and over budding entrepreneurs that attended the Prime Minister's
unveiling of the action plan around Startup India.’

https://economictimes.indiatimes.com/small-biz/legal/law-startup-india-
story/articleshow/50713362.cms?from=mdr

ASSESSING RISKS
An entrepreneur needs to identify the various risks that confront the venture and make an
assessment of their importance to his or her specific situation. The act of starting a
business is inherently risky:

 There is no guarantee that customers will like your products or services enough to purchase them.
 Entrepreneurs frequently borrow money to finance their venture in its earliest stages; there is a chance that they
will not make sufficient profits to be able to pay these loans back.
 As a business expands, the founders will invariably have to delegate responsibility for certain tasks to
employees whom they do not know well. The employees bring uncertainty and risk related to their skills and
performance.
 Entrepreneurs do not know the correct price for their product at the beginning; they may have to raise prices or
change their business model, running the risk of alienating customers.
 Whenever a business ventures into a new market or launches a new product line, there are risk involved with the
logistics and geography.
 Business owners also have to face risks that are external to the day-to-day operations of their companies. These
risks include natural disasters (earthquakes, tsunamis, volcanos), freak accidents (plane crashes, car accidents)
and long-term environmental changes (global warming, freshwater depletion, etc).

Entrepreneurship involves accepting those risks that are necessary or unavoidable, while taking
steps to mitigate those that can be controlled. Given that reducing down to zero is impossible (or
extremely expensive), individual entrepreneurs must decide where on the spectrum of risk-taking
they stand. What kind and how much risk are you prepared to accept? The answer to this
question will depend on your specific situation; good entrepreneurs are the ones who can
successfully answer it. In the rest of this article, we will outline the risks faced by most
businesses and offer some strategies for mitigating them.
FINANCIAL RISK
Running out of cash is often the end point in the life of any business. The managers of a
business must ensure that they never get to this stage. However, there are many financial
risks that can lead you to this stage:

 Customers can refuse to pay your invoices (credit risk).

 The cost of your raw materials or suppliers could rise suddenly.
 Customers may switch to a competing product and not buy your product or service any more.
 A strengthening local currency can reduce the net profits from your foreign customers, or a weak
currency can increase the cost of running your foreign operations (exchange rate risk).
 A spike in interest rates could raise the cost of your working capital (interest rate risk).
 A plunge in the value of stocks or real estate you pledged as collateral could cause your bank to
cut your credit lines (asset price risk).
 A slowing economy could reduce the demand for your firm’s product or service.

Not all of these risks are relevant for all businesses but an entrepreneur must know
which ones may affect his or her venture. The best safeguard against running out of
money is to have enough of it as invested capital. Entrepreneurs often find it difficult
to raise money when they need it most; while everybody wants to give them money
when they don’t need it. One way to minimize your financial risk and give yourself a
long runway is to take funding when it is available and keeping it in reserve for a
rainy day; this is the strategy that most “hot” startups take.