• Startup compliance
  • Regulatory Framework for Startups in India

What is a Startup?

According to the DIPP Notification (11.04.2018), an entity is considered a startup if:

  • It is registered as a Private Limited Company, Limited Liability Partnership (LLP), or a Registered Partnership Firm.
  • It has been incorporated within the last 7 years (for biotech startups, the limit is 10 years).
  • Its annual turnover does not exceed ₹25 crore in any of the last 5 financial years.
  • It is focused on innovation, development, or improvement of products/services or is a scalable model with high employment or wealth-generation potential.

It registers through the Startup India portal: Startup India Website.

Exclusion:

 If the startup is formed by splitting or reconstructing an existing business, it will not be considered a startup.

Legal Structures for Startups

Startups in India can be structured as:

  • Sole Proprietorship (Not eligible for Startup India benefits)
  • Registered Partnership Firm
  • Limited Liability Partnership (LLP)
  • Private Limited Company (Preferred choice due to funding and tax benefits)

Why Choose a Private Limited Company?

  • Eligible for tax exemptions on profits and investments above fair market valuation.
  • Easier to raise funds through equity shares, preference shares, and debentures.

Licenses and Agreements Required for Startups

Once established, startups must obtain several mandatory licenses, including:

Basic Business Licenses
  • PAN (Permanent Account Number)
  • TAN (Tax Deduction Account Number)
  • GSTIN (Goods & Services Tax Identification Number)
  • Importer Exporter Code (IEC) (If dealing with import/export)
  • Shops & Establishments Act (State-specific registration for commercial establishments)
  • EPF (Employee Provident Fund Act) (Required if employing 20+ people)
  • ESIC (Employee State Insurance Act) (Required if employing 10+ people, or 20 in Maharashtra & Chhattisgarh)

Regulatory Compliance for Startups

As per the Companies Act, 2013, startups must file:

  • INC-1 – Name reservation.
  • DIR-12 – Director appointment.
  • CHG-7 – Register of charges on company properties.
  • MGT-1 – Register of members.
  • MGT-2 – Register of debenture holders.
  • DPT-3 – Return of deposits.
  • MGT-7 – Annual return (Can be signed by a director if no company secretary is available).
  • Minutes of Meetings Book – Proper record-keeping of board meetings.

Service Agreements for Startups

Startups enter into contracts with vendors and service providers. These agreements should include:

  1. Non-disclosure of Confidential Information
  2. Obligations of the Service Provider
  3. Intellectual Property Rights Restrictions
  4. Payment Terms
  5. Indemnity & Liability
  6. Force Majeure (Unforeseen circumstances)
  7. Exclusivity & Non-Solicitation
  8. Termination Clause
  9. Dispute Resolution & Governing Law
  10. Damages & Equitable Relief
  11. Representations & Warranties

Intellectual Property Rights (IPR) Protection for Startups

Startups must register their intellectual property under relevant acts to prevent infringement.

Types of Intellectual Property:

  • Trademarks – Protects brand names, logos, symbols, etc.
  • Patents – Covers innovative products, processes, or industrial applications.

Startup Benefits under IPR Protection:

  • 80% reduction in patent registration fees.
  • 50% reduction in trademark registration fees.
  • Fast-track patent examinations under the Startup Intellectual Property Protection (SIPP) Scheme.

Labor & Environmental Law Exemptions for Startups

Startups can self-certify compliance with 6 labor laws and 3 environmental laws for 5 years.

Exempt Labor Laws:

  1. The Payment of Gratuity Act, 1972
  2. The Contract Labour (Regulation & Abolition) Act, 1970
  3. The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952
  4. The Employees’ State Insurance Act, 1948
  5. The Inter-State Migrant Workmen Act, 1979
  6. The Other Construction Workers’ Act, 1996

Exempt Environmental Laws:

  1. The Water (Prevention & Control of Pollution) Act, 1974
  2. The Water (Cess) Amendment Act, 2003
  3. The Air (Prevention & Control of Pollution) Act, 1981

Labor & Environmental Law Exemptions for Startups

1. Exemption on Profits (Section 80-IAC)

  • 100% tax exemption for 3 out of 7 years.
  • Conditions:
    • Not formed by splitting/reconstructing an existing business.
    • Not using previously owned machinery.
    • Must be incorporated between April 1, 2016 – April 1, 2021.
  •  

2. Angel Tax Exemption (Section 56)

  • Investments above fair market valuation are exempt from tax.
  • Conditions:
    • Paid-up capital & premium should not exceed ₹10 crore.
    • Investor should have
    • ₹25 lakh+ annual income (last 3 years)
    • Net worth of ₹2 crore+

3. Capital Gains Exemptions

  • Section 54EE – Capital gains exempt if reinvested in specified funds (max ₹50 lakh per year).
  • Section 54GB – Tax-free if invested in small/medium enterprises or tech-based startups.

Fast-Track Insolvency Resolution for Startups

Under Insolvency & Bankruptcy Code (IBC), 2016, startups (except partnership firms) qualify for fast-track resolution:

  • Process must be completed within 90 days (extendable by 45 days).
  • Requires 75% creditor approval for extension.
Fundraising Options for Startups

Startups can raise funds through:

  1. Alternative Investment Funds (AIFs) – Privately pooled investment vehicles.
  2. Venture Capital Funds (VCFs) – Focus on early-stage startups.
  3. Angel Funds – Investments from high-net-worth individuals.
  4. Fund of Funds (FFS) – ₹10,000 crore government-backed fund managed by SIDBI.
  5. External Commercial Borrowings (ECB) – Foreign investments (min. 3-year maturity).
Instruments for Raising Capital
  • Equity Shares
  • Preference Shares
  • Debentures

Key Investment Agreements for Startups

  1. Term Sheet

A non-binding agreement outlining investment conditions, including:

  • Valuation & Share Price
  • Dividend Rights
  • Pre & Post-Conditions
  • Exclusivity (45-60 days negotiation period)
  1. Shareholders Agreement
Defines rights of investors:
  • Pre-emptive Rights – Right to buy new shares before outsiders.
  • Right of First Offer – Priority purchase of selling shareholders’ stakes.
  • Tag-Along Rights – Allows investors to exit along with founders.
  • Liquidation Preference – Investors get paid before founders if the company is liquidated.
  • Arbitration & Governing Law – Defines jurisdiction for legal disputes.
Employee Compensation & ESOPs

Employment Agreements Should Cover:

  • Salary & Benefits
  • Confidentiality & Non-Compete
  • Termination Terms
  • Intellectual Property Ownership
Employee Stock Option Plans (ESOPs)
  • Requires shareholder approval.
  • Minimum 1-year vesting period before employees can exercise stock options.
  • No ESOPs for independent directors.

Conclusion

India’s startup ecosystem benefits from government incentives, tax exemptions, simplified compliance, and multiple funding options. By following regulatory guidelines, startups can maximize growth potential and sustain long-term success.