Lok Sabha Question No. 1702 (UNSTARRED), answered on 2023-07-31
Subject: New Regulatory Regime for Start-ups
Ministry: CORPORATE AFFAIRS
Asked by: Dayanidhi Maran, Sudheer Gupta, Sambhajirao Mane Dhairyasheel, Gautam Gambhir, Sanjay Sadashivrao Mandlik, Shrirang Appa Barne, Prataprao  Jadhav, Bidyut Baran Mahato

## GOVERNMENT OF INDIA MINISTRY OF CORPORATE AFFAIRS LOK SABHA

## UN-STARRED QUESTION NO. 1702

## TO BE ANSWERED ON MONDAY, JULY 31, 2023/ SRAVANA 9, 1945 (SAKA) NEW REGULATORY REGIME FOR START-UPS QUESTION

1702. SHRI DAYANIDHI MARAN: SHRI SUDHEER GUPTA: SHRI DHAIRYASHEEL SAMBHAJIRAO MANE: SHRI GAUTAM GAMBHIR: SHRI SANJAY SADASHIVRAO MANDLIK: SHRI SHRIRANG APPA BARNE: SHRI PRATAPRAO JADHAV:

SHRI BIDYUT BARAN MAHATO

Will the Minister of CORPORATE AFFAIRS

be pleased to state:

- (a) whether the Government is examining the need for a new regulatory regime for large start-ups that have grown beyond a certain size, if so, the details thereof and the reasons therefor;
- (b)  the  details  of  factors  that  will  be  considered  by  the  Government  while determining  the  appropriate  size  at  which  start-ups  should  be  subject  to  this regulatory regime;
- (c) the manner in which the Government is planning to strike a balance between enhancing governance systems and maintaining ease of doing business for these start-ups;
- (d) whether the Government proposes of any exemptions or incentives to these start-ups so that they demonstrate strong governance voluntarily, if so, the details thereof;
- (e) the manner in which the Government will collaborate with stakeholders like industry experts and start-up associations to develop this regulatory regime and the potential impact thereof on the growth and competitiveness of start-ups in the country;
- (f)  whether  the  Government  has  appointed  a  panel  of  experts  to  advise  in  this regard, if so, the details and the composition thereof; and
- (g) the time by which such panel is likely to submit its report and the way in which this will help in ease of doing the business through start-ups in the country?

## ANSWER

Minister of State (Independent Charge) of the Ministry of Statistics and Programme Implementation; Minister of State (Independent Charge) of the Ministry of Planning and Minister of State in the Ministry of Corporate Affairs.

(Rao Inderjit Singh)

(a), (b) and (c) : Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry has informed that in order to build a strong ecosystem for nurturing innovation, startups and encouraging private investments in  the  startup  ecosystem  of  the  country,  the  Government  launched  the  Startup India  initiative  on  16th  January,  2016.  In  order  to  meet  these  objectives,  the Government  unveiled  an  Action  Plan  for  Startups  comprising  of  schemes  and incentives envisaged to create a vibrant startup ecosystem in the country. The Action  Plan  comprises  of  19  action  items  spanning  across  areas  such  as 'Simplification and handholding', 'Funding support and incentives' and 'Industry -academia partnership and incubation'.

For  attaining  specific  targets,  various  programs  are  implemented  by  the Government under the Startup India initiative to recognize, develop, and empower startups so that they are able to raise private investments. Sustained Government efforts  in  this  direction  have  resulted  in  98,119  entities  being  recognised  as startups as on 30th April, 2023.

The Government is also spearheading the initiatives under Ease of Doing Business and  Reducing  Compliance  Burden  which  are  aimed  at  creating  a  conducive business environment. These initiatives aim to extend benefit to all entities/sectors/industries of the economy, including startups.

The key focus areas of the initiatives are:

- i. Simplification of procedures related to applications, renewals, inspections, filing records, etc.,
- ii. Rationalization by repealing, amending, or subsuming redundant laws,
- iii. Digitization by creating online interfaces eliminating manual forms and records, and

iv. Decriminalization of minor technical or procedural defaults.

Furthermore, the Government has unveiled the National Single Window System (NSWS) to provide a single platform to enable the identification and obtaining of approvals and clearances needed by investors, entrepreneurs, and businesses in India. NSWS is providing a single interface to apply for all Government to Business (G2B)  clearances  from  various  Ministries/Departments  as  well  as  eliminating duplication of work by auto-populating form fields across different approvals based on single investor profile. Specifically for startup ecosystem, the Government has taken various measures to enhance ease of doing business, raising capital and reducing compliance burden.

(d):  A list of the 57 key regulatory reforms undertaken for startup ecosystem as on 30th April, 2023 can be found at the following link: (https://www.mca.gov.in/content/mca/global/en/parliament-questions-assurances/ parliament-questions/lok-sabha.html (e) to (g):  Nil.

- ………………..

57 Key regulatory reforms undertaken for start-ups ecosystem are as under:

## Reserve Bank of India

1. Startup  enterprises  permitted  to  access  loans  under  External  Commercial Borrowing Framework up to USD 3 million. (Oct, 2016)
2. A Securities and Exchange Board of India (SEBI) registered Foreign Venture Capital Investor  (FVCI)  may  contribute  up  to  100%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. (Aug, 2017)
3. An  Indian  startup  having  an  overseas  subsidiary,  may  open  a  foreign  currency account  with  a  bank  outside  India  for  the  purpose  of  crediting  to  it  foreign exchange  earnings  out  of  exports/  sales  made  by  the  said  entity  and/  or  the receivables, arising out of exports/ sales, of its overseas subsidiary. (June, 2016)
4. SOFTEX form filed by software exporters moved online. (Feb, 2019)
5. Under FDI Policy, tenure of Startup has been aligned with DPIIT Notification dated 19th February,2019 for the purpose of definition of convertible notes. (March 2022)
6. RBI has rationalised the reporting process in Single Master Form (SMF) on FIRMS Portal for Foreign Investment in India. (January 2023)

Securities and Exchange Board of India (SEBI)

7. Lock in period for investments made by an Angel Fund reduced to 1 year from 3 years  as  amended  by  the  SEBI  (Alternative  Investment  Funds)  (Amendment) Regulations,2016, w.e.f. 04-01-2017.
8. Angel Funds are allowed to invest in overseas venture capital undertakings upto 25% of  their  investible  corpus  in  line  with  other  AIFs  as  provided  by  the  SEBI (Alternative Investment Funds) (Amendment) Regulations, 2016, w.e.f. 04-01-2017.
9. The upper limit for number of angel investors in a scheme is increased from forty nine  to  two  hundred  as  amended  by  SEBI  (Alternative  Investment  Funds) (Amendment) Regulations, 2016,w.e.f. 04-01-2017
10. The requirements of minimum investment amount by an Angel Fund in any venture capital undertaking is reduced from fifty lakhs to twenty five lakhs as amended by SEBI (Alternative Investment Funds) (Amendment) Regulations, 2016,w.e.f. 04-012017
11. 'Operating Guidelines for Alternative Investment Fun ds in International Financial Services Centres' issued by SEBI. (Nov, 2018)
12. Under  AIF  Regulations,  definition  of  Startup  has  been  aligned  with  DPIIT Notification  dated  19th  February,2019  for  the  purpose  of  investment  by  Angel Funds in Startups (5th May,2021)
13. The SEBI (Alternative Investment Fund) (Second Amendment) Regulations 2021 removes the list of restricted activities or sectors from the definition of Venture Capital Undertaking i.e. Category 1 AIFs can now invest in NBFCs.  (5th May 2021)

Ministry of Corporate Affairs

14. The financial statement, with respect to private company (if such private company is a start-up) may not include the cash flow statement. (June, 2017)
15. A private company, which is considered as a start-up for a period of five years from the date of its incorporation, is also allowed to accept deposits from members without any restriction on the amount. (Sep, 2017)
16. Startup defined for the purpose of Companies Act, 2013: As per the definition, a start-up  company means a private company incorporated under the Companies Act, 2013 and recognised as a 'start -up' in accordance with the notification issued by the Department for Promotion of Industry and Internal Trade. (June, 2017)
17. Exemption from procedural compliance (e.g. such as issue of an offer circular or creation of a deposit repayment reserve) for raising deposits from shareholders. (June, 2017)
18. In relation to a private company (if such private company is a startup), the annual return shall be signed by the Company Secretary, or where there is no Company Secretary, by the Director of the company. (June, 2017)
19. A private company (if such private company is a startup) is required to conduct at least one meeting of the Board of Directors  in each half of a calendar year and the gap between the two meetings is not less than ninety days. (June, 2017)
20. Name Reservation for Company incorporation: Rule 8, Companies (Incorporation) Rules,  2014  substituted  with  Companies  (Incorporation)  5th  Amendment  Rules, 2019,which provides for new regulations on resemblance with an existing company name, new categories of undesirable names of a company and list of words which can be used only after obtaining approval. (May, 2019)
21. Amendment  in  Companies  (Share  Capital  and  Debentures)  Rules,  2014:  The Ministry of Corporate Affairs issued a notification on 16th August, 2019 increasing the period in which ESOPs could be granted to promoters and directors (holding more  than  10%  equity)  of  Startups,  from  5  years  to  10  years  from  the  date  of incorporation and thereby aligned the provisions of the Companies (Share Capital and  Debentures)  Rules  with  the  provisions  referred  to  in  the  DPIIT  notification dated 19th Feb, 2019.

The notification also enhanced the limit on shares with Differential Voting Rights in  the  Company  from  26%  of  the  total  post-issue  paid  up  equity  capital  of  the Company to 74% of the total voting power. Further, the condition for the company to have consistent track record of distributable profits for the last three years for issue of DVR shares has been removed. (August 2019)

22. Corporate  Social  Responsibility  Funds:  In  reference  to  section  135  of  the Companies Act 2013, Schedule VII has been amended to include  Contribution to incubators funded by Central Government or State Government or any agency or Public  Sector  Undertaking  of  Central  Government  or  State  Government,  and
2. contributions to public funded Universities, Indian Institute of Technology (IITs), National Laboratories and Autonomous Bodies (established under the auspices of Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department of Atomic Energy (DAE), Defence Research and Development Organisation (DRDO), Department  of  Science  and  Technology  (DST),  Ministry  of  Electronics  and Information Technology) engaged in conducting research in science, technology, engineering  and  medicine  aimed  at  promoting  Sustainable  Development  Goals (SDGs). (October 2019).
23. As part of Government of India's Ease of Doing Business ( EODB) initiatives, the Ministry of Corporate Affairs has launched a new integrated Web Form christened 'SPICe+' replacing the existing SPICe form. SPICe+ would offer 10 services by 3 Central Govt Ministries & Departments (Ministry of Corporate Affairs, Ministry of Labour  &  Department  of  Revenue  in  the  Ministry  of  Finance)  and  One  State Government(Maharashtra), thereby saving as many procedures, time and cost for Starting  a  Business  in  India  and  would  be  applicable  for  all  new  company incorporations w.e.f.23rd February 2020. SPICe+ has two parts: Part A-for Name reservation for new companies and Part B offering a bouquet of services viz. (i) Incorporation (ii) DIN allotment (iii) Mandatory issue of PAN (iv) Mandatory issue of TAN  (v)  Mandatory  issue  of  EPFO  registration  (vi)  Mandatory  issue  of  ESIC registration (vii) Mandatory issue of Profession Tax registration(Maharashtra) (viii) Mandatory Opening of Bank Account for the Company and (ix) Allotment of GSTIN (if so applied for) (February 2020)
24. Amendment  in  Companies  (Share  Capital  and  Debentures)  Rules,  2014:  The Ministry of Corporate Affairs issued a notification on 05th June, 2020 increasing the period in which Sweat Equity shares, from 5 years to 10 years from the date of incorporation and thereby aligned the provisions of the Companies (Share Capital and  Debentures)  Rules  with  the  provisions  referred  to  in  the  DPIIT  notification dated 19th Feb, 2019. (June 2020)
25. Amendment in Companies (Acceptance of Deposits) Rules, 2014: The Ministry of Corporate Affairs issued a notification on 07th September, 2020 increasing the period of issuance of convertible note, from 5 years to 10 years from the date of issue  and  thereby  aligned  the  provisions  of  the  Companies  (Acceptance  of Deposits) Rules, 2014 with the provisions referred to in the DPIIT notification dated 19th Feb, 2019. (September 2020)
26. Amendment in Companies (Acceptance of Deposits) Rules, 2014: The Ministry of Corporate  Affairs  issued  a  notification  on  07th  September,  2020  whereby  the maximum limit in respect of deposits to be accepted from members by a private company shall not apply to a start-up company for 10 years from the date of its incorporation, instead of 5 years. (September 2020)
27. Incorporation of One Person Companies (OPCs) by allowing OPCs to grow without any restrictions on paid up capital and turnover, allowing their conversion into any other type of company at any time, reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and also allow Non-Resident Indians (NRIs) to incorporate OPCs in India. (February 2021)
28. Amendment in Insolvency and Bankruptcy Code, 2016: The Ministry of Corporate Affairs issued a notification on 30th August, 2022 harmonizing the definition of startup with the DPIIT notification dated 19th February 2019. (August 2022)

Ministry of Finance

Department of Revenue

29. In the case of a domestic company, where its total turnover or the gross receipt in the previous year does not exceed two hundred and fifty crore rupees, income tax shall be charged at the rate of 25 percent of the total income. (Feb, 2018)
30. Definition of eligible business as stated in Section 80-IAC aligned with Startups definition. (April, 2018)
31. Introduction of Section 54EE in the Income Tax Act, 1961: Exemption from tax on long-term capital gain if such long-term capital gain is invested in a fund notified by Central Government. The maximum amount that can be invested is Rs 50 lakh. (May, 2016)
32. Amendment in Section 54GB of Income Tax Act: Exemption from tax on capital gains arising out of sale of residential house or a residential plot of land if the amount of net consideration is invested in prescribed stake of equity shares of eligible Startup for utilizing the same for purchase of specified asset. (Feb, 2016)
33. Minimum  Alternate  Tax  credit  allowed  to  be  carried  forward  up  to  fifteenth assessment years instead of ten assessment years. (2017)
34. Exemption under section 80-IAC of Income Tax Act: Exemption to eligible Startup for any 3 consecutive assessment years out of 7 years (earlier 5 years) beginning from the year in which such eligible Startup is incorporated.(April, 2018)
35. Exemption from tax under the provisions of section 56(2)(viib) to Startups for issue of shares above fair market value on the basis of a self-declaration to the Central Board of Direct Taxes. The aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue should not exceed Rs. 25 Crore (Feb, 2019)
36. Taxation of  convertible  notes  -  Period  for  which  a  bond,  debenture,  debenturestock or deposit certificate was held prior to conversion shall be considered for determining  the  period  of  holding  of  such  shares  or  debentures  acquired  upon conversion. (March, 2016)
37. Amendment in Section 54GB of Income Tax Act w.e.f 1st April 2020: (August 2019)
- i. The condition of minimum holding of 50% of share capital or voting rights in the start-up relaxed to 25%
- ii. Extension  of  period  under  which  benefit  under  section  54GB  from  for  sale  of residential property can be availed up to 31st March, 2021
- iii. Condition restricting transfer of new asset being computer or computer software is to relaxed from 5 years to 3 years w.e.f. 1-4-2020
38. Amendment in Section 79 of Income Tax Act (August 2019): Eligible Startups to carry forward their losses on satisfaction of any one of the two conditions:
- i. Continuity of 51% shareholding/voting power or
- ii. Continuity of 100% of original shareholders carrying voting power
39. Pass  through  of  losses  allowed  to  Investment  Funds  i.e.  Category  I  and  II  AIF similar to pass through of income. These amendments will take effect from the 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years (August 2019)
40. The investment made by Venture Capital Fund of Category-I AIF in a startup was exempted from the applicability of the provisions of section 56(2)(viib) of the IT Act. This exemption has been extended to all sub-categories of Category-I AIF and CategoryII  AIF  via  introduction  of  'specified funds' in the said section (August 2019)
41. The Finance Act 2020 provides for amendment in section 80-IAC of the Income-tax Act relating to special provision in respect of specified business. The provisions of section 80-IAC, inter alia, provide for a deduction of an amount equal to hundred per cent. of the profits and gains derived from an eligible business by an eligible start-up  for  three  consecutive  assessment  years  out  of  ten  years  vis-à-vis  the earlier norm of seven years at the option of the assessee and the total turnover of its business does not exceed hundred crore rupees in the previous year relevant to the assessment year for which deduction under this section is claimed. This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years. (Feb 2020).
42. The Finance Act 2020 provides for amendment in section 80-IAC of the Income-tax Act relating to special provision in respect of specified business. The provisions of section 80-IAC, inter alia, provide for a deduction of an amount equal to hundred per cent. of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of ten years at the option of the assessee and the total turnover of its business does not exceed hundred crore rupees vis-à-vis the earlier norm of twenty-five crore rupees in the previous year relevant to the assessment year for which deduction under this section is claimed. This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years. (Feb 2020)
43. The Finance Act 2020 provides for amendment in sections 156, 191 and 192 of the Income Tax Act laying to enable employees receiving specified security or sweat equity share as perquisite under section 17(2)(vi) of an eligible startup referred to in section 80-IAC, to deduct or pay, as the case may be, tax on such income within fourteen days after the expiry of forty-eight months from the end of the relevant assessment year; or from the date of the sale of such specified security or sweat equity share by the assessee; or from the date of the assessee ceasing to be the employee of the person, whichever is earlier, on the basis of rates in force of the financial year in which the said specified security or sweat equity share is allotted or transferred. This amendment will take effect from 1st April, 2020. As per the
21. earlier norms, the said perquisite including ESOPs were taxed in the hands of the employee at the time of exercise of the option. (Feb 2020)
44. The Finance Bill 2021 provides for extension of the eligibility period to claim tax holiday for the startups by one more year. (Feb 2021)
45. The Finance Bill 2021 provides for extension of claiming Capital gains exemption for investment in startups by one year i.e. till 31 March, 2022. (Feb 2021)
46. The Finance Bill 2022 provides for extension of the eligibility period to claim tax holiday for the startups by one more year. (Feb 2022)
47. The Finance Bill 2022 capped the surcharge on the long term capital gain at 15% for  unlisted  companies  from  existing  37%.  The  effective  rate  of  tax  has  been reduced from 28.5% to 23.9%. (Feb 2022)
48. The Finance Bill 2023 provides for extension of the eligibility period to claim tax holiday for the startups by one more year. (Feb 2023)
49. The Finance Bill 2023 enables startups to set off and carry forward losses for a period  of  10  years  vis-a-vis  7  years  under  section  79  of  the  Income  Tax  Act 1961. (Feb 2023)
50. The Finance Bill 2023 capped the surcharge on the long term capital gain at 25% for unlisted companies from existing 37% under the new tax regime. The effective rate of tax has been reduced from 42.74% to 39.0%. (Feb 2023)

Department of Economics Affairs

51. The Ministry of Finance now allows non-government provident funds, superannuation, and gratuity funds to invest up to 5 percent of their  investible surplus in Category I and II Alternate Investment Funds (AIFs) registered with SEBI. (March 2021).

Insurance Regulatory and Development Authority

52. The Insurance Regulatory and Development Authority of India (IRDAI) has allowed insurance companies to invest in Fund-of-Funds (FoF) that invest within the country subject to certain conditions. (April 2021).

Department of Expenditure

53. Harmonization  of  Startup Definition  under  the  Manual  for  Procurement  of Consultancy and other Services with the DPIIT notification dated 19th February 2019.

Ministry of Labour and Employment

54. The Ministry of Labour and Employment now allows EPFO to invest up to 5 percent of their investible surplus in Category I and II Alternate Investment Funds (AIFs) registered with SEBI. (April 2021)

Ministry of Electronics and Information Technology

55. Removal of clause from Electronic Development Fund (EDF) operating guidelines stating that if a fund draws from Fund of Funds for Startups, then they cannot draw from EDF and vice versa. (Nov, 2018)

Ministry of Commerce and Industry, Department for Promotion of Industry and Internal Trade

56. Amendment in the definition of a Startup: An entity shall be considered as a Startup upto a period of ten years from the date of incorporation/ registration and turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees. (Feb, 2019)
57. Ministry  of  Commerce  and  Industry,  Department  for  Promotion  of  Industry  and Internal Trade vide Gazette Notification No. G.S.R. 646(E). dated 21st September 2021 amended the Patent Rules. The Patent Rules have now extended the benefits related  to  80%  reduced  fee  for  patent  filing  &  prosecution  to  Educational institutions as well. (Sept 2021).