Start-ups in India are predicted to become the soul of India’s corporate sector in the near future. This can be mainly credited to the risks that entrepreneurs take getting into this ecosystem. For successful implementation of the startup process, it is important to understand the legal scenario around startup investment in India. For start-ups in India, it is an era of innovation and rapid transformative change. Today, India’s the third largest start-up ecosystem globally. The reason India’s start-up scene has developed at such a fast rate and has been incredibly rewarding to entrepreneurs can be credited to an amalgamation of factors, including smartphone and internet penetration, cloud computing, application programming interfaces (APIs), and a national payments stack in place. Amid the covid-19 pandemic, India has witnessed more unicorn start-ups in just 2021 than it did in 2011-2020. In this article, read about the legal scenario around start-up Investment In India.
The start-up ecosystem in India has seen a landmark change over the last decade as India’s business landscape has become more conducive to entrepreneurship and, in turn, beneficial to entrepreneurs. This has fostered a vibrant start-up scene in the country, buzzing with new technologies and innovation, creating employment, and celebrating entrepreneurship.
As they are fledgling companies with a limited amount of capital and experience, the government has taken several steps to simplify the whole procedure for start-ups to evolve, from easier IPR facilitation, a favorable taxation system, and easier compliance for the setting-up company. The Indian government is on a mission to build a robust start-up ecosystem to understand the legal scenario around start-up investment in India and rewarding entrepreneurs for the risks they take, which is commendable. The government has undertaken several initiatives and introduced many schemes to promote and support entrepreneurs. Despite all this, start-ups need to keep in mind to follow laws and regulations that dictate how to invest in start-ups in India. Failure to comply with these laws may land start-ups in serious trouble like fines, punishments, revocation of licenses, litigation expenses, etc., which may lead to causing an adverse effect on the limited capital of the start-ups.
As such, there are plenty of legal and ethical issues that start-ups need to consider before beginning their entrepreneurship journey.
Common legal and ethical issues start-ups need to keep in mind
1. Requirement of licenses, permits, and permissions
The start-ups may require various licenses, permissions, or permits to execute their ideas. Due to a lack of legal knowledge of the legal scenario around startup investment in India, the start-up may end up paying penalties and may even be unethical or illegal. Knowing the applicable licenses for your start-up and obtaining them is always the best way to start a business. The lack of relevant licenses can lead to costly lawsuits and unwanted legal battles. Business licenses are the legal documents that allow a business to operate, while business registration is the official process of listing a company. They should also be aware of the local rules and regulations.
Some of the licenses required by the companies are registration certificates, GST registration, FSSAI license, import and export code, Udyog Aadhar registration, etc.
They should also be aware that dealing goods like alcohol, guns, etc, without licenses, will lead to criminal charges.
For GST registration the businesses whose turnover is equal to or more than 40 Lakhs should get themselves registered
2. Benefits related to registering your start-up
The benefit of obtaining registrations is not limited solely to protection from legal hindrances but it also benefits entrepreneurs and the start-up by availing various government schemes like MSME registration which can help the start-ups to get subsidies in loans, taxation, and other schemes.
A start-up should register itself under the start-up India registration scheme. According to this Startup India initiative, a start-up can avail of income tax exemption for a period of 3 years as well as tax exemptions from capital gains and investments above Fair Market Value, fulfilling some conditions.
The conditions are that the start-up must not be more than 7 years old from the date it started. It Is incorporated as a Registered Partnership, Limited Liability Company, or Private Limited Company. Turnover in any year should not have exceeded 25 crores. The start-up should not have been formed by splitting or reconstructing an existing business.
As far as business accounting is concerned, it is good to maintain proper books of accounts and audit them in a timely fashion in order to ensure that relevant accounting and taxation rules are adhered to. Ignoring or being lax about this can lead to serious accounting mishaps which may affect the finances of the start-up in the long run.
3. Legality around advertisements
Advertising false claims, obscene, scandalous, or seditious advertisements may give rise to serious criminal penalties and it may chip away the good reputation of a company.
4. Laws regarding the usage of land
The start-ups should be aware of local laws regarding the commercial use of agricultural land/ school/ hospital property. In India land comes under the domain of the state government.
If a person is planning to operate a business from his residence they may be required to take necessary permissions from the local municipal authority, town planning authority or landlord.
When a residential property is being used for a commercial purpose the property tax also changes.
Start-ups should not access the private details of the users without their permission or they should not ask for permissions that are not needed by their website or application. The start-ups should give importance to the privacy of the users.
- Protecting their intellectual rights
Start-ups should protect their intellectual rights through the usage of Patents, NDA’s, copyrights, etc. whichever is relevant to their idea.
6. Strict liability
The Startups should take care that they should be careful in handling and in managing raw materials, noise, fire, vibrations, smell, etc. or they may face Strict Liability.
7. Adhering and following labor laws
It is an integral part of every company and every company is subject to labor laws regardless of the size of the company. Laws with regards to minimum wages, gratuity, PF payment, weekly holidays, maternity benefits, sexual harassment, and payment of bonuses among others will need to be complied with.
With regards to labor laws, start-ups registered under the Startup India initiative can complete a self-declaration (for nine labor laws) within one year from the date of incorporation in order to get an exemption from labor inspection.
8. Clear Founders Agreement and details about the closure
Founders will need to incorporate the business as a specific business type – sole proprietorship, private limited, public limited, partnership, limited liability partnership, etc.
Each business type comes with its own set of legal requirements and regulations. Having a clear Founders Agreement with all basic details clearly laid out forms a solid foundation to start and scale a business. A Founder’s Agreement is essentially a document that specifies important details about the founding team and the business, such as roles, responsibilities, executive compensation, operational details, and exit clauses among others.
Another important question that start-up founders should be asking themselves is if they are looking to raise external funds or bootstrap their business.
Details about shutting down of the start-up (fast tract exit/voluntary closure/court or tribunal route) should also be planned well ahead of time.
As an investor, it is essential to make investment decisions by understanding the nuances of the business and legal scenario around start-up Investment In India. As you’re investing in and not indulge in rapid investment decisions and take unnecessary risks with no rewards in sight without considering future financial goals. It is difficult to manage investment decisions in a volatile market, but there are certain financial ratios you can keep in mind before making any decisions. Investing securely in start-ups will be very beneficial for investors.
Key financial ratios you must look at before making investments
Ratio analysis is crucial for investment decisions. It not only helps in knowing how the company has been performing but also makes it easy for investors to compare companies in the same industry and zero in on the best investment option and is a beneficial method for investors to count their rewards.
- The price-to-earnings, or P/E, the ratio shows how much stock investors are paying for each rupee of earnings. It shows if the market is overvalued or undervalued by the company. It should be compared with the company’s history and with the market.
- The price-to-book value (P/BV) ratio is used to compare a company’s market price to its book value. Book value, in simple terms, is the amount that will remain if the company liquidates its assets and repays all its liabilities.
- Debt to Equity ratio It shows how much a company is leveraged, that is, how much debt is involved in the business. A low figure is usually considered better.
- Operating Profit Margin The OPM shows operational efficiency and pricing power.
- The asset Turnover Ratio shows how efficiently the management is using assets to generate revenue. The higher the ratio, the better it is, as it indicates that the company is generating more revenue per rupee spent on the asset. This comparison should be made between companies in the same industry. While financial ratio analysis is helpful in assessing factors such as profitability, efficiency, and risk, other factors such as management quality and industry outlook should also be keenly looked at before making investment decisions. Investing in start-ups is the way forward, and risk-taking by investors should not be dampened. Whether the insights and wagers of investors work out for the better or not, it is still crucial that they invest in helping rewire India’s economy for faster expansion in the years ahead. Besides promoting local funding, the government and corporate entities may need to invest in big ways so as to lower the risk start-up investments have in the long run.
It is important to note that the money generated through start-up ventures will be used to hire people, build infrastructure, stimulate technology innovations, spur demand, build brands, etc. – all of which will result in a significant economic growth multiplier for the economy. As the start-up avenue matures in the country, there will be an increased focus on sustainable growth. For consistent growth, it is essential to understand the legal scenario around start-up Investment In India. The opportunity is huge and the stage is set for entrepreneurs to benefit from the current ecosystem by continuing to innovate and build businesses that can deliver positive cash flows. If this is successfully achieved then there is no end in sight for the Indian start-up world.