Consequent to the various representations made by several committees such as Bankruptcy Law Reforms Committee, the high-level committee on corporate social responsibility, Law Commission of India, industry experts, etc., over a period of several quarters regarding implementation challenges under the Companies Act, 2013 and for facilitating ease of doing business for companies, including start-ups, the government took several initiatives to pave the way for smooth functioning of business. To address the challenges and promote ease of doing business, the Companies Bill, 2016 was framed which received Presidential assent on 3rd January 2018. The amended act eases several implementation challenges and contains clarificatory amendments.
Further, in a bid to promote and empower startups, the Government of India introduced an action plan under the ‘Start-up India’ initiative in the year 2016. As a result of the aforesaid, numerous amendments were carried out under the Companies Act and various other laws for startups and the same is dealt here under.
The amendment in Companies Acceptance of Deposits Rules, 2014, has given startups leverage to raise up to hundred percent funds from outside India in the form of convertible notes. Ā Such convertible notes should have a minimum investment size of INR25 lakh and are required either to be converted into equity or repaid within five years. Ā If the conditions are satisfied, then convertible notes shall not be treated as ‘deposit’ and various compliances, which were required otherwise, shall not be required to be complied with. Further, a startup private company for the first five years since incorporation is permitted to accept deposits from its members, in excess of limit prescribed under the Act, intended for companies other than startup. Ā
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In order to reward employees of startups with sweat equity shares, the rules under the 2013 Act were amended so as to enable startups to issue sweat equity shares up to 50 per cent of paid up share capital up to five years from the date of incorporation. Also, promoters of startups working as employees or employee directors or as a whole-time director are eligible for Employee Stock Options Plan (ESOP) which is not possible in case of companies other than startups. Ā
In order to ease the compliance burden, startups are exempted from the requirement of preparing cash flow statements and either a company secretary or director could be signatory to the annual return, unlike other companies where both are required to sign the return. Additionally, startup companies are required to have a board meeting once in six months unlike quarterly meeting as applicable to other companies.
The amended Act enables holding of an annual general meeting of an unlisted company at any place in India where consent in writing or by electronic mode is granted by all the members in advance. Further it Ā permits holding of extraordinary general meetings of wholly owned subsidiaries incorporated outside India, at a place outside India. This will not only provide operational flexibility but also avoid companies from unnecessary imposition of penalty, etc.
Furthermore, simplification in private placement procedure for various compliances such as preparation of offer letter, time period for allotment of securities, size of minimum investment and making a fresh offer etc. is expected to make the process less cumbersome and less time consuming. Ā
The regulatory changes carried out by the government are aimed at reducing the compliance burden and costs and granting flexibility in operations to young entrepreneurs and technocrats who are experts in their respective fields but may not be well conversant with the applicable regulatory requirements. The initiatives taken by the government will provide impetus to work in a more relaxed environment, which will encourage entrepreneurship, which will ultimately boost our economy. Ā Moreover, Budget being around the corner, it is expected that government will introduce more tax reforms for start-ups, such as lower corporate tax rate for start-up for initial period or extension of tax holiday from 3 years to say 5 years in the initial 7 years of incorporation based on various representations made by Department of Industrial Policy and Promotion, start-ups etc.
With inputs from Amrita Bhatnagar, Assistant Manager, Tax Deal Advisory, KPMG in India
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