Re-Startup India

Introduction 

Start-ups are crucial for innovation, economic growth, and job creation globally. India’s start-up ecosystem has seen exponential growth, ranking as the 3rd largest globally. As of 2024, it hosts over 1,57,000 registered startups, many of which are technology-based. Cities like Bangalore, Mumbai, and the National Capital Region (NCR) are leading hubs. In 2023, startups contributed approximately INR 11.62 lakh crores to the Indian economy, projected to reach INR 83 lakh crores by 2030. However, there exists a palpable gap between the regulatory framework and business reality for Indian start-ups. 

In terms of legal definitions and regulatory contours, the Department for Promotion of Industry and Internal Trade (DPIIT) defines a “start-up” as an entity incorporated in India on or after April 1, 2016, with a turnover not exceeding INR 100 crore, involved in innovation, product/service development, or having a scalable business model with potential for employment or wealth generation. While not expressly defined in law, a “technology start-up” is understood to specifically leverage technology to create new products, services, or business models across diverse sectors like fintech, healthtech, and AI (“Tech Start-up”).

Within these contours, Indian start-ups interact with numerous governmental and regulatory bodies, including the Ministry of Corporate Affairs (MCA), Reserve Bank of India (RBI), Income Tax Department, Securities and Exchange Board of India (SEBI), DPIIT, and others. Navigating distinct statutory requirements, regulatory compliances, and ancillary procedural frameworks is often challenging. Early-stage startups, with limited founder resources, struggle to devote significant time and energy to legal and regulatory compliance, which is often time and cost-intensive. This complexity can either detract from core business activities or lead founders to risk non-compliance, sometimes causing them to consider incorporating in other, more business-friendly jurisdictions. 

The Government of India has introduced initiatives like the Atal Innovation Mission (AIM) and the Start-up India Scheme to promote innovation and ease operational hurdles, offering benefits like tax exemptions, easier compliance, and IP registration rebates. However, despite these well-intentioned schemes, their efficacy may often be limited by operational and procedural challenges, restrictive eligibility criteria, and a significant gap between policy design and real-world implementation. Recent legal and policy reforms, such as simplifying merger approvals for foreign-incorporated startups, removing angel tax provisions, harmonising capital gains tax, and extending tax holidays, reflect a commitment to a start-up – friendly environment. 

A report published by the Vidhi Centre for Legal Policy, ‘Re-Startup India’ (“Report”), highlights the need for continuous refinement of these regulatory frameworks to address nuanced, systemic, and practical challenges faced by Tech Start-ups in India. Specifically, the Report outlines the significant legal and regulatory hurdles that Tech Start-ups face in India and proposes a series of targeted recommendations to foster a more supportive business environment. The core issues range across the business lifecycle of a Tech Start-up, touching upon incorporation, funding, corporate governance, taxation, and licensing bottlenecks. 

Challenges in the current legal and regulatory framework

• Mandate of physical offices for Tech Start-ups: The mandatory requirement for a physical registered office under the Companies Act, 2013 creates a significant financial burden for “digital-first” start-ups that operate remotely.
  
• Convoluted GST requirements: Operating across states within an integrated economic zone like Delhi-NCR requires multiple GST registrations, leading to massive compliance overheads. Furthermore, inconsistent and arbitrary demands from GST officers during visits create business uncertainty and operational hiccups.
  
• Limited diversity in funding instruments and high-cost of private fundraising: Popular fundraising instruments like SAFE notes lack clear legal recognition in India, creating ambiguity for founders and funders operating through regulated banking channels. Further, compliance with the rules for private placements made under the Companies Act, 2013 can be overly complex, rigid, and costly for early-stage start-ups.
  
• Unclear norms for board meetings: There is ambiguity regarding the static board meeting requirements for start-ups in their first year of operations, as the eligibility for relaxed meeting requirements is tied to financial filings with floating timelines.
  
• Inaccessible DPIIT Support: The Start-up India portal is often user-unfriendly, and accessing tax benefits is difficult due to the subjective interpretation of “innovation” by officials, leading to arbitrary rejections.
  
• Delays in intellectual property registration: The process for registering trademarks and patents is mired by chronic delays, procedural inefficiencies, and a severe shortage of staff.
  
• Gender obstacles: Outdated provisions, such as provisions under the Factories Act, 1948 prohibiting women from working night shifts in certain sectors limit cross-employment opportunities. Women entrepreneurs also face systemic or subtle biases that hinder their access to funding and institutional support.
  
• Lack of awareness for founders: Many boot-strapped founders lack fundamental legal and regulatory knowledge, leading to costly compliance errors and non-compliance risks down the line.

Key recommendations

• Permit temporary ‘opt-outs’ from physical offices, and mandate business reporting: Allow a temporary ‘opt-out’ from the physical office rule for 2-3 years, with start-ups submitting a “Quarterly Business Activity Report” as proof of operations.
  
• Enhance uniformity in GST documentation and issue non-binding guidance to Tech Start-ups: Standardize document requirements for GST registration, establish a non-binding guidance mechanism for Tech Start-ups, and implement firm timelines for appeals. Regular training for GST officers is also recommended.
  
• Recognise the legality of SAFE notes and relax private placement compliances for early-stage funding rounds: Grant explicit legal recognition to SAFE notes and create a ‘de minimis‘ exemption from complex private placement rules for early-stage funding rounds.
  
• Issue clarifications on board meeting norms for Tech Start-ups: The Ministry of Corporate Affairs (MCA) should issue a clarification confirming that start-ups in their first year of operations are automatically eligible for relaxed board meeting norms.
  
• Enhance DPIIT Support: Improve the user experience of the Start-up India portal with multilingual support and real-time assistance. Amend the Income Tax Act, 1961 to include objective, verifiable criteria for tax exemptions, removing subjectivity and ambiguity surrounding issuance of exemptions.
  
• Digitise and automate intellectual property registrations: Implement end-to-end digital processing and automation for IPR applications, immediately fill vacant examiner positions, and strictly enforce statutory deadlines.
  
• Support work flexibility for women and incentivise vouching for female founders: Expedite the implementation of the new Occupational Safety, Health and Working Conditions (OSH) Code to allow women to work night shifts, subject to safeguards. Additionally, mandate gender-sensitization training for officials and launch programs to incentivize investment in women-led startups.
  
• Build an informational toolkit for improving founder awareness: Develop simplified legal education modules and standardized, founder-friendly legal templates to be distributed through the Start-up India Portal, for use at the founders option.

The Report also emphasizes the urgent need for a robust regulatory framework for emerging technologies like AI and blockchain to provide legal clarity and encourage innovation within India.

About the Authors

Varsha Banta (Senior Resident Fellow)

Varsha is a lawyer, and Senior Resident Fellow (Corporate Law and Financial Regulation) at Vidhi, New Delhi. She works on engaged/commissioned projects from various ministries, statutory authorities, regulators, and other public institutions where she provides legal research and drafting support across various stages of law-making. Varsha's focus areas include financial laws, commercial laws, and other regulatory & economic laws. Her academic and research interests include economics, company law, cross-border M&A and investment law, technology law, green & sustainable finance, and comparative insolvency regulation. Prior to joining Vidhi, she worked with the general corporate and M&A practices at JSA and AZB & Partners, where she advised & assisted on matters relating to business restructuring, corporate governance, private and Section 8 company setups/operations, privacy regulation, intellectual property, securities and financial regulation and white-collar crimes. Varsha writes on a range of commercial and financial law subjects, including non-performing assets, green & sustainable finance, virtual currencies, and pooled investments. Varsha graduated from the Jindal Global Law School, India (JGLS) in 2020 with a BA., L.L.B (Hons.), with distinction. She is qualified to practice by the Bar Council of Delhi and the Bar Council of India.

Vasundhara Sharan (Research Fellow)

Vasundhara is a Research Fellow with the Corporate Law and Financial Regulation team at the Vidhi Centre for Legal Policy. She graduated in 2023 with a BBA LL.B. (Hons.) from Symbiosis Law School, Noida. At Vidhi, she primarily works on engaged projects with various government ministries.

Shivani Mody (Research Fellow)

Shivani Mody is a Research Fellow with the Law, Finance, and Development team. Prior to joining Vidhi, she worked as a Law Researcher under Hon'ble Mr. Justice Prateek Jalan at the Delhi High Court where she focused on cases involving arbitration law as well as statutory writs. She graduated from Jindal Global Law School with a B.A. LL.B. in 2023. As a law student, she gained experience interning with various research and advocacy organizations, such as Vidhi, the Alternative Law Forum, and the Centre for Justice, Law and Society, where she examined how legal frameworks shape and influence societal issues.

Shreya Garg (Alumni)

Shreya was a Senior Resident Fellow, and lead the work at the intersection of law, finance and development at Vidhi. She focused on independent research work relating to financial inclusion, tech and corporate governance. She has worked on several engaged projects with the International Financial Services Centres Authority, Ministry of Corporate Affairs and the Insolvency and Bankruptcy Board of India. Shreya completed her LLB from National Law University, Jodhpur in 2012 and LLM from Queen Mary, London on a Chevening scholarship in 2019. She also worked with the European Bank for Reconstruction and Development, London in 2019. Prior to joining Vidhi in 2014, she worked as an Associate at Luthra & Luthra Law Offices, New Delhi.