India: A Legal Business Guide For Startups

CHAPTER 1: WHAT FORM SHOULD YOUR STARTUP VENTURE HAVE?

I. Formation of a Company in India

The law of companies in India is governed by the Indian Companies Act, 2013 ("companies act") which is a comprehensive legislation, in relation to the erstwhile Companies Act, 1956, and provides for provisions relating to all phases of a company's life, i.e. incorporation, management, mergers, winding up.

A Registrar of Companies ("RoC") is appointed under the act for designated regions, who is the nodal authority for affairs related to companies in that particular region.

II. Types of Companies in India

Any person can choose to incorporate either a company with unlimited liability or one with liability limited either by shares or guarantee. An incorporated company may take one of the following three forms:

II.1. Private Company

With restrictions on transfer of shares, and limited number of members a private limited company enjoys greater flexibility, less legal formalities, and the small shareholders body facilitates prompt decisions. A private company must have a minimum of two directors. A private company may be converted into a public company for raising capital from the public, if need arises, by completing certain legal formalities as specified in the companies act.

II.2. Public Company

Public companies are subject to stricter legal formalities. However, the free transferability of the shares of a public company and unlimited membership provides a larger base for raising of capital. Shares of a listed public company can be traded on stock exchange, which may open it to the scrutiny and watch of Securities and Exchange Board of India. A public company must have a minimum of seven members and three directors, Public limited companies must have at least one third of the total number of directors as independent directors out of which one director has to be a woman.

Minimum authorized and paid up share capital requirement of a private and public company: The criteria of having minimum paid up share capital for both private public company, as stated in the erstwhile Companies Act, 1956, has been omitted in the revised companies act. This is a significant advantage to start-ups with respect to the requirement of maintaining minimum share capital under the Companies Act since inception.

II.3. One Person Company

This concept has been brought by the new companies act and states that one person company is in the nature of a private company which has only one person as its member/director

At the time of incorporation, the memorandum of association must name a nominee for the sole member of an OPC. The minimum number of directors for an OPC is also one, OPC provides the option of limited personal liability of proprietors (as opposed to unlimited liability in sole proprietorship).

Businesses which currently run under the proprietorship model could get converted into OPC's without any difficulty. The questions of consensus or majority opinions do not arise in case of OPCs, and is suitable for small entrepreneurs with low risk taking capacity.

III. Charter documents of a Company

III.1 Memorandum of Association

The MoA sets out the objects for which the company is proposed to be incorporated in the manner provided hereunder

  1. The first and foremost clause in MoA shall be the name of the proposed company suffixed with the words limited or private limited, as the case may be;
  2. The state where the registered office of the company shall be situated.
  3. The third clause contains the main objects for which the company is going to be formed/incorporated.

The MoA binds the area of operation of the company in respect to the objects mentioned therein and any decision or actions taken in contravention of the MoA shall be void. A company cannot run any business contrary to the main objects mentioned in their MoA.

The MoA and AoA of a company can be modified post incorporation in accordance with the applicable provisions of the Companies Act.

III.2. Articles of Association

The articles of a company contains regulations for the management of the company. This document is confined to the applicability of the provisions of the companies act, on private or public limited company, as the case may be.

IV. Legal formalities for incorporation of a company:

IV.1. Pre-incorporation formalities:

The below mentioned compliances are required to be carried out with regard to setting up of company in India:-

  1. Obtaining of Director's Identification Number ("DIN") and Digital Signature Certificates ("DSC") for the proposed directors of the company by preparing and filing of all the relevant forms and documents as required under the provisions of the companies act.
  2. Once the DIN and DSC are ready, the next step is filing of online application for the approval of name of the company, provided the name is not matching or similar with any other existing company.
  3. On approval of name by the registrar of companies, the drafting of the charter documents of the company needs to be carried out i.e. memorandum (MoU) and articles of association (AoA), which are the basic documents for any company.

Thereafter all the incorporation forms, shall be prepared and filed with the RoC for registration of company for the final step of the incorporation process and obtaining a certificate of incorporation of the company.

IV.2. Post incorporation formalities:

Once the certificate of incorporation has been issued by RoC, the company becomes a separate legal entity in the eyes of laws in India, and requires certain basic registrations to initiate the business which includes filing of application for obtaining a permanent account number and tax deduction account number on the name of the company and any other business specific registrations from the relevant government authorities i.e. Import –Export Code Number in case of company carrying out the business of import and/or export.

Further, every company shall be required to carry out certain compliances, as required under the provisions of the companies act, for their day to day activities which includes holding of first board meeting immediately after incorporation, carrying out the annual general meetings every year, maintaining all the secretarial records at the registered office of the company, maintaining of statutory registers, minutes books etc. of company in compliance with the companies act.

CHAPTER 2: FINANCING OPTIONS AVAILABLE FOR STARTUP COMPANIES

Finance is the life blood of any business. In case the venture is self-funded there can be no better option than that. However, a Startup is mostly the result of a novel idea that is the brainchild of its founder(s) and often than not funds are always a challenge.

For a first time business man the world of funding seems complex and challenging. Financing is generally of two types i.e. (a) equity financing; or (b) debt-financing;

A. Equity Financing

Startups are usually equity financed/funded by way of angel investors and/or venture capital/ private equity investors.

  1. Venture Capitalist/Private Equity

    Venture capital ("VC") / Private Equity ("PE") is often the first large investment a startup can expect to receive. Convertible instruments are usually the preferred option and most commonly used securities for VC/PE investment which includes compulsory convertible preference shares and compulsory convertible debentures. The investor and startup will normally enter into a non-binding offer based on the preliminary valuation of the startup usually followed with a financial, legal and technical due diligence on the startup as required by the investors. Upon completion of due-diligence to the satisfaction of investor such investments involve execution of essentially following transaction documents between the investors and startups:

    1. Term Sheet / Letter of Intent /Memorandum of understanding; Set out the following:

      • basic commercial understanding between the VC and the startup; and
      • legal terms for the agreements to follow the due-diligence;
    2. Share Subscription Agreement/ Debenture Subscription Agreement; Usually captures the followings:

      • the issuance of shares in the share capital or debentures at subscription amount determined based on the valuation of the startup;
      • condition precedents to completion of transaction or conditions subsequent to be completed within the agreed time frame after the completion date;
      • sets of representation and warranties and indemnification resulting from due-diligence exercise or otherwise, etc.
    3. Shareholders' Agreement; Usually provides for the following:

      • Nomination/representation rights on the board of investee;
      • Information and reporting right and disclosure obligation of investee to the investors;
      • Redemption rights on debenture or preference shares;
      • Pre-emption rights, Right of First Refusal or Right of First Offer, Tag Along Right, Drag Along Rights, Lock-in-period for the investor or promoter's holding, put and call options, affirmative vote rights on certain reserved matters, anti-dilution provisions;
      • Exit options to investors after the lock-in-period; etc.
    Due-diligence will help the investors to finalize the representation and warranties and also to identify conditions precedents to the completion of investments and conditions subsequent in the aforesaid transaction documents.
  2. Angel Investors

    Angel investors are usually individuals or a group of industry professionals who are willing to fund your venture in return for an equity stake. Under the SEBI (Alternative Investment Funds) Regulations, 2012 which was subsequently amended in 2013, SEBI has made the following restrictions applicable to angel funds investing in an Indian company:

    1. An investee company has to be within 3 years of its incorporation, not listed on the floor of a stock exchange, and should have a turnover of less than INR 250 million and not be promoted by or related to an industrial group (with group turnover exceeding INR 3 billion).
    2. The deal size is required to be between INR 5 million and INR 50 million. Separately, it is required that an investment shall be held for a period of at least 3 years.

B. Debt Financing

  1. Loan from Banks & NBFCs

    Loans from banks and NBFCs help finance the purchase of inventory and equipment, besides securing operating capital and funds for expansion. More importantly, unlike a VC or angels, which have an equity stake, banks do not seek ownership in your venture. However, there are several drawbacks of such funding option. Not only do you pay interest on loan but it also has to be done on time irrespective of how your business is faring. They require substantial collateral and a good track record, besides the fulfilment of other terms and conditions and a lot of documentation as follows:

    1. Application for loan sanction by borrowers;
    2. Issue of sanction letter by the Bank;
    3. Agreement of Loan;
    4. Security/collateral documentation, such as (i) Deed of Mortgage; (ii) Deed of Hypothecation; (iii) Deed of guarantee; (iv) Share pledge agreement; (v) Memorandum of Entry; etc.
  2. External Commercial Borrowings

    External Commercial Borrowings (ECB) in form of bank loans, buyers' credit, suppliers' credit, securitized instruments (e.g. non-convertible, optionally convertible or partially convertible preference shares, floating rate notes and fixed rate bonds) can also be availed from non-resident lenders to fund the business requirement of a company. ECB can be accessed under two routes, viz., (i) Automatic Route; and (ii) Approval Route depending upon the category of eligible borrower and recognized lender, amount of ECB availed, average maturity period and other applicable factor.

    ECB raised has also certain end use restrictions such as that it cannot be used for (a) on lending or investment in capital market; (b) acquiring a company in India; (c) real estate sector etc. Under ECB also the borrower needs to create certain charge on immovable assets, movable assets, financial securities and issue of corporate and / or personal guarantees in favour of overseas lender / security trustee, to secure the ECB raised by the borrower, subject to compliance of certain conditions as prescribed under ECB guidelines framed by Reserve Bank of India. The documentation on similar lines as mentioned under bank loan section above will need to be executed.
  3. CGTMSE Loans

    Under the Credit Guarantee Trust for Micro and Small Enterprises scheme launched by Ministry of Micro, Small & Medium Enterprises (MSME), Government of India to encourage entrepreneurs, one can get loans of up to 1 crore without collateral or surety. Any new and existing micro and small enterprise can take the loan under the scheme from all scheduled commercial banks and specified Regional Rural Banks, NSIC, NEDFi, and SIDBI, which have signed an agreement with the Credit Guarantee Trust.

C. Once the startups achieve stable operations and revenue flows, it may consider the following option to raise the funds or increase the magnitude of the business operations:

  1. Initial Public Offering

    During the IPO, the Company raises funds by offering and issuing equity shares to the public. An IPO allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The existing shareholding will get diluted as a proportion of the company's shares. However, existing capital investment will make the existing shareholdings more valuable in absolute terms. Companies can also issue of American Depository Receipts ("ADRs") or Global Depository Receipts ("GDRs") to raise funds from international stock investors. The promoter has certain obligations such as (a) meeting minimum contribution requirements; and (b) is generally subject to a 3 year lock-in once the IPO is concluded.

    Various parties such as investment bankers, underwriters and lawyers need to be engaged as part of procedure of IPO.

D. Unconventional modes of financing options which are now becoming popular in india:

  1. Crowd Funding

    This is recent phenomena being practiced for getting seed funding through small amounts collected from a large number of people (crowd), usually through the Internet. Now we have companies existing in India which are specializing in "Crowd Funding".

    The entrepreneur can get money for his venture by showcasing his idea before a large group of people and trying to convince people of its utility and success.

    Wishberry.in and Catapooolt are a few among many such forums operating / present in India. The entrepreneur needs to put up on a portal his profile and presentation, which should include the business idea, its impact, and the rewards and returns for investors. It should be supported by suitable images and videos of the project.

    SEBI in 2014, even rolled out a 'Consultation Paper on Crowdfunding in India' proposing a framework in the form of Crowdfunding to allow startups and SMEs to raise early stage capital in relatively small sums from a broad investor base. The Consultation Paper defined Crowdfunding as solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause. However SEBI till now has not issued any further regulations in this regard.
  2. Incubators

    These set-ups precede the seed funding stage and help the entrepreneur develop a business idea or make a prototype by providing resources and services in exchange for an equity stake ranging from 2-10%. Incubators offer office space, administrative support, legal compliances, management training, mentoring and access to industry experts as well as to funding through angel investors or VCs.

    These are usually government-supported institutes like the IIMs or IITs, technical institutes or private business incubators run by industry veterans or companies. The incubation period can be 2-3 years and admission is rigorous. Some of the top options in India include IIM-Bangalore NSRCEL, Microsoft Accelerator and IIT-Kanpur SIIC and the famous Sriram College of Commerce (SRCC).

CHAPTER 3: DO YOU NEED TO HAVE AGREEMENTS, WITH CO-FOUNDERS / EMPLOYEES / CONSULTANTS ETC.?

Now that you have finally decided to put your idea to test by setting up your startup entity an important aspect which often remains unattended is putting in place formal Agreements.

Questions which often come to mind:

  • Do we need formal written Agreements?
  • If yes then what Agreements do we actually require?
  • What should these Agreement provide for?

The simple answer to the above questions is that even though you can still operate and manage your startup without any formal written Agreements, but there is always a risk in the long run, especially when differences arise between the founders with regards to running the business or any other account and at that point of time one always regrets not having executed written Agreements clearly spelling out the terms and conditions that we wish to put in place.

For your understanding in this section, we set out brief information about elementary Agreements which must be entered into between the concerned parties.

1. Joint Venture Agreements/ Agreement with Co-Founders

It could be quite possible that your start-up has been founded along with your friends or family members, if not a sole proprietorship. Mutual trust is one aspect, but when it comes to business, it is sensible that one must carefully draw basic understanding between themselves in order to operate and manage the business. These agreements should define roles and responsibilities of all stakeholders, capital contribution, governance, profit sharing, additional funding, mode and manner to settle disputes, exit clauses etc.

In case, a start-up decide to operate through a partnership, one must meticulously draft a partnership deed with an endeavor to encapsulate all situations beginning from the establishment up to the dissolution of the partnership.

Following are the important clauses which are generally provided for in joint venture agreement:

The Agreement constituting JV generally covers the below clauses:-

  1. Name/type of the entity;
  2. Mechanism for initial funding: share capital/ debt;
  3. Drafting of charter documents (i.e. memorandum and articles of association, or amendments thereto);
  4. Management of the entity: composition of board of directors, decision making at the board and shareholder level meetings;
  5. Additional funding requirements;
  6. Anti-dilution provisions, Transfer of shares/interest;
  7. Pre-emptive rights;
  8. Positive and negative covenants;
  9. Manner of preparing accounts and audit;
  10. Manner for dealing with Intellectual Property Rights
  11. Sharing of profits/ dividends;
  12. Confidentiality;
  13. Termination and Exit mechanism;
  14. Arbitration and dispute resolution;
  15. Non-compete and non-solicitation;
  16. Governing law.

2. Agreements with Employees

It is a standard practice with Indian entities to either issue letter of employment or execute employment agreement with their employees at the time of their engagement.

Such letter/agreement outline terms and conditions of employment of the concerned employee and his key performance areas. It is quite often seen that entities use standard form employment letters/ agreement irrespective of the nature of work and the position at which an employee is inducted, this often results in ambiguity and vagueness especially at the time when the employee is to be removed or a dispute arises with the employee. This should be avoided. One may have an agreed template with certain standard conditions which will remain sacrosanct for every letter of employment/ agreements, however, while drafting and negotiating terms of employment with the prospective candidate , a careful thought must again be given to each and every term and condition and the same must be captured with modifications to suit the particular requirement.

Following are the important clauses which are generally provided for in a letter of employment/ employment agreement:

  1. Formal clause for offer of employment and acceptance of the terms of offer by the employee;
  2. Scope of services, duties and responsibilities;
  3. Remuneration;
  4. Incentives, bonuses and other perquisites, allowances etc. if any;
  5. Place of work and working hours;
  6. Leave and holidays;
  7. Manner of dealing with proprietary and confidential information and data protection (this is quite critical in the startup possess critical intellectual and proprietary information);
  8. Non-compete and non-solicitation;
  9. Term of employment and termination provisions including age of retirement;
  10. Process of settlement of disputes; and
  11. Governing law

Many organizations, also get a separate non-disclosure/confidentiality agreement signed from its employees. Please refer to next paragraph for more details on non-disclosure and confidentiality agreements.

3. Non-Disclosure/ Confidentiality Agreements

Generally, referred to as NDA (non-disclosure agreement) in legal parlance. This is an agreement through which a party who is disclosing any confidential information, which may be about its business strategy, financial projections, technical knowhow, trade secrets, details of clients, business ideas, pricing methodologies etc., tends to place strict conditions on the recipient of such information from any disclosure of the same to any third party.

Following are the important clauses which are generally provided for in NDA's:

  1. Definition of 'Confidential Information'. One need to carefully analyse such information and put under this definition;
  2. Terms and conditions of use of Confidential Information;
  3. Surrender of Confidential Information after termination of relationship, may be that of employer and employee or employer and independent contractor;
  4. Survival of conditions for confidentiality even after expire of the term of NDA;
  5. Conditions of care and diligence while handling Confidential Information;
  6. Permissible disclosures;
  7. Dispute resolution; and
  8. Governing law.

4. Consultant Agreements

Very often consultant are engaged by companies. In this case too it is advisable to have a 'Consultancy Agreement'; there is material difference between a letter of employment and a Consultancy Agreement. Consultant Agreements are generally entered into when any entity intends to engage any person or party for limited period or for a particular assignment and not as a regular employee.

There is no employer-employee relationship in this case and the consultant is not typically entitled to the benefits enjoyed by the employees, unless it is specifically mentioned and agreed upon in the agreement. Independent consultant agreements are quite prevalent in the industry and is extensively used.

Following are the important clauses which are generally provided for in consultant's agreement:

  1. Formal clause for offer and acceptance of the terms of engagement;
  2. Scope of work, duties and responsibilities;
  3. Fee- be fixed fee or lumpsum or a combination of both;
  4. Incentives;
  5. Place of work;
  6. Provision of off-days;
  7. Manner of dealing with proprietary and confidential information and data protection;
  8. Non-compete and non-solicitation;
  9. Term of engagement and termination provisions;
  10. Process of settlement of disputes; and
  11. Governing law

5. HR Manual/ Handbook

Startups may not initially require a detailed HR manual/ handbook. But, gradually with progression in business and increase in number of head-count, it will be imperative to have a manual which will provide inter alia all human resources related policies applicable to different level of employees working in the organization.

HR policies are to be drafted and aligned with the State laws and local labour legislations applicable to the State where work place is located.

In India, every State has their separate labour legislations/rules/regulations; therefore, while drafting a HR manual and defining policies therein, one need to be familarised with these applicable State legislations.

Following aspects/policies which are typically provided in the HR Manual:

  1. Code of conduct and standards;
  2. Non-discrimination;
  3. Policy prohibiting smoking and consumption of alcohol, drugs and other illegal items;
  4. Confidentiality;
  5. Harassment and bullying- including policy on prevention of sexual harassment;
  6. Grievances redressal mechanism;
  7. Disciplinary procedure;
  8. Policy on probation and confirmation to employment;
  9. Background Checks;
  10. Annual Performance Review;
  11. Employee Stock Options Plans;
  12. Training and Developments;
  13. Performance Appraisals;
  14. Location and transfer;
  15. Assignment of Intellectual Property Rights developed by an employee during the course of his work in office;
  16. Working hours, and manner of dealing with absenteeism;
  17. Leave Policy: annual leave/sick leave/ maternity leave/ leave without pay etc.
  18. Dress code;
  19. Safety policy at work place;
  20. Resignation, Termination, Suspension from duties;
  21. Death- benefits to legal heir;
  22. Exit interview;
  23. Handover of company property;
  24. Lay off

CHAPTER 4: TAKE CARE TO PROTECT YOUR INTELLECTUAL PROPERTY

Intellectual Property Rights (IP Rights) are like any other property rights which are intangible in nature. The IP Rights usually give the creator an exclusive right over the use of his/her creation for a certain period of time. With the rapid increase in the globalization and opening up of the new vistas in India, the "Intellectual Capital" has become one of the key wealth drivers in the present era. There are different country specific legislations, as well international laws and treaties that govern IP rights.

Every startup has IP Rights, which it needs to understand and protect for excelling in its business. Every startup uses trade name, brand, logo, advertisements, inventions, designs, products, or a website, in which it possesses valuable IP Rights. While starting any venture, the startup also needs to confirm that it is not in violation of the IP Rights of any other person to save itself from unwarranted litigation or legal action which can thwart its business activities. Further, startup ventures should be proactive in developing and protecting their intellectual property for many reasons like improving the valuation of its business, to generate better goodwill, to protect its competitive advantage, to use intellectual property as a marketing edge and to use the IP Rights as a potential revenue stream through licensing.

IP Rights protect several aspects of a business and each type of IP Right carries its own advantages. The scope of IP Rights is very wide, but the prime areas of intellectual property which are of utmost importance for any startup venture are as follows:

  • Trademarks
  • Patents
  • Copyrights and Related Rights
  • Industrial Designs
  • Trade Secrets

Trademarks

The Trade Marks Act 1999 ("TM Act") provides, inter alia, for registration of marks, filing of multiclass applications, the renewable term of registration of a trademark as ten years as well as recognition of the concept of well-known marks, etc. It is pertinent to note that the letter "R" in a circle i.e. ® with a trademark can only be used after the registration of the trademark under the TM Act.

Trademarks means any words, symbols, logos, slogans, product packaging or design that identify the goods or services from a particular source. As per the definition provided under Section 2 (zb) of the TM Act, "trade mark" means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include shape of goods, their packaging and combination of colors.

The definition of the trademark provided under the TM Act is wide enough to include non-conventional marks like color marks, sound marks, etc. As per the definition provided under Section 2 (m) of the TM Act, "mark" includes a device, brand, heading, label, ticket, name, signature, word, letter, numeral, shape of goods, packaging or combination of colors or any combination thereof.

Accordingly, any mark used by the startup in the trade or business in any form, for distinguishing itself from other, can qualify as trademark. It is quite significant to note that the Indian judiciary has been proactive in the protection of trademarks, and it has extended the protection under the trademarks law to Domain Names as demonstrated in landmark cases of Tata Sons Ltd v Manu Kosuri & Ors [90 (2001) DLT 659] and Yahoo Inc. v Akash Arora [1999 PTC 201].

Points To Consider While Adopting A Trademark

Any startup needs to be cautious in selecting its trade name, brands, logos, packaging for products, domain names and any other mark which it proposes to use. You must do a proper due diligence before adopting a trademark. The trademarks, can be broadly classified into following five categories:

  1. Generic
  2. Descriptive
  3. Suggestive
  4. Arbitrary
  5. Invented/Coined

Generic marks means using the name of the product for the product, like "Salt" for salt.

Descriptive marks means the mark describing the characteristic of the products, like using the mark "Fair" for the fairness creams.

Suggestive marks means the mark suggesting the characteristic of the products, like "Habitat" for home furnishings products.

Arbitrary marks means mark which exist in popular vocabulary, but have no logical relationship to the goods or services for which they are used, like "Blackberry" for phones.

The invented/ coined marks means coining a new word which has no dictionary meaning, like "Adidas". The strongest marks, and thus the easiest to protect, are invented or arbitrary marks. The weaker marks are descriptive or suggestive marks which are very hard to protect. The weakest marks are generic marks which can never function as trademarks.

India follows the NICE Classification of Goods and Services for the purpose of registration of trademarks. The NICE Classification groups products into 45 classes (classes 1-34 include goods and classes 35-45 include services). The NICE Classification is recognized in majority of the countries and makes applying for trademarks internationally a streamlined process. Every startup, seeking to trademark a good or service, has to choose from the appropriate classes, out of the 45 classes.

While adopting any mark, the startup should also keep in mind and ensure that the mark is not being used by any other person in India or abroad, especially if the mark is well-known. It is important to note that India recognizes the concept of the "Well-known Trademark" and the principle of "Trans-border Reputation".

Example of well-known trademarks are Google, Tata, Yahoo, Pepsi, Reliance, etc. Further, under the principle of "Trans-border Reputation", India has afforded protection to trademarks like Apple, Gillette, Whirlpool, Volvo, which despite having no physical presence in India, are protected on the basis of their trans-border reputation in India.

Enforecement Of Trademark Rights

Trademarks can be protected under the statutory law, i.e., under the TM Act and the common law, i.e., under the remedy of passing off. If a person is using a similar mark for similar or related goods or services or is using a well-known mark, the other person can file a suit against that person for violation of the IP rights irrespective of the fact that the trademark is registered or not.

Registration of a trademark is not a pre-requisite in order to sustain a civil or criminal action against violation of trademarks in India. The prior adoption and use of the trademark is of utmost importance under trademark laws.

The relief which a court may usually grant in a suit for infringement or passing off includes permanent and interim injunction, damages or account of profits, delivery of the infringing goods for destruction and cost of the legal proceedings. It is pertinent to note that infringement of a trademark is also a cognizable offence and criminal proceedings can also be initiated against the infringers.

Patents

Patent, in general parlance means, a monopoly given to the inventor on his invention to commercial use and exploit that invention in the market, to the exclusion of other, for a certain period. As per Section 2(1) (j) of the Patents Act, 1970, "invention" includes any new and useful;

  1. art, process, method or manner of manufacture;
  2. machine, apparatus or other article;
  3. substance produced by manufacture, and includes any new and useful improvement of any of them, and an alleged invention;

The definition of the word "Invention" in the Patents Act, 1970 includes the new product as well as new process. Therefore, a patent can be applied for the "Product" as well as "Process" which is new, involving inventive step and capable of industrial application can be patented in India.

The invention will not be considered new if it has been disclosed to the public in India or anywhere else in the world by a written or oral description or by use or in any other way before the filing date of the patent application. The information appearing in magazines, technical journals, books etc, will also constitute the prior knowledge. If the invention is already a part of the state of the art, a patent cannot be granted. Examples of such disclosure are displaying of products in exhibitions, trade fairs, etc. explaining its working, and similar disclosures in an article or a publication.

It is important to note that any invention which falls into the following categories, is not patentable: (a) frivolous, (b) obvious, (c) contrary to well established natural laws, (d) contrary to law, (e) morality, (f) injurious to public health, (g) a mere discovery of a scientific principle, (h) the formulation of an abstract theory, (i) a mere discovery of any new property or new use for a known substance or process, machine or apparatus, (j) a substance obtained by a mere admixture resulting only in the aggregation of the properties of the components thereof or a process for producing such substance, (k) a mere arrangement or rearrangement or duplication of known devices, (l) a method of agriculture or horticulture, and (m) inventions relating to atomic energy or the inventions which are known or used by any other person, or used or sold to any person in India or outside India. The application for the grant of patent can be made by either the inventor or by the assignee or legal representative of the inventor. In India, the term of the patent is for 20 years. The patent is renewed every year from the date of patent.

Use Of Technology Or Invention

While using any technology or invention, the startup should check and confirm that it does not violate any patent right of the patentee. If the startup desires to use any patented invention or technology, the startup is required to obtain a license from the patentee.

Enforcement Of Patent Rights

It is pertinent to note that the patent infringement proceedings can only be initiated after grant of patent in India but may include a claim retrospectively from the date of publication of the application for grant of the patent. Infringement of a patent consists of the unauthorized making, importing, using, offering for sale or selling any patented invention within the India. Under the (Indian) Patents Act, 1970 only a civil action can be initiated in a Court of Law. Like trademarks, the relief which a court may usually grant in a suit for infringement of patent includes permanent and interim injunction, damages or account of profits, delivery of the infringing goods for destruction and cost of the legal proceedings.

Copyright

Copyright means a legal right of an author/artist/originator to commercially exploit his original work which has been expressed in a tangible form and prevents such work from being copied or reproduced without his/their consent.

Under the Copyright Act, 1957, the term "work", in which copyright subsists, includes an artistic work comprising a painting, a sculpture, a drawing (including a diagram, a map, a chart or plan), an engraving, a photograph, a work of architecture or artistic craftsmanship, dramatic work (recitation, choreographic work), literary work (including computer programmes, tables, compilations and computer databases), musical work (including music as well as graphical notations), sound recording and cinematographic film.

In the case of original literary, dramatic, musical and artistic works, the duration of copyright is the lifetime of the author or artist, and 60 years counted from the year following the death of the author and in the case of cinematograph films, sound recordings, posthumous publications, anonymous and pseudonymous publications, works of government and works of international organizations are protected for a period of 60 years which is counted from the year following the date of first publication.

In order to keep pace with the global requirement of harmonization, the Copyright Act, 1957 has brought the copyright law in India in line with the developments in the information technology industry, whether it is in the field of satellite broadcasting or computer software or digital technology.

Registration Of Copyright

In India, the registration of copyright is not mandatory as the registration is treated as mere recordal of a fact. The registration does not create or confer any new right and is not a prerequisite for initiating action against infringement. The view has been upheld by the Indian courts in a catena of judgments. Despite the fact that the registration of copyright is not mandatory in India and is protectable through the International Copyright Order, 1999, it is advisable to register the copyright as the copyright registration certificate is accepted as a "proof of ownership" in courts and by police authorities, and acted upon smoothly by them.

Enforcement Of Copyright In India

Any person who uses the original work of the other person without obtaining license from the owner, infringes the copyright of the owner. The law of copyright in India not only provides for civil remedies in the form of permanent injunction, damages or accounts of profits, delivery of the infringing material for destruction and cost of the legal proceedings, etc, but also makes instances of infringement of copyright, a cognizable offence punishable with imprisonment for a term which shall not be less than six months but which may extend to three years, with a fine which shall not be less than INR 50,000 but may extend to INR 200,000

For the second and subsequent offences, there are provisions for enhanced fine and punishment under the Copyright Act. The (Indian) Copyright Act, 1957 gives power to the police authorities to register the Complaint (First Information Report, i.e., FIR) and act on its own to arrest the accused, search the premises of the accused and seize the infringing material without any intervention of the court.

Industrial Designs

As per the definition given under Section 2(d) of the Designs Act, 2000, "design" means only the features of shape configuration patterns or ornament applied to any article by any industrial process or means whether manual mechanical or chemical separate or combined which in the finished article appeal to and are judged solely by the eye. However, "design" does not include any mode or principle of construction or anything which is in substance a mere mechanical device and does not include any trademark as defined under the TM Act or any artistic work as defined under the Copyright Act, 1957. The total period of validity of registration of an Industrial Design under the (Indian) Designs Act, 2000 is 15 years.

Features of shape, configuration, pattern, ornament or composition of lines or colours applied to any article, whether in two dimensional or three dimensional or in both forms, can be registered under the (Indian) Designs Act, 2000. However, functionality aspects of a design are not protected under the (Indian) Designs Act, 2000, as the same are subject matter of patents.

Design of an article is not registrable in India, if it:

  • is not new or original;
  • has been disclosed to the public anywhere in India or in any other country by publication in tangible form or by use in any other way prior to the filing date or priority date of the application;
  • is not significantly distinguishable from known designs or combination of known designs; or
  • comprises or contains scandalous or obscene matter.

Enforcement Of Design Rights In India

The (Indian) Designs Act, 2000, only provides for civil remedies. Besides injunction, monetary compensation is recoverable by the proprietor of the design either as contract debt or damages. An action for infringement of design can only be initiated after the registration of the design, however, an action for passing-off is maintainable in case of unregistered design.

Trade Secrets

Trade secrets includes any confidential business information which provides an enterprise a competitive edge over others. Trade secrets encompass manufacturing or industrial secrets and commercial secrets, formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by other.

The unauthorized use of such information by persons other than the holder is regarded as an unfair practice and a violation of the trade secret. There are no specific statutes under the Indian law for the protection of trade secrets and the same are protectable under the common law rights.

Strategies For Protection And Exploitation Of IPR For Startups

  1. Make Intellectual Property protection a priority:

    Start-ups cannot afford the complete protection available under the intellectual property regime. The first step for any startup is to evaluate and prioritize the IP Rights involved in its business. Depending upon the type of industry involved, IP Rights play an important role. Failure to identify or prioritize IP Rights, is likely to create problems for startup's business, especially during negotiations with future investors or exiting its business. Sometimes IP Rights are the only asset available with a startup.
  2. Register Intellectual Property Rights:

    It is important to note that certain IP Rights like patents and designs are required to be registered before claiming any protection under the respective statutes. On the other hand, certain IP Rights like trademark and copyright need not be mandatorily registered for protection under. Nevertheless, a registered IP Right carries a greater value and acts as evidence of use of the IP Rights before courts as well as enforcement agencies;
  3. Due Diligence of IP Rights:

    For any startup, it is indispensable that it does not violate IP Rights of any other person. This will ensure safety from unwarranted litigation or legal action which can thwart its business activities. This makes it even more important for startups to make careful IP decisions in the initial phase and conduct proper due diligence of IP Rights, which it is using or intends to use.
  4. Implement clear and effective policies and strategies for protection of IP Rights:

    It is in the long term interest of startups to have an Intellectual Property Policy for management of various IP rights which may be presently owned, created or acquired in future by startups. The aim of such a policy is to ensure that there are no inter-se dispute between the promoters of the startups, which remains till date to be one of the main concerns for failure of startups.
  5. Agreements related to Intellectual Property:

    It is pertinent to note that having proper documentation in the form of agreements like non-disclosure agreements, agreements with employees or independent contractors, can make all the difference between the success and failure of startups. Usually, intellectual property is created either by the founders or some key employee or a third party. The intellectual property so created, must be protected through a proper agreement between the founder or key employee or a third party, as the case may be and the startup. If the agreement, with founders or employees or a third party, , under which a novel idea was/is created, is overlooked, it could create bottlenecks later after such idea becomes successful. Accordingly, the startups need to ensure that anything created on behalf of the startup, belongs to the startup and not the Employee or a third party. Further, it is advisable to enter into elaborate assignments, licensing or user agreements, and care should be taken to make provisions for all post termination IP Right issues.

© 2015, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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Authors
Vinay Vaish, Partner, Vaish Associates Advocates
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