India: Regulatory Relaxations For Start-Ups

Last Updated: 28 April 2016
Article by Singh & Associates

Most Read Contributor in India, September 2016

The Reserve Bank of India has released notification no. RBI/2015-16/318 A.P. (DIR Series) Circular No. 51, dated February 11, 2016, wherein it has permitted start-ups with overseas unit to open foreign currency a/c abroad. It invited attention of Authorized Dealer Category - I (AD Category-I) banks to the Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2000, notified by the Reserve Bank vide Notification No. FEMA. 10 (R) /2015-RB dated January 21, 2016, as amended from time to time.

RBI has clarified that a start-up in India with an overseas subsidiary is permitted to open foreign currency account abroad to pool the foreign exchange earnings out of the exports/sales made by the concerned start-up. The overseas subsidiary of the start-up is also permitted to pool its receivables arising from the transactions with the residents in India as well as the transactions with the non-residents abroad into the said foreign currency account opened abroad in the name of the start-up.

Further, RBI stated that the balances in the said foreign currency account as due to the Indian start-up should be repatriated to India within a period as applicable to realization of export proceeds (currently nine months). A start-up is also permitted to avail of the facility for realizing the receivables of its overseas subsidiary or making the above repatriation through Online Payment Gateway Service Providers (OPGSPs) for value not exceeding USD 10,000 (US Dollar ten thousand) or up to such limit as may be permitted by the Reserve Bank of India from time to time under this facility and to facilitate the this arrangement, an appropriate contractual arrangement between the start-up, its overseas subsidiary and the customers concerned should be in place.

The Securities and Exchange Board of India issued a Circular CIR/CDMRD/DEA/01/2016, dated January 11, 2016, wherein SEBI has reviewed the circular issued by Forward Markets Commission (FMC) [Circular No. 9/1/2014-MKTI (Vol-II)], dated May 19, 2015 and has decided that, if there is no trading operation on the platform of any commodity derivatives exchanges for more than twelve months, then in terms of the above circular, such exchange shall be liable to exit.

As per Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012, "commodity derivatives exchange" means a recognized stock exchange which assists, regulates or controls the business of buying, selling or dealing only in commodity derivatives. Also, "national commodity derivatives exchange" means a commodity derivatives exchange that is demutualized, has an electronic trading platform and is permitted to assist, regulate or control the business of buying, selling or dealing in derivatives on all commodities as notified by the Central Government from time to time.

SEBI also directed all National Commodity Derivative Exchanges shall continuously meet the turnover criteria of Rs. 1000 crores per annum. The Regional Commodity Exchanges shall ensure that they have at least 5% of the nation-wide market share of the commodity, which is principally traded on their platform. In case the National and Regional Commodity Exchanges fail to meet the above criteria for 2 consecutive years, they shall be liable to exit.

SEBI also said that if a recognized commodity derivatives exchange, for any reason suspends its trading operations, it shall resume its trading only after ensuring that adequate and effective trading systems, clearing and settlement systems, monitoring and surveillance mechanisms, risk management systems are put in place and only after complying with all other regulatory requirements stipulated by SEBI from time to time. Further, such recognized commodity derivatives exchanges shall resume trading operations only after obtaining prior approval from SEBI.

Also, if any commodity derivatives exchange proposes to surrender its recognition voluntarily or whose recognition is proposed to be withdrawn by SEBI, the concerned Exchange shall not alienate any assets of the exchange without taking prior approval of SEBI, and shall comply with the conditions as prescribed by this circular.

The Ministry of Commerce and Industry (Department of Industrial Policy and Promotion) has issued a notification G.S.R. 180(E) [F. No. 5(91)/2015-BE. I], dated 17th February, 2016, wherein the Central Government has, in order to bring uniformity in the identified enterprises, stated that an entity shall be considered as a 'start-up'-

a) Up to five years from the date of its incorporation/ registration,

b) If its turnover for any of the financial years has not exceeded Rs. 25 crores, and

c) It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;

Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a 'start-up';

Also, it was stated that in order to obtain tax benefits a start-up so identified under the above definition shall be required to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification consisting of:

a) Joint Secretary, Department of Industrial Policy and Promotion,

b) Representative of Department of Science and Technology, and

c) Representative of Department of Biotechnology.

Further, following points were also provided as explanations:

1. An entity shall cease to be a startup on completion of five years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rupees 25 crores.

2. Entity means a private limited company (as defined in the Companies Act, 2013), or a registered partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2002).

3. Turnover is as defined under the Companies Act, 2013.

4. An entity is considered to be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property if it aims to develop and commercialize:

a. A new product or service or process, or

b. A significantly improved existing product or service or process that will create or add value for customers or workflow.

Provided that the mere act of developing:

a. products or services or processes which do not have potential for commercialization, or

b. undifferentiated products or services or processes, or

c. products or services or processes with no or limited incremental value for customers or workflow would not be covered under this definition.

5. The process of recognition as a 'start-up' shall be through mobile app/portal of the Department of Industrial Policy and Promotion. Startups will be required to submit a simple application with any of following documents:

a) a recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator established in a postgraduate college in India; or

b) a letter of support by any incubator which is funded (in relation to the project) from Government of India or any State Government as part of any specified scheme to promote innovation; or

c) a recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator recognized by Government of India; or

d) a letter of funding of not less than 20 per cent in equity by any Incubation Fund,/Angel Fund/ Private Equity Fund/Accelerator/Angel Network duly registered with Securities and Exchange Board of India that endorses innovative nature of the business. Department of Industrial Policy and Promotion may include any such fund in a negative list for such reasons as it may deem fit; or

e) a letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; or

f) a patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.

The notification also said that Department of Industrial Policy and Promotion may, until such mobile app/ portal is launched make alternative arrangement of recognizing a 'startup'. Once such application with relevant document is uploaded a real-time recognition number will be issued to the startup. If on subsequent verification, such recognition is found to be obtained without uploading the document or uploading any other document or a forged document, the concerned applicant shall be liable to a fine which shall be fifty per cent of paid up capital of the startup but shall not be less than Rs. 25,000.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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