Legal Issues faced by Startups in India
Written By: Dhimaan Dutta
What are startups?
A startup, sometimes known as a start-up, is a business or initiative started by an entrepreneur with the goal of finding, developing, and validating a scalable business model. Startups are usually started by a single founder (solo-founder) or a group of co-founders who have a solution to a problem. To create and verify their business models, a startup’s founder will conduct issue interviews, solution interviews, and construct a minimal viable product (MVP), i.e. a prototype. Because the starting process can take a long time (three years or longer, according to some estimates), ongoing work is necessary.
Sustaining effort over time is particularly difficult due to high failure rates and unclear consequences. A business plan lays out what needs to be done as well as how to plan and execute a concept in the future. These plans usually cover the first three to five years of your company’s strategy. Before they run out of resources, startups must learn at a breakneck pace. Experimentation, seeking, and other proactive efforts help a founder understand how to establish a business. Founders frequently create falsifiable hypotheses, build a minimal viable product (MVP), and undertake A/B testing in order to learn successfully.
Legal issues faced by Startups in India
- Issues with licensing and permits
- Marketing and advertising
- Zonal Laws Concerning Infrastructure
- Privacy and Data Protection Concerns
- Intellectual property rights are protected.
- Tortious Liabilities in Contract Management
- Issues with licensing and permits
Start-ups may need a variety of licenses, licenses, or permits to carry out their plans since a lack of legal understanding might result in penalties and even unethical or criminal behavior. Licenses, permissions, and permits may differ from one business to the next, therefore a person should be informed of local laws, rules, and regulations before beginning a business. Another difficulty with licenses is that they are not always quick and easy to get from government officials, and they take a lot of time and money.
Registration certificates, GST registration, FSSAI license, import and export code, Udyog Aadhar registration, and other licenses are among the licenses required by businesses. Dealing with goods or services that require a license, such as alcohol/alcoholic beverages, electricity, guns, drugs and medicines, prohibited crops such as marijuana or opium, tobacco, food products, human organs, and so on, without first obtaining proper licenses from the relevant governing bodies, may result in criminal charges that could land the businessman in jail or subject him to severe fines and penalties.
- GST registration – In the current scenario, most start-ups are looking at their future as an e-commerce business. For such e-commerce businesses, GST registration is required. Businesses with a turnover of equal to or greater than 40 lakhs should register, and the process is known as GST registration. There are certain types of businesses that should get GST registration fai. Casual taxable individuals, non-resident taxable persons, e-commerce aggregators, those paying using the reverse charge mechanism, and others should be required to register for GST.
- Licenses– A firm’s smooth operation requires that it invest its resources in productivity rather than paying fines and penalties, thus it is vital that a business get the required permissions and permits from the appropriate authorities before beginning operations. Fire permits and safety registration should be obtained by the startup. The advantage of getting registrations is that it not only protects you from legal entanglements, but it also allows you to take advantage of government programmes such as MSME registration, which may help you access loans, tax breaks, and other benefits. The start-up India registration system should be used to register new businesses.
2. Marketing and advertising
Advertisement and marketing are critical for any start-up or other type of business, but false claims, obscene, scandalous, or seditious advertisements can result in serious criminal penalties and can destroy a company’s goodwill and reputation, and such mistakes can be like stepping on a small growing seedling for start-ups. The following are some instances of banned advertisements: The “Tobacco Prohibition Act” outlaws all tobacco and tobacco product advertising, whether direct or indirect, in all media. The food safety and standards act of 2006 prohibits advertising of infant formula in order to encourage breastfeeding of infants, physicians under the Indian Medical Council regulations of 2002, legal services under the Bar Council of India Rules, prenatal sex determination services under The Prenatal Diagnostic Techniques Act of 1994, alcohol or alcoholic beverages under the Cable Television Network Rules of 1994, and prenatal sex determination services under The Prenatal Diagnostic Techniques Act of 1994.
3. Zonal Laws Concerning Infrastructure
Allocating land for offices, warehouses, service centers, manufacturing units, and other purposes is another big hurdle for Indian start-ups. Local regulations governing the commercial use of agricultural land, school, and hospital property should be understood by start-ups. In India, the land is under the control of state governments, and land laws differ from state to state. The start-up must be familiar with zonal rules, which are restrictions that govern the use of land in a certain region. For example, because it is a residential neighborhood, a local municipal body can adopt an ordinance prohibiting the use of any property or land for industrial or commercial uses.
Residential, commercial, industrial, public, and semi-public, public utilities, open areas/parks/playgrounds, transportation and communication, and agricultural usage are all divided into eight divisions by the zonal authority. The height, position, and layout of the building where the commercial job is done may be prescribed by the zoning authority. The objective of zonal legislation is to distinguish between residential and business zones. If a person wants to run a company out of his home, he or she may need to get authorization from the local municipal authorities, the town planning authority, and the landlord (if the property is being used by the tenant). When a residential property is utilized for commercial purposes, the property tax changes as well. When a property is used for commercial reasons, the tax rate is greater than when the property is used for residential purposes.
4. Privacy and Data Protection Concerns
The covid-19 epidemic was like frosting on the cake for the area of digitization, like many enterprises, offices, and courts moved their work to the online mode, presenting enormous potential for start-ups. Consider a real-life illustration of how privacy is fiction in the digital age. What happens to your information like your phone number and address if you download and log in to Healthkart to check out some supplements and input your phone number, address, name, and click the terms and conditions popup even if you don’t read it? And the next time you open YouTube or Google Chrome, you’ll see advertising tailored to your Healthkart search. Startups and other e-commerce firms keep track of and use personal information, such as search history.
5. Intellectual property rights are protected.
Intellectual property rights are the lifeblood of any new business. Many start-ups are concerned that their concept or strategy may be stolen, therefore it is critical for them to safeguard their intellectual property rights as soon as possible. The other concern is that the start-up should double-check that what they want to accomplish or sell has already been protected. So that they don’t run into issues like trademark infringement or other IP breaches after investing a significant quantity of money in their company. Intellectual property rights protection requirements may change from one startup to the next. The following intellectual property rights should be protected by start-ups:
- Trademarks/Service marks
- Confidentiality Agreements and Trade Secrets
6. Tortious Liabilities in Contract Management
A start-up goes through many contracts with suppliers, workers, and others. It would be excellent for a start-up to review example contracts available online from established businesses for the purpose of reference, since this may assist them in drafting a solid contract. Co-founders’ agreement – To minimize future disputes, start-ups should create a well-written agreement with their co-founders/partners. There are many different agreements which startups are bound, some of them being:
- Contract with service providers
- Employee contracts
- Confidentiality agreements
Tortious responsibilities might emerge when someone does anything that is illegal or when he fails to do something that is required by law. If a startup is not careful with its actions, it may risk tort liability. Strict Liability is one of the tortious responsibilities that may develop. Startups should be cautious while handling and managing raw materials, noise, fire, vibrations, and odors, among other things.
What is the Government of India doing?
The Government of India has launched a system known as Startup India. Indian Prime Minister Narendra Modi originally announced the campaign during a speech on August 15, 2015. This initiative’s action plan focuses on three areas: simplification, handholding, and collaboration, support, and incentives. Another aspect of this endeavor is the elimination of restrictive state government regulations in this sector, including the License Raj, Land Permissions, Foreign Investment Proposals, and Environmental Clearances. It was organized by the Department of Industry and Internal Trade Promotion (DPI&IT). There are some key points from the side of GOI to be noticed upon for startups, and that is as follows:
- A startup capital pool of 10,000 crores has been established.
- Fees for filing patents will be reduced.
- The Bankruptcy Code has been modified to provide a 90-day escape window.
- Inspections are not required for the first three years of operation.
- For the first three years of operation, there is no capital gain tax.
- For the first three years of operation, there is no tax.
- Compliance with self-certification.
- Under the Atal Innovation Mission, an innovation cluster was established.
- 5 lakh schools will be targeted, and 10 lakh pupils will be involved in innovation-related programmes.
- New approaches to safeguard fledgling companies’ intellectual property.
- Built Rajasthan Incubation Center, Startup Oasis
The Ministry of Human Resource Development and the Department of Science and Technology have agreed to collaborate on a project to establish over 75 startup support hubs at the National Institutes of Technology (NITs), Indian Institutes of Information Technology (IIITs), Indian Institutes of Science Education and Research (IISERs), and National Institutes of Pharmaceutical Education and Research (NIPERs) across the country (NIPERs). The Reserve Bank of India said that it will make efforts to improve the country’s “ease of doing business” and contribute to an environment that is favorable to the growth of small enterprises. State and federal governments are taking proactive measures to boost growth and create an entrepreneurial culture in the country.
Government actions and legislation are fostering a favorable climate for entrepreneurs, allowing for the growth of infrastructure, co-working spaces, incubators, accelerators, and, in certain circumstances, market access. The Union Ministry of Human Resource Development has announced intentions to build Research Parks in cooperation with higher education institutions across India, as part of the Startup India initiative’s “Industry-Academia Partnership and Incubation” theme. The initiative, which seeks to offer students access to financing and coaching for companies, has received the first investment of Rs.100 crore.
In February 2016, the Innovation in Mobile App Development Ecosystem (I-MADE) initiative was also launched. It’s a collaboration between the Indian government’s Department of Telecommunications, Telecom Centers of Excellence (TCOE), EVC Ventures, and Unified that seeks to help Indian entrepreneurs launch mobile app businesses. The initiative is set to run for five years and will involve 11 Indian colleges.
The Futuristic View
In the second week of April 2021, India got six new “unicorns,” or companies worth $1 billion or more. That’s amazing given that there were only seven new unicorns in 2020 and six in 2019. It’s a remarkable achievement that these unicorns have developed while COVID-19 is ravaging the country and lockdown is suppressing demand and stifling supply. However, this was not the case for all businesses; according to a poll done by the National Association of Software and Service Companies in April, nine out of ten startups saw a revenue decrease, indicating many investors’ cautious stance in the face of the epidemic. Most Indian companies have seen their expansion stifled as a result of fluctuating demand. With a market value of US$11.8 billion in 2020, India was the world’s third-largest startup market, after only the United States (US$143 billion) and China (US$83 billion).
Despite new foreign direct investment (FDI) restrictions meant to limit opportunistic takeovers of Indian companies by Chinese players, India’s startup sector remains a hot market for private equity and venture capital firms like SoftBank, Naspers, and Tiger Global. China is one of the most important investors in India’s startup ecosystem, with Chinese funds financing 18 of the country’s 30 unicorns. However, under the current FDI regulations, these types of investments must now be approved by the government. The epidemic has accelerated India’s embrace of online technologies. Venture capital companies are focusing on tech startups as well as entrepreneurs in areas including fast-moving consumer goods, online grocery delivery, and home entertainment, as more businesses move or develop digitally and online. This year’s dozen new Indian unicorns come from a wide range of IT fields, including digital insurance, FinTech, HealthTech, and social commerce platforms.
By developing digital and financial infrastructure and tackling socio-economic inequalities, the government can assist maintain momentum in these areas. To its credit, the government’s Startup India program, which began in 2016, has aided in the creation of an enabling environment. The goal of this program is to catalyze the startup culture and develop a creative and enterprising startup environment that drives economic growth and provides large-scale job possibilities.
India’s startup environment, however, is not without its difficulties. One issue is that the distribution of startups and financing is concentrated in major metropolitan regions, leaving smaller towns and rural areas with few choices. IT-enabled technology industries are also seeing a lot of investment. Diversifying startup investment into a variety of industries, such as agriculture, manufacturing, social services, healthcare, education, and others, will be critical to future success. There are no really worldwide firms that started as startups in India, such as Google, Facebook, or SpaceX. China, to whom India is sometimes compared, has its own successful companies, such as Alibaba, ByteDance, and DiDi. This might be due to a lack of digital infrastructures, such as poor mobile and internet access, a lack of high-tech solutions, and a lack of research and development expenditure.
India has a low ranking in terms of innovation and patent filings. There is a significant difference between what India is now and what it can become. With a big population’s unmet needs and a strong focus on technology and innovation, India has the potential to be a bright light in the global economy. The COVID19 epidemic has marked a watershed moment in India’s startup landscape, with rising demand for digital solutions allowing the creation of new unicorns in the same manner that they did after the global financial crisis, albeit many small businesses will fail. The epidemic also laid out the future digital economy. Cycles include booms and busts. During a bust, some of the finest businesses emerge, and India may be home to many more towering startups.