Start-Ups Regulatory And Housekeeping Do’s and Don’ts – For Seamless Investment

Investor interest grows in sectors like AI, renewables, EVs, healthcare, space-tech, ed-tech, and financial services, suggesting a potential market recovery.
(L-R) Nidhi Killawala, Partner and Achint Kaur, Counsel at Khaitan & Co
(L-R) Nidhi Killawala, Partner and Achint Kaur, Counsel at Khaitan & Co

“While rationality takes you from point A to B, the unquenchable innovative zeal makes you go the distance.”   

With 1,17,254 start-ups in India as on 31 December 2023, including at least one startup in every state and union territory and in 80 per cent of the districts, India aims to create the third largest startup ecosystem in the world. The Bharat Start-up and MSME summit held in February this year, emphasised the key role played by start-ups in generating transformational change in tier 2 and 3 cities and villages, and ensuring equitable development for all strata.   

Despite a significant decline of 63 per cent in Indian venture capital from $21.2 billion in 2022 to $7.8 billion in 2023, a few start-ups secured notable investments, including Lenskart with $500 million from Abu Dhabi Investment Authority and PhonePe with $600 million from Walmart.  

On 21 February 2024, iCreate and Microsoft collaborated with the Ministry of Electronics and Information Technology to create the IMPEL AI program to boost 1100 AI start-up across India.

Sectors such as artificial intelligence, renewables, electric vehicles, climate tech, healthcare, deep tech, space-tech, ed-tech, financial services, agriculture, and software-as-a-service continue to gain investor interest, signalling a potential market rebound.   

To pass the litmus test of equity and venture capital investment, start-ups must look beyond the challenges and follow below-mentioned dos and don’ts to ensure smooth investment: 

Know your product market, competition, and customer behaviour, and evolving trends: From taxi cabs, grocery delivery, to fashion and lifestyle, Indian startups have innovatively identified market opportunities with thorough research, understanding customers, competition, trends and leveraging their advantage over existing business solutions. Thereby deviating from customary critical strategies and tailoring products/services, pricing, and marketing strategies to meet customer needs, to reduce the risk of failure.  

Startup India Phase II was one such accelerator programme for start-ups launched on 16 January 2024 and the Startup Innovation Week, held between 10-18 January 2024 initiating ‘StartupShala’, providing access to knowledge, network, and funds, to scale up. 

Registration, compliances, policies including privacy, anti-bribery, corruption, Environmental, Social, and Governance (ESG): Knowledge of the legal intricacies in managing startups can avoid penalties, build stakeholders trust, reduce business risks, access funding opportunities. 

To aid start-up funding, the Reserve Bank of India has permitted Indian Start-ups from raising funds through ‘Convertible Note’ with government approval in certain cases. 

Robust anti-bribery and data protection policies in sync with the Digital Personal Data Protection Act, 2023, risk assessments, secure data storage time-bound breach redressal mechanism, adherence to the Information Technology Act, 2000 and rules made therein, Prevention of Money Laundering Act, 2002 and Prevention of Corruption Act, 1988 are essential for building consumer and investor trust and avoiding penalties. 

Start-ups must integrate ESG considerations within their operations to steer ahead of evolving regulations including ESG due diligence, reporting, and target setting to distinguish themselves in the market and align with investor expectations, in addition to the employment and labour law compliances. 

Start-ups seeking external funding must comply with the Securities and Exchange Board of India (SEBI) regulations governing angel investments, venture capital funding, crowdfunding, and structure their investment agreements accordingly. 

Workforce Management: In devising a workforce strategy in addition to a skilled, driven team optimising resource utilisation and sustainable growth utilising tech-tools is critical. 

Contractual and Intellectual Property protection arrangements with partners, buyers, and sellers: Robust contracts safeguarding against risks is paramount. Startups must protect their intellectual property through registration, and iron clad agreements to avoid infringement, for which the Department for Promotion of Industry and Internal Trade had introduced the “Scheme for Facilitating Startups Intellectual Property Protection”, with the Start-up India initiative, the National Intellectual Rights policy and Patent (Amendment) Rules. 

Financial Health: Strict adherence to accounting, secretarial and regulatory compliances, filing of returns audit and reporting requirements including Income Tax Act, 1961, Central Goods and Services Tax Act, 2017, accounting standards, filing Form AOC-4 with the Registrar of Companies, maintaining records and books of accounts are essential.  

Certain start-ups incorporated between 1 April 2016 and 1 April 2021 are also eligible for tax benefits. A certificate of an eligible business from the Inter-Ministerial Board of Certification of Department of Industrial Policy and Promotion is a prerequisite for availing the benefits including a three-year tax holiday, long term capital gains  tax exemptions, subject to complying with the criteria under MSME Development Act, 2006. The Union budget also had an innovation and startup focus offering startup tax benefits. 

Corporate Governance: is a crucial focus of investor demand and required under Companies Act and SEBI regulations as part of an accountable, transparent, risk management strategy. A diverse board composition, disclosure of related party transactions, prohibition on insider trading. The MAARG Portal by Startup India offers valuable guidance on corporate governance on best practices for sustainable growth.   

On 17 January 2024, the National Startup Day was convened with discussions on growth trajectory and role of domestic capital in nurturing and scaling startups. The Draft National Deep Tech Startup Policy seeks to strengthen the startup ecosystem by complimenting existing initiatives like Start Up India and Start Up Credit Guarantee schemes.  

A 'Startup Maha Kumbh' is scheduled in March 2024 with establishment of a 'Startups Club of India' to support and mentor aspiring entrepreneurs with the active participation of Indian unicorns. Thus, 2024 marks a transformational start-up phase. 

Authored by Nidhi Killawala, Partner and Achint Kaur, Counsel at Khaitan & Co

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