Tag Archives: Startups

Advisors in Start-ups and Early Stage Companies

India is witnessing a high growth in the number of start-ups in the country and is also amongst the top start-up ecosystems in the world. The government has provided a few benefits to startups as well, through the Startup India Action Plan.

However, only a few of these start-ups actually succeed. It is a treacherous path with a lot of unknowns. An advisor or an advisory board in a start-up might help the early stage companies to atleast know some of those unknowns. Financial investors certainly add value, sometimes domain expertise even. The comfort of speaking with an advisor where they bring in the expert views, advice and sheer experience onto the table is very valuable. As the saying goes, ‘Experience is the best teacher’.

Who are these Advisors and what role do they play?

An advisor is a person who brings in his unique skill sets and expert opinion on the business of the company, operational or otherwise. They are the people ‘who have been there and done that’. They can play a major role, especially if the founders and the team are new to the industry and do not have much experience. There are celebrity advisors even, who by being called as an advisor adds value to the startup.

Advisors can play different roles, for example, advisors who bring in their expertise in a particular domain or area; help with their networks and can introduce potential clients, employees or investors; or scaling up teams; expansion to new geo. It is not just having the advisors but also heeding to their advice. Therefore, advisors need to be chosen very wisely, so that their advice can be relied and executed upon.

How to choose the right Advisor?

Hiring an advisor who does not add much value or provides incorrect advice to the company may turn out to be counter-productive or disastrous. The advisors bringing in complementary skills or “deeper” skills which the founding team has a gap would be great. Identify the areas where the founders lack expertise or sufficient industry knowledge, where they face difficulties or have faced difficulties in the past or any area where they would require expert advice. Once there is clarity on where and why advisors are required, do some research and talk to people who can introduce you to some advisors. Discussing the same with the existing investors (if any) might also be a good idea as they might be able to connect the founders with the relevant people. And since the investors have invested in the company, they would ensure that the advisor will be someone who can add value to the company.

Ensure that they are people with the relevant expertise and knowledge, proven track record, good communication skills, networking skills, etc. Advisors should be individuals who would invest their time for the growth of the company and who can provide support to the founders where there is lack of expertise or knowledge.

Engaging with the advisor

An advisor may be compensated in cash, equity etc. Many a time, the advisor is interested in just giving back to the eco-system. One should evaluate if the advisor has time to provide support to the startup, whether the advisor is associated with other companies which the startup may have conflict / competition.  Maintaining a good rapport, having regular discussions and candid conversations, updating the advisor on a regular basis about the business and other relevant aspects of the business can go a long way. The most important factor is to ensure that there is trust between the parties.

Some startups look for a small investment by the advisors into the company, as a test to ensure that the advisor believes in the idea, startup, founders etc.

Compensation for Advisors

Let us now evaluate some of the ways to compensate advisors for the value-add they bring to the company.

Start-ups, more often than not, compensate advisors by giving a percentage of equity in the company since they may not have the finances to give cash compensation (unless well-funded). New shares can be issued to the advisors or shares can be transferred from the founders. Such issuance or transfer should ideally happen at the face value of the shares since it is a compensation for the services rendered by the advisors and the advisors would not want to pay the full price of the shares. As the same is being issued/transferred at face value instead of the fair market value, tax implications need to be evaluated since any issuance/transfer of shares below the fair market value will fall under the ambit of the Income Tax Act, 1961. Also, the percentage holding of the founders needs to be taken into account so that their shareholding percentage does not get diluted to a large extent considering that there will be future investments, where the shareholding will get diluted further. Another aspect to be considered is that, an issuance of shares will dilute the shareholding of all shareholders (including investors if any) whereas the transfer of shares from founders will dilute only the founders’ shareholding.

Another way of compensating the advisors is by issuing shares to them by way of consideration other than cash under section 62 (1) (c) of the Companies Act, 2013 (“Act”) read with rule 13 of Companies (Shares Capital and Debenture) Rules, 2014. The private placement process under section 42 of the Act will have to be followed for this purpose. The advisors have to raise invoice for the services rendered which will be commensurate with the fair market value of the advisory shares. Company will be responsible for TDS which will be a cash out on the Company. Further, the entire amount shall be taxed in the hands of the Investor as income from other sources, at the applicable tax slab.

Yet another option could be granting phantom stock options (“PSOs”) to the advisors. These are options which are settled by way of cash settlement. It a performance-based incentive plan through which the advisors will be entitled to receive cash payments after a specific period of time or upon reaching a specific target. A separate agreement can be entered into for capturing the details. This is directly linked to the value of the company’s share price. For example, the advisors could have promise of ‘x’ number of shares at ‘y’ price at grant. At exercise, the appreciation in the value of the share price, is handed out as cash incentive. Tax will be applicable at the time of payout. However, unlike employee stock options, which is recognized under the Act, PSOs by private limited companies does not fall under the ambit of the Act and therefore, will be in the nature of contractual right. Please see our previous post on  Phantom Stock Options to know more about this.

It has to be noted that advisors are not eligible for employee stock options (ESOPs) as ESOPs can be given only to employees and directors subject to the restrictions under the Act and relevant Rules.

Advisory shares to Non-Residents:

It becomes a little more complex when the advisor is a non-resident since the shares issued/transferred to a non-resident needs to be in compliance with the pricing guidelines as provided in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (“FDI Regulations“). As per the pricing guidelines, capital instruments which are issued or transferred to a non-resident has to be priced as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a chartered accountant or a SEBI registered merchant banker, in case of an unlisted company. Considering these rules, granting of advisory shares to a non-resident can be a very tricky situation. PSOs may be a better option in this case.

Formal Agreement with Advisors

The engagement with the advisors should be fruitful for the company and help in its growth. It is advisable to enter into a formal agreement with the advisors which captures all important terms regarding the engagement which will be beneficial for both the company and the advisors. This will help in keeping track of the contribution of the advisors and also if in future, any differences arise between the company/founders and the advisors, it will always help to have a formal agreement. The exact role of the advisor and deliverables, vesting schedule, time commitments, compensation, non-compete, confidentiality, exit related provisions, etc. should be captured in such agreements. Specific milestones may also be included in these agreements. Once the milestones are satisfactorily completed, compensation as agreed can be given.

Once the advisors become shareholders in the company, depending on the shareholders’ agreement (if any), the advisor might need to enter into a deed of adherence, so that the rights of the shares are captured.

Author: Paul Albert


Regulatory Update: MCA amends Incorporation Rules in relation to Shifting of Registered Office and Incorporation fee for companies

As part of Government’s efforts to make India a startup hub and continuous efforts of ease of doing business in India, the Ministry of Corporate Affairs (the MCA) has issued notification dated 6 March 2019. With this notification following changes will come into effect:

Sl No Category Before Amendment After Amendment Effect of this amendment
1. Shifting of Registered Office from One State to Another The Companies desirous to shift their Registered office from one state to another state shall advertise the notice of shifting the registered office in a vernacular newspaper in the principal vernacular language in the district and in the English language in an English newspaper with the widest circulation in the State in which the registered office of the company is situated.





The Companies desirous to shift their Registered office from one state to another state can advertise the notice of shifting the registered office in a vernacular newspaper in the principal vernacular language in the district and in the English language in an English newspaper with the wide circulation in the State in which the registered office of the company is situated.



This will remove the confusion among the stakeholders with respect to publication of notice in the newspaper and they can choose the newspapers with minimum circulation as well.


Prior to amendment if any Company choose to publish in 2nd widest circulation newspaper, then the application would be rejected and this entails to start shifting process a fresh and this would take additional 3-5 months to complete.


With this relaxation, companies can choose among various newspapers which has wide circulation.

2. Fee on Incorporation of a Company The companies incorporated with a nominal capital of less than or equal to rupees ten lakhs, fee on INC-32 (SPICe) shall not be applicable. The companies incorporated with a nominal capital of less than or equal to rupees fifteen lakhs, fee on INC-32 (SPICe) shall not be applicable with effect from 18 March 2019. Earlier the Companies with initial authorised capital up to INR 10 lakh was exempted from any MCA fee on Incorporation and only stamp duty was applicable.


Now the exemption limit has been increased to INR 15 lakh. Therefore, Companies to be incorporated with nominal capital up to 15 lakh is exempted from MCA fee and stamp duty shall continue to be applicable.


Source: http://egazette.nic.in/WriteReadData/2019/199251.pdf

Basic HR 101 For Startups

“Unlimited leave policy” “Beer bottles on every table” – these and others that startups do to attract talent.

Culture, specially at the initial stages of the company, is largely driven by the tone set by the founders.

Some of the cultural tones have an impact on the human resources policies and a few of those have a legal impact. How does one deal with an employee who has taken 2 months leave in a company which has unlimited leave policy? How does one deal with a tipsy co-worker, who passes a loose remark on a female colleague?

The notes written below is nothing new at all. But becomes important to the new entrepreneurs who believe they have to disrupt “everything” to stand-out.


Image Credit: Gaebler.com

This post is meant somewhat as a cheat-sheet of HR things to be kept in mind /entrepreneur need to work on, at some relevant points in time.


  • Background verification.
  • Relieving letter from previous employer, along with a copy of the full and final settlement with the previous employer.
  • In the good old days, there used to be a “conduct certificate” issued by the employer, along with relieving letter, which no one uses anymore.
  • Copy of the previous salary slips.
  • A quick check on obligations due by the candidate, to the previous employer.


  • Offer Letter, which has details of role, designation, salary (CTC, payroll structure), employment benefits such as insurance, date of joining and a few details such as leave, notice period at termination/ resignation, confidentiality, corporate ethics.
    • It is recommended that the offer letter clearly states that the candidate should not bring in any document, trade secret, proprietary information of the previous employer.
  • Offer of ESOP (employee stock options), while may be mentioned in the Offer Letter, has a separate set of compliances under Companies Act, which the company has to follow. A copy of the ESOP policy / scheme may be provided to the employee upon issuance of ESOP grant letter.

Upon joining:

  • Employment Agreement: A detailed agreement, which references the Offer Letter and describes the terms and conditions of employment. This Agreement can further include as annexures:
    • Non Disclosure Agreement with Employees- In some generic business, a clause on confidentiality in the Employment Agreement might suffice. However, for businesses which deal extensively on intellectual property or roles where a lot of company’s secret sauce is exposed or for companies where there is high democracy and openness, then it is recommended to a slightly detailed NDA (instead of just a clause in the Employment Agreement).
    • IP Assignment Agreement – Similar to above, if the company deals with creation of intellectual property (think of: codes, algo, schema- not necessarily inventions), then a separate IP Assignment Agreement may be required. In an employer-employee relationship, which is work-for-hire, all IP belongs to the employer. However, previous IP or IP created by the employee not part of employment does not belong to the employer and it is essential for the employee to detail those previous IP at the time of signing an employment agreement.
  • Copy of the Employee handbook: The Handbook consists of many governance related aspects. These are helpful in level setting expectations with employees. The Handbook generally gets built over a period of time. It starts with a few mandatory aspects and then develops into a larger set of guidance note over a period of the company’s business growth. Some of the usual points are:
    • Tone at the top – an overview by the founder
    • Equal employment opportunity
    • Categories of employment
    • Leave: Sick Leave, Earned Leave, casual leave. The process for taking leave.
    • Compensation practices
    • Performance appraisal, performance improvement plans
    • Reimbursement process – conveyance, travel, food, telephone
    • Grievance Redressal and disciplinary action
    • Policy for prohibition, prevention and redressal of harassment and sexual harassment (you can download our free handbook here)
    • Anti-bribery and anti-corruption policy
    • Email, internet and intranet usage
    • Usage of office equipment
    • Exit, termination, resignation – A lot of detail goes in here.


  • A file for an employee, with employee’s details such as blood group, contact details of family for reaching out in case of emergency, a record of the above, some medical details, records of performance appraisal, etc. All of these are very personal and appropriate access control (Privacy policy) has to be in place.
  • Ongoing trainings including training on prevention of sexual harassment (down load free ebook here)
  • In some companies which still uses “Service Bonds” with employees, then maintainance of records of all training costs.


  • A copy of resignation email/ letter
  • Calculation of full and final settlement and employee’s acknowledgment
  • Exit interview to re-iterate obligations of confidentiality, non-compete and the like.
  • Collection of all office equipment
  • Change of email passwords, social media handles, access cards, access to group internet/intranet storage
  • Revocation of power of attorney if any is granted
  • Change of bank signatories if any is granted
  • Issuance of relieving letter.

Each entrepreneur would have their own hack of complying with all this, until a full time HR person is hired. If you have anything more to add to this checklist, please leave a comment.

Amendments to Companies Act and some relief to Permitted Startups

With the ability to modify the guidelines quick and fast, Companies Act has become dynamic. On 19 July 2016, the Ministry of Corporate Affairs notified the Companies (Share Capital and Debentures) Third Amendment Rules 2016 (Amendment) to amend certain provisions of the Companies (Share Capital and Debentures) Rules 2014 (Rules). These Rules contain the procedures for issuance of shares and debentures and disclosures to be made.
Notes of the Amendments made:

1. Relaxation of preferential allotment process:
Earlier to these amendments, any securities issued through the ‘private placement’ process had to be fully paid up at the time of allotment. This infact was an anomaly, because, if the company chose a ‘right issue’ process, then it was possible to issue partly paid shares. The amendment now seeks to set this anomaly right and made it possible to issue partly-paid shares even through private placement process.

2. Determination of conversion price:
Earlier to these amendments, a company issuing convertible securities had to determine the conversion price at the time of issuance. This is true for any foreign direct investment as well. Now, companies may either determine the conversion price (a) upfront at the time of offering the convertible securities, or (b) not later than 30 days prior to the date the holder of convertible securities becomes entitled to convert such convertible securities, based on a valuation report of a registered valuer issued not later than 60 days prior to such date. The change in the foreign direct investment guidelines is still the same and it has to be notified to RBI at the time of issuance.

3. Issue of secured debentures:
Earlier to these amendments, a company could provide only its own assets and properties as a security for issuance of secured debentures. Now, the companies can issue secured debentures by creating a charge on the assets and properties of its subsidiaries, holding company or associate companies. The amendment expressly permits companies intending to redeem their debentures prematurely to transfer such amounts in excess of the limits specified under the Rules as may be necessary to the Debenture Redemption Reserve.

4. Issue of equity shares with differential rights:
Earlier, companies could not issue equity shares with differential rights if they defaulted in (a) the payment of dividends on preference shares, (b) the repayment of a term loan (or interest thereon) from specified institutions, (c) the payment of statutory dues relating to employees, or (d) crediting prescribed amounts in the Investor Education and Protection Fund. Now, such defaulting companies to issue equity shares with differential rights after 5 years from the end of the financial year in which they make good the default. It would have been nice, that a company could issue such shares immediately upon compliance.

5. Sweat equity shares by Permitted Start-ups:
Start-ups (as defined in notification number GSR 180(E) dated 17 February 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India – “Permitted Startups”) are now permitted to issue sweat equity shares up to 50% of their paid-up capital for the first 5 years from the date of their incorporation. For other companies, this limit continues to be 25%.

6. Stock options to promoters and shareholder-directors of the Permitted Start-ups:
Permitted Start-ups can issue stock options to their promoters and to directors who hold more than 10% of the start-up’s equity shares for the first 5 years from the date of their incorporation. The restriction on issuing stock options to promoters and such directors continues for all other companies, who are not Permitted Startups.

7. Form SH-7 by companies not having share capital:
The Amendment requires that Form SH-7, for intimating any alteration of a company’s authorised share capital, be filed by companies that do not have share capital in case of an increase in the number of members.

Author: Venkatesh Vempati, works as an Associate with the Compliance Team

Startup India Policy – Update One

Government of India in continuation to the Startup Initiative (read here on announcements to date), as a part of the 19 points Action Plan to empower startups to grow through innovation and design, has now issued a notification dated 17 February 2016 (F. No. 5(91)/2015-BE. I).

The notification defines the term startup and prescribes the procedure for obtaining tax benefits.

According to the Startup Guideline issued by Government of India, Ministry of Commerce and Industry an entity shall mean a Private Limited Company (under The Companies Act, 2013) or a Registered Partnership Firm (under The Indian Partnership Act, 1932) or Limited Liability Partnership (under The Limited Liability Partnership Act, 2008).

Definition of Startup

A Private Limited Company, Partnership firm, LLP –

  1. up to 5 years from the date of its incorporation/registration,
  2. turnover for any of the financial years is not more than INR 250 million and
  3. entity working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property or entity is aiming to significantly develop or improve existing product or service or process that will create or add value for customers or workflow.

The above conditions are cumulative and are to be satisfied.

The mere act of developing products or services or processes which do not have potential for commercialization, or undifferentiated products or services or processes, or products or services or processes with no or limited incremental value for customers or workflow shall not be categorized as a startup.

Procedure and recognising a startup

  1. Application has to be made by the entity using the mobile app/portal of the Department of Industrial Policy and Promotion (DIPP).
  1. Application to be accompanied by any of the following documents:
    • 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 post-graduate college in India or
    • 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
    • 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
    • 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: or
    • a letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; or
    • a patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.

Upon uploading of the above said documents real-time recognition number will be issued to the startup.

(Note: Department (DIPP) shall make an alternate arrangement till mobile app/portal is launched)

  1. In order to obtain tax benefits a startup so identified after registration is required to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification consisting of:
    • Joint Secretary, Department of Industrial Policy and Promotion,
    • Representative of Department of Science and Technology, and
    • Representative of Department of Biotechnology.

Penalty for false registration:

If the application 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/- (Rupees Twenty Five Thousand only).

Our views:

We appreciate the efforts the Government is taking to make India a value creating country. We further look forward to efforts towards ease of doing business, therefore the holding companies continue to remain in India.

Startup India – announcements of many initiatives

Action Plan on Startup India: A Brief Overview

Startup India Action Plan (“Action Plan”), launched by Prime Minister Narendra Modi on 16 January 2016, is part of a flagship initiative of the Government of India for boosting the startup ecosystem in India that will drive sustainable economic growth, generate large scale employment opportunities. It aims to accelerate spreading the startup movement in existing tier 1 cities to tier 2 / tier 3 cities, semi urban and rural areas, in a wide range of sectors, varying from digital/technology sector to agriculture, manufacturing, social sector, healthcare, education, etc. In the recent years, India has witnessed a dynamic trend of people with no or little business background emerging to be the new age entrepreneurs.  The upsurge has had a massive outreach and the impact has been the launch of the “Startup India: Stand up India” campaign, followed by the detailed 19 point Action Plan that interestingly is an unprecedented move even in comparison to other strong startup ecosystems of the world and as pointed out by Masayoshi Son, Chairman and CEO of Softbank, “this is the beginning of a Big Bang for India”.

The word ‘startup’ has been around for quite some time now and it comes as a relief that the Action Plan, for the first time, defines ‘startup’, albeit for the purpose of government schemes only. The definition reads as follows:-

“Startup means an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding INR 25 crore in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

Provided that such entity is not formed by splitting up, or reconstruction, of a business already in existence.

Provided also that an entity shall cease to be a Startup if its turnover for the previous financial years has exceeded INR 25crore or it has completed 5 years from the date of incorporation/registration.

Provided further that a Startup shall be eligible for tax benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purposes.” (Emphasis supplied)

The definition is important in order to understand the eligibility criteria for the various benefits that the Action Plan talks about. However, what remains to be seen is how the definition gets formalized by way of a statute or notification and how the concerned authorities, for example the Inter-Ministerial Board, interprets “working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property” for the purposes of certification. Usage of words such as “new” may open up dialogues on what may be considered as new and what should be the criteria for determining “new”.

Broadly, the Action Plan talks about schemes and initiatives to be undertaken in four major categories:-

(a) Ease of doing business: For easing operational aspects of the workings of a newly incorporated company

  • compliance regime based on self-certification with labour laws and environment laws;
  • no suo motu inspection with respect to labour law compliances for the first 3 years
  • only random checks in ‘white category’ startups with respect to environmental law compliances;
  • mobile app to provide on-going accessibility for registering startups, tracking the status of the registration application, filing for compliances and obtaining information, etc.;
  • legal support and fast tracking patent examinations; 80% waiver of patent filing fees;
  • relaxed norms for public procurement;
  • faster exits,
  • income tax exemption for a period of 3 years,
  • extension of capital gains tax exemption to ‘computer or computer software’)

(b) Funding: For enhancing funding support through a Fund of Funds with an initial corpus of INR 2,500 crore and a total corpus of INR 10,000 crore and through credit guarantee fund via National Credit Guarantee Trust Company/SIDBI with a budgetary corpus of INR 500 crore per year for the next four years; extension of exemption from Section 56(2)(viib) of the Income Tax Act 1961 to investments made by incubators above fair market value; seed funding to potentially successful and high growth startups;

(c)  For promoting visibility through national and international fests and encouraging innovation through national and state level awards; and

(d) Programs and Centres: For structuring and enhancing the startup ecosystem through various programs such as Atal Innovation Mission (AIM), Self-Employment and Talent Utilization (SETU), Innovation core program in schools and establishment of Startup India Hub, 500 tinkering labs, incubators, innovation centers and Research Parks.

In the inaugural speech, the Prime Minister has also made special mention of the lack of patent experts/lawyers as the patent protection remains one of the biggest concern of newly incorporated companies working in the fields of innovation and technology. As such, the Action Plan talks about fast tracking mechanisms to exclusively cater to startup patent applications in order to protect the intellectual property rights of startups at an early stage. Another key highlight of the Action Plan is the panel of facilitators and lawyers to assist startups in filing and disposal of patent applications. Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a startup may file.

Overall, the Action Plan goes a long way in identifying the various problems persistent in the startup ecosystem today and aims to bring thousands of entrepreneurs from across India into this discourse and force the growth of a transformed, diversified and inclusive economy.

Introduction of the Insolvency and Bankruptcy Bill, 2015 (Read more at https://novojuris.com/2015/12/28/bankruptcy-bill-2015/) and recent announcements by the Reserve Bank of India of incentives to ease business norms and drive growth in the ecosystems, which inter alia include:

  • creation of a dedicated mailbox to provide assistance and guidance to the startup sector,
  • permitting receipt of deal value on a deferred basis in case of a transfer of ownership of a startup,
  • accessing rupee loans under the External Commercial Borrowing framework with relaxations, etc., indicate the Government’s existing and ongoing commitment to actualizing the Action Plan.

However, it leaves one wanting for more answers with respect to how the various actions points will be formalized and implemented by the concerned authorities and the timelines that we are looking at, amongst other things. The nuances that may be associated with ‘simple’ form for registering startups and the practical aspects of uploading documents for registration through a Mobile App; executing faster exits in 90 days; allocating funds for the announced rebates; effective management of the Fund of Funds and strategizing rollover of its profits are some of the questions that loom large. However, ambitious times call for ambitious ventures and the Action Plan certainly has opened up a whole new horizon.

Budget 2014 – Reasons to Cheer…

Some of our top takes:

Cheer to Startups:

  • Rs.10,000 crore set up for venture capital in the MSME sector, for providing equity, quasi equity, soft loans and other risk capital. The earlier promise by the government was Rs.5,000 crore fund, which we did not hear of any action.  The definition of MSME will be reviewed to provide for higher ceiling, therefore many more companies can fall under the MSME benefits.


  • Rs. 100 crores is proposed for “Start Up Village Entrepreneurship Programme” for encouraging rural youth to take up local entrepreneurship programs. References to nationwide “District level Incubation and Accelerator Programme” for incubation of new ideas and providing necessary support for accelerating entrepreneurship.
  • Rs. 200 crore corpus is proposed for technology centre network to promote innovation, entrepreneurship and agro-industry.
  • Rs. 200 crore will be operationalized through IFCI, for SC/ST startup entrepreneurs.
  • FDI upto 49% in defence and insurance.  Budget did not talk about FDI in multi-brand, as this  government is very cautious on the subject.

Easing business:

  • There was no reference to Companies Act 2013.  The government is planning to modify the Apprentices Act and entrepreneur friendly legal bankruptcy framework to be developed for SMEs to enable easy exit.
  • Earlier to budget, there were discussions on modifying the Factories Act and labor reforms. We’ll have to wait to hear more on that.
  • New Section 142A : Valuation Officer will estimate the value, including fair market value, of any asset, property or investment, based on report by Income Tax Assessing Officer and the assessee.
  • Advance tax ruling facility will now be provided to resident tax payers as well.
  • Harmonized GST is still a far cry.

(New) Areas of business that startups can think of:

  • eBiz platform by making all business and investment related clearances and compliances available, with an integrated payment gateway.
  • E-visa (Visa on arrival) facility to be provided in a phased manner. To start with, in 9 airports.
  • Clean drinking water at rural, urban and cities.
  • Sports education, training and others.
  • Farming and skills training.

Transaction structuring:

  • Dividend Distribution Tax

As it stands now, dividend tax is calculated on the net amount that is to be paid to the shareholders. The Budget proposes computing the tax on the ‘grossed up’ amount. i.e. the tax will be levied on the amount of dividend inclusive of the tax.

As an example:  If a company wants to pay Rs. 100 as dividend, then it has to pay a dividend distribution tax of Rs.15 and the balance will be paid to shareholders.

Effectively, the company which would pay Rs 13 as tax, and the balance Rs 87as dividend to shareholders will now pay Rs.15 as tax.

  •  Fund Managers can now shift to India
  • Income arising to foreign portfolio investors from transaction in securities will be treated as capital gains.

  Authors: Sharda Balaji and Praveen Kumar