Startup India flagship: An initiative to make forward looking world class investments

Startup India is a flagship initiative of the Government of India, intended to build a strong ecosystem for nurturing innovation and Startups in the country. This will drive sustainable economic growth and generate large scale employment opportunities. The Government, through this initiative aims to empower Startups to grow through innovation and design.

Startup India Stand up India Action Plan

In order to meet the objectives of the initiative, Government of India announced an Action Plan that addresses all aspects of the Startup ecosystem. With this Action Plan, the Government hopes to accelerate spreading of the Startup movement from digital/ technology sector to a wide array of sectors including agriculture, manufacturing, social sector, healthcare, education, etc. and from existing tier 1 cities to tier 2 and tier 3 cities including semi-urban and rural areas.

The Action Plan is divided across the following areas:

Simplification and Handholding
Funding Support and Incentives
Industry-Academia Partnership and Incubation
Since the day, the talk on “Start-up India” scheme has started, its been a burning question in each entrepreneur’s mind, whether their venture qualifies for these new schemes and benefits announced. Finally Department of Industrial Policy and Promotion (DIPP), Government of India has clarified which ventures will qualify as Start-up to claim the benefits.

Definition of a Start-up (only for the purpose of Government schemes):
Start-up means:

An entity, incorporated or registered in India
Not older than five years,
Annual turnover does 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.
It is important to note following points:

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 Start-up if its turnover for the previous financial years has exceeded INR 25 crore or it has completed 5 years from the date of incorporation/ registration.
Provided further that a Start-up shall be eligible for tax benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purpose.

Some of the key terms used in definition are further clarified as follows:

Meaning of an “Entity”

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)

A business is covered under the definition if it aims to develop and commercialize :

A new product or service or process; or
A significantly improved existing product or service or process that will create or add value for customers or workflow.
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 would not be covered under this definition.
In order for a “Startup” to be considered eligible, the Startup should

be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator established in a post-graduate college in India; or
be supported by an incubator which is funded (in relation to the project) from GoI as part of any specified scheme to promote innovation; or
be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an Incubator recognized by GoI; or
be funded by an Incubation Fund/Angel Fund/ Private Equity Fund/ Accelerator/Angel Network duly registered with SEBI* that endorses innovative nature of the business; or
be funded by GoI as part of any specified scheme to promote innovation; or
have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.
(DIPP may publish a ‘negative’ list of funds which are not eligible for this initiative)

Inter-Ministerial Board

An Inter-Ministerial Board setup by DIPP to validate the innovative nature of the business for granting tax related benefits Approval from the Inter-Ministerial Board shall not in any manner, limit or absolve the entity(ies) from any liability incurred in case of any misrepresentation/ fraud arising from submission of such application and/ or supporting such application.

Startup India, Standup India Scheme – Action Plan In Detail
Lets look at the 19 items proposed in the Startup India action plan

Compliance Regime based on Self-Certification
Objective is to reduce the regulatory burden on Startups thereby allowing them to focus on their core business and keep compliance cost low.

Regulatory formalities requiring compliance with various labour and environment laws are time consuming and difficult in nature. Often, new and small firms are unaware of nuances of the issues and can be subjected to intrusive action by regulatory agencies. In order to make compliance for Startups friendly and flexible, simplifications are required in the regulatory regime.

Accordingly, the process of conducting inspections shall be made more meaningful and simple. Startups shall be allowed to self-certify compliance (through the Startup mobile app) with 9 labour and environment laws.

In case of the labour laws, no inspections will be conducted for a period of 3 years. Startups may be inspected on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer. In case of environment laws, Startups which fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in such cases

Startup India Hub
An all-India hub will be created as a single contact point for start-up foundations in India, which will help the entrepreneurs to exchange knowledge and access financial aid.

The Government of India has taken various measures to improve the ease of doing business and is also building an exciting and enabling environment for these Startups, with the launch of the “Startup India” movement.

The “Startup India Hub” will be a key stakeholder in this vibrant ecosystem and will:

– Work in a hub and spoke model and collaborate with Central & State governments, Indian and foreign VCs, angel networks, banks, incubators, legal partners, consultants, universities and R&D institutions
– Assist Startups through their lifecycle with specific focus on important aspects like obtaining financing, feasibility testing, business structuring advisory, enhancement of marketing skills, technology commercialization and management evaluation
– Organize mentorship programs in collaboration with government organizations, incubation centers, educational institutions and private organizations who aspire to foster innovation.

To all young Indians who have the courage to enter an environment of risk, the Startup India Hub will be their friend, mentor and guide to hold their hand and walk with them through this journey

Rollout of Mobile App and Portal
An online portal, in the shape of a mobile application, will be launched on April 1 to serve as the single platform for Startups for interacting with Government and Regulatory Institutions for all business needs and information exchange among various stakeholders.

Startups often suffer from the uncertainty regarding the exact regulatory requirements to set up its operations. In order to ensure that such information is readily available, it is intended that a checklist of required licenses covering labour licensing, environmental clearances etc. be made available.

Towards these efforts, the Government will introduce a Mobile App to provide on-the-go accessibility for:
– Registering Startups with Ministry of Corporate Affairs and Registrar of Firms
– Tracking the status of the registration application. A digital version of the final registration certificate shall be made available for downloading through the Mobile App
– Filing for compliances and obtaining information on various clearances/ approvals/ registrations required
– Collaborating with various Startup ecosystem partners (venture funds, incubators, academia, mentors etc.)
– Applying for various schemes being undertaken under the Startup India Action Plan
Legal Support and Fast-tracking Patent Examination at Lower Costs
A fast-track system for patent examination at lower costs is being conceptualised by the central government. The system will promote awareness and adoption of the Intellectual Property Rights (IPRs) by the start-up foundations.

The scheme for Startup Intellectual Property Protection (SIPP) shall facilitate filing of Patents, Trademarks and Designs by innovative Startups. Various measures being taken in this regard include:

– Fast-tracking of Startup patent application
– Panel of facilitators to assist in filing of IP applications.
– The Central Government shall bear the entire fees of the facilitators for any number of patents, trademarks or designs that a Startup may file, and the Startups shall bear the cost of only the statutory fees payable.
– Rebate on filing of application. Startups shall be provided an 80% rebate in filing of patents vis-a-vis other companies.

The scheme is being launched initially on a pilot basis for 1 year; based on the experience gained, further steps shall be taken.

Relaxed Norms of Public Procurement for Startups
Typically, whenever a tender is floated by a Government entity or by a PSU, very often the eligibility condition specifies either “prior experience” or “prior turnover”. Such a stipulation prohibits/ impedes Startups from participating in such tenders.

At present, effective April 1, 2015 Central Government, State Government and PSUs have to mandatorily procure at least 20% from the Micro Small and Medium Enterprise (MSME).

In order to promote Startups, Government shall exempt Startups (in the manufacturing sector) from the criteria of “prior experience/ turnover” without any relaxation in quality standards or technical parameters. The Startups will also have to demonstrate requisite capability to execute the project as per the requirements and should have their own manufacturing facility in India.

Faster Exit for Startups
In the event of a business failure, it is critical to reallocate capital and resources to more productive avenues and accordingly a swift and simple process has been proposed for Startups to wind-up operations. This will promote entrepreneurs to experiment with new and innovative ideas, without having the fear of facing a complex and long-drawn exit process where their capital remain interminably stuck.

The Insolvency and Bankruptcy Bill 2015 (“IBB”), tabled in the Lok Sabha in December 2015 has provisions for the fast track and / or voluntary closure of businesses. In terms of the IBB, Startups with simple debt structures or those meeting such criteria as may be specified may be wound up within a period of 90 days from making of an application for winding up on a fast track basis.

On appointment of the insolvency professional, the liquidator shall be responsible for the swift closure of the business, sale of assets and repayment of creditors in accordance with the distribution waterfall set out in the IBB.

Providing Funding Support through a ‘Fund of Funds’ with a Corpus of INR 10,000 crore
Government will set up a fund with an initial corpus of INR 2,500 crore and a total corpus of INR 10,000 crore over a period 4 years (i.e. INR 2,500 crore per year).

The Fund will be in the nature of Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds. Key features of the Fund of Funds are highlighted below:

– The Fund of Funds shall be managed by a Board with private professionals drawn from industry bodies, academia, and successful Startups
– Life Insurance Corporation (LIC) shall be a co-investor in the Fund of Funds
– The Fund of Funds shall contribute to a maximum of 50% of the stated daughter fund size. In order to be able to receive the contribution, the daughter fund should have already raised the balance 50% or more of the stated fund size as the case maybe.
– The Fund shall ensure support to a broad mix of sectors such as manufacturing, agriculture, health, education, etc.

Also read – 10 Funding options to raise capital for your startup.

Credit Guarantee Fund for Startups
In order to overcome traditional Indian stigma associated with failure of Startup enterprises in general and to encourage experimentation among Startup entrepreneurs through disruptive business models, credit guarantee comfort would help flow of Venture Debt from the formal Banking System. Debt funding to Startups is also perceived as high risk area and to encourage Banks and other Lenders to provide Venture Debts to Startups, Credit guarantee mechanism through National Credit Guarantee Trust Company (NCGTC)/ SIDBI is being envisaged with a budgetary Corpus of INR 500 crore per year for the next four years.

Tax Exemption on Capital Gains
Government wants to promote investments into Startups by mobilizing the capital gains arising from sale of capital assets. With this objective, exemption shall be given to persons who have capital gains during the year, if they have invested such capital gains in the Fund of Funds recognized by the Government.

This will augment the funds available to various VCs/AIFs for investment in Startups. In addition, existing capital gain tax exemption for investment in newly formed manufacturing MSMEs by individuals shall be extended to all Startups. Currently, such an entity needs to purchase “new assets” with the capital gain received to avail such an exemption.

Investment in ‘computer or computer software’ (as used in core business activity, like an accounting software) shall also be considered as purchase of ‘new assets’ in order to promote technology driven Startups.

Tax Exemption to Startups for 3 years
With a view to stimulate the development of Startups in India and provide them a competitive platform, it is imperative that the profits of Startup initiatives are exempted from income-tax for a period of 3 years. This fiscal exemption shall facilitate growth of business and meet the working capital requirements during the initial years of operations. The exemption shall be available subject to non-distribution of dividend by the Startup.

Tax Exemption on Investments above Fair Market Value
Under The Income Tax Act, 1961, where a Startup (company) receives any consideration for issue of shares which exceeds the Fair Market Value (FMV) of such shares, such excess consideration is taxable in the hands of recipient as Income from Other Sources.

In the context of Startups, where the idea is at a conceptualization or development stage, it is often difficult to determine the FMV of such shares. In majority of the cases, FMV is also significantly lower than the value at which the capital investment is made. This results into the tax being levied under section 56(2) (viib).

Currently, investment by venture capital funds in Startups is exempted from operations of this provision. The same shall be extended to investment made by incubators in the Startups.

Organizing Startup Fests for Showcasing Innovation and Providing a Collaboration Platform
To bolster the Startup ecosystem in India, the Government is proposing to introduce Startup fests at national and international stages. These fests would provide a platform to Startups in India to showcase their ideas and work with a larger audience comprising of potential investors, mentors and fellow Startups.

As part of “Make in India” initiative, Government proposes to:
– Hold one fest at the national level annually to enable all the stakeholders of Startup ecosystem to come together on one platform.
– Hold one fest at the international level annually in an international city known for its Startup ecosystem.

The fests shall have activities such as sessions to connect with investors, mentors, incubators and Startups, showcasing innovations, exhibitions and product launches, pitches by Startups, mentoring sessions, curated Startup walks, talks by disruptive innovators, competitions such as Hackathon, Makerspace, etc., announcements of rewards and recognitions, panels and conferences with industry leaders, etc.

Launch of Atal Innovation Mission (AIM) with Self-Employment and Talent Utilization (SETU) Program
The Atal Innovation Mission (AIM) shall have two core functions:
– Entrepreneurship promotion through Self-Employment and Talent Utilization (SETU), wherein innovators would be supported and mentored to become successful entrepreneurs
– Innovation promotion – to provide a platform where innovative ideas are generated

The main components proposed to be undertaken as part of the mission include:
Entrepreneurship promotion:
• Establishment of sector specific Incubators including in PPP mode (refer #14 of this Action Plan)
• Establishment of 500 Tinkering Labs
• Pre-incubation training to potential entrepreneurs in various technology areas in collaboration with various academic institutions having expertise in the field
• Strengthening of incubation facilities in existing incubators and mentoring of Startups
• Seed funding to potentially successful and high growth Startups

Innovation promotion:
• Institution of Innovation Awards (3 per state/UT) and 3 National level awards
• Providing support to State Innovation Councils for awareness creation and organizing state level workshops/conferences
• Launch of Grand Innovation Challenge Awards for finding ultra-low cost solutions to India’s pressing and intractable problems

Harnessing Private Sector Expertise for Incubator Setup
To ensure professional management of Government sponsored / funded incubators, Government will create a policy and framework for setting-up of incubators across the country in public private partnership.

Government shall encourage setting up of;
• 35 new incubators in existing institutions. Funding support of 40% (subject to a maximum of INR 10 crore) shall be provided by Central Government for establishment of new incubators for which 40% funding by the respective State Government and 20% funding by the private sector has been committed. The incubator shall be managed and operated by the private sector.
• 35 new private sector incubators. A grant of 50% (subject to a maximum of INR 10 crore) shall be provided by Central Government for incubators established by private sector in existing institutions. The incubator shall be managed and operated by the private sector.

The funding for setting up of the incubators shall be provided by NITI Aayog as part of Atal Innovation Mission (refer #13 of this Action Plan). Participating departments and agencies for setting up of new incubators shall be Department of Science and Technology, Department of Biotechnology, Department of Electronics and Information Technology, Ministry of Micro, Small and Medium Enterprises, Department of Higher Education, Department of Industrial Policy and Promotion and NITI Aayog.

Building Innovation Centres at National Institutes
In order to augment the incubation and R&D efforts in the country, the Government will set up/ scale up 31 centres (to provide facilities for over 1,200 new Startups) of innovation and entrepreneurship at national institutes, including:
• Setting-up 13 Startup centres: Annual funding support of INR 50 lakhs (shared 50:50 by DST and MHRD) shall be provided for three years for encouraging student driven Startups from the host institute.
• Setting-up/ Scaling-up 18 Technology Business Incubators (TBIs) at NITs/IITs/IIMs etc. as per funding model of DST with MHRD providing smooth approvals for TBI to have separate society and built up space

Startup India incubation centers

Setting up of 7 New Research Parks
The Government shall set up 7 new Research Parks in institutes indicated below with an initial investment of INR 100 crore each. The Research Parks shall be modeled based on the Research Park setup at IIT Madras.

IIT Guwahati, IIT Hyderabad, IIT Kanpur, IIT Kharagpur, IISc Bangalore, IIT Gandhinagar and IIT Delhi.

Promoting Startups in the Biotechnology Sector
In order to promote Startups in the sector, The Department of Biotechnology shall be implementing the following measures along with its Public Sector Undertaking Biotechnology Research Assistance Council (BIRAC):

Bio-incubators, Seed Fund and Equity Funding:
• 5 new Bio-clusters, 50 new Bio-Incubators, 150 technology transfer offices and 20 Bio-Connect offices will be set up in research institutes and universities across India.
• Biotech Equity Fund – BIRAC AcE Fund in partnership with National and Global Equity Funds (Bharat Fund, India Aspiration Fund amongst others) will provide financial assistance to young Biotech Startups.

Encouraging and leveraging global partnerships:
• Bengaluru-Boston Biotech Gateway to India has been formed. Through this initiative, a range of institutes in Boston (Harvard/ MIT) and Bengaluru will be able to connect to share ideas and mentor the entrepreneurs especially in the areas of Genomics, Computational Biology, Drug Discovery and new vaccines.
• Amplification of Bio-entrepreneurship through BIRAC Regional Entrepreneurship Centres (BREC). Department of Biotechnology shall set up 5 Regional centres or Mini-BIRACs in the next 5 years.

Launching of Innovation Focused Programs for Students
In order to promote research and innovation among young students, the Government shall implement the following measures:
• Innovation Core. Innovation Core program shall be initiated to target school kids with an outreach to 10 lakh innovations from 5 lakh schools. One lakh innovations would be targeted and the top 10,000 innovations would be provided prototyping support. Of these 10,000 innovations, the best 100 would be shortlisted and showcased at the Annual Festival of Innovations in the Rashtrapati Bhavan.

• NIDHI: A Grand Challenge program (“National Initiative for Developing and Harnessing Innovations) shall be instituted through Innovation and Entrepreneurship Development Centres (IEDCs) to support and award INR 10 lakhs to 20 student innovations from IEDCs.

• Uchhattar Avishkar Yojana: A joint MHRD-DST scheme which has earmarked INR 250 crore per annum towards fostering “very high quality” research amongst IIT students. The funding towards this research will be 50% contribution from MHRD, 25% from DST and 25% from industry. This format has been devised to ensure that the research and funding gets utilized bearing in mind its relevance to the industry. Each project may amount to INR 5 crore only. This scheme will initially apply to IITs only

Annual Incubator Grand Challenge
The Government is proposing to make forward looking investments towards building world class incubators. In its first phase, the aim is to establish 10 such incubators. To enable this, GoI shall identify and select 10 incubators who have the potential to become world class. These incubators would be given INR 10 crore each as financial assistance which may be used for ramping up the quality of service offerings.

The incubators shall also become reference models for other incubators aspiring to offer best-in-class services. Video interviews of these incubators would be showcased on the Startup India portal. An “Incubator Grand Challenge” exercise shall be carried out for identification of these incubators.

How to register for Startup India program?

This initiative benefits startups on many levels. One of the biggest benefit, is that you can apply for the Start Up India, Stand Up India plan and get a loan from the Government.

All the essential updates are accessible on Narendra Modi app. Here is a complete Startup India action plan in Hindi.

Useful media resources to stay in touch of the updates made by Stand Up India:

Startup India Twitter handle.
Official Website Start Up The first step in social change
Official Facebook page.

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