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Partners Column

Dear Friends

I am sharing my thoughts on few topics which have engaged minds of government, entrepreneurs, corporates, professionals etc., during last few weeks.

Startup India: Our Honorable Primer Minister Mr. Modi recently launched an ambitious action plan for Startup India on 16th Jan 2016 in Delhi in the presence of celebrity startup founders from India and overseas. I, strongly believe that promoting entrepreneurship in the current knowledge era can make huge difference to the society in terms of solving societal problems, wealth creation, distribution of wealth etc., Government has come up with a 19 point action plan to encourage Startups to grow through innovation and design covering broadly three categories such as simplification, funding needs and industry &  academia partnership. Some of the points need legislative changes which government may take up in the upcoming budget session.   The document defines Startup as an entity, incorporated or registered in India not prior to 5 years, with an annual turnover not exceeding Rs. 25 crores in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. The question is how many startups will fall into this.  Startups will be eligible to avail incentives under the scheme only after obtaining certificate from an inter-ministerial board which has been set up for this purpose. This has come under huge criticism as bureaucracy can take long time to give certificate and complicate things. My suggestion is to move this role to industry associations, incubators, accelerators, academic institutions etc.,   The other key concern of the startups is income tax implication on issue of shares, valuation etc., while this is partly addressed in the action plan, this has to be implemented across all the startups. Overall this is a fantastic move by the government to encourage and handhold startups and let’s hope that the implementation happens in the next few months to the benefit of startups.

Ease of Doing Business: This has become No.1 priority for the entire government machinery and has started to see measures being taken in this direction. Recent initiatives under this include – Integrated form for incorporation, easing of name availability guidelines, online filing for FDI reporting. Also for speedy settlement of high value business disputes the Arbitration Act has been amended to have definitive timelines and also Commercial Courts are being set up under Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act 2015.

Net neutrality: Being part of a connected world and as we are all netizens the other subject which is concerning all of us is the net neutrality. What does Net Neutrality means – as per Wikipedia, the principle that internet service providers should enable access to all content and applications regardless of the source, and without favoring or blocking particular products or websites. Facebook launched internet.org where it has partnered with telecom operators to provide free access to basic internet services.  What amounts to basic internet services and who should decide this is also a big question and its against the spirit of Net Neutrality and facebook may have its own bias and interest and bundle facebook, whatsapp as free basics.  This should be the job of government to ensure internet access is available to all and the user decides what he wishes to access or use, hence I am also against facebook’s internet.org. Everybody is waiting for government stand on this.

Companies Act 2013: One of the main objects of replacing Companies Act 1956 with Companies Act 2013 was simplification whereas the way it came out it is draconian, complex and confusing. There has been huge hue and cry against a lot of provisions and the practical challenges it had. Consequently, government constituted Company Law Committee on 4 June 2015, which went to details and made 100+ significant changes. The following are few major recommendations:

  • Managerial remuneration to be approved by shareholders and no need to go to the government.
  • An unrestricted object clause to be allowed in the memorandum of association like most other countries.
  • The provisions relating to insider regulations will be deleted as there are separate regulations for the same which are being governed by SEBI
  • Restriction on layers of subsidiaries and investment companies to be removed.
  • Rationalisation of penal provisions with reduced liability for procedural and technical defaults. Penal provisions for small companies to be reduced.
  • ESOPs to be allowed to promoters working as employees/directors.
  • Limit on sweat equity to be raised from 25% of paid up capital to 50% for start-ups.
  • Requirement for a managerial person to be resident in India for twelve months prior to appointment to be done away with.
  • Test of materiality to be introduced for pecuniary interest for testing independence of an individual to be an independent director; thresholds for relatives’ pecuniary interest to be revised to make it more practical.
  • Disclosures in the Directors’ Report to be simplified and duplications with SEBI’s disclosure requirements and financial statements to be removed while retaining the informative content for shareholders.

All the recommendations are very relevant considering ease of doing business, simplification, introduction of materiality with regard to compliance requirements and penal provisions.  Hence government should adopt these recommendations in toto and implement the same through amendment to the act or rules immediately.

As we are in February, the Union Budget is round the corner and all eyes are at it.  Government has lot of unfinished legislative agenda to finish including constitutional amendment for GST.  A committee set up by the government under the Chairmanship of Justice (retired) R.V. Eswar to change direct tax laws has suggested several taxpayer – friendly measures to improve the ease of doing business, reduce litigation and accelerate the resolution of tax disputes and some of the proposals need amendments to the Income Tax act, hopefully they will be addressed in the upcoming budget.

There is a hyper activity around the legal frame work affecting the businesses and corporates in India such as bankruptcy code, GST, simplification of companies act, labour law reforms, constitution of commercial courts, amendments to arbitration law and specific performance act etc., All these are demands from the  corporate sector and banking sector for a very long time and I am happy to see these things have attracted the attention of the current government and they have started acting on it. With all these likely to take around one or two years to implement, we can expect to see the benefits in the short to medium term.

With best regards
Raghu Babu G
Partner
[email protected]
2 Feb 2016

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