The Viewpoint: Optimism reigns for start-up ecosystem - Emerging Opportunities

COVID-19 pandemic saw an overall growth of the investment for Start-up sector. Interestingly, funding is almost back to pre-covid levels, with nearly a billion dollars invested and a number of large deals recorded from April to September 2020.

The measures enforced due to Coronavirus pandemic have accelerated the adoption of digitisation to enable consumers to embrace an enriched digital experience. To support the people of the country and bolster the monitoring system with tech-enabled innovations, many Indian startups are closely working with authorities at central, state, and district levels. Startups have also been at the forefront of solving the problems created by the pandemic and promise to play a significant role in the development of vaccines and tracking apps that will help economies return to normal.

Some of the key recent government notifications, actions and policy amendments aimed at easing the complexities faced by entrepreneurs and their benefits to the Start-up ecosystem are discussed below.

POLICY RESPONSES - SPEED UP THE RECOVERY

• The Finance Minister has announced a slew of measures as a part of the economic stimulus package for self-reliant India. Among various schemes introduced in the package, one was the Emergency Credit Line Guarantee Scheme (‘ECLGS Scheme’), which intends to enable the flow of funds to Start-ups, MSMEs and other enterprises. This scheme, in particular, has assisted its target sectors by providing liquidity and addressing the cash crunch situation due to business disruptions during this pandemic. The liquidity support has further enhanced the buying power of enterprises and has assisted the Start-ups and MSMEs to recover from the effects of COVID-19 pandemic.

• To allow some economic activities, to re-start manufacturing activities or provision of services, some states have provided relaxations to establishments from their existing labour laws. To name a few, the states of Uttar Pradesh, Gujarat, Rajasthan, Himachal Pradesh, Assam and Madhya Pradesh have passed Labour Laws (Amendment) Ordinance, 2020 that provides for these essential relaxations. For instance, in its many provisions, it exempts all factories and establishments engaged in manufacturing processes from all labour laws for a period of three years and allows the employers to increase the stipulated working hours. It also expedites the factory registration period while relaxing the license renewal regulations.

• In order to facilitate Start-ups to retain and incentivise their key employees as well as to offer stock options schemes to their employees, the deduction of applicable tax on employee stock option scheme has been deferred by 48 months from the end of the relevant assessment year in which ESOPs are exercised, or employees cease to be in employment of the concerned start-up which issued such ESOP or sweat equity, or from the date of the sale of such ESOP or sweat equity share by the employee, whichever is earlier. In comparison to the earlier restrictions wherein the ESOP or sweat equity were taxed as perquisites in the hands of the employee at the time of exercise, requiring the companies to deduct withholding tax at the time of exercise, this move will boost additional cash-flow for the eligible employees.

• In another attempt, a provision has been made for all Start-up companies that are recognised by Inter-Ministerial Board and have a turnover up to INR 25 Crores to avail deduction of 100%of its profits for 3 consecutive assessment years out of 7 years . Additionally, the Reserve Bank of India has categorised Start-ups and included it under the priority sector lending regime. This allows a loan of upto INR 50 Crores to recognised, sector-specific Start-ups as falling within the stipulated priority sector lending. This credit facility instead of just raising share capital, will also benefit the investors' community of Start-ups by ensuring that their shareholding in the Start-up is intact and not subject to further dilution. The inclusion of Start-ups within the definition of priority sector lending will open more avenues for Start-ups to raise money from traditional banking channels and improve liquidity to carry on their business operations and other functions seamlessly, thereby ensuring their survival in the competitive market and during COVID-19 pandemic. RBI has also drawn up a ‘COVID-19 regulatory package’ which is intended at reducing the burden of debt-servicing and aims at easing working-capital requirements, pursuant to which lending institutions would be permitted to grant a moratorium.

EASING DEPOSIT RULES FOR START-UPS

• The Ministry of Corporate Affairs (“MCA”) has relaxed deposit norms for Start-up companies to enable Start-ups to raise funds through corporate bonds or other convertible instruments for 10 years, as against the previously stipulated period of 5 years and allowed an additional 5 years’ time to repay deposits of INR 25 lakhs or more.

This move may help start-ups to pick up pace in raising funds without having to comply with the deposits related regulatory compliances and is being lauded by the start-ups and the stakeholders who have been severely distressed and unable to meet their repayment obligations in the recent past due to the COVID – 19 pandemic.

START-UP ASSISTANCE SCHEME

• The Small Industries Development Bank of India had formulated a 'COVID-19 Start-up Assistance Scheme' with the intention to provide interim support to startups whose cash flow and liquidity have been adversely impacted by the on-going pandemic. This assistance can be used for various working capital requirements inter-alia salaries/wages, rent, administrative expenses and payment to vendors. Under the Scheme, a loan of not more than INR 2 Crores at an interest rate of 10.5% would be provided to eligible Start-ups for a period extendable to 36 months.

RELAXATIONS FOR CORPORATE COMPLIANCES BY MINISTRY OF CORPORATE AFFAIRS

• The MCA launched the Companies Fresh Start Scheme in order to give companies an opportunity to regularise any filing related defaults so that it the respective entities can become fully compliant.

Norms related to holding general meetings and passing of special and ordinary resolutions in such meetings were also relaxed in order to facilitate the holding of such meetings through video conferencing and other audio-visual. Considering that strict compliance with the applicable law is an important caveat in the investment agreements and any non-compliance with the regulations can have dire consequences for the Start-ups and founders, such relaxations from MCA have proved to ease the discomfort of founders of Start-ups. Furthermore, the MCA has also increased the threshold for default for initiating corporate insolvency.

CONCLUSION

The Indian Start-up ecosystem has adapted to the Covid-19 scenario and with the integration of new-age technologies such as the Internet of Things (IoT), artificial intelligence (AI), data analytics, and remote sensing, the startups are offering immediate solutions in streamlining the supply process and helping the farmers to produce more efficiently.

There is a clear V-shaped recovery in the sectors that are comparatively more open to adopting new-age technologies and redesigning their ecosystem. With the rising number of new startups in India, entrepreneurs and venture capitalists are turbocharging the development of the top technology-driven start-ups.

There are opportunities for start-ups that introduce (or upscale) radical innovations that can be useful in the long run. Innovations in tele-medicine, remote personal care, medical equipment, home delivery, food processing, teleworking, online education and contact tracing are the sectors which will see more traction in the coming years.

Authors: Founder Partner, Archana Khosla Burman; Associate Partner, Vishal Mehta; and Associate, Soumya Bansal