This article has been written by Mahek Patel, a 3rd semester law student from Balaji Law College.
ABSTRACT
Have you heard about the Schumpeter Theory of growth, basically the theory of innovation. This theory of innovation states that there are two elements that bring growth and change are innovation and entrepreneurship, but these two elements play their roles on the ground of a game called “Startups”. Startups are known as young companies that are on the early stage of development and growth. Startups are one of the business ecosystems which are characterized by Innovation and led by the Entrepreneurs and when a startup reaches upto the valuation of over $1 billion rare, extraordinary and unique, such rare startups are called as “Unicorns”. As these unicorns and startups are taking the pace in the Indian corporate landscape, the need for legal guidance and regulation arises as well. The need of understanding the Intellectual Property and its aspects becomes a necessary thing, the need of regulatory authority like SEBI and FDI and understanding its regulation and changes are necessary as getting investors interested and growing funds. Exploring the funding, development, investor rights and protection and innovation and intellectual property laws related in context with evolving legal methodology holds significance.
INTELLECTUAL PROPERTY (IP) AND INNOVATION PROTECTION
In 2024 the legal landscape of this unicorn and startup ecosystem focused on the strategic tool called intellectual property which drives innovation and growth. In the startup ecosystem the IPR has become an important growth asset which not only focuses on growth but also act as a guarding mechanism of innovation, the factor that drives up the startup ecosystem.
IP and innovation protection is a legal mechanism that safeguard creative works of an entrepreneur, unique ideas, company’s new evolving technology and brand identities which all play a crucial role in maintaining the complex edge and fostering continuous innovation within the rapidly growing startup ecosystem.
Schemes for facilitating Startups Intellectual Property Protection (SIPP)
Sipp is a flagship scheme by the Department for Promotion of Industry and Internal Trade(DPIIT) which provides a supportive hand to the startup ecosystem, as it provides and manages their IP assets. The main aim of the scheme is to provide financial support and create awareness about IPR and manage everything from the first step that is from filling, registration, application, to the last step of final disposal. Implemented through a network of facilitators which are registered with controller journal of patent, design, and trademarks and focuses mainly on it promotion that has lead India leaping ahead on the Global Innovation Index (GII) published by World Intellectual Property Organization (WIPO) by which now India holds the 40 position in GII and has been acknowledge as “Innovative Achiever” for the 12th executive year.
Overview of this scheme:
SIPP was launched in 2016 on a pilot basis for a year and in September 2019 the scheme was made applicable to all Indian innovators/ creators using the services of WIPO and TISCs. In effect for 7 years SIP scheme as consequence and extended in 3 parts and the outcome and impact is fully positive.
Benefits of SIPP:
- Builds awareness: The scheme promotes and creates awareness about intellectual property protection among emerging startups.
- Cost reduction: Startups have received a discount on IP filling by the scheme as it manages and provides everything.
- Expertise: This scheme provides access to IP professionals and guides young entrepreneurs in the startup chain through their IP registration process.[1]
FUNDING LANDSCAPE AND INVESTORS PROTECTION
In the startup race, funding and investors are the sources that navigate the challenges in the growing business. Funding on one hand helps in marketing, expansion, manufacturing, where this funding is raised by investors and founders which helps in boosting and
Investors on other hand provide advice on hiring product development marketing and other extensive networks and connections in the market which prove to be valuable assets for new startups so as these sources are valuable assets and play a vital role in understanding the funding landscape and focusing on investors protection becomes a must in this startup ecosystem. In the current scenario, the startup ecosystem has become definitely secured as SEBI changed some regulations which not only affects funding and IPOs but also the venture and capital investment and other updates in FDI which highlights the foreign business opportunities and the challenges for startups seeking global funding.
SEBI Amendments:
Security and Exchange Board of India( SEBI )are not statutory body which was constituted on April 12, 1988 this board bought its second amendment August 2024 in Securities Contract (Regulations) Rules, 1957, through Securities Contract (Regulations) Amendment Rules, 2024, vide Notification No. GSR 518(E), dated 28.08.2024.
Intermediaries regulation amendment:
Regulation 16A of the regulations placed restrictions in having association with certain persons. The term ‘association’ is defined under Explanation 2 to this Regulation as meaning-
- a transaction involving money or money’s worth;
- referral of a client;
- interaction of information technology systems;
- any other association of a similar nature or character.
Regulation 16A (1) provides that a person regulated by the Board or its agent, shall have any direct or indirect association, with another person who-
- provides advice or any recommendation, directly or indirectly, in respect of or related to a security or securities, unless the person is registered with or otherwise permitted by the Board to provide recommendation; or such advice or
- makes any claim, of returns or performance expressly or impliedly, in respect of or related to a security or securities, unless the person has been permitted by the Board to make such a claim.
And under the regulation 16B, this regulation provides punishment for violation of 16A.
Stock exchange and clearing corporation Amendments:
This amendment to stop exchange and clearing corporations came into the plan of action on 26 August 2024 inserted in a new Chapter VIA that deals with the restrictions in dealing with other entities containing two regulations 44 B and 44C.
Regulation 44B placed restrictions in having association with certain person the term association defined as a transaction involving money or money is worth regulation 44 B states depository or its agent shell have any direct or indirect association with another person who-
- provides advice or any recommendation, directly or indirectly, in respect of or related to a security or securities, unless the person is registered with or otherwise permitted by the Board to provide recommendation; or such advice or
- makes any claim, of returns or performance expressly or impliedly, in respect of or related to a security or securities, unless the person has been permitted by the Board to make such a claim.
Regulation 44B (1) shall not apply in respect of an association through a specified digital platform. The expression ‘another person’ is defined under
- Explanation 3 to this Regulation as not including a
- person who is engaged in investor education,
- provided that such a person does not, directly or
- indirectly, indulge in any activity as referred to in any
- clause of sub-regulation (1) without the necessary permission.
The expression ‘specified digital platform’ is defined in Explanation 2 to this Regulation as a digital platform as specified by the Board, which has a mechanism in place to take preventive as well as curative action, to the satisfaction of the Board, to ensure that such a platform is not used for indulging in any activity as referred to either clause of sub- regulation (1).
Regulation 44C provides that the Board may, in case of violation of any of the provisions of regulation 44B, take such action as it may deem fit including action as provided under regulation 49 (power to issue directions and levy penalty.
Depository regulation Amendments:
The amendment regulations came into effect from 26.08.2024. The amendment inserted a new Chapter VII A dealing with restrictions in dealing with other entities, containing two Regulations 82B and 82C.
Regulation 82B placed restrictions in having association with certain persons. The term ‘association’ is defined under Explanation 1 to this Regulation as meaning-
- a transaction involving money or money’s worth;
- referral of a client;
- interaction of information technology systems;
- any other association of a similar nature or character.
Regulation 82B (1) provides that a depository or its agent, shall have any direct or indirect association, with another person who-
- provides advice or any recommendation, directly or indirectly, in respect of or related to a security or securities, unless the person is registered with or otherwise permitted by the Board to provide recommendation; or such advice or
- makes any claim, of returns or performance expressly or impliedly, in respect of or related to a security or securities, unless the person has been permitted by the Board to make such a claim.
Regulation 82B (1) shall not apply in respect of an association through a specified digital platform.
- The expression ‘another person’ is defined under Explanation 3 to this Regulation as not including a person who is engaged in investor education, provided that such a person does not, directly or indirectly, indulge in any activity as referred to in any clause of sub-regulation (1) without the necessary permission.
- The expression ‘specified digital platform’ is defined in Explanation 2 to this Regulation as a digital platform as specified by the Board, which has a mechanism in place to take preventive as well as curative action, to the satisfaction of the Board, to ensure that such a platform is not used for indulging in any activity as referred to either clause of sub- regulation (1).
- Regulation 82B (2) provides that the depository shall ensure that any person associated with it or its agent does not engage in the activities mentioned in either of the clauses in sub-regulation (1) without the necessary permission.
- Regulation 82C provides punishment for violation of Regulation 82B. The said Regulation provides that the Board may, in case of violation of any of the provisions of regulation 82B, take such action ↑ may deem fit including action under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulation 2008.[2]
Taxation and Financial Incentives
Angel tax:
While presenting the union budget 2024-25 Finance Minister Nirmala Sitaraman announced that angel tax will be abolished. This announcement of Nirmala Sitaraman comes as a significant relief for the startup ecosystem in India as the ecosystem was facing funding slums from the past year.
She said” first of all to bolster the Indian startup ecosystem, boost the entrepreneurial spirit and support innovation, I proposed to abolish the so-called Angel tax for all classes of investors”.
This abolition was anticipated with DPIIT, in addition to the angel tax abolition the final minister extended the definition of eligible startup under the startup India scheme to include entities incorporated between April 1 2016 and March 31st 2025, this allowed most startups to benefit from the tax holiday.
How has this announcement become good news for the Indian startup ecosystem?
The budget announcement comes at a crucial time for Indian startups, which saw funding fall sharply to $8.8 billion in 2023 from $25 billion in 2022. Only two new unicorns emerged compared to 23 in 2022 and 39 in 2021. Previous budget initiatives for startups included extending the date of incorporation for income tax benefits and increasing the benefit of carrying forward losses to 10 years. The government has implemented various measures to boost India’s startup ecosystem, which is now the third largest in the world.
So far, the government has taken multiple steps to promote startups in the country. In 2016, the government launched The Startup India initiative with an aim to build a strong ecosystem for innovation and to encourage private investments in startups. Under this initiative, various programs like Fund of Funds for Startups (FFS) scheme, Startup India Seed Fund Scheme (SISFS), and Credit Guarantee Scheme for Startups (CGSS) have provided domestic startups with capital at various stages of their business cycles.
And other financial initiatives like the new GST registration regulation affecting startups and focusing on the benefits along with the hardships. Specifically for startups the GST has facilitated the business operation by conducting a complex network of indirect taxes into a single tax framework and the Indian government in an attempt to reduce tax evasion and lower the load on small enterprises.
The main changes are:
- GST registration threshold limit
- Updates on the GST composition scheme
- Compulsory GST E-invoicing
- GST registration process for small business[3]
CONCLUSION
Focusing On recent regulatory development, complainant and challenges, and emerging opportunities Indian Startups and Unicorns have grown so much with its evolving legal landscape that could be called as legal guidance, help and acts as an regulatory authority that safeguards and maintains smooth working, and that’s highlights how the Startups ecosystems are working in this Indian pace.
This article has discussed government initiatives and all other changing and evolving regulations of SEBI and FDI, but there are still some challenges standing behind to break down the wealthy chain of startup ecosystems. As much challenges are waiting for the Entrepreneurs this is must that law will support and safeguard them with evolving nature and maintain balance in other sector specific trends. The legal landscape now here is shaping the growth of startups and unicorns in India’s corporate dynamic landscape.
References
All you need to know about the business structure of startups
All about legal status of startups under corporate jurisprudence in India
The ease of doing business for startups in the light of recent amendments to LLP Act 2008
- https://www.ijllr.com/post/angel-tax-the-devil-in-disguise-a-critical-juxtaposition-of-private-equity-venture-capital-polic
- https://www.ijllr.com/post/corporate-governance-in-indian-startups-challenges-and-opportunities
- https://www.ijllr.com/post/an-analysis-of-corporate-governance-in-startups
- [1]https://www.investindia.gov.in/team-india-blogs/safeguarding-innovation-governments-focus-startups-intellectual-property#:~:text=SIPP%20is%20a%20flagship%20scheme%20of%20the,to%20protect%20and%20manage%20their%20IP%20assets.&text=Startups%20will%20be%20required%20to%20give%20a,for%20filing%20and%20prosecuting%20their%20IP%20application
- [2]https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=12913#:~:text=The%20amendments%20brought%20in%20Intermediaries,a%20similar%20nature%20or%20character
- [3]https://timesofindia.indiatimes.com/business/india-business/budget-2024-fm-nirmala-sitharaman-boosts-indias-startup-ecosystem-by-abolishing-this-tax/articleshow/111952356.cms
