Why Indian Start-Ups Are Not Growing

Business / Jul 11, 2020

One of the most commonly used words in emerging new India is ‘Start-up’ which signifies a new commercial venture started by a person or a group of persons (known as entrepreneurs), to execute an innovative idea and launch it in the market. Indian youth today is having a strong vision as well as a strong will to execute it. As a result, India is witnessing start-ups like Oyo, Zomato, Flipkart, Paytm, Ola et cetera, which are not only strengthening the economy of the country but also generating around 60 thousand direct and 1.3 to 1.8 lakh indirect employment.

Government involvement in the start-up arena started in January, 2016 when our Honourable Prime Minister Shri Narendra Modi launched the Start-up India Action Plan. Numerous facilities are put forward for encouraging the start-up growth in the country through different governmental schemes. As per a recent report by NASSCOM, India has the third largest start-up ecosystem in the world. There are 31 start-ups in the unicorn club and 52 others in the list of potential unicorns.

Even after such governmental support and glorified examples of a few start-ups, there are a large number of start-ups in India which are failing. As per a report by the Institute for Business Value and Oxford Economics, 90% of India’s Start-ups fail in the first 5 years. Securely, it can be said that 9 out of 10 start-ups could not witness a potential success.

The reasons of failure are many, for example, a start-up may fail due to lack of innovation or because of its inability to understand the customer requirements or maybe due to weak leadership or non-compliance with legal aspects.

Here in this blog, we will focus on the legal requirements because failure to comply with these legal obligations is one of the reasons why Indian Start-Ups are collapsing.

Let us look at these aspects in detail:

THE FOUNDATION: CHOOSING THE MOST APPROPRIATE BUSINESS STRUCTURE

Choosing the right business structure is of utmost importance because it has a huge impact on major factors involved in running the business. If this choice is not made diligently then a Start-Up can face severe consequences. This factor decides the liability and accountability of the owner, the amount of paperwork required, the extent of tax liability, divisions of profits, amount of investment and fund raising. One can make a choice between a few preferred structures like:

  • Private Limited Company
  • Sole Proprietorship
  • One Person Company
  • Public Limited Company
  • Partnership Firm
  • Limited Liability Partnership

All structures have some advantages and disadvantages attached to them. It depends on the nature of business and the vision of the entrepreneur(s) as to how much they want to expand and how much power, risk, control and responsibility they are willing to take directly.

Most business organisations suffer by choosing the wrong structure and end up in losses; therefore, expert guidance must be sought.

For a better understanding of what these structures have to offer as well as to know the advantages and disadvantages attached to each structure, you can refer our article explaining all of them in detail by clicking here.

COMPLIANCE WITH BUSINESS LICENSING REQUIREMENTS

Licensing norms in India are very strict and failure to obtain the required licenses can attract heavy penalties and legal actions. There are certain categories of businesses which require license according to their nature of operations. Shops and establishments, import and export, healthcare, food business, financial institutions etc. are few types requiring special permits. For instance, FSSAI (FoSCos-FSSAI) Certification must be obtained by food Start-Ups, otherwise, the founders may face imprisonment with heavy penalties.

Most start-ups are ignorant of technicalities and requisition of specific licensing norms and therefore face unwanted lawsuits. To avoid failure of the business, this area must be thoroughly checked and all required licenses must be obtained.

To save the business from unnecessary actions, the entrepreneurs must be vigilant of these obligations.

PROTECTION OF INTELLECTUAL PROPERTY

Indian market is witnessing a cut throat competition and the start-ups are new businesses coming forward with better ideas to conduct their operations. With so many rivals in the market, there are chances of theft of intellectual property which a start-up has uniquely formulated with innovative thinking and hard work. To protect this, India has strong Intellectual Property laws like The Trademarks Act, 1999, The Patents Act, 1970, The Copyright Act, 1957 which are amended time to time to provide the most effective remedies. Various forms of IP include:

  • Trademarks
  • Copyrights
  • Patents
  • Industrial Designs

With more patents registered in its name, a start-up can attract more investors. A registered logo can prevent other market rivals from copying the name and concept of a business. Patenting the unique product can create a monopoly of the business in the market and increase the monetary flow. Therefore, it is always suggested to register the Intellectual Property beforehand.

By protecting these Intellectual Properties, a business can take benefit of their brand name and stand distinct in the market adding value to its Goodwill.

TIP: Be very careful while naming and branding your start-up. If the name and logo you adopted for your Start-Up is already present and registered in the market then it may attract lawsuits.

FULFILLING THE LISTING REQUIREMENTS

Listing requirements are the regulations by the National Stock Exchange which are to be complied with if a start-up wishes to list its securities. These guidelines by Securities Exchange Board of India must be followed and the requisite fee must be paid along with several required disclosures in order to list the company in the stock exchange. These provisions are updated regularly; hence it is necessary to stay well informed with the latest changes.

FAILURE TO REGISTER UNDER BENEFIT SCHEMES

The entrepreneurs initiating start-ups are generally new minds in the industry; therefore, due to lack of knowledge, they couldn’t grab maximum benefits from the available governmental schemes. Let us look at few governmental schemes for start-ups.

Start-Up India Plan

After registering under the start-up India scheme a new business can get the following benefits:

  • Income Tax Exemptions- For 3 consecutive years and it also gives exemption on capital gains and investments above fair market value.
  • Patent Application and IPR Protection- Fast Track and up to 80% rebate in filing patents.
  • Easier Public Procurement Norms- Get listed as a seller to the government and benefit from exemptions on EMD and minimum requirements.
  • Easy Winding-Up of Company- within 90 days under Insolvency & Bankruptcy Code.

MSME/ Udhyam Aadhar Registration

Certifications like Udhyam Aadhar help the start-ups to register themselves as a Micro, Small or Medium Enterprise (MSME) which has attached benefits like:

  • Easy Bank Loans
  • Exemptions on Bank Overdraft
  • Tax Rebates
  • Concession in Electricity Bills
  • Preference in Procuring Government Tenders
  • Fast Resolution of Disputes and many more.

By overlooking these benefits due to lack of knowledge, the start-ups fail to achieve their full potential.

CO-FOUNDERS AGREEMENT

Co-Founders Agreement is a legal document that depicts the terms and conditions related to the conduct of business between the founders. It depicts their extent of liability, rights and responsibilities along with other roles they hold in the setup. In case of any dispute between the co-founders, this agreement proves to be of great significance and is legally binding on the signatories.

Some of the most important clauses of a Co-Founders agreement include:

  • Equity Ownership
  • Transfer of Shares
  • Vesting
  • Confidentiality
  • Intellectual Property
  • Start-Up Finances
  • Removal or Exit of Co-Founder
  • Dispute Resolution
  • Winding Up of Business

Not having a proper Co-Founders agreement can lead to disputes at a later stage.

PROPER DOCUMENTATION TO AVOID LEGAL ACTIONS

Unlike the established market giants and renowned companies, start-ups generally do not have an in house-legal team. At times, they couldn’t comply with certain mandatory requirements which result in legal actions against them.

Certain documents are must for a start-up to continue operations effectively and therefore the founders must be cautious about fulfilling this requirement.

Few important legal documents include:

  1. Articles of Incorporation: A declaration of nature, purpose, rules and regulations of a company.
  2. Operating Agreement: Required to avoid conflict between founding partners.
  3. IP Assignment Agreement: Attracts investment and adds to growth.
  4. Employee Contracts: The offer letter to clarify the roles and responsibilities of the recruit and the binding policies of the company.
  5. Shareholder Agreements: Determines the rights of shareholders and their access to those rights in stipulated conditions.
  6. Bylaws: Internal rules of the company to avoid complications.
  7. Non-Disclosure Agreement: To maintain confidentiality in the affairs of the business.

CONCLUSION

A start-up processing with due diligence has a better chance to succeed. Keeping an on-board Compliance partner could allow the start-up to focus on its business without worrying much about the legal requirements. Spending more time on developing business and neglecting the legal and regulatory compliances could be fatal. It is always suggested to stay in touch with the experts to fulfil the obligations without any failure. We at Legal-N-Tax Advisory, provide complete guidance regarding all the legal aspects for a start-up to grow without any burden. Contact us for any regulatory requirements.

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