Aaratrika Bal
“The success of the young entrepreneur will be the key to India’s transformation in the new millennium.”
– Dhirubhai Ambani
Introduction
A start-up can be considered a private firm or a limited liability partnership. In 2016, the ‘Start-Up India’ scheme was undertaken by the government. The primary objective of this scheme was to promote the concept of entrepreneurship and start-ups among the backward classes and women. As per this scheme, the age of a start-up has been raised to 7 years. It has been raised to 10 years for those dealing with biotechnology. In 2017, the DIPP wanted to alter the meaning and definition of a start-up. It was then decided that there cannot be just one definition. The definition and explanation would vary in different sectors. This article will focus on the need for proper legislation and regulations. The government has taken many measures to make the process more convenient for start-ups.
Existing Laws to Regulate Start-ups
As mentioned before, many schemes and programs have been undertaken to contribute to the betterment of start-ups. For instance, FFS or the “Fund of Funds for Start-ups” had been set up to make the funding process easier for start-ups . This fund helps reduce the risks of investing in stocks and bonds. A number of legislations are related to the whole process of starting a start-up. These legislations include labour laws, taxation laws, IP laws, contract laws, etc. More structured and streamlined legislation is essential for the convenient functioning of the start-ups. An act, particularly for start-ups, would make the process more systematic.
The laws vary in different types of start-ups. For instance, in the case of proprietorship, there is no requirement for formal registration. On the other hand, LLPs need to get registered. LLPs and private limited companies have limited liability, whereas partnerships have unlimited liability. Thus, all start-ups do not function according to the same rules and laws. Exemption from paying taxes for a period of 3 years had also been provided under the ‘Start-Up India’ scheme. This scheme also states that nine labour laws apply to the start-ups in India. They are as follows:
– The Industrial Disputes Act, 1947
– The Trade Unit Act, 1926
– Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act, 1996
– The Industrial Employment (Standing Orders) Act, 1946
– The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
– The Payment of Gratuity Act, 1972
– The Contract Labour (Regulation and Abolition) Act, 1970
– The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
– The Employees’ State Insurance Act, 1948
Legal Lacunae
Start-ups often face multiple issues due to a lack of streamlined legislation. Before discussing the legal lacunae, we will briefly discuss some other significant issues that the start-ups will likely face. The primary problem is that of funding. It is tricky for a start-up owner to find a funding company or source. There are certain factors that companies often look for before funding start-ups. Rajan Anandan, the Managing Director of Sequoia Capital, says that one of the most important factors is the capability of the start-up’s founder. A start-up is expected to exist for at least a period of 10 years to prove consistency and profitability. The user-friendliness of the product that the start-up is offering is also studied. Hence, being a new start-up founder or aspiring, you can take note of the above tips to make the funding procedure easier. Now, let’s come to the main point to study the legalities and the legal mistakes that start-ups might commit. Forming a legal structure is a vital step, which many founders happen to overlook. It is essential to decide who will play what role in the organization. Therefore, you need to sign formal contracts and agreements. Customer agreements also play a vital role and often get ignored while building a start-up. The third mistake would be underestimating the function of an NDA or “non-disclosure agreement.” Due to a lack of sound legal knowledge, many start-ups do not have proper IP protection. These are some basic lacunae that start-ups face in their growing phase. Streamlined legislation would help the founders deal with these issues more effectively.
Why Do We Need a Separate Law?
Today, start-up owners are more concerned about legal complications rather than the profitability of their business. They face random changes in legislation and regulations. There have been events of many regressive policies too. Priyanka Roy, the founder of Saraqua Law, Mumbai, said that it is high time governments understand the difference between regressive policies and effective regulation .
The biggest reason for updated and streamlined legislation is the execution of sudden regulations. Start-ups find it challenging to follow these regulations and change them randomly due to financial constraints. Therefore, something more permanent and stricter is required.
Socio-legal Factors Hindering the Execution of Updated Legislation
One of the main reasons behind the lack of updated and streamlined legislation is the lack of awareness. The concept of start-ups has become popular quite lately and thus needs time to form a proper regulatory framework. We still have conservative legislation which needs updating. Some unnecessary legislation makes the whole system complicated. This problem can be well understood through various cases. For instance, take the case of ‘Little Eye Labs.’ The acquisition of this company was more difficult for Google than acquiring WhatsApp in the United States.
Inventus Capital Partners surveyed entrepreneurs in India and the US. It was found that the biggest flaw in the Indian system is the absence of any structured regulatory framework .
Some of the factors hindering the growth of the start-up ecosystem in India are:
– Conservative and traditional regulations.
– Lack of basic skills and infrastructure.
– Lack of awareness and skills to make a new framework
International Laws Regulating Start-ups
In this segment, we will talk about various start-up laws that different countries have adopted, which have proven to be very helpful. Some start-up-friendly countries are the UAE, Netherlands, Finland, South Korea, Spain, etc. These countries top the list provided by Global Entrepreneurship Monitor, aka GEM.
These countries have very effective regulatory frameworks that ease the process of establishment of the start-ups and their taxation issues. Different countries have different economic and social dynamics. Hence, the regulatory frameworks differ too. India does not necessarily have to borrow any particular rules or laws from other nations. The heed of the hour is to have streamlined legislation with laws suitable for a developing country like India.
Conclusion
India is one of the largest growing hubs for start-ups. The Modi government had also been found taking measures to promote entrepreneurship. But there is a need for permanent legislation to regulate the functioning of these start-ups. Streamlined legislation would solve many problems. It would also be a pioneering step in encouraging more people in the field of entrepreneurship.
Views are personal.
The author is a graduate from National Law University, Odisha and is interning with Desi Kaanoon as a Content Writer.