In-Depth: Startup Eligibility Literature For Founders

Prime Minister Narendra Modi’s Startup India Action Plan got many entrepreneurs really excited but the prime question is, are the eligibility criteria really inclusive for all startups?

We can just hope that the government understands the need of startups and makes encouraging policies to 'ease starting up' but up till now startups of young entrepreneurs who work without government incubation or without government recognized funds cannot avail any of these benefits. Even the the recent budget announced on Feb 1st, 2017 couldn't change the existing policies much for new entrepreneurs.

Eligibility Criteria for a startup (as on January 2016)

1. It must be an entity registered/incorporated as:-
• Private Limited Company under the Companies Act, 2013; or
• Registered Partnership firm under the Indian Partnership Act, 1932; or
• Limited Liability Partnership under the Limited Liability Partnership Act, 2008.

2. Five years must not have elapsed from the date of incorporation/registration.

3. Annual turnover (as defined in the Companies Act, 2013) in any preceding F.Y. must not exceed Rs.25 crore

4. Startup must be working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

5. The Startup must aim to develop and commercialise:
• a new product or service or process; or
• a significantly improved existing product or service or process that will create or add value for customers or workflow.

6. The Startup must not merely be engaged in:
• developing products or services or processes which do not have potential for commercialisation; or
• undifferentiated products or services or processes; or
• products or services or processes with no or limited incremental value for customers or workflow

7. The Startup must not be formed by splitting up, or reconstruction, of a business already in existence.

8. The Startup has obtained certification from the Inter-Ministerial Board, setup by DIPP to validate the innovative nature of the business, and:
• be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an incubator established in a post-graduate college in India; or
• be supported by an incubator which is funded (in relation to the project) from GoI as part of any specified scheme to promote innovation; or
• be supported by a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from an incubator recognized by GoI; or
• be funded by an Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network duly registered with SEBI* that endorses innovative nature of the business; or
• be funded by the Government of India as part of any specified scheme to promote innovation; or
• have a patent granted by the Indian Patent and Trademark Office in areas affiliated with the nature of business being promoted.

Challenges in the Startup India Action Plan
One of the problematic elements is the definition of ‘startups’ given by the government. It says, ‘working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.’

Arguably, this will restrict the number of new businesses that can take advantage of the benefits. Moreover, due to its vague wording, it remains to be seen how the Inter-Ministerial Board will scrutinize the startups and see if they fit this criterion.

Legal experts like Raghav Shekhar, Founder of Lawyered.in, “the plan also mentions - The product or service should be a new one or a significantly improved version of existing services or products. If we look at this criteria closely, the option of creating competitors to already established startups is not viable under the Startup India scheme. I'm sure a big number of startups will fall out of the 'eligibility bracket' just by this condition alone.” Let’s take the example of e-commerce marketplaces that are dominated by the likes of Amazon, Flipkart and Myntra. For a startup trying to break into this space, unless its product is significantly an improvement upon what existing players have on offer, it may not be eligible for the benefits offered by the plan.

It requires a startup to get a recommendation letter from the recognized incubator cell or be recognized by the Government of India or should be funded by recognized funds. This is surely going to be a tedious task for any startup. For entrepreneurs who are struggling to set up their team, business, office and marketing; also striving hard to get funding, they shouldn’t further be troubled to get recognized by the government agencies or departments.

1. First, convince the incubator for eligibility based on an already vague definition is not going to be a smooth process.

2. Second, with investments getting so hard to come by in the age of consolidation, startups are happy going with unregistered funds/investors, which is a complete setback if they are looking to get registered under the scheme.

Welcome Moves
The tax exemptions, reduction of regulatory burden, self-certification of compliances and the ease in filing for Intellectual Property were definitely a welcome move, the startups still demand more clarity and access to getting inducted as a startup. Also, harnessing private sector expertise for Incubator setup through public private sector (35 new incubators, 7 new research parks)

Our Analysis
An estimate of about 60% startups were rendered ineligible for registering under Startup India plan, which pushes us to think that ‘Startup India’ can really benefit by going back to the drawing board. On this Raghav said, “In my personal opinion, we would definitely like to see a clearer bouquet of benefits for startups under the scheme, ranging from discounted technology/cloud services, affordable office spaces to pro-bono legal work”.

Fore registering on the government's Startup India website, follow the link- StartupIndiaRegisteration