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VC
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mca compliance for foreign companies setting up in india

MCA Compliances for Foreign Entities Starting Business in India

Introduction

India has emerged as a global hub for business and investment, attracting foreign entities eager to tap into its dynamic and growing market. Whether it’s multinational corporations expanding operations or startups venturing into new territories, establishing a presence in India offers immense opportunities. However, along with these opportunities come regulatory obligations that must be adhered to for smooth operations.

The Ministry of Corporate Affairs (MCA) plays a pivotal role in regulating companies and ensuring compliance with Indian laws. For foreign entities, understanding and fulfilling these mandatory MCA compliances is crucial not only to avoid penalties but also to build credibility and maintain transparency.

Overview of Foreign Entities Setting Up in India

Foreign entities can establish a presence in India either through incorporated or unincorporated entities. Incorporated entities include Wholly Owned Subsidiaries (WOS), Joint Ventures (JV), and Limited Liability Partnerships (LLP). On the other hand, unincorporated entities like Liaison Offices (LO), Branch Offices (BO), and Project Offices (PO) allow businesses to operate without forming a distinct legal entity in India.

Each mode of entry comes with its own set of benefits and limitations. For instance, incorporated entities enjoy a separate legal identity, while unincorporated entities often focus on specific functions like liaisoning or executing turnkey projects. Regardless of the mode chosen, foreign businesses must comply with: (i) stringent regulatory frameworks prescribed under the Companies Act, 2013 and governed by the Ministry of Corporate Affairs; and (ii) compliances under the Foreign Exchange Management Act, 1999, governed primarily by the Reserve Bank of India (RBI).

Importance of Compliance with Companies Act, 2013:

Compliance with the Companies Act, 2013 is paramount to legal sustainability of operations of a foreign entity in India, and consequently, is not just a legal requirement. Compliance with Companies Act, 2013 ensures that:

  • a business operates within the legal framework, avoiding fines or operational restrictions.
  • Stakeholders, including customers, investors, and partners, view the business as reliable and trustworthy.
  • The business can leverage tax benefits, investment incentives, and other government schemes.

Failure to comply with these corporate governance laws can lead to hefty penalties, reputational damage, and even suspension of business operations, implemented by the MCA. By maintaining compliance, foreign entities safeguard their interests and contribute to the ease of doing business in India.

Modes of Setting Up Business in India

Foreign entities looking to tap into India’s vast and growing market can choose from several modes to establish their business presence. These options are broadly categorized into unincorporated entities and incorporated entities, each with distinct features, advantages, and compliance requirements. 

Unincorporated Entities

Unincorporated entities allow foreign companies to establish a presence in India without creating a separate legal entity. These setups are ideal for specific or limited activities like representation, research, or project execution.

1. Liaison Office (LO)

Purpose: A Liaison Office acts as a communication channel between the foreign parent company and its operations in India. It facilitates networking, market research, and promotion of technical and financial collaborations.
Process:

  • Approval is required from the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA).
  • Post-RBI approval, documents must be filed with the Ministry of Corporate Affairs (MCA) using e-Form FC-1.
    Restrictions:
  • An LO cannot engage in any commercial or revenue-generating activities.
  • Its operations are restricted to liaisoning, brand promotion, and market surveys.
  • Validity is generally three years, with exceptions for specific sectors like NBFCs or construction (two years).
2. Branch Office (BO)

Purpose: A Branch Office enables foreign companies to conduct business operations directly in India, aligned with the parent company’s activities.
Activities Permitted:

  • Import/export of goods.
  • Rendering professional or consultancy services.
  • Acting as a buying or selling agent.
  • Conducting research and development.
    Process:
  • Prior approval is required from the RBI.
  • Incorporation documents and operational details must be filed with the MCA.
    Restrictions:
  • The BO must engage in activities similar to its parent company.
  • It cannot undertake retail trading or manufacturing unless explicitly permitted.
3. Project Office (PO)

Purpose: A Project Office is set up to execute a specific project in India, often in sectors like construction, engineering, or turnkey installations.
Setup:

  • Approval from the RBI is necessary, particularly for projects funded by international financing or collaboration with Indian companies.
  • Registration with the MCA is required post-approval.
    Validity Period:
  • The PO remains valid for the duration of the project and ceases operations upon completion.

Incorporated Entities

Incorporated entities offer a more permanent business presence and distinct legal identity in India. These setups are suitable for foreign businesses seeking long-term growth and operational independence.

1. Joint Ventures (JV)

Features:

  • A Joint Venture is formed through collaboration between a foreign company and an Indian partner, sharing resources, risks, and expertise.
  • Ownership and profit-sharing terms are defined contractually.
    Setup:
  • Approval may be required based on the FDI policy and sectoral caps.
  • The incorporation process involves filing e-Form SPICe+ with the MCA, along with drafting a Memorandum of Association (MOA) and Articles of Association (AOA).
  • At least one Indian resident director is mandatory.
2. Wholly Owned Subsidiaries (WOS)

Features:

  • A Wholly Owned Subsidiary is entirely owned by the foreign parent company, offering complete control over operations.
  • It operates as a separate legal entity, minimizing liability risks for the parent company.
    Process:
  • Submit an incorporation application using e-Form SPICe+ to the MCA.
  • The application also includes statutory registrations like PAN, TAN, GSTIN, and more.
  • A minimum of one Indian resident director is required on the board.
3. Limited Liability Partnerships (LLP)

Process:

  • File the name reservation application using e-Form RUN-LLP.
  • Submit incorporation documents through e-Form Fillip.
  • Draft and register the LLP Agreement using e-Form 3.
    Advantages:
  • An LLP combines the flexibility of a partnership with the limited liability of a company.
  • It involves fewer compliance requirements compared to companies, making it cost-effective.
  • Unlike incorporated entities, LLPs can commence operations immediately after obtaining the Certificate of Incorporation.

The choice between unincorporated and incorporated entities depends on factors such as the nature of business, long-term goals, and regulatory implications. While unincorporated entities are ideal for specific, short-term projects or liaisoning, incorporated entities provide a more robust and independent structure for long-term operations.

Regulatory Framework for Foreign Entities Starting Business in India

Establishing a business in India involves navigating a robust regulatory framework designed to facilitate foreign investments while ensuring compliance with Indian laws. The framework includes key regulations under the Foreign Exchange Management Act (FEMA), oversight by the Ministry of Corporate Affairs (MCA), and provisions outlined in the Foreign Direct Investment (FDI) Policy. Here’s an overview of these critical regulatory elements:

FEMA Regulations for Foreign Investment

The Foreign Exchange Management Act, 1999 (FEMA) governs all foreign investments and capital transactions in India, ensuring a streamlined process for non-resident entities to invest in the Indian market.

Key Provisions:

  • FEMA regulates the establishment of unincorporated entities like Liaison Offices (LO), Branch Offices (BO), and Project Offices (PO).
  • Investments in incorporated entities, such as Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS), are subject to FEMA guidelines for capital flows.
  • Transactions involving foreign direct investment, external commercial borrowings, or the transfer of shares are closely monitored under FEMA.

Compliance Requirements:

  • Prior Approvals: Entities such as LO, BO, and PO must secure approvals from the Reserve Bank of India (RBI) under FEMA regulations.
  • Post-Investment Reporting: Investments in equity instruments or convertible securities must be reported to the RBI through the FIRMS Portal using the FC-GPR Form within 30 days of share issuance.
  • Adherence to sectoral caps, entry routes, and conditionalities specified under the FEMA Non-Debt Instrument (NDI) Rules, 2019 is mandatory.

Ministry of Corporate Affairs (MCA) Role

The Ministry of Corporate Affairs (MCA) plays a pivotal role in regulating business entities incorporated in India, including subsidiaries of foreign companies and limited liability partnerships.

Key Responsibilities:

  1. Entity Incorporation: The MCA oversees the registration of incorporated entities through the online SPICe+ system for companies and Fillip form for LLPs.
  2. Compliance Enforcement:
    • Filing of annual returns (e-Form MGT-7/MGT-7A) and financial statements (e-Form AOC-4) by incorporated entities.
    • Event-based filings such as changes in directors (DIR-12) or registered office (INC-22).
  3. Foreign Company Oversight:
    • Foreign companies with an LO, BO, or PO must submit annual compliance filings like e-Form FC-3 (annual accounts) and e-Form FC-4 (annual return).

Why MCA Oversight Matters:

  • Ensures compliance with the Companies Act, 2013, reducing risks of legal or operational penalties.
  • Helps foreign entities maintain transparency and accountability in their Indian operations.

FDI Policy Overview and Approval Routes

India’s Foreign Direct Investment (FDI) Policy is a key driver for foreign investment, offering a structured and investor-friendly approach. The policy is governed by the Department for Promotion of Industry and Internal Trade (DPIIT) and provides clear guidelines for foreign investments across various sectors.

Key Highlights:

  • Automatic Route:
    • No prior government or RBI approval is required.
    • Most sectors, including manufacturing, e-commerce, and technology, fall under this route.
  • Government Route:
    • Investments in sensitive or restricted sectors require approval from the concerned ministry.
    • Examples include defense, telecom, and multi-brand retail.
  • Sectoral Caps:
    • FDI limits vary by sector, such as 100% for IT/ITES but capped at 74% in certain defense sectors.
    • Additional conditionalities may apply, such as performance-linked incentives or local sourcing requirements.

Steps for FDI Approval:

  1. Assessment of Entry Route: Determine whether the proposed investment falls under the automatic or government route.
  2. Application Filing: For the government route, file an application through the FDI Single Window Clearance Portal.
  3. Regulatory Adherence: Ensure compliance with the FEMA NDI Rules, 2019, including reporting the investment to the RBI via the FIRMS Portal.

Significance of FDI Policy:

  • Encourages foreign investment by simplifying regulatory processes and offering tax incentives.
  • Aligns with India’s vision of economic growth and job creation under initiatives like Make in India and Startup India.

Mandatory MCA Compliances for Foreign Entities

Adhering to the mandatory compliances set forth by the Ministry of Corporate Affairs (MCA) is critical for foreign entities to ensure seamless operations and avoid penalties. Whether operating as unincorporated entities like Liaison Offices (LO), Branch Offices (BO), or Project Offices (PO), or as incorporated entities like Joint Ventures (JV), Wholly Owned Subsidiaries (WOS), or Limited Liability Partnerships (LLP), specific regulatory filings and procedures must be followed. 

Mandatory MCA Compliances for Unincorporated Entities

Foreign entities operating in India without incorporation, such as LOs, BOs, or POs, must comply with specific MCA filing requirements:

  1. Filing e-Form FC-1: Initial Documentation
    • This form is filed upon the establishment of the foreign office in India.
    • Includes submission of charter documents, address proofs, and RBI approval.
    • Must be filed within 30 days of setting up the entity in India.
  2. Annual Filings: FC-3 and FC-4
    • e-Form FC-3: Submission of annual accounts, including financial statements and details of the principal places of business in India.
    • e-Form FC-4: Filing of the annual return detailing operations, governance, and compliance status.
    • These forms must be filed annually, ensuring compliance with the Companies Act, 2013.
  3. Event-Based Filings: e-Form FC-2
    • Required for reporting significant changes such as:
      • Alterations in charter documents.
      • Changes in the registered office address.
    • Must be filed promptly upon occurrence of the event to ensure regulatory transparency.

Mandatory MCA Compliances for Incorporated Entities

For foreign entities operating as incorporated bodies, such as JVs, WOS, or LLPs, there are both initial and annual compliance requirements:

Initial Compliances Post-Incorporation
  1. Obtaining Certificate of Commencement (e-Form INC-20A):
    • Required for newly incorporated companies to commence business operations.
    • Must be filed within 180 days of incorporation with proof of initial share subscription by shareholders.
  2. Convening the First Board Meeting:
    • To be conducted within 30 days of incorporation.
    • Key agenda items include:
      • Appointment of first auditors.
      • Issuance of share certificates to initial subscribers.
      • Confirmation of the registered office.
  3. FC-GPR Filing for Share Issuance:
    • Filed with the RBI through the FIRMS Portal within 30 days of share issuance to foreign investors.
    • Includes details of FDI received and sectoral compliance under the FDI policy.
Annual Compliances
  1. Minimum Board Meetings and AGMs:
    • Convene at least 4 board meetings annually, with a maximum gap of 120 days between two meetings.
    • Conduct an Annual General Meeting (AGM) to approve financial statements, declare dividends, and discuss other shareholder matters.
  2. Filing Financial Statements (e-Form AOC-4):
    • Submit audited financial statements, including the balance sheet, profit and loss account, and cash flow statement, within 30 days of AGM.
  3. Filing Annual Return (e-Form MGT-7/MGT-7A):
    • Includes details of the company’s shareholding, directorship, and compliance status.
    • Must be filed within 60 days of AGM.
  4. RBI Filing (FLA Return):
    • Report on Foreign Liabilities and Assets (FLA) to the RBI by July 15th each year.
    • Details include foreign investments, repatriations, and financial performance.
  5. Director KYC Compliance:
    • Annual KYC verification for all directors using e-Form DIR-3 KYC.
    • Ensures the validity of Director Identification Numbers (DINs) to maintain governance integrity.

Mandatory MCA Compliances for LLPs

Foreign entities choosing the Limited Liability Partnership (LLP) structure for their Indian operations must adhere to specific compliance requirements set by the Ministry of Corporate Affairs (MCA). Proper compliance ensures smooth operations and legal credibility.

1. Filing e-Form RUN-LLP for Name Reservation

  • The first step in establishing an LLP is reserving a unique name through the e-Form RUN-LLP (Reserve Unique Name for LLP).
  • Key Points:
    • The name must comply with the LLP Act, 2008, and should not conflict with existing registered names.
    • The approved name is valid for 90 days, within which the incorporation process must be completed.
  • Ensuring a distinctive and relevant name is essential to avoid delays in registration.

2. Annual Compliances for LLPs

LLPs must fulfill annual filing requirements to remain compliant under the MCA regulations.

a) e-Form 8 (Statement of Accounts and Solvency)
  • Filed annually to report the financial health of the LLP.
  • Includes details of:
    • Assets and liabilities of the LLP.
    • Declaration of solvency by the designated partners.
  • Filing Deadline: Within 30 days from the end of six months of the financial year (i.e., October 30th).
  • Importance: Maintains transparency in financial operations and solvency status.
b) e-Form 11 (Annual Return)
  • Filed to disclose the LLP’s partners and their contributions.
  • Includes:
    • Details of all partners, including designated partners.
    • Changes in partnership structure during the year.
  • Filing Deadline: May 30th each year.
  • Importance: Ensures that the MCA database is updated with the LLP’s operational details.

3. Event-Based Compliances for LLPs

LLPs must file additional forms for specific events or changes during their lifecycle.

  • e-Form 4:
    • Filed for appointment, resignation, or changes in the details of partners/designated partners.
    • Filing Deadline: 30 days from the date of the event.
  • e-Form 5:
    • Filed for changes in the name or registered office address of the LLP.
  • e-Form 3:
    • Filed for modifications in the LLP agreement, such as capital contributions or governance policies.
    • Filing Deadline: 30 days from the date of agreement change.

Penalties for Non-Compliance

Consequences Under MCA Rules

Non-compliance with MCA regulations can result in:

  • Financial Penalties: Hefty fines for delayed or missed filings, often calculated per day.
  • Legal Liabilities: Potential disqualification of directors or partners and restrictions on future business operations.
  • Reputational Damage: Non-compliance reflects poorly on the organization, deterring investors and stakeholders.

Examples of Common Non-Compliances

  • Failure to file annual returns like AOC-4, MGT-7, or e-Form 8.
  • Not adhering to event-based filing requirements, such as reporting changes in directors, partners, or registered office.
  • Delays in RBI filings for FDI reporting.

Advantages of Adhering to MCA Compliances

Building Trust with Stakeholders

  • Compliance demonstrates transparency and accountability, boosting confidence among investors, partners, and customers.
  • Enhances the company’s reputation as a reliable and law-abiding entity.

Legal Safeguards and Smooth Operations

  • Ensures the business operates within the framework of Indian laws, avoiding unnecessary legal hurdles.
  • Facilitates seamless interaction with government bodies for approvals and licenses.
  • Creates a strong foundation for scaling operations, securing funding, and attracting long-term partnerships.

Adhering to MCA compliances for foreign entities starting business in India is not just a regulatory requirement but a strategic necessity for smooth operations and long-term success. Whether operating as an unincorporated entity like a Liaison Office, Branch Office, or Project Office, or as an incorporated entity such as a Joint Venture, Wholly Owned Subsidiary, or LLP, compliance ensures legal protection, builds stakeholder trust, and fosters seamless business growth. By understanding and fulfilling annual, event-based, and regulatory obligations under MCA and FEMA rules, foreign businesses can avoid penalties, establish credibility, and create a strong foothold in the dynamic Indian market.


FAQs on MCA Compliances for Foreign Companies Setting Up Business in India

1. What are the mandatory MCA compliances for foreign entities in India?

Foreign entities must file initial documentation such as e-Form FC-1, annual filings like FC-3 and FC-4, and event-based forms such as e-Form FC-2 for unincorporated entities. For incorporated entities, compliance includes filing INC-20A for commencement, annual returns (AOC-4, MGT-7), and RBI filings like FLA returns.

2. What happens if a foreign entity fails to comply with MCA regulations in India?

Non-compliance can lead to financial penalties, legal consequences such as disqualification of directors or partners, restrictions on future operations, and reputational damage that may deter stakeholders and investors.

3. What is the role of the Ministry of Corporate Affairs (MCA) for foreign businesses in India?

The MCA governs the incorporation, regulation, and compliance of business entities in India, ensuring they operate within the framework of Indian laws. It mandates regular filings, transparency, and adherence to corporate governance standards.

4. How can a foreign entity establish a business presence in India?

Foreign entities can establish their presence in India through unincorporated entities like Liaison Offices (LO), Branch Offices (BO), or Project Offices (PO), or incorporated entities such as Joint Ventures (JV), Wholly Owned Subsidiaries (WOS), or Limited Liability Partnerships (LLP).

5. Why is compliance with MCA regulations critical for foreign entities in India?

Compliance with MCA regulations ensures legal protection, smooth operations, and credibility with stakeholders. It also helps avoid penalties, facilitates approvals from regulatory bodies, and establishes a strong foundation for sustainable growth in the Indian market.

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Non Disclosure Agreements- NDA Template, Meaning, Breach

Non Disclosure Agreements in India – NDA Template, Types & Breach

Introduction

Security of sensitive business information, protection of intellectual property and trade secrets and trust in collaborations are critical aspects of business security in an increasingly competitive and data-driven market today. It is to this effect that businesses typically execute non disclosure agreement (“NDA”), which imposes a contractual obligation on the party receiving the protected information to not only keep the same confidential but to not disclose or divulge such information without permission from the disclosing party. 

NDAs can relate to trade secrets, business models, or intellectual property; all of which help to ensure confidentiality and security in business partnerships. Fundamentally, this agreement ensures that the recipient of such confidential information is obligated to keep the same protected. As such, any breach of an NDA would typically build in mechanisms for compensation for damages caused by the party in breach of the NDA. 

Overview of NDAs in Indian Law / Legal Environment

NDAs in India are enforceable as per the Indian Contract Act, 1872. They are very commonly employed across sectors and can be used for purposes ranging from technology/manufacturing to consulting to even labour or critical events requiring protection of sensitive information. An airtight NDA defines what is and is not confidential information, limits the use of such information, and outlines the consequences for a breach of the obligations. NDAs are widely used in India to guard proprietary information involving in commercial transactions, employment, or partnership. NDAs keep the most important business information private by:

  • Security of proprietary information from unauthorized use or leakage.
  • Developing intellectual property, trade secrets, and business plans protection laws.
  • Establishing trust in relationships while going through mergers, acquisitions or negotiations.

NDAs by ensuring confidentiality preserve a business’s competitive edge and eliminate litigation.such as technology, manufacturing, and consulting. NDAs can be unilateral, mutual or multilateral, but for it to be effective they should meet Indian laws. The success of an NDA depends on its definitions, enforceable provisions and jurisdiction. A breach of an NDA can be financially and reputationally disastrous.

What is a Non-Disclosure Agreement (NDA)?

A Non-Disclosure Agreement (NDA) is a legally binding contract designed to safeguard sensitive and proprietary information shared between two or more parties. It establishes a confidential relationship by outlining the type of information that must remain undisclosed, the purpose of sharing the information, and the consequences of any breach. NDAs are integral to protecting intellectual property, trade secrets, and other business-critical data.

Definition of a Non-Disclosure Agreement

In simple terms, an NDA is a formal agreement where one party agrees not to disclose or misuse the confidential information provided by the other party. Colloquially also referred to as a confidentiality agreement, an NDA ensures that the disclosed information is used solely for the intended purpose and remains secure. NDAs are enforceable under the Indian Contract Act, 1872, making them a vital tool in safeguarding sensitive data in India.

Key Purposes and Objectives of NDAs

The primary goal of an NDA is to maintain the confidentiality of information and prevent its unauthorized use. Key objectives include:

  • Protecting Intellectual Property: Ensuring that trade secrets, patents, and proprietary processes remain secure.
  • Establishing Trust: Building a reliable relationship between parties, particularly in mergers, acquisitions, or joint ventures.
  • Avoiding Misuse of Data: Preventing employees, contractors, or partners from sharing confidential details with competitors.
  • Defining Legal Recourse: Outlining the consequences of a breach, including penalties and legal actions.

By clearly defining the scope of confidentiality, NDAs reduce the likelihood of disputes and offer a framework for resolution if a breach occurs.

Real-Life Examples of NDA Use in Business Scenarios

NDAs are widely used across various industries and situations, such as:

  1. Employment Agreements: Employers often require NDAs to protect internal policies, client lists, and proprietary methods from being disclosed by employees.
  2. Mergers and Acquisitions: During due diligence, NDAs secure sensitive financial and operational data exchanged between companies. This can also include restrictions on disclosure of investment by a party and prevention of any media release (as typically required by incubators).
  3. Technology and Innovation: Startups and tech companies frequently use NDAs to safeguard unique ideas, algorithms, or software codes when pitching to investors or collaborating with developers.
  4. Freelance and Consulting Projects: Freelancers or consultants working with confidential client data are bound by NDAs to prevent misuse.
  5. Vendor or Supplier Relationships: NDAs protect sensitive pricing strategies, product designs, or supply chain details shared with third-party vendors.

For example, a startup seeking funding may share its business model, product specifications and financial projections with potential investors under an NDA, ensuring these details remain confidential and protected from competitors.

Types of Non-Disclosure Agreements in India

Non-Disclosure Agreements (NDAs) come in various forms depending on the nature of the relationship and the flow of confidential information between parties. Understanding the types of NDAs is essential for selecting the most suitable agreement to safeguard sensitive information. Typically, an NDA will impose a total ban on disclosure, except where such disclosure is required by law or on order of any statutory authority. Below are the primary types of NDAs used in India:

1. Unilateral NDAs

A Unilateral NDA is a one-sided agreement where only one party discloses confidential information, and the receiving party agrees to protect it. This type of NDA is commonly used when a business shares proprietary information with employees, contractors, or third-party vendors who are not expected to reciprocate with their own confidential data.

Common Use Cases:

  • Protecting trade secrets during product development.
  • Sharing sensitive business data with potential investors.
  • Securing intellectual property shared with a freelancer or consultant.

Example: A tech startup providing details of its proprietary algorithm to a marketing agency under a unilateral NDA.

2. Bilateral/Mutual NDAs

A Bilateral NDA, also known as a mutual NDA, involves two parties sharing confidential information with each other and agreeing to protect it. This type of agreement is ideal when both parties need to exchange sensitive data, such as in partnerships, collaborations, or joint ventures.

Common Use Cases:

  • Collaborations between companies on a new product or service.
  • Mergers and acquisitions where both entities share financial and operational data.
  • Negotiations between two businesses for a potential partnership.

Example: Two pharmaceutical companies working together on developing a new drug may use a mutual NDA to safeguard their research and development data.

3. Multilateral NDAs

A Multilateral NDA is used when three or more parties need to share confidential information among themselves while ensuring mutual protection. This type of NDA simplifies the process by consolidating multiple bilateral agreements into a single document, reducing legal complexities and administrative overhead.

Common Use Cases:

  • Consortiums or alliances in large-scale projects like infrastructure development.
  • Joint ventures involving multiple stakeholders.
  • Collaborative research projects between academic institutions and private companies.

Example: A group of IT companies collaborating on a government project to develop a unified digital platform may use a multilateral NDA to protect their individual contributions.

Essential Clauses in an NDA

A well-drafted Non-Disclosure Agreement (NDA) is only as strong as the clauses it includes. Each clause serves a specific purpose in defining the rights and obligations of the parties, ensuring comprehensive protection of confidential information. Here are the key clauses every NDA should have:

1. Confidentiality Clause

The confidentiality clause is the cornerstone of an NDA. It explicitly defines what constitutes “confidential” or “privileged” or “sensitive” information, how it can be used, and the obligations of the receiving party to protect it.

Key Points to Include:

  • Clearly specify the information considered confidential.
  • Outline permissible uses of the information.
  • Prohibit unauthorized sharing, reproduction, or disclosure.

2. Non-Compete Clause

A Non-Compete Clause prevents the receiving party from using the confidential information to gain a competitive advantage or engage in competing activities.
Key Points to Include:

  • Define the duration of the non-compete obligation.
  • Specify the geographic scope where competition is restricted.
  • Ensure compliance with Indian laws to avoid enforceability issues.

Example: An NDA between a software company and a vendor may include a non-compete clause to prevent the vendor from replicating or selling similar software.

3. Duration and Scope of Confidentiality

This clause specifies how long the confidentiality obligation will remain in effect and the extent to which it applies.
Key Points to Include:

  • Duration: Specify whether confidentiality is time-bound (e.g., 3-5 years) or indefinite.
  • Scope: Clearly define the level of protection and the limitations of disclosure.

Tip: While most NDAs in India enforce confidentiality for a limited period, indefinite clauses are often used for trade secrets.

4. Dispute Resolution Clause

This clause outlines how disputes related to the NDA will be resolved. It ensures a smooth resolution process and avoids lengthy litigation.
Key Points to Include:

  • Specify the jurisdiction under which disputes will be resolved.
  • Choose between arbitration, mediation, or court proceedings.
  • Define the governing laws (e.g., Indian Contract Act, 1872).

Example: An NDA might state that disputes will be resolved through arbitration under the Arbitration and Conciliation Act, 1996.

5. Exclusions from Confidentiality

This clause identifies situations where confidentiality obligations do not apply.
Common Exclusions:

  • Information already in the public domain.
  • Information disclosed with prior consent.
  • Data independently developed without using confidential information.

Including clear exclusions prevents ambiguity and protects the receiving party from unwarranted liability.

Tips for Drafting a Legally Sound NDA in India

  1. Be Specific: Avoid vague terms; clearly define confidential information and obligations.
  2. Customize the NDA: Tailor the agreement to the specific needs of your business and the type of relationship.
  3. Include Remedies for Breach: Specify monetary penalties or injunctive relief for violations.
  4. Use Simple Language: Avoid overly complex legal jargon to ensure all parties fully understand their obligations.
  5. Seek Professional Help: Consult legal experts to ensure compliance with Indian laws and enforceability in courts.

Adding these essential clauses strengthens the NDA, ensuring that confidential information remains secure and disputes are minimized. 

Non Disclosure Agreements Format

Overview of an NDA Template in India

An NDA template serves as a standard framework for creating confidentiality agreements tailored to specific needs. While the format can vary depending on the context, every NDA must clearly define the scope of confidentiality, the parties involved, and the remedies in case of a breach. A professionally drafted NDA ensures enforceability under the Indian Contract Act, 1872.

Key Elements to Include in an NDA

  1. Parties to the Agreement
    • Clearly identify the disclosing party and the receiving party.
    • Include details such as names, designations, and addresses to eliminate ambiguity.
    • For multilateral NDAs, list all parties involved.

Example: “This Agreement is entered into by ABC Pvt. Ltd. (Disclosing Party) and XYZ Pvt. Ltd. (Receiving Party) on [date].”

  1. Definition of Confidential Information
    • Specify the information considered confidential, such as trade secrets, business strategies, or technical data.
    • Use precise language to avoid disputes about the scope of confidentiality. The more detailed the scope of what constitutes “confidential information”, the better clarity that is brought about on the non-disclosure obligation.

Example: “Confidential Information includes but is not limited to financial data, client lists, marketing strategies, and proprietary software.”

  1. Obligations of the Receiving Party
    • Detail the receiving party’s responsibilities to safeguard the information.
    • Prohibit disclosure to third parties and unauthorized use.

Example: “The Receiving Party agrees not to disclose the Confidential Information to any third party without prior written consent of the Disclosing Party.”

  1. Consequences of Breach
    • Define the penalties for unauthorized disclosure or misuse of confidential information.
    • Specify remedies such as monetary damages, injunctions, or termination of the agreement.

Example: “In the event of a breach, the Receiving Party shall indemnify the Disclosing Party for all losses, including legal fees and damages.”

  1. Jurisdiction and Governing Law
    • Specify the jurisdiction under which disputes will be resolved.
    • Include the applicable legal framework, such as Indian Contract Act, 1872.

Example: “This Agreement shall be governed by and construed in accordance with the laws of India, and disputes shall be subject to the exclusive jurisdiction of the courts in [city].”

Sample NDA Template for Download

To make the process easier, here’s a downloadable sample Non Disclosure Agreement PDF template for Indian businesses. The NDA Document includes all the main elements mentioned , ensuring compliance and clarity. 

Download Sample Non Disclosure Agreement Format.

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Legal Validity of NDAs in India

Non-Disclosure Agreements (NDAs) are widely used to protect sensitive information in India, but their enforceability depends on how well they align with the legal framework. Understanding the legal validity of NDAs is crucial for ensuring that these agreements hold up in a court of law.

Enforceability Under the Indian Contract Act, 1872

NDAs in India are governed by the Indian Contract Act, 1872, which mandates that:

  1. Lawful Consideration and Object: The agreement must not violate any existing laws or public policy.
  2. Free Consent: All parties must willingly agree to the terms without coercion, fraud, or misrepresentation.
  3. Definite and Certain Terms: The NDA must clearly define the confidential information, obligations, and consequences of a breach.

Key Point: NDAs with overly broad or vague clauses may be deemed unenforceable. Clauses such as “indefinite confidentiality for all types of information” are likely to be rejected by Indian courts.

Relevant Case Laws Supporting NDA Breaches in India

Case laws play a significant role in determining the enforceability of NDAs. Below are some landmark cases that highlight how Indian courts address NDA breaches, which have informed and clarified the interpretation of the Indian Contract Act, 1872 and its governance of non-disclosure agreements, including the enforceability of such agreements and their legal validity. These case laws have also informed the principle of “reasonableness” in enforcing such restrictions, from the perspective of protecting a business and its data:

  1. Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. Ltd. (1967):
    • The Supreme Court upheld the validity of confidentiality clauses in employment contracts, ruling that such restrictions must be reasonable and protect legitimate business interests.
  2. Superintendence Company of India v. Krishan Murgai (1980):
    • This case emphasized that NDAs and restrictive covenants must strike a balance between protecting business interests and not imposing unreasonable restrictions on an individual’s right to work.
  3. American Express Bank Ltd. v. Priya Puri (2006):
    • The Delhi High Court ruled that NDAs signed by employees are enforceable, particularly when the disclosed information constitutes trade secrets or proprietary knowledge.
  4. Gujarat Bottling Co. Ltd. v. Coca-Cola Co. (1995):
    • The court underscored that an injunction can be granted to prevent further disclosure of confidential information in case of a breach of an NDA.

Key Point: Courts often evaluate the reasonableness of the NDA’s terms and whether the breach caused material harm to the disclosing party.

Breach of NDAs: Consequences & Remedies

A breach of a Non-Disclosure Agreement (NDA) is a serious violation that can lead to significant legal, financial, and reputational damage. NDAs are legally binding contracts that ensure the confidentiality of sensitive information. Breaching an NDA can result in severe consequences, including legal actions, fines, and loss of business trust. This section explores common types of NDA breaches, legal remedies available in India, and ways to mitigate risks.

Common Types of Breaches

  1. Intentional Disclosure of Confidential Information
    • This occurs when the receiving party intentionally discloses confidential information to unauthorized third parties.
    • Example: An employee shares proprietary business strategies with a competitor to gain personal benefits.
  2. Accidental Breaches
    • These breaches occur due to negligence, such as sending an email to the wrong person or failing to secure confidential files.
    • Example: A company accidentally discloses confidential client information in an unsecured email.

What Happens If You Breach a Confidentiality Agreement?

A breach of the NDA is considered a civil offense in India. NDAs are legally enforceable contracts, and the receiving party is obligated to keep the disclosed information confidential. If the confidentiality clause is breached, several legal consequences may follow:

Legal Remedies for Breach of NDA

In the event of a breach, the NDA itself may outline remedies such as termination, injunctions, and indemnification.

  1. Injunctions
    • The non-breaching party may seek a court order to stop the breaching party from further disclosing confidential information. Injunctions may be interim (temporary) or perpetual (permanent).
    • Legal Basis: Governed by Order XXXIX Rule 1 and 2 of the Code of Civil Procedure, 1908, and Section 38 of the Specific Relief Act, 1963.
  2. Indemnification and Damages
    • The breaching party may be required to indemnify the non-breaching party for any losses, including court fees, legal costs, and actual damages incurred. This can include both compensatory and consequential damages.
    • Compensatory Damages: These are calculated based on the actual financial loss suffered due to the breach.
      • Example: If a business loses ₹50,000 due to a breach, compensatory damages may cover that loss.
    • Consequential Damages: These damages include losses that occurred indirectly due to the breach, such as lost profits or opportunities.
      • Example: A tour company loses potential sales after a breach prevents them from securing a necessary asset.
  3. Criminal Remedies
    • In certain cases, criminal remedies may apply, particularly under the Indian Penal Code (IPC) and the Information Technology Act, 2000.
      • Section 72A of the IT Act, 2000 provides for imprisonment up to 3 years or fines up to ₹5 lakh for the unlawful disclosure of information obtained during a contractual relationship.

Why Should You Not Break a Confidentiality Agreement?

Breaking an NDA can lead to severe consequences, including:

  1. Legal and Financial Penalties
    • NDAs often specify penalties for violations, including injunctions, indemnifications, and damages.
    • A breach could result in substantial financial loss, not only in direct damages but also in reputational harm and loss of future business.
  2. Job Termination and Reputational Damage
    • For employees or contractors, breaching an NDA may result in termination from their position and loss of professional reputation.
    • Businesses that breach NDAs risk losing client trust and face the possibility of damaging their public image, which could lead to a loss of clients and future opportunities.

Different Types of Contract Breach Remedies

The remedy for a breach of NDA depends on the specific provisions in the agreement, the nature of the violation, and the facts of the case. Common remedies include:

  1. Damages for Compensation
    • Compensatory Damages: The most common remedy, compensatory damages are calculated based on the actual losses suffered due to the breach, including expectation damages and consequential damages.
    • Example: A business loses potential profits from a deal that fell through due to a breach.
  2. Specific Performance
    • Courts may order the breaching party to fulfill its contractual obligations if monetary damages are insufficient. This remedy is more common for contracts involving unique or irreplaceable items.
    • Example: A company may seek specific performance if the item breached is a unique asset that cannot be replaced.
  3. Injunctions
    • Injunctions prevent the breaching party from further disclosing confidential information. These can be temporary or permanent, depending on the severity of the breach.
  4. Liquidated Damages
    • A set amount specified in the NDA to cover the breach, particularly where it is difficult to quantify actual damages. Liquidated damages clauses are often used in construction contracts, real estate deals, and partnerships.
  5. Revocation
    • The non-breaching party can rescind the contract, returning both parties to their original position. This remedy is typically used for significant breaches that go to the heart of the agreement.

How to Mitigate the Risk of NDA Breaches

  1. Draft Clear and Precise NDAs
    • Ensure that the NDA clearly defines the scope of confidentiality and the consequences of a breach. Consider incorporating clauses for arbitration to resolve disputes efficiently.
  2. Implement Security Measures
    • Use encryption, access restrictions, and secure systems to prevent accidental breaches.
  3. Regular Audits and Training
    • Conduct periodic reviews of compliance and train employees and third parties on proper handling of confidential information.
  4. Legal Preparation
    • Ensure that any breach is met with swift legal action through well-defined remedies in the NDA.

This proactive approach helps mitigate risks and maintain business integrity.

Importance of Customized NDAs for Businesses

A generic NDA may not always be effective in addressing the specific needs and risks of a business. Customized NDAs are essential for ensuring that the confidentiality, legal obligations, and remedies align with the unique aspects of each business relationship.

Benefits of Tailoring NDAs for Specific Business Needs

  1. Enhanced Protection of Sensitive Information
    Custom NDAs allow businesses to define confidential information more precisely, ensuring better protection for proprietary data, trade secrets, and strategic plans.
  2. Addressing Unique Business Risks
    A tailored NDA can address the unique risks associated with different types of business relationships, such as vendor contracts, partnerships, or employee agreements, ensuring that all specific scenarios are covered.
  3. Clearer Terms and Obligations
    By customizing the terms and obligations, businesses can ensure both parties have a clear understanding of their responsibilities, reducing the potential for disputes.
  4. Better Enforcement of Terms
    A well-crafted NDA that aligns with business needs is easier to enforce in case of breach, as it clearly defines the scope of confidential information, obligations, and penalties for violation.
  5. Minimized Legal Loopholes
    Customization helps eliminate ambiguities and potential legal loopholes that could undermine the NDA’s effectiveness in protecting confidential information.

Wrapping up, Non-Disclosure Agreements (NDAs) are a vital tool for businesses in India to protect confidential information and ensure that sensitive data remains secure. Whether it’s a unilateral, bilateral, or multilateral NDA, having the right type tailored to your specific needs is essential for safeguarding trade secrets, business strategies, and proprietary information. A well-drafted NDA template can serve as a solid foundation for any business relationship, offering clarity on obligations and consequences in case of breach. Understanding the legal framework surrounding NDAs, including remedies for breach, is crucial to ensure enforceability under Indian law. To maximize protection, it’s highly recommended to consult with a legal professional to draft a customized NDA that best suits your business’s unique requirements.

FAQs on Non-Disclosure Agreements (NDAs) in India

1. What is an NDA, and why is it important in business?

A Non-Disclosure Agreement (NDA) is a legally binding contract that protects confidential information shared between parties during business dealings. It ensures sensitive data like trade secrets, strategies, or intellectual property remains secure, preventing unauthorized disclosure and fostering trust in business relationships.

2. What are the types of NDAs commonly used in India?

The three main types of NDAs are:

  • Unilateral NDA: One party discloses information to another.
  • Bilateral (Mutual) NDA: Both parties share confidential information.
  • Multilateral NDA: Multiple parties are involved in the agreement.

Each type caters to different business scenarios and ensures tailored protection.

3. What happens if someone breaches an NDA in India?

A breach of NDA can lead to serious consequences, including:

  • Civil remedies: Injunctions, monetary damages, or compensation under the Indian Contract Act, 1872.
  • Criminal penalties: Punishments under laws like the IT Act, 2000 for unauthorized data disclosure.
    Legal actions ensure accountability and protect the affected party’s interests.

4. How can businesses draft an effective NDA?

Businesses should seek legal assistance to draft customized NDAs that address their specific needs. This includes tailoring clauses for confidentiality, scope, and remedies for breach, ensuring compliance with Indian laws for enforceability.

5. Are NDAs legally enforceable in India?

Yes, NDAs are enforceable under Indian laws, including the Indian Contract Act, 1872, Specific Relief Act, 1963, and other relevant statutes. Courts uphold NDAs as long as the terms are fair, reasonable, and not overly broad.

7. Why is it essential to customize an NDA instead of using a generic one?

A customized NDA addresses the unique risks and requirements of your business, ensuring better protection of sensitive information. Tailoring an NDA minimizes legal loopholes, clarifies obligations, and provides effective remedies for breach.

8. How long does an NDA remain valid?

The validity of an NDA depends on the terms set in the agreement. It can be for a fixed duration (e.g., 2-5 years) or remain indefinite, especially for trade secrets or proprietary information that requires long-term protection.

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SaaS Report

SaaS Blueprint – Unlocking India’s Potential with Industry Insights

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The Software as a Service (SaaS) industry is transforming how businesses operate, enabling organizations to scale rapidly, reduce costs, and enhance accessibility. India’s SaaS story is particularly compelling: once a nascent segment, the Indian SaaS market is now projected to reach $50 billion by 2030, contributing significantly to the global market valued at over $200 billion in 2024. The country is home to over 1,500 SaaS companies, several of which have achieved unicorn status, contributing to a market valued at approximately $13 billion in 2023

In India, the SaaS ecosystem is experiencing an unprecedented boom, becoming a global hub for innovation, entrepreneurship, and investment. Treelife’s SaaS Blueprint: Unlocking India’s Potential with Industry Insights and Regulatory Guide offers a comprehensive exploration of the Indian SaaS landscape, delving into industry growth trends, regulatory frameworks, investment landscape, risk mitigation strategies, and key government initiatives driving the sector. Whether you’re an entrepreneur, investor, or an industry observer, this handbook provides actionable insights and a clear roadmap to navigate the opportunities in this vibrant and fast growing ecosystem.

If you have any questions or need further clarity, please don’t hesitate to reach out to us at garima@treelife.in

Why SaaS is the Future of Technology

The Indian SaaS sector stands at the intersection of global opportunity and local ingenuity, ready to redefine industries with cutting-edge solutions. As businesses embrace technologies like artificial intelligence, blockchain, and machine learning, the potential for innovation and impact is limitless. The SaaS model is projected to surpass $300 billion globally by 2026 – a testament to its scalability and adaptability. From CRM and ERP solutions to AI-driven platforms and industry-specific tools, SaaS caters to diverse business needs. In India, the sector’s growth is equally remarkable, with the market expected to reach $50 billion by 2030. Fueled by affordable cloud infrastructure, a highly skilled workforce, and supportive government policies, the Indian SaaS sector has become a powerhouse of global significance.

However, navigating the complexities of regulation, compliance, and market dynamics is essential for long-term success. With actionable insights and a deep dive into the regulatory framework, this handbook equips businesses and stakeholders to harness the immense potential of SaaS while staying compliant and resilient.

Inside the SaaS Blueprint – Key Highlights

1. A Comprehensive Industry Overview

The handbook provides an analysis of the SaaS industry’s evolution, market size, and the role of technology in driving transformation. Key highlights include:

  • The global rise of SaaS, driven by innovations in AI, machine learning, and cloud computing.
  • Insights into the Indian SaaS market, which is home to over 1,500 companies generating $13 billion in annual revenue, with 70% of revenue generated in international markets.
  • An exploration of key SaaS segments like Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), cybersecurity, fintech, and more, showcasing India’s ability to serve both local and global markets.

2. Regulatory and Legal Framework

The legal and regulatory landscape for SaaS businesses is complex, with both domestic and international considerations. The handbook covers:

  • Contract Law: SaaS agreements such as subscription, service level, and licensing agreements, and the importance of safeguarding intellectual property (IP).
  • Data Protection and Privacy: Navigating India’s Digital Personal Data Protection Act, 2023, and ensuring compliance with global laws like GDPR, HIPAA, and CCPA.
  • Intellectual Property Protection: Securing patents, copyrights, trademarks, and trade secrets to protect proprietary technology.
  • Taxation: Detailed insights into GST implications, equalization levy updates, and income tax considerations for SaaS businesses operating domestically and internationally.

3. Investment Landscape

India’s SaaS sector has emerged as an attractive destination for venture capital and private equity investment, with the handbook providing: 

  • The growing preference for vertical SaaS solutions catering to niche industries like agritech and climate tech.
  • Key investment trends, including the role of AI in creating new SaaS categories like software testing, predictive analytics, and automation.
  • Challenges such as founder dilution and valuation pressures, with strategies for navigating these hurdles while attracting sustainable funding.

4. Mitigating Risks and Building Resilience

The digital nature of SaaS exposes companies to unique risks, including data breaches and operational disruptions. Learn more about strategies to mitigate risk and build resilience through::

  • Enhancing data security through encryption, access controls, and compliance with local and global regulations.
  • Building operational resilience with disaster recovery plans, fault-tolerant infrastructure, and robust incident response and reporting frameworks.
  • Addressing third-party risks by vetting external vendors and ensuring alignment with security standards like SOC 2 and ISO 27001.

5. Government Initiatives Supporting SaaS

Aimed at fostering innovation and promoting adoption of SaaS, the Government of India has launched multiple initiatives and policies, the most prominent of which are below:

  • MeghRaj Initiative: Accelerating cloud adoption in public services to improve efficiency and scalability.
  • National Policy on Software Products (NPSP): Supporting 10,000 startups and developing clusters for software product innovation.
  • Government eMarketplace (GeM): Enabling SaaS companies to tap into public sector procurement opportunities.
  • SAMRIDH Program: Connecting startups with resources for scaling and growth.

Key Takeaways for Stakeholders

Whether you’re an entrepreneur, investor, or policymaker, this handbook provides actionable insights to navigate the opportunities and challenges of the SaaS ecosystem. Key takeaways include:

  • The roadmap to build and scale a successful SaaS business in India.
  • Strategies to ensure compliance with complex regulatory frameworks.
  • Insights into investment trends and funding opportunities in SaaS.
  • A detailed analysis of risks and resilience strategies to future-proof your business.

Download the SaaS Blueprint today and take the next step in shaping the future of SaaS in India. For inquiries or further guidance, reach out to us at garima@treelife.in.

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Streamlining Financial Compliance for a Health-Tech Innovator

Streamlining Financial Compliance for a Health-Tech Innovator

Streamlining Financial Compliance for a Health-Tech Innovator

Business Overview

A health-tech company operating a digital clinic under the brand name ‘Proactive For Her’, providing a digital platform to offer accessible, personalized, and confidential healthcare solutions for women.

 

Project Undertaken

  • Review of accounting records and tax filings on a monthly basis
  • Compliance assistance for fundraising

 

How We Helped?

Review of Accounts and Tax Filing:

  • Treelife conducted a thorough review of the monthly accounting books to ensure accuracy and completeness, helping the company maintain precise financial records.
  • We ensured GST payments and returns were filed timely and accurately, reducing the risk of non-compliance and potential penalties for the company.
  • Our team streamlined and regularized tax returns, annual filings, and other statutory compliances according to applicable due dates, ensuring the company met all regulatory requirements promptly.

Fundraising (Compliance Advisor):

  • Treelife provided compliance advisory services for the company’s fundraising efforts, ensuring that all financial records and compliance requirements were up-to-date.
  • We assisted with the timely updating of accounting entries and filings, completing requisite regulatory compliances efficiently.
  • Our involvement ensured a reduction in the turnaround time (TAT) for payments and MIS processing, facilitating smoother financial operations and improved investor confidence.

By leveraging our expertise in financial and compliance advisory, Treelife enabled ‘Proactive For Her’ to maintain accurate financial records, meet all compliance requirements, and support its fundraising activities. Our comprehensive support helped the company focus on its core mission of providing accessible and personalized healthcare solutions while ensuring robust financial and compliance management.

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We facilitated a seamless global expansion for an Indian company

We facilitated a seamless global expansion for an Indian company

Treelife played a pivotal role in helping an Indian private limited company transition to a US-headquartered structure. By setting up an LLP in India and guiding the investment process under the ODI route, we ensured compliance with FEMA and income-tax regulations. Our strategic approach enabled the company to raise funds from foreign investors and expand globally with minimal tax implications.

 

Business Overview

Indian individual promoters had established a private limited company in India and sought to expand their business globally. They aimed to raise funds from foreign investors and transition to a US-headquartered structure.

 

Project Undertaken

  • Setting up an LLP in India
  • Investment in a newly incorporated US entity under the ODI route
  • Acquisition of Indian entity shares by the US entity from the promoters

 

Structure Mechanics:

  • Indian individual promoters set up an LLP in India.
  • The LLP makes investments in a newly incorporated US entity under the ODI route.
  • The US entity acquires the shares of the Indian entity from the promoters, adhering to FEMA and income-tax regulations.
  • A benchmarking study is undertaken for all ongoing transactions between the US entity and the Indian entity.

 

Parameters:

  • The gift structure used under the erstwhile ODI rules was no longer possible, as Indian resident founders can now receive gifts of shares from their relatives.
  • Recently revamped ODI rules by RBI do not permit a foreign company to set up an Indian subsidiary where the Indian promoters control such a foreign company.
  • Any transaction between the offshore company and its Indian subsidiary needs to be benchmarked from a transfer pricing perspective.
  • Minimal income-tax implications and adherence to FEMA pricing norms.

 

Facts:

  • Indian promoters aimed to expand their business globally and raise funds from foreign investors.
  • They sought to move to a US-headquartered structure to facilitate this expansion.

By strategically structuring the investment and ensuring compliance with the latest ODI rules and FEMA pricing norms, Treelife enabled the company to achieve its global expansion goals. Our financial advisory services provided the necessary support to navigate complex regulatory landscapes and optimize tax implications, ensuring a smooth transition for the company’s international growth.

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We streamlined financial operations for an insurance-tech company in record time

We streamlined financial operations for an insurance-tech company in record time

In just a few weeks, Treelife transformed the financial infrastructure of an innovative SaaS company. We set up efficient accounting systems, ensured seamless bookkeeping, and provided critical fundraising support. Discover how our strategic approach reduced their operational burden and enhanced their financial management.

 

Business Overview

An innovative insurance-tech company using technology and innovation to transform the traditional insurance model. The company offers a cloud-based platform that connects distributors to the insurance ecosystem.

 

Project Undertaken

  • Setting up systems for HR, accounting, and payroll
  • Ongoing bookkeeping, tax compliance, and payments
  • Fundraising and due diligence support

 

How We Helped?

Setting Up:

  • Treelife took ownership and set up the entire accounting system for the company from inception using Zoho Books and Zoho Payroll.
  • Assisted in migrating from Zoho Payroll to Keka, ensuring a smooth transition.
  • Effective implementation of software and processes reduced the time and effort required by the founders.

Bookkeeping and Accounting:

  • Timely updating of accounting entries and filing, ensuring compliance with regulatory requirements.
  • Completion of requisite regulatory compliances, reducing TAT for payments and MIS processing.

Fundraising & Vendor Due Diligence:

  • Represented the company during the due diligence process conducted by investors, assisting them in understanding the business model and transaction workflow.
  • Submitted data in the requisite formats and seamlessly resolved queries from the diligence team regarding finance and tax-related areas promptly.

By leveraging our expertise in financial management, Treelife significantly improved the company’s operational efficiency and supported its growth journey. Our comprehensive services ensured that the company was well-prepared for investor scrutiny and ongoing financial challenges.

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IFSCA releases consultation paper seeking comments on draft circular on “𝑷𝒓𝒊𝒏𝒄𝒊𝒑𝒍𝒆𝒔 𝒕𝒐 𝒎𝒊𝒕𝒊𝒈𝒂𝒕𝒆 𝒕𝒉𝒆 𝑹𝒊𝒔𝒌 𝒐𝒇 𝑮𝒓𝒆𝒆𝒏𝒘𝒂𝒔𝒉𝒊𝒏𝒈 𝒊𝒏 𝑬𝑺𝑮 𝒍𝒂𝒃𝒆𝒍𝒍𝒆𝒅 𝒅𝒆𝒃𝒕 𝒔𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔 𝒊𝒏 𝒕𝒉𝒆 𝑰𝑭𝑺𝑪”

IFSCA releases consultation paper seeking comments on draft circular on “𝑷𝒓𝒊𝒏𝒄𝒊𝒑𝒍𝒆𝒔 𝒕𝒐 𝒎𝒊𝒕𝒊𝒈𝒂𝒕𝒆 𝒕𝒉𝒆 𝑹𝒊𝒔𝒌 𝒐𝒇 𝑮𝒓𝒆𝒆𝒏𝒘𝒂𝒔𝒉𝒊𝒏𝒈 𝒊𝒏 𝑬𝑺𝑮 𝒍𝒂𝒃𝒆𝒍𝒍𝒆𝒅 𝒅𝒆𝒃𝒕 𝒔𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔 𝒊𝒏 𝒕𝒉𝒆 𝑰𝑭𝑺𝑪”

IFSCA listing regulations requires debt securities to adhere to international standards/principles to be labelled as “𝐠𝐫𝐞𝐞𝐧”, “𝐬𝐨𝐜𝐢𝐚𝐥”, “𝐬𝐮𝐬𝐭𝐚𝐢𝐧𝐚𝐛𝐢𝐥𝐢𝐭𝐲” 𝐚𝐧𝐝 “𝐬𝐮𝐬𝐭𝐚𝐢𝐧𝐚𝐛𝐢𝐥𝐢𝐭𝐲-𝐥𝐢𝐧𝐤𝐞𝐝” 𝐛𝐨𝐧𝐝.

As of September 30, 2024, the IFSC exchanges boasted a listing of approximately USD 14 billion in ESG-labelled debt securities, a significant chunk of the total USD 64 billion debt listings in a short period. This rapid growth highlights the growing appetite for sustainable investments among global investors.

Certain investors, particularly institutional ones like pension funds and socially responsible investment (SRI) funds, explicitly state in their investment mandates that they can only invest in ESG-labeled securities. To encourage and promote ESG funds, the IFSCA has waived fund filing fees for the first 10 ESG funds registered at GIFT-IFSC, to incentivise fund managers to launch ESG-focused funds.

However, this rapid growth also comes with a significant risk of “greenwashing” where companies or funds exaggerate or falsely claim their environmental and sustainability efforts.

𝐖𝐡𝐚𝐭 𝐢𝐬 “𝐆𝐫𝐞𝐞𝐧𝐰𝐚𝐬𝐡𝐢𝐧𝐠”?

However, with this rapid growth comes a significant risk: greenwashing. Greenwashing occurs when companies or funds exaggerate or fabricate their environmental and sustainability efforts to project a greener image and attract investors. It’s essentially a deceptive marketing tactic that undermines the true purpose of sustainable investing.

IFSCA’s Consultation Paper: Mitigating Greenwashing

Recognizing the threat of greenwashing, the IFSCA has released a consultation paper seeking public comment on a draft circular titled “Principles to Mitigate the Risk of Greenwashing in ESG labelled debt securities in the IFSC.” This circular outlines principles that companies and funds issuing ESG-labelled debt securities on the IFSC platform must adhere to.

Refer link for consultation paper: https://ifsca.gov.in/ReportPublication?MId=8kS3KLrLjxk= 

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Karnataka's Global Capability Centres Policy: A Game Changer for India's Tech Landscape

Karnataka’s Global Capability Centres Policy: A Game Changer for India’s Tech Landscape

Karnataka, a state in India known for its vibrant tech industry, has recently unveiled its Global Capability Centres (GCC) Policy 2024-2029. This ambitious policy aims to solidify Karnataka’s position as a leading hub for GCCs in India and propel the state’s tech ecosystem to even greater heights.

What are Global Capability Centres (GCCs)?

For those unfamiliar with the term, GCCs are specialized facilities established by companies to handle various strategic functions. These functions can encompass a wide range of areas, including:

  • Information Technology (IT) services
  • Customer support
  • Research and development (R&D)
  • Analytics

By setting up GCCs, companies can streamline operations, reduce costs, and tap into a pool of talented professionals. This allows them to achieve their global objectives more efficiently.

Why is Karnataka a Major Hub for GCCs?

India is a powerhouse for GCCs, boasting over 1,300 such centers. Karnataka takes the lead in this domain, housing nearly 30% of India’s GCCs and employing a staggering 35% of the workforce in this sector. Several factors contribute to Karnataka’s attractiveness for GCCs:

  • Vast Talent Pool: Karnataka is home to some of India’s premier educational institutions, churning out a steady stream of highly skilled graduates in engineering, technology, and other relevant fields.
  • Cost-Effectiveness:India offers a significant cost advantage for setting up and operating GCCs, compared to other global locations.

Key Highlights of Karnataka’s GCC Policy 2024-2029

The recently unveiled GCC Policy outlines a series of ambitious goals and initiatives aimed at propelling Karnataka to the forefront of the global GCC landscape. Here are some of the key highlights:

  • Establishment of 500 New GCCs: The policy sets a target of establishing 500 new GCCs in Karnataka by 2029. This aggressive target signifies the government’s commitment to significantly expanding the state’s GCC footprint.
  • Generating $50 Billion in Economic Output: The policy envisions generating a staggering $50 billion in economic output through GCCs by 2029. This substantial economic contribution will be a boon for Karnataka’s overall development.
  • Creation of 3.5 Lakh Jobs: The policy aims to create 3.5 lakh (350,000) new jobs across Karnataka through the establishment and operation of new GCCs. This significant job creation will provide immense opportunities for the state’s workforce.
  • Centre of Excellence for AI in Bengaluru: Recognizing the growing importance of Artificial Intelligence (AI), the policy proposes establishing a Centre of Excellence for AI in Bengaluru. This center will focus on driving research, development, and innovation in the field of AI, fostering a robust AI ecosystem in Karnataka.
  • AI Skilling Council: The policy acknowledges the need to equip the workforce with the necessary skills to thrive in the AI-driven future. To address this, the policy proposes the creation of an AI Skilling Council. This council will be responsible for developing and delivering AI-related training programs, ensuring Karnataka’s workforce is well-prepared for the jobs of tomorrow.
  • INR 100 Crore Innovation Fund: The policy establishes an INR 100 crore (approximately $12.3 million) Innovation Fund. This fund will support joint research initiatives between academia and GCCs, fostering a collaborative environment that fuels innovation and technological advancements.

The GCC Policy has a clear and ambitious goal: for Karnataka to capture 50% of India’s GCC market share by 2029. Read more about the policy here.

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Major Boost for Reverse Flipping: Indian Startups Coming Home

Major Boost for Reverse Flipping: Indian Startups Coming Home

In recent years, a significant number of Indian startups have chosen to incorporate their businesses outside India, primarily in locations like Delaware, Singapore  and other global locations. This trend, known as “flipping,” offered advantages like easier access to foreign capital and tax benefits. However, the tide is starting to turn. We’re witnessing a growing phenomenon of “reverse flipping,” where these startups are now shifting their bases back to India.

This shift back home is driven by several factors, including a booming Indian market, attractive stock market valuations, and a desire to be closer to their target audience – Indian customers. To further incentivize this homecoming, the Ministry of Corporate Affairs (MCA) has recently introduced a significant policy change.

MCA Streamlines Cross-border Mergers for Reverse Flipping

The MCA has amended the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, to streamline the process of cross-border mergers. This move makes it easier for foreign holding companies to merge with their wholly-owned Indian subsidiaries, facilitating a smooth transition for startups seeking to return to their roots.

Key Takeaways of the Amended Rules

Here’s a breakdown of the key benefits for startups considering a reverse flip through this streamlined process:

  • Fast-Track Mergers: The Indian subsidiary can file an application under Section 233 read with Rule 25 of the Act. This rule governs “fast-track mergers,” which receive deemed approval if the Central Government doesn’t provide a response within 60 days.
  • RBI Approval: Both the foreign holding company and the Indian subsidiary need prior approval from the Reserve Bank of India (RBI) for the merger.
  • Compliance with Section 233: The Indian subsidiary, acting as the transferee company, must comply with Section 233 of the Companies Act, which outlines the requirements for fast-track mergers.
  • No NCLT Clearance Required: This streamlined process eliminates the need for clearance from the National Company Law Tribunal (NCLT), further reducing time and complexity.

The Road Ahead

The MCA’s move represents a significant positive step for Indian startups looking to return home. This policy change, coupled with a thriving domestic market, is likely to accelerate the trend of reverse flipping. This not only benefits returning companies but also strengthens the overall Indian startup ecosystem, fostering innovation and entrepreneurial growth within the country.

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SaaS Report

SaaS Blueprint – Unlocking India’s Potential with Industry Insights

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The Software as a Service (SaaS) industry is transforming how businesses operate, enabling organizations to scale rapidly, reduce costs, and enhance accessibility. India’s SaaS story is particularly compelling: once a nascent segment, the Indian SaaS market is now projected to reach $50 billion by 2030, contributing significantly to the global market valued at over $200 billion in 2024. The country is home to over 1,500 SaaS companies, several of which have achieved unicorn status, contributing to a market valued at approximately $13 billion in 2023

In India, the SaaS ecosystem is experiencing an unprecedented boom, becoming a global hub for innovation, entrepreneurship, and investment. Treelife’s SaaS Blueprint: Unlocking India’s Potential with Industry Insights and Regulatory Guide offers a comprehensive exploration of the Indian SaaS landscape, delving into industry growth trends, regulatory frameworks, investment landscape, risk mitigation strategies, and key government initiatives driving the sector. Whether you’re an entrepreneur, investor, or an industry observer, this handbook provides actionable insights and a clear roadmap to navigate the opportunities in this vibrant and fast growing ecosystem.

If you have any questions or need further clarity, please don’t hesitate to reach out to us at garima@treelife.in

Why SaaS is the Future of Technology

The Indian SaaS sector stands at the intersection of global opportunity and local ingenuity, ready to redefine industries with cutting-edge solutions. As businesses embrace technologies like artificial intelligence, blockchain, and machine learning, the potential for innovation and impact is limitless. The SaaS model is projected to surpass $300 billion globally by 2026 – a testament to its scalability and adaptability. From CRM and ERP solutions to AI-driven platforms and industry-specific tools, SaaS caters to diverse business needs. In India, the sector’s growth is equally remarkable, with the market expected to reach $50 billion by 2030. Fueled by affordable cloud infrastructure, a highly skilled workforce, and supportive government policies, the Indian SaaS sector has become a powerhouse of global significance.

However, navigating the complexities of regulation, compliance, and market dynamics is essential for long-term success. With actionable insights and a deep dive into the regulatory framework, this handbook equips businesses and stakeholders to harness the immense potential of SaaS while staying compliant and resilient.

Inside the SaaS Blueprint – Key Highlights

1. A Comprehensive Industry Overview

The handbook provides an analysis of the SaaS industry’s evolution, market size, and the role of technology in driving transformation. Key highlights include:

  • The global rise of SaaS, driven by innovations in AI, machine learning, and cloud computing.
  • Insights into the Indian SaaS market, which is home to over 1,500 companies generating $13 billion in annual revenue, with 70% of revenue generated in international markets.
  • An exploration of key SaaS segments like Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), cybersecurity, fintech, and more, showcasing India’s ability to serve both local and global markets.

2. Regulatory and Legal Framework

The legal and regulatory landscape for SaaS businesses is complex, with both domestic and international considerations. The handbook covers:

  • Contract Law: SaaS agreements such as subscription, service level, and licensing agreements, and the importance of safeguarding intellectual property (IP).
  • Data Protection and Privacy: Navigating India’s Digital Personal Data Protection Act, 2023, and ensuring compliance with global laws like GDPR, HIPAA, and CCPA.
  • Intellectual Property Protection: Securing patents, copyrights, trademarks, and trade secrets to protect proprietary technology.
  • Taxation: Detailed insights into GST implications, equalization levy updates, and income tax considerations for SaaS businesses operating domestically and internationally.

3. Investment Landscape

India’s SaaS sector has emerged as an attractive destination for venture capital and private equity investment, with the handbook providing: 

  • The growing preference for vertical SaaS solutions catering to niche industries like agritech and climate tech.
  • Key investment trends, including the role of AI in creating new SaaS categories like software testing, predictive analytics, and automation.
  • Challenges such as founder dilution and valuation pressures, with strategies for navigating these hurdles while attracting sustainable funding.

4. Mitigating Risks and Building Resilience

The digital nature of SaaS exposes companies to unique risks, including data breaches and operational disruptions. Learn more about strategies to mitigate risk and build resilience through::

  • Enhancing data security through encryption, access controls, and compliance with local and global regulations.
  • Building operational resilience with disaster recovery plans, fault-tolerant infrastructure, and robust incident response and reporting frameworks.
  • Addressing third-party risks by vetting external vendors and ensuring alignment with security standards like SOC 2 and ISO 27001.

5. Government Initiatives Supporting SaaS

Aimed at fostering innovation and promoting adoption of SaaS, the Government of India has launched multiple initiatives and policies, the most prominent of which are below:

  • MeghRaj Initiative: Accelerating cloud adoption in public services to improve efficiency and scalability.
  • National Policy on Software Products (NPSP): Supporting 10,000 startups and developing clusters for software product innovation.
  • Government eMarketplace (GeM): Enabling SaaS companies to tap into public sector procurement opportunities.
  • SAMRIDH Program: Connecting startups with resources for scaling and growth.

Key Takeaways for Stakeholders

Whether you’re an entrepreneur, investor, or policymaker, this handbook provides actionable insights to navigate the opportunities and challenges of the SaaS ecosystem. Key takeaways include:

  • The roadmap to build and scale a successful SaaS business in India.
  • Strategies to ensure compliance with complex regulatory frameworks.
  • Insights into investment trends and funding opportunities in SaaS.
  • A detailed analysis of risks and resilience strategies to future-proof your business.

Download the SaaS Blueprint today and take the next step in shaping the future of SaaS in India. For inquiries or further guidance, reach out to us at garima@treelife.in.

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Environmental, Social, and Governance (ESG) in India - Handbook

Environmental, Social, and Governance (ESG) in India – Handbook

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Environmental, Social, and Governance (ESG) principles have evolved from being a global framework for responsible business practices into a cornerstone of sustainable and ethical growth. In India, the prominence of ESG is rapidly increasing, with the total assets under management (AUM) of ESG funds reaching substantial growth of USD 1.17 billion (INR 9,753 crores) in March 2024. In fact, ESG could represent approximately 34% of the total domestic AUM by 2051

These principles originated as a response to growing concerns on climate change, social equity, and corporate accountability. Today, they are critical for businesses aiming to align with international sustainability goals. Startups are uniquely positioned to integrate ESG frameworks into their operations from the outset, contributing to global sustainability objectives while enhancing financial performance. Improved risk management, operational efficiencies, and stronger stakeholder trust are among the many benefits of embedding ESG practices. Furthermore, companies with strong ESG performance are increasingly favored by investors, reflecting a global shift toward sustainable financing and prioritizing climate action.

India’s ESG evolution mirrors international trends while addressing domestic opportunities and challenges. Initiatives such as the Business Responsibility and Sustainability Report (BRSR) framework and increasing green finance options have propelled India into the global spotlight. Startups can leverage these developments to scale responsibly, align with India’s international commitments, and position themselves as leaders in the evolving ESG landscape.

Tailored for practical insight, this handbook focuses on individual contributions to ESG as the building blocks for collective progress, enabling startups to align their practices with India’s international commitments and sustainability objectives, and to: (i) scale responsibly; (ii) contribute to global sustainability goals; and (iii) position themselves as leaders in India’s evolving ESG landscape. 

This handbook is developed as a comprehensive look into the ESG framework in India covering the evolution of ESG in corporate governance, key components, the Indian regulatory landscape, accounting and reporting standards, and market trends. With case studies on Tata Power, Zomato and IKEA, the handbook also addresses challenges, investment opportunities, and the future of ESG in India. This handbook provides startups with practical strategies to integrate ESG principles into their operations, enabling them to align with India’s global sustainability goals and unlock opportunities for responsible growth. For further guidance or inquiries, reach out to us at garima@treelife.in

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AIF (Alternative Investment Funds) in India – Framework

AIF (Alternative Investment Funds) in India – Framework, Types Taxability for 2025

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Overview

Alternative Investment Funds, often abbreviated as AIFs, have become a buzzword among sophisticated investors, especially High Net Worth Individuals (HNIs). As of November 2024, India has nearly 1,400 registered AIFs. This domain has witnessed remarkable growth, underscored by an almost 77% surge in commitments which escalated from Rs. 22.73 trillion in the fiscal year 2021-22 to a staggering Rs. 40.19 trillion in 2023-24. This growth translated to a substantial Rs. 17.46 trillion jump within two years! The total assets under management (AUM) of AIFs have grown at a CAGR (Compound Annual Growth Rate) of 28% between June FY19 and June FY24s. 

In light of the burgeoning AIF industry, its regulatory authority, the Securities and Exchange Board of India (SEBI), hasn’t remained a silent observer. SEBI has proactively been fortifying protocols to guarantee investor safety, heighten transparency, and ensure fair practices within the AIF guidelines.

So, the question arises, what exactly are AIFs? And how do they function within the Indian regulatory landscape? 

Understanding AIFs

An AIF is a privately pooled investment vehicle that gathers funds from investors, Indian or foreign, for investment as per a defined investment policy to benefit its investors. With their promise of high returns across diverse asset classes, AIFs are attractive for those aiming to diversify and enhance their portfolios.

Some key terms used in AIFs:

Carry
Carry or carried interest is akin to performance fees which is paid to the investment manager as a share of the AIF’s profits which the investment manager is entitled to if they exceed a specific threshold return. Carry is typically in the range of 15-20% of the profits earned by the AIF in excess of the specified threshold.

Hurdle / Preferred rate of return
Minimum percentage of returns that an investor earns before the Investment Manager can catch-up and charge carry to the investor.

Catch-up
Catch-up allows the investment manager to earn the hurdle rate of return on its investment in the AIF but only after the investors have received their investment along with the hurdle rate of return on such investment.

Distribution waterfall
Provides for an order of specified priority in which the distributions are made by AIF which includes the capital contributions, fees, hurdle, catch up (if any), carry, etc.

Closing
Closing is the date fixed by the Investment Manager as a cut-off date to obtain capital commitment from investors.

Regulatory Framework

In India, AIFs operate under the purview of the SEBI. Since their establishment in the late 1980s, Venture Capital Funds (VCFs) have been a significant focus for the government to bolster the growth of specific sectors and early stage companies. However, the desired outcomes in supporting emerging sectors and startups were not realized, largely due to regulatory uncertainties. Recognizing this challenge, in 2012, the Securities and Exchange Board of India unveiled the SEBI (AIF) Regulations. This was done to categorize AIFs as a unique asset class, similar to Private Equities (PEs) and VCFs.

Any entity wishing to function as an AIF must seek registration with SEBI. While there are various legal structures under which an AIF can be established – such as a trust, a company, an LLP, or a body corporate – trusts are the most commonly chosen form in India.

A typical AIF structure looks like the following –

AIF (Alternative Investment Funds) in India - Framework, Types Taxability for 2025

The entities are:
Settlor – Person who settles the trust with a nominal initial settlement
Trustee – Person in charge of the overall administration and management of the Trust. In practice, this responsibility is then outsourced to the investment manager.
Contributor – Investor to the Trust (AIF) and makes a capital commitment to the AIF
Sponsor – Face of the AIF i.e. Person who sets up the AIF
Investment Manager – Brain of the AIF i.e. Person who is appointed to manage the
investments.

It’s noteworthy that the roles of the Sponsor and Investment Manager can be unified, with one entity performing both functions.

Under the SEBI AIF Regulations, AIFs are classified into 3 distinct categories. Each category serves a unique purpose and is characterized by specific investment conditions and varying degrees of regulatory oversight. Below is an overview of the categories, highlighting their primary purpose and key conditions:

 

Parameters

Category I AIF 

Category II AIF

Category III AIF

Definitions

Funds with strategies to invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable.

Includes: 

  • Venture Capital Funds (angel funds are a subcategory of VCFs)

  • SME funds

  • Social Impact Funds

  • Infrastructure Funds

  • Special Situation Funds

Funds that cannot be categorized as Category I AIFs or Category III AIFs. These funds do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the AIF Regulations.

Examples – Private Equity or Debt Funds

Funds which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

Examples – Hedge funds or funds which trade with a view to make short-term returns 

 
 

Minimum ticket size

INR 1 crore 

INR 1 crore

INR 1 crore

Minimum fund size

INR 20 crore 

INR 20 crore

INR 20 crore

Open or close ended fund

Close-ended 

Close-ended 

Can be open or close-ended

Tenure

Minimum tenure of 3 years 

Minimum tenure of 3 years 

NA

Continuing interest of Sponsor / Manager

(a.k.a skin in the game)

Lower of:

  • 2.5 % of corpus

  • INR 5 crores

Lower of:

  • 2.5 % of corpus;

  • INR 5 crores

Lower of:

  • 5 % of corpus;

  • INR 10 crore

Investment outside India

Permissible subject to SEBI approval

Concentration norms

Can’t invest more than 25% in 1 investee company

Can’t invest more than 25% in 1 investee company

Can’t invest more than 10% in 1 investee company

Borrowing 

Cant borrow funds except for :

(a) temporary funds not more than 30 days

(b) less than 4 occasions in a year

(c) less than 10% of investable funds

Cant borrow funds except for :

(a) temporary funds not more than 30 days

(b) less than 4 occasions in a year

(c) less than 10% of investable funds

Can engage in leverage & borrowing as per prescribed rules 

Overall restrictions / compliances

Low

Medium

High

SEBI registration fees

INR 500,000 

INR 1,000,000

INR 1,500,000

Per scheme filing fees

INR 100,000 

INR 100,000

INR 100,000

 

Apart from the categories mentioned above, any of the three categories of AIFs can be classified as a large-value fund (LVFs), provided that each investor is an “accredited investor” as per the AIF Regulations and invests a minimum of INR 70 crores in the AIF. LVFs have certain investment and compliance related exemptions.

Angel Funds also hold a distinct categorization under the AIF Regulations. These funds are a subcategory of Category I AIFs – VCFs, primarily designed to acknowledge and support the unique role of angel investors in the startup ecosystem. The key characteristics of Angel funds are summarized below:

Parameters

Category I AIF 

Minimum ticket size

INR 25 lakhs 

Minimum fund size

INR 5 crore 

Investments

Should be not less than INR 25 lakhs and not more than INR 10 crores, with a minimum lock-in period of 3 years.

Open or close ended fund

Close-ended 

Continuing interest of Sponsor / Manager

(a.k.a skin in the game)

Lower of:

  • 2.5 % of corpus

  • INR 50 lakhs 

Investors

Angel investors who meet the specified criteria

SEBI application fee

INR 200,000 

Per scheme filing fee

NIL

Table 2: Angel Funds

Taxability of AIFs

Category I and II AIFs:

Category I and II AIFs are granted pass-through status from an income-tax perspective, whereby any income earned by these AIFs (other than profits or gains from business) is not taxed at the AIF level, but directly taxed as income at the hands of the investors as if these investors had directly received this income from the investments.

Unabsorbed losses (other than business losses) of the AIF may be allocated to the investors for them to set off against their respective individual incomes, subject to such investors having held the units in the AIF for at least 12 months. 

Further, the distributions from Category I and II AIFs are subject to a withholding tax of 10% in the case of resident investors, and at the rates in force in the case of non-resident investors (after giving due consideration to any benefit available to them under the applicable tax treaty).

Business income of Category I and II AIFs is chargeable to tax at the maximum marginal rate (MMR) i.e. 30% plus applicable surcharge and education cess at the AIF level as per the legal status of the AIF and once this tax is paid, no further tax on the same is payable by the investors.

Category III AIFs 

Category III AIFs have not been granted statutory pass-through status. Typically, they are set up as “determinate and irrevocable trusts.” This means the trusts have identifiable beneficiaries, and their respective beneficial interests can be determined at any given time. In such trusts, the trustee can discharge the tax obligation for the income of the trust on behalf of its beneficiaries (i.e., the investors) in a representative capacity. This is similar to the tax liability an investor would face if they had received the income directly. However, there’s an exception: trusts with any business income must pay tax at the MMR. As per income-tax law, tax authorities can recover tax either from the trustee or directly from the beneficiaries. Given this flexibility, a trustee might opt to pay the entire tax amount at the AIF level. Moreover, the law permits the trustee (acting as a representative assesses) to recover from investors any taxes it has paid on their behalf.

We have not covered tax implications for investment managers and sponsor entities above.

Key Documents

Private Placement Memorandum (PPM):

The PPM provides comprehensive details about the AIF. Contents include information about the manager, key investment team, targeted investors, proposed fees and expenses, scheme tenure, redemption conditions or limits, investment strategy, risk factors and management, conflict of interest procedures, disciplinary history, service terms and conditions by the manager, affiliations with intermediaries, winding up procedures, and any other relevant details helping investors make informed decisions about investing in an AIF scheme.

SEBI has introduced mandatory templates for PPMs (for and) which provides for two parts: 

Part A – section for minimum disclosures

Part B – supplementary section to allow full flexibility to the AIF in order to provide any additional information, which it may deem fit. 

There are two templates – one for Category I and II AIFs and the other for Category III AIFs

Angel Funds, LVFs and AIFs in which each investor commits to a minimum capital contribution of INR 70 crores are exempted from following the aforementioned template.

Indenture of Trust / Trust Deed:

This document is an agreement between the settlor and the trustee. It involves the settlor transferring an initial settlement (can be nominal) to the trustee to create the fund’s assets. The Indenture details the roles and responsibilities of the trustee. 

Investment Management Agreement:

This agreement is entered between the trustee and the investment manager. Here, the trustee designates the investment manager and transfers most of its management powers regarding the fund to them. However, certain powers retained by the trustee are outlined in the Indenture of Trust.

Contribution Agreement:

This agreement is between the contributor (investor), the trustee, and the investment manager. It mentions the terms of an investor’s participation in the fund, covering areas like beneficial interest computation, distribution mechanism, expense list to be borne by the fund, and the investment committee’s powers. SEBI mandates that the Contribution Agreement’s terms should align with the PPM and shouldn’t exceed its provisions.

How to get registered with SEBI?

This is the registration process if the Fund is set up as a Trust.

To register an AIF with SEBI, the fund needs to make an application to SEBI on its online portal. 

The trust deed i.e. incorporation document of the fund where it is set up as a trust, needs to be registered with the local authorities. Further, the PAN needs to be obtained before making the application to SEBI.

The application to SEBI has the following key documents to be submitted:

  • Application form in Form A 
  • Private Placement Memorandum (PPM)
  • Trust Deed
  • Declarations and KYC documents of the entities involved i.e. investment manager, sponsor, trustee (if the AIF is structured as a trust), and the AIF itself

Further, before submitting the application to SEBI, the AIF must engage a merchant banker who performs due diligence on the PPM and subsequently provides a certification that needs to be filed with SEBI. However, there’s an exemption for LVFs and Angel Funds for this requirement. 

Once the application is submitted, SEBI will evaluate the application. Generally, the entire setup and registration process, including SEBI’s assessment, spans around four to six months.
Broadly, the process flow looks as follows:

AIF (Alternative Investment Funds) in India - Framework, Types Taxability for 2025

AIF Process Flow

Final Thoughts

With their ability to diversify investment portfolios and provide potential high returns, AIFs undeniably present an attractive avenue for investment in today’s dynamic market scenario. The regulatory framework, set by SEBI, ensures transparency, credibility, and alignment with global best practices, further instilling confidence among stakeholders.

However, AIFs can be tricky to understand because of the different types, how they are taxed, and the many documents involved. It’s like trying to put together a puzzle with lots of pieces.

For both potential AIF managers and investors, understanding this intricate ecosystem is crucial. It is recommended to talk to experts who know the details. They can guide you through the process, help you understand the rules, and make sure you’re making the best decisions. As the world of AIFs keeps changing, staying informed and getting the right advice will be key to success.

FAQs:

  1. What is an Alternative Investment Fund (AIF)?

Answer: An AIF is a privately pooled investment vehicle that collects funds from investors, either Indian or foreign, to invest as per a defined investment policy, with the aim of benefiting its investors. It offers diversified asset classes and promises potentially high returns, making it an attractive choice for High Net Worth Individuals (HNIs) and other discerning investors.

  1. How are AIFs regulated in India?

Answer: AIFs in India operate under the regulatory framework of the Securities and Exchange Board of India (SEBI). SEBI introduced the SEBI (Alternative Investment Funds) Regulations in 2012 to categorize AIFs as a distinct asset class. All entities desiring to function as an AIF must register with SEBI.

  1. What are the different categories of AIFs?

Answer: SEBI classifies AIFs into three categories:

  • Category I AIF: Focus on sectors or areas which are socially or economically desirable. Includes Venture Capital Funds, SME funds, and more.
  • Category II AIF: Funds that do not fall under Category I or III and don’t undertake excessive leverage.
  • Category III AIF: Funds employing diverse or complex trading strategies, often using leverage. Examples include hedge funds.
  1. How is the taxability of AIFs determined?

Answer:

  • Category I and II AIFs: Granted pass-through status, meaning income (other than business profits) is taxed directly in the hands of investors.
  • Category III AIFs: Not granted a statutory pass-through. Typically, tax liability for trusts can be met by the trustee or the beneficiaries directly.
  1. What are Angel Funds and how do they fit into the AIF landscape?

Answer: Angel Funds are a subcategory of Category I AIFs – specifically Venture Capital Funds. They are designed to support the crucial role of angel investors in the startup ecosystem. Angel funds have distinct features like a minimum ticket size of INR 25 lakhs and a minimum fund size of INR 5 crores.

  1. How does one register an AIF with SEBI if set up as Trust?

Answer: To register with SEBI, the fund must make an online application. Prior to this, the trust deed must be registered locally, and a PAN should be obtained. Key documents like the PPM, Trust Deed, and relevant KYC documents must be submitted. The entire setup and registration process usually takes around four to six months.

  1. What is the typical cost for setting up an AIF in India?

Answer: The typical cost for setting up an AIF in India ranges from INR 10 to 15 lakhs. The SEBI registration fees depend on the Category of AIF. However as per SEBI guidelines, the minimum investment in an AIF is Rs. 1 Crore.

 

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Frequently Asked Questions GET IN TOUCH WITH US

What does Treelife do?

Treelife provides comprehensive legal, financial, and compliance services tailored to the needs of startups, investors, and businesses. Our services include Virtual CFO, legal support, secretarial compliance, tax and regulatory advisory, and assistance with global market entry.

Can Treelife assist with setting up a business in India?

Yes, Treelife provides end-to-end support for setting up a business in India. Our services include market entry strategy, company registration, regulatory compliance, and ongoing back office support to ensure a smooth and successful setup.

What is your experience of working with investors and AIFs?

Treelife has a robust track record of working with investors and Alternative Investment Funds (AIFs). We offer comprehensive support for fund setup, tax structuring, SEBI applications, due diligence, and ongoing compliance, ensuring smooth operations and successful investments.

How is your pricing model?

Treelife offers a flexible and transparent pricing model tailored to the specific needs of your business. Our pricing is structured based on the scope and complexity of the services required and works on the following basis: project-based, where there is a one-time fee; retainer, with ongoing services for a fixed monthly fee; hourly, based on the number of hours worked; and an equity sharing model, where payment is made through a share of equity in your business. This approach ensures you receive the best value for your investment.

Are there any hidden fees or additional costs?

No, Treelife believes in transparency and ensures there are no hidden fees or unexpected charges. All costs are clearly outlined in our engagement proposal, and any additional expenses will be discussed and approved by you before being incurred.

Can Treelife assist with setting up a business in India?

Yes, Treelife provides end-to-end support for setting up a business in India. Our services include market entry strategy, company registration, regulatory compliance, and ongoing back office support to ensure a smooth and successful setup.

Can Treelife assist with international market entry?

Yes, Treelife offers extensive support for businesses looking to expand globally. Our services include jurisdiction evaluation, regulatory assessment, and execution support for market entry, ensuring compliance and smooth operations in new markets.

Do you help in raising funds?

Yes, Treelife supports startups and businesses during their fundraising process. While we are not an investor or fund, we offer comprehensive services such as preparing investor-ready documents, conducting due diligence, financial modeling, and providing strategic advisory to help you successfully raise the capital you need.

What is transaction services?

Our transaction services encompass advisory and documentation support for various financial transactions, including private equity/venture capital (PE/VC) deals, mergers and acquisitions (M&A), and venture debt. We ensure smooth and compliant transactions, from due diligence to closure.

I am just a startup, I need all services, can you help me?

Absolutely! Treelife specializes in supporting startups with a wide range of services. From legal support and virtual CFO services to secretarial compliance and tax advisory, we provide end-to-end solutions to help your startup grow and succeed.

What does Treelife do?

Treelife provides comprehensive legal, financial, and compliance services tailored to the needs of startups, investors, and businesses. Our services include Virtual CFO, legal support, secretarial compliance, tax and regulatory advisory, and assistance with global market entry.

What is your experience of working with investors and AIFs?

Treelife has a robust track record of working with investors and Alternative Investment Funds (AIFs). We offer comprehensive support for fund setup, tax structuring, SEBI applications, due diligence, and ongoing compliance, ensuring smooth operations and successful investments.

What is the profile of the members working at Treelife?

Our team at Treelife is made up of experienced professionals, including lawyers, Chartered Accountants (CAs), and Company Secretaries (CS), with diverse backgrounds in finance, law, compliance, and business advisory. Each member brings specialized knowledge and practical expertise to help our clients navigate complex legal and financial landscapes effectively.

Have you worked with startups before?

Yes, we have extensive experience working with startups across various industries. We understand the unique challenges faced by startups and provide tailored solutions to support their growth, from incorporation to fundraising and beyond.

What sets Treelife apart from other service providers?

Treelife stands out due to our integrated approach, combining legal, financial, and compliance expertise under one roof. Our personalized service and deep domain expertise of the Indian market ensure that we deliver solutions that are both strategic and practical.

How do you ensure data security and confidentiality?

Treelife prioritizes the security and confidentiality of your data. We use secure servers, encryption, and access controls to protect your information. Additionally, our team adheres to strict confidentiality agreements and industry best practices to safeguard your data.

Do I need to physically sign any documents?

No, physical signatures are generally not required. Treelife uses secure electronic signature platforms to facilitate the signing of documents, making the process quick and convenient for our clients. However, if physical signatures are necessary, we will coordinate the process with you.

Who will manage my account?

Your account will be managed by a dedicated SPOC who will be your primary point of contact. This person will coordinate with our team of experts to ensure all your needs are met and provide regular updates on the progress of your projects.

What tools or technologies are you equipped with?

Treelife is equipped with a comprehensive technology stack to ensure effective and efficent way to deliver our services. For bookkeeping, we use Tally, QuickBooks, Zoho, and Xero. Our data management is handled through Slack, Dropbox, and Google Drive. For payment processing, we utilize platforms like Kodo, Razorpay, Keka, and PayPal.These tools enable us to provide high-quality, reliable services tailored to your business needs.

I am based out of a location where Treelife doesn’t have an office, how do we work?

Treelife operates seamlessly with clients across various locations whether domestic or international through virtual communication and collaboration tools. We conduct meetings via video calls, share documents electronically, and stay in constant touch through emails and messaging platforms to ensure smooth operations regardless of your location.

How is your pricing model?

Treelife offers a flexible and transparent pricing model tailored to the specific needs of your business. Our pricing is structured based on the scope and complexity of the services required and works on the following basis: project-based, where there is a one-time fee; retainer, with ongoing services for a fixed monthly fee; hourly, based on the number of hours worked; and an equity sharing model, where payment is made through a share of equity in your business. This approach ensures you receive the best value for your investment.

Are there any hidden fees or additional costs?

No, Treelife believes in transparency and ensures there are no hidden fees or unexpected charges. All costs are clearly outlined in our engagement proposal, and any additional expenses will be discussed and approved by you before being incurred.

What is the typical turnaround time for your services?

The turnaround time for our services depends on the complexity and scope of the project. During the initial consultation, we provide an estimated timeline based on your specific needs and ensure timely delivery through efficient project management.

What is your payment schedule?

Our payment schedule is designed to be convenient and flexible. Typically, we operate on a milestone-based payment system, where payments are made at key stages of the project. We also offer customized payment plans based on your specific requirements.

How can I pay you?

Treelife accepts various payment methods to ensure ease and convenience for our clients. You can pay us via bank transfer, or other electronic payment methods. Detailed payment instructions will be provided upon engagement.

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For Business Enquiry

Mumbai | Delhi |
Bangalore | GIFT City