In today’s digital landscape, where personal data is both a valuable asset and a subject of concern, a robust privacy policy is paramount. A well-crafted privacy policy serves as a guiding document outlining how an organization collects, uses, and protects user information. Let’s delve into the intricacies of a privacy policy, drawing insights from a comprehensive framework commonly found in such documents.
Introduction: A privacy policy typically begins with an introduction that underscores the organization’s commitment to safeguarding user privacy and complying with relevant laws and regulations. This section aims to establish trust and transparency from the outset, laying the foundation for user confidence in the organization’s data practices.
Consent and Updates: User consent forms the cornerstone of data collection and processing activities. A robust privacy policy should clarify that by using the organization’s services or accessing its platform, users implicitly agree to its terms. Furthermore, the policy should outline procedures for notifying users of any material changes, ensuring ongoing consent and transparency.
Opt-Out Provision: Respecting user autonomy is paramount. A privacy policy should include provisions for users to opt out of data collection and processing activities. By providing clear instructions on how to do so, organizations empower users to assert control over their personal information.
Collection of Personal Information: The policy should detail the types of personal information collected and the methods used for its acquisition. Importantly, it should clarify that only information provided voluntarily or available in the public domain is collected, fostering transparency and user trust.
Use of Personal Information: The policy should articulate the purposes for which personal information is collected and used, ensuring alignment with specific organizational objectives. By providing clarity on data usage, organizations demonstrate transparency and accountability in their data practices.
Sharing Personal Information with Third Parties: Instances where personal information may be shared with third parties should be clearly delineated in the policy. By stipulating the conditions under which data is shared, organizations establish transparency and accountability in their data-sharing practices.
Use of Cookies: If cookies are used for enhancing user experience or analyzing site traffic, the policy should address their usage and implications for user privacy. By informing users about cookie management options, organizations empower users to make informed decisions about their privacy preferences.
Retention and Security of Personal Information: The policy should outline the organization’s approach to data retention and the security measures employed to protect user information. By reassuring users of robust security measures, organizations foster trust and confidence in their data handling practices.
International Data Transfer: If data processing involves international transfer, the policy should clarify the jurisdictions involved and the measures taken to ensure compliance with relevant laws and regulations. Transparent communication about data transfer practices enhances user trust and confidence.
Disclaimers and Limitations of Liability: The policy may include disclaimers regarding external links and user-contributed content, mitigating the organization’s liability for third-party actions. By setting clear boundaries, organizations minimize legal risks associated with user-generated content and external links.
User Rights: Users should be empowered with rights to access, rectify, and erase their personal information, as well as to withdraw consent and lodge complaints. The policy should pledge to facilitate the exercise of these rights while upholding legal obligations, fostering trust and accountability.
Grievance Officer: Designating a grievance officer to address user concerns and complaints promptly demonstrates the organization’s commitment to resolving privacy-related issues effectively. Providing a dedicated point of contact enhances accountability and transparency in conflict resolution.
Legal Compliance: In compliance with relevant legislation, such as the Digital Personal Data Protection Act of 2023, organizations should ensure that their privacy policy aligns with stipulated requirements for data protection and privacy. Adhering to legislative provisions enhances legal compliance and user trust in the organization’s data handling practices.
In conclusion, a comprehensive privacy policy plays a pivotal role in navigating the complexities of data protection and privacy regulation in the digital age. By prioritizing transparency, user consent, and data protection, organizations can foster trust, enhance user experiences, and maintain compliance with regulatory standards. In doing so, they uphold privacy as a fundamental right in the modern digital landscape.
The Reserve Bank of India issued the Reserve Bank of India (Outsourcing of Information Technology Services) Directions, 2023 (“Directions”), which have come into effect on and from October 1st, 2023 and are applicable to Schedule Commercial Bank including Foreign Banks located in India, Local Banks, Small Finance Banks, and Payments Banks but excluding Regional Rural Banks, Primary (Urban) Co-operative Banks excluding Tier 1 and Tier 2 Urban Co-operative Banks, Credit Information Companies (CICs), Non- Banking Financial Companies (“NBFCs”) but excluding Base Layer NBFCs and All India Financial Institutions (EXIM Bank, NABARD, NaBFID, NHB and SIDBI) (“REs”). It is essential to note that foreign banks operating in India through branch mode must interpret references to the ‘Board’ or ‘Board of Directors’ as pertaining to the head office or controlling office overseeing branch operations in India.
RETROSPECTIVE AND PROSPECTIVE EFFECT
Outsourcing Agreements
Particulars
Timelines
Existing Agreements
Due for renewal before October 1, 2023
Must comply with the Directions on the renewal date (preferably) but no later than April 9th, 2024.
Due for renewal on or after October 1, 2023
Must comply with the Directions on the renewal date or by April 9th, 2026, whichever is earlier.
New Agreements
Will come into force before October 1, 2023
Must comply with the Directions as on the effective date of the agreement (preferably) or by April 9th, 2024, whichever is earlier.
Will come into force on or after October 1, 2023
Must comply with the Directions from the effective date of the agreement.
APPLICABILITY
These Directions shall apply to Material Outsourcing of IT Services arrangements entered by the REs. The term “Material Outsourcing of IT Services” shall include any such services which:
(a) if disrupted or compromised will significantly impact the RE’s business operations; or
(b) may have material impact on the RE’s customers in the event of any unauthorised access, loss or theft of customer information.
The “Outsourced IT Services” will include the following:
S.No.
IT Services
Inclusions (not an exhaustive list)
1.
IT infrastructure management, maintenance and support (hardware, software or firmware)
Hardware/ Software installation and configuration, OS management, network setup and configuration, server management, data backup and recovery, technical support services, security management, performance monitoring and optimization, IT asset management and vendor management
2.
Network and security solutions, maintenance (hardware, software or firmware)
Firewall, IDS/IPS, VPN, NAC and WAF management, network monitoring and traffic analysis, patch management, security policy management and security audits and compliance
3.
Application Development, Maintenance and Testing; Application Service Providers (ASPs) including ATM Switch ASPs
Requirements analysis, application design and architecture, programming and development, software testing, bug fixing and maintenance, performance optimization, version development, application security and hosting, application development, integration and customization
4.
Services and operations related to Data Centres
Installation, setup, design, consulting, networking, security, compliance and auditing, maintenance and upgrades and server and storage management of Data Centres.
5.
Cloud Computing Services
SaaS, PaaS, IaaS, DBaaS, cloud storage, monitoring and management, cloud networking, IAM management and data analytics and machine learning
6.
Managed Security Services
Security monitoring and incident response, vulnerability management, security device management, security assessments and audits, security incident handling and forensics, security policy and governance and managed encryption services
7.
Management of IT infrastructure and technology services associated with payment system ecosystem
Payment Gateway management, merchant account management, fraud detection and prevention, payment processor management and infrastructure management
ROLES AND RESPONSIBILITIES OF THE REs
The guidelines underscore the critical responsibility of REs in overseeing outsourced activities. The Board and Senior Management bear ultimate accountability and must ensure that service providers adhere to the same standards and obligations as the REs themselves. To this end, REs are mandated to maintain a robust grievance redressal mechanism and compile an inventory of services provided by service providers.
Governance Framework: A comprehensive governance framework is essential for effective oversight of outsourcing activities. REs intending to outsource IT activities must formulate a board-approved IT outsourcing policy encompassing roles and responsibilities, selection criteria for service providers, risk assessment methodologies, disaster recovery plans, and termination processes. The Board is entrusted with approving policies and establishing administrative frameworks, while Senior Management is responsible for policy formulation and risk evaluation.
Evaluation and Engagement of Service Providers: Prior to engaging service providers, REs must conduct meticulous due diligence to assess their capabilities and suitability. Evaluation criteria should span qualitative, quantitative, financial, operational, legal, and reputational factors. The subsequent agreement between REs and service providers should be legally binding and encompass critical aspects such as service level agreements, data confidentiality, and liability clauses.
Risk Management: Mitigating risks associated with outsourcing activities requires a robust risk management framework. REs must identify, measure, mitigate, and manage risks comprehensively. Additionally, they are required to establish business continuity plans (BCP) and disaster recovery plans (DRP) to ensure uninterrupted operations during emergencies.
Monitoring and Control of Outsourced Activities: Maintaining effective oversight of outsourced IT activities is paramount for REs. Regular audits, performance monitoring, and periodic reviews of service providers are essential components of this oversight. Access to relevant data and business premises must be granted for oversight purposes.
Outsourcing within a Group / Conglomerate: While REs are permitted to outsource IT activities within their business group or conglomerate, they must ensure the adoption of appropriate policies and service level agreements. Maintaining an arm’s length relationship with group entities and adhering to identical risk management practices is imperative.
Cross-Border Outsourcing: Engaging service providers based in different jurisdictions necessitates a thorough understanding of associated risks. REs must closely monitor country risks, political, social, economic, and legal conditions, and ensure compliance with regulatory requirements. Contingency and exit strategies must be in place to mitigate potential disruptions.
Exit Strategy: Incorporating a clear exit strategy in outsourcing policies is essential for ensuring business continuity during and after termination of outsourcing arrangements. Alternative arrangements and procedures for data removal, transition, and cooperation between parties must be clearly defined.
EXCLUSIONS
The following services/ activities are excluded from the ambit of “Outsourcing IT Services” (non-exhaustive list):
Corporate Internet Banking services obtained by regulated entities as corporate customers/ sub members of another regulated entity
External audit such as Vulnerability Assessment/ Penetration Testing (VA/PT), Information Systems Audit, security review
SMS gateways (Bulk SMS service providers)
Procurement of IT hardware/ appliances
Acquisition of IT software/ product/ application (like CBS, database, security solutions, etc.,) on a licence or subscription basis and any enhancements made to such licensed third-party applications by its vendor (as upgrades) or on specific change requests made by the RE.
Any maintenance service (including security patches, bug fixes) for IT Infra or licensed products, provided by the Original Equipment Manufacturer (OEM) themselves, in order to ensure continued usage of the same by the RE.
Applications provided by financial sector regulators or institutions like CCIL, NSE, BSE, etc.
Platforms provided by entities like Reuters, Bloomberg, SWIFT, etc.
Any other off the shelf products (like anti-virus software, email solution, etc.,) subscribed to by the regulated entity wherein only a license is procured with no/ minimal customisation
Services obtained by a RE as a sub-member of a Centralised Payment Systems (CPS) from another RE
Business Correspondent (BC) services, payroll processing, statement printing
In addition to the above, certain vendors/ entities will not be considered as a third-party service provider for these Directions. A non-exhaustive list is provided below:
Vendors providing business services using IT. Example – BCs
Payment System Operators authorised by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 for setting up and operating Payment Systems in India
Partnership based Fintech firms such as those providing co-branded applications, service, products (would be considered under outsourcing of financial services)
Services of Fintech firms for data retrieval, data validation and verification services such as (list is not exhaustive): (a) bank statement analysis; (b) GST returns analysis; (c) fetching of vehicle information; (d) digital document execution; and (e) data entry and call centre services.
Telecom Service Providers from whom leased lines or other similar kind of infrastructure are availed and used for transmission of the data
Security/ Audit Consultants appointed for certification/ audit/ VA-PT related to IT infra/ IT services/ Information Security services in their role as independent third-party auditor/ consultant/ lead implementer.
The RBI’s IT Outsourcing Directions represent a significant regulatory milestone aimed at enhancing the resilience and integrity of IT outsourcing practices within the financial sector. By delineating clear roles, responsibilities, and standards, these guidelines seek to foster transparency, accountability, and risk mitigation in outsourcing arrangements. Compliance with these directives is essential for REs to maintain operational stability and safeguard customer interests in an increasingly digitalized financial landscape.
In the ever-evolving landscape of innovation, intellectual property rights (IPR) serve as the cornerstone of creativity and progress. It’s the shield that protects original ideas, inventions, and brand identity, to reap the rewards of one’s hard work and rightfully enjoy the reputational credit of being the first, original creator of a certain intangible property.
India’s decision to be a signatory to international intellectual property conventions, like the Berne Convention for the Protection of Literary and Artistic Works and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), signifies its commitment to upholding a global framework for protecting creativity and innovation. These conventions establish a set of rules and minimum standards that member countries, including India, agree to implement within their legal systems.
This article aims to explain Difference between Copyrights, Trademarks and Patents and their associated legal intricacies which are the three most widely implemented types of intellectual property protection. From safeguarding original works of authorship to securing exclusive rights for groundbreaking inventions, and establishing a recognizable brand identity, this research article will equip you to choose the most effective form of IP protection for the specific needs of your creation.
What is Intellectual Property?
Intellectual property (IP) refers to creations of the mind. These creations are intangible, meaning they can’t be physically held and can include inventions; literary and artistic works; designs; and symbols, names, and images used in commerce, as defined by the World Intellectual Property Organization (WIPO). Intellectual property rights (IPR) serve as the cornerstone for fostering innovation and creativity across various industries, by providing legal protection to inventors, creators, and businesses for their unique ideas and creations. The importance of intellectual property rights lies in their ability to promote a fair competitive environment, encouraging the development of new technologies, artistic expressions, and brands. By securing exclusive rights to use, share, and monetize their creations, individuals and companies are incentivized to invest in research and development, leading to economic growth and the advancement of human knowledge.
A)Types of Intellectual Property: The most common types of Intellectual Property Rights (IPR) include:
Copyright: Protects original works of authorship like books, music, software, and artistic designs.
Patents: Grants exclusive rights for new and inventive products or processes.
Trademarks: Distinguishes the source of goods or services, allowing consumers to identify a particular brand.
Trade secrets: Confidential information that provides a competitive advantage, such as a unique formula or manufacturing process.
B)Importance of Intellectual Property: IPR protection plays a vital role in:
Protects Innovation and Creativity: IPR incentivizes people to create new things by giving them control over their inventions, designs, and creative works. Knowing their work is protected encourages investment in research and development, which fosters innovation.
Competitive Advantage: IPR can be a significant source of competitive advantage for businesses. A unique product design protected by a trademark or a groundbreaking invention with a patent can set a business apart from competitors.
Monetization: IPR can be a way to generate income. Owners can license their rights to others for a fee, or they can sell their rights altogether. This can be a valuable revenue stream for individuals and businesses.
Builds Brand Reputation: Strong trademarks can help build brand recognition and customer loyalty. Customers associate a trademark with a certain level of quality and trust, and IPR helps ensure that only the authorized owner can use that mark.
Promotes Fair Trade: IPR enforcement helps prevent counterfeiting and piracy. This protects consumers from getting lower-quality goods and helps ensure that creators are fairly compensated for their work.
The meaning of copyright is mentioned under the Indian Copyright Act, 1957 (hereinafter ‘Copyright Act’) in Section 14 which essentially states that exclusive rights are granted to the owner of a copyright.
Section 14:Meaning of copyright – This section defines the exclusive rights granted to copyright owners. These rights typically include reproduction, distribution, public performance, and adaptation of the copyrighted work.
Section 13:Acts not infringing copyright – This section outlines certain actions that don’t constitute copyright infringement. These may include fair dealing for purposes like research, criticism, or review.
Sections 15-21:Deal with specific rights and limitations – These sections cover various aspects of copyright ownership and limitations on those rights. They delve deeper into specific rights for certain types of creative works, like cinematograph films, sound recordings, and performer’s rights.
What are the rights protected under copyright?
Here are the main types of rights protected by copyright:
Reproduction rights: This allows the copyright owner to control how their work is copied, whether in physical form (printing a book) or digital form (downloading music).
Distribution rights: This grants the copyright owner control over how copies of their work are distributed to the public. This could include selling books, distributing movies, or making music available online.
Public performance or communication rights: The copyright owner controls how their work is performed or communicated to the public. This could involve public readings of a book, screenings of a film, or online transmissions of music.
Adaptation rights: This allows the copyright owner to control the creation of derivative works based on their original work. This could include translations, adaptations for films, or other modifications.
Copyright primarily protects two main categories of rights: economic rights and moral rights.
Economic rights These are the exclusive rights that allow the copyright owner to financially benefit from their work. They encompass the reproduction, distribution, public performance, and adaptation rights as mentioned earlier.
Moral rights Moral rights are distinct. These rights are personal and non-economic. They protect the creator’s non-financial interests in their work: a) The right of attribution: This ensures the creator is identified as the author of the work. b) The right of integrity: This allows the creator to object to any distortion or modification of their work that could damage their reputation.
Moral rights are separate from economic rights and continue to belong to the author and cannot be transferred or sold. They remain with the creator even if they assign their economic rights to someone else.
What does copyright include?
The Copyright Act protects original expressions in various creative works. Section 13 of the Act specifies the types of works that can be copyrighted:
Literary works: This includes written materials like books, articles, poems, scripts, computer programs, and compilations like databases.
Dramatic works: Plays, screenplays, and other works intended for performance fall under this category.
Musical works: Original musical compositions, with or without lyrics, are protected.
Artistic works: This broad category encompasses paintings, sculptures, drawings, photographs, architectural works, and any other artistic creations.
Cinematograph films: Movies and films are included in this section.
Sound recordings: Recordings of music, speeches, or other sounds are protected. It’s important to note that copyright protects the original form of expression in these works, not the ideas themselves.
What is not protected under copyright?
While the Copyright Act safeguards creative expression, it doesn’t encompass everything under the sun. This law grants copyright protection to specific categories of original works. Let’s delve into what elements fall outside the scope of copyright. Here’s a list of things that generally fall outside the copyright ambit:
Ideas, concepts, and methods: Copyright protects the way something is expressed, not the underlying idea, concept, or method itself. For instance, the concept of a love story cannot be copyrighted, but the specific expression of that story in a novel can be.
Facts and information: Factual information, common knowledge, and news items are not copyrightable.
Short phrases, names, and titles: Copyright doesn’t typically protect short phrases like slogans, names, titles, or common expressions.
Official documents and symbols: Government reports, emblems, and other official documents are not protected by copyright. Simple formats and arrangements: Standard calendars, height and weight charts, or phone directory layouts wouldn’t be copyrightable.
Works that haven’t been fixed in a tangible form: Copyright protects things that are expressed in a physical or digital medium. Improv comedy or a speech wouldn’t be protected until written down or recorded.
Public domain works: Works whose copyright term has expired or that were never copyrighted in the first place fall into the public domain and can be freely used by anyone.
Benefits of Copyright
Copyright offers several benefits that incentivize creativity and protect the rights of creators. Here are some key advantages:
Encourages Creativity: Copyright grants creators exclusive control and the potential for financial gain from their work. This incentive fuels the creation of new and original works across various fields.
Protects Investment: The creative process often requires substantial time, effort, and resources. Copyright safeguards these investments by allowing creators to control how their work is used and potentially earn royalties or licensing fees.
Fair Compensation: Copyright ensures creators are fairly compensated for their work. They control commercial use and can choose to license their work for a fee or sell copies directly.
Builds Brand Reputation: Strong copyright protection allows creators to manage how their work is presented to the public. This helps them build and maintain a positive reputation associated with their brand or style.
Promotes Innovation: Copyright protection extends to areas like software and computer programs. This incentivizes investment in research and development, fostering innovation that benefits society as a whole.
Duration of Copyright
Copyright protection in India grants creators a set time frame of exclusive rights over their original works. The duration of copyright protection varies depending on the type of work:
Literary, Dramatic, Musical, and Artistic Works: For these works, copyright protection lasts for the lifetime of the author plus 60 years from the year following the author’s death. If the work is created by multiple authors (joint authorship), the duration is 60 years from the death of the last surviving author.
Cinematograph Films, Sound Recordings, Photographs: The copyright term for these works is 60 years from the year of their publication. For unpublished works in these categories, the duration is 60 years from the year of creation.
Posthumous Publications, Anonymous and Pseudonymous Publications: These works are protected for 60 years from the year of their publication.
Works of Government and Works of International Organizations: These works have a copyright term of 60 years from the year of their publication.
Section 22 of the Indian Copyright Act focuses on the term of copyright for published literary, dramatic, musical, and artistic works. Here’s a breakdown of what it says:
General Rule: Copyright in these types of works subsists during the lifetime of the author and for 60 years after the beginning of the calendar year following the year in which the author dies. In simpler terms, the copyright protection for these works lasts for the author’s lifetime plus 60 years after their death.
Joint Authorship: The explanation included in Section 22 clarifies that for works with multiple authors (joint authorship), the 60-year period starts after the death of the last surviving author. So, if a book is written by two authors and one passes away in 2020, copyright protection continues until 2080 (60 years after the second author’s death, assuming they die in 2040).
Fair Use Doctrine
The Copyright Act, 1957, recognizes the concept of fair dealing, a crucial doctrine that carves out exceptions to copyright infringement. This doctrine allows for the limited use of copyrighted material without the copyright holder’s permission, fostering a balance between protecting creators’ rights and enabling public access to information. Section 52 of the Act lays the groundwork for fair dealing. It specifies that “fair dealing with any literary, dramatic, musical or artistic work for private use, research, criticism or review, whether of that work or any other work” shall not constitute copyright infringement. The Act, however, doesn’t provide a rigid definition of “fair dealing.”
In the judicial pronouncement of, Folsom vs Marsh, the doctrine of fair use emerged for the first time in the USA, wherein, Justice Story set forth the following four factors to determine a work to be of Fair Use, which later went to be codified under the Copyright Act, 1976:
“The nature and objects of the selections made;
The nature of the original work;
The amount is taken; and
The degree in which the use may prejudice the sale, or diminish the profits, or supersede the objects, of the original work.”
It was through the Copyright (Amendment) Act, 2012 that fair dealing as a concept brought within its scope musical recordings and cinematograph films, as laid down in the ruling of India TV Independent News Services Pvt. Ltd. vs Yashraj Films Pvt. Ltd. This case established a crucial precedent for fair use of copyrighted material in India, particularly for news reporting, criticism, and commentary. It allows for limited use of excerpts from musical recordings and films without permission from the copyright holder, as long as the use falls under the fair dealing ambit.
Landmark Cases & Judgements in India concerning Copyrights
1)Super Cassettes Industries Limited vs Google and YouTube (2008): This case addressed the issue of online copyright infringement. The court held that online platforms like YouTube have a duty to take down infringing content if they are notified by the copyright owner. This case played a significant role in shaping the online copyright landscape in India.
2)R.G. Anand vs. Deluxe Films and Ors. (1978):This case established the principle that copyright protects the expression of ideas, not the ideas themselves. The plaintiff, a playwriter, sued a film producer for copyright infringement because the film’s plot was similar to his play. The court ruled that while the themes might be similar, the way they were expressed in the play and film were distinct.
3)Ratna Sagar (P) Ltd. vs. Trisea Publications and Ors. (1996): This case dealt with copyright infringement of children’s educational books. The court ruled that copying the substantial and original elements of the book’s layout, illustrations, and content constituted copyright infringement. This case highlighted the protection extended to creative elements beyond just the text in a work.
4)Shree Venkatesh Films Pvt. Ltd. vs. Vipul Amrutlal Shah and Ors. (2009):This case involved a dispute over the copyright of the iconic Hindi film dialogue “Mogambo khush hua” (Mogambo is pleased). The court ruled that short phrases or slogans might not be protected by copyright on their own, but they could be protected if they are unique and distinctive elements within a larger copyrighted work (the film in this case).
What is a Trademark?
A trademark ™ is a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others.It can include the shape of goods, their packaging, and combinations of colors. In other words, trademarks can be almost anything that distinguishes the products and/or services from others and signifies their sources. Brand names, taglines, and logos are some examples.
The definition of a trademark according to the Trademark Act, 1999 of India (hereinafter ‘Trademark Act’) is provided in Section 2(zb). It states: “trademark means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include the shape of goods, their packaging, and combination of colors.”
Breaking down the definition, following are the the key elements:
capable of being represented graphically;
capable of distinguishing the goods or services of one person from those of others;
may include the shape of goods, their packaging, and combinations of colors.
Under the Trademark Act, the word “mark” is defined under Section 2(1)(i)(V)(m) as “a device, brand, heading, label, ticket, name, signature, word, letter, numeral”. The term “Mark” under the Act also includes the shape of goods, packaging, or combination of colors or any other type of combination.
What does a trademark protect?
A trademark protects various elements that act as identifiers for your brand, not the product or service itself. Following are the aspects that are covered under the umbrella protection of trademark:
Logos, Symbols, and Designs: This is the most common type of trademark. It encompasses logos, symbols, or even unique product designs that visually represent your brand. For instance, the swoosh symbol identifies Nike and the golden arches represent McDonald’s. Registering these visual elements as trademarks prevents competitors from using confusingly similar designs that could mislead consumers.
Words, Phrases, and Slogans: Catchy brand names, slogans, or even short phrases can be registered as trademarks. Think of “Just Do It” by Nike or “Melts in Your Mouth, Not in Your Hand” by M&M’s. Trademark registration protects these unique word combinations and ensures they’re solely associated with your brand.
Sounds and Audio Elements: While less common, distinctive sounds or audio elements associated with a brand can also be trademarked. For example, the MGM lion’s roar or the Netflix startup sound are registered trademarks that instantly bring a brand to mind.
Packaging and Color Combinations: The unique design or color scheme of your product packaging can be protected as a trademark if it’s distinctive enough to identify your brand. For instance, the distinctive yellow color of BIC pens or the Tiffany blue packaging are registered trademarks.
What is not protected under trademark?
However, there are certain categories of marks that generally cannot be registered as trademarks:
Generic Terms: Words or phrases that have become synonymous with the product or service itself cannot be trademarked. For instance, “computer” or “running shoes” wouldn’t be protectable trademarks because they are generic terms for those products.
Descriptive Marks: Marks that merely describe the qualities, ingredients, functions, or characteristics of the product or service are not registrable. For example, “shiny shoes” for footwear or “long-lasting battery” for a mobile phone wouldn’t qualify as trademarks.
Deceptive or Misleading Marks: Marks that could mislead consumers about the nature, place of origin, or qualities of the product or service cannot be registered. For instance, a trademark for woolen clothing depicting a tropical island would be considered deceptive.
Immoral or Scandalous Marks: Marks that are considered offensive, indecent, or against public morality cannot be registered. The Trademark Office would likely reject such applications.
Marks Lacking Distinctiveness: Marks that are too common, generic, or lack any inherent distinctiveness wouldn’t be registrable. For example, a simple geometric shape or a common letter wouldn’t qualify as a trademark unless it has acquired distinctiveness through use in association with a specific brand.
Flags and Emblems: The use of national flags, emblems, or official symbols is restricted and cannot be registered as trademarks without proper authorization from the relevant authorities.
Types of Trademark
The Trademark Act serves as the foundation for protecting and registering trademarks in India. While the Trademark Act doesn’t explicitly categorize types of trademarks, the following are the most common types categorized based on their utility:
Product Marks: Product marks represent the brand name, logo, or symbol associated with a specific product. They are the first point of contact for consumers, helping them identify the source and quality of the goods. Examples: The iconic Apple logo instantly identifies Apple smartphones and computers.
Service Marks: Service Marks act as identifiers in a world of intangible offerings, allowing consumers to choose between various service providers. Examples: Think of “Uber” for ride-hailing services or “FedEx” for delivery services. These service marks help consumers differentiate between different transportation options available.
Collective Marks: Collective marks are used by a group of entities, typically an association or organization, to identify their members or the goods or services offered by its members. Examples: A prominent example in India is the “Khadi Mark” used by certified producers of khadi fabric. This mark signifies that the fabric adheres to specific production methods and ethical practices promoted by the Khadi and Village Industries Commission.
Certification Marks: Certification marks act as a seal of approval for certain characteristics of a product or service. They function as independent third-party endorsements, assuring consumers that the product or service meets specific quality standards. Examples: The ISI mark (Bureau of Indian Standards) is a well-known certification mark in India. It signifies that a product has undergone rigorous testing and meets established quality standards.
Shape Marks: The Trademark Act allows for the registration of the shape of goods or their packaging as a trademark if it’s distinctive enough to identify the source. This opens doors for creative branding strategies that go beyond traditional logos and symbols. Examples: The bottle shape of Coca-Cola or the triangular Toblerone chocolate packaging. These unique shapes have become synonymous with the respective brands, allowing for instant recognition on store shelves.
Sound Marks: While less common, distinctive sounds or audio elements associated with a brand can be registered as trademarks in India. This allows businesses to leverage the power of sound to create a unique brand identity. Examples: Imagine the iconic MGM lion’s roar before a movie or the familiar Netflix startup sound.
Benefits of Trademark Protection
Trademark protection under the Trademark Act offers a multitude of benefits for businesses, fostering brand growth and safeguarding their hard-earned reputation. Here are some key advantages to consider:
Brand Protection: Trademark registration prevents competitors from using confusingly similar marks that could mislead consumers and dilute your brand’s reputation. This ensures your brand identity is protected.
Builds Brand Recognition: A strong trademark becomes synonymous with the quality and trust associated with your brand. Consumers can easily recognize your trademark and rely on it when making purchasing decisions.
Controls Brand Image: Trademark protection allows you to control how your brand is presented to the public. This ensures consistency and prevents unauthorized use that could damage your brand’s image.
Market Differentiation: A unique and well-protected trademark sets your brand apart from competitors. It allows you to establish a distinct market presence and attract customers seeking a specific brand experience.
Legal Action: Trademark registration provides a legal basis for taking action against infringers. This can involve stopping the infringement, seeking compensation for damages, and recovering attorney fees. It strengthens your legal position and deters counterfeiting.
Trademark Duration
Unlike copyright, trademarks in India don’t have a set expiration date. However, they require renewal every 10 years to maintain exclusive rights. Here’s a breakdown of how trademark duration works in India:
Initial Registration: A trademark registration in India is valid for 10 years from the date of filing.
Renewal: To maintain exclusive rights after the initial 10 years, the trademark needs to be renewed every 10 years. Renewal applications can be submitted within six months before the current registration expires or six months after the expiry date with an additional fee.
Indefinite Protection: As long as a trademark is properly renewed and in use, it can be protected indefinitely.
Landmark Cases & Judgements in India concerning Trademarks
1)McDonalds Corporation & Ors vs. Supermac’s Restaurants Ltd. & Ors (1996): This case dealt with the concept of distinctiveness in trademarks. McDonalds sued a fast-food chain named “Supermac’s” for trademark infringement. The court ruled that while “Supermac” was similar to “McDonald’s,” it wasn’t deceptively similar due to the addition of the “‘s” This case highlights the importance of considering the degree of similarity and the likelihood of consumer confusion while evaluating trademark infringement.
2)Britannia Industries Ltd. vs. Hindustan Lever Ltd. (1995): This case centered around the concept of descriptive marks. Britannia Industries, known for their “50-50” biscuits, sued Hindustan Lever for using “Treat” in their biscuit brand name “Treat Perfect.” The court ruled that “Treat” was a descriptive term for a biscuit and couldn’t be exclusively owned by any brand. This case emphasizes the limitations on registering generic or descriptive terms as trademarks.
3)Cadila Health Care Ltd. vs. Zydus Cadila Ltd. (2008): This case dealt with the concept of deceptive similarity. The court ruled that even slight similarities in trademarks can lead to confusion if the products are closely related. In this case, “Cadila” for pharmaceuticals could mislead consumers regarding the source of the drugs.
4)RK Cables vs. DG Cables (2009): This case emphasized the importance of distinctiveness in trademarks. The court ruled that a combination of weak elements (like common words) wouldn’t be a strong trademark because it lacked the necessary distinctiveness to identify the source.
5)Havmor Ice Cream Ltd. vs. Arjun Ice Cream Pvt. Ltd. (2010): This case addressed the concept of passing off. The court ruled that even if a mark isn’t registered, a company can still take action if a competitor’s mark is so similar that it deceives consumers into believing they are purchasing the well-known brand’s product.
What is a Patent?
A patent (Pat.) is an exclusive right for an invention provided by the law for a limited time to an inventor or their legal representatives. By patenting an invention, the patentee can control the making, using, selling, or importing of the patented product or process for producing that product without his/her consent.
The Indian Patents Act, 1970 (hereinafter ‘Patent Act’), defines a patent under Section 2(m) as: “patent” means a patent for any invention granted under this Act.
Patentability and Non-Patentability of Inventions
The Patents Act defines a patentable invention as one that fulfills three key criteria:
Novelty (Section 2(1)(d)): The invention must be new and not have been disclosed to the public anywhere in the world before the patent application date. This includes: Public knowledge or use description in printed publications; prior filing of a patent application for the same invention. Disclosures made by the inventor within one year before filing don’t necessarily preclude patentability.
Inventive Step (Section 2(1)(ja)): The invention must not be obvious to a person skilled in the art (someone with knowledge in the relevant field). It should involve a non-trivial technical advancement over existing knowledge.
Industrial Applicability (Section 2(1)(g)): The invention must be capable of being produced or used in an industry. This means it should have practical use and be capable of being manufactured or implemented using readily available technologies.
An invention must fulfill all three requisites – novelty, inventive step, and industrial applicability – to be considered patentable under the Patents Act. The onus of proving these requirements lies with the applicant.
What all can be Patented?
The Act also specifies various categories of inventions that can be patented, including:
New products or processes – Machines, articles of manufacture, compositions of matter, or processes for producing them, as long as they meet the criteria of novelty, inventive step, and industrial application (Section 2(j)).
Improvements to existing products or processes – Improvements to existing inventions can also be patentable if they meet the aforementioned criteria (Section 2(j)).
Machines, apparatus, and methods of manufacture
Computer software (subject to certain conditions)
What all cannot be patented?
While patents encourage innovation, there are certain categories of inventions that are excluded from protection. These exclusions ensure that fundamental principles and abstract ideas remain freely available for further innovation. Here are some key categories of non-patentable inventions:
Discoveries: Simply discovering a new scientific principle or phenomenon wouldn’t qualify for a patent.
Scientific theories: Abstract theories or mathematical methods are not patentable.
Mere juxtaposition of known devices: Combining existing devices in a known way without any inventive step wouldn’t be patentable.
Schemes, rules, and methods for performing mental acts, playing games, or doing business: Business methods or algorithms in their abstract form are not patentable.
Plants and animals (other than microorganisms): Naturally occurring plants and animals cannot be patented. However, new varieties of plants or genetically modified organisms might be patentable under specific conditions.
Methods for the treatment of human beings or animals: Medical and surgical procedures cannot be patented. However, inventions related to medical devices or pharmaceuticals might be patentable.
Immoral or scandalous inventions: Inventions that are deemed offensive or against public order are not patentable.
Types of Patents
The Patents Act doesn’t explicitly categorize patents into different types. However, based on the nature of the invention and the provisions within the Act, we can identify two main categories:
Utility Patents: This is the most common type of patent in India and covers new inventions, involves an inventive step, and is capable of industrial application (as defined in Section 2(j) of the Act). These patents protect the functionality of an invention, encompassing:
Machines (e.g., a new engine design) Articles of manufacture (e.g., a unique type of packaging) Compositions of matter (e.g., a new chemical formula)
Processes for producing these products (e.g., a method for manufacturing a specific material) Utility patents are the workhorses of the patent system, granting inventors exclusive rights to prevent others from making, using, selling, offering to sell, or importing their invention for a specific period (typically 20 years from the filing date).
Patent of Addition: This is a special type of patent used to protect improvements or modifications made to an existing invention that is already covered by a granted utility patent. The main invention must have a valid utility patent in place, and the improvement must be directly related to the original invention. The term of a patent of addition expires along with the term of the original utility patent to which it relates.
Patent Duration
The duration of a patent in India depends on the type of patent:
Utility Patent: The most common type of patent in India, a utility patent grants exclusive rights for 20 years from the date of filing the application.
Patent of Addition: This special type of patent protects improvements on an existing utility patent. The duration of a patent of addition is tied to the original utility patent. It expires along with the original patent, not necessarily after 20 years from filing the addition.
Landmark Cases & Judgements in India involving Patents
Novartis AG & Ors vs. Union of India & Ors (2013)
This landmark case in 2013 centered on a dispute regarding the patentability of a new form (polymorph) of an existing medication.
Novartis, a pharmaceutical company, challenged the Indian government’s rejection of their patent application for a specific form of a known drug.
The Supreme Court of India issued a critical judgment, establishing a stricter standard for granting patents in the pharmaceutical industry.
The court ruled that simply creating a new form (polymorph) of an existing drug wouldn’t be sufficient for a patent. The new form must demonstrate a significant improvement in effectiveness (efficacy) to be considered a patentable invention.
This decision aimed to strike a balance between encouraging innovation in drug development and ensuring access to affordable medicines for the public.
F. Hoffmann-La Roche Ltd vs Cipla Ltd. (2008)
This case decided in 2008, marked a significant turning point for patent litigation in India, particularly concerning pharmaceutical products.
Following the introduction of product patents for pharmaceuticals in 2005, this case was the first major legal dispute related to such patents.
F. Hoffmann-La Roche Ltd., a pharmaceutical giant, sued Cipla Ltd., a leading Indian generic drug manufacturer, for allegedly infringing their patent on the anti-cancer drug Erlotinib.
The Delhi High Court, while acknowledging the validity of Roche’s patent, delivered a nuanced judgment.
The court recognized the importance of intellectual property rights but also emphasized the need to consider public health concerns, such as ensuring the availability of affordable medicines, when dealing with patents for life-saving drugs.
Copyright vs Trademark vs Patent
Here are the core differences between copyright, trademark and patent –
Feature
Copyright
Trademark
Patent
Governed Under
The Copyright Act, 1957
Trademark Act, 1999
The Patent Act, 1970
Protects
Original works of authorship (literary, artistic, musical, cinematographic, and sound recordings)
Distinctive signs that identify a source of goods/services
New and inventive products, processes, or methods
Grants Exclusive Right
To reproduce, distribute, adapt, perform, or display the copyrighted work
To control the use of the trademark and prevent others from using confusingly similar marks
To prevent others from making, using, selling, importing, or exporting the invention for a limited period.
Duration of Protection
Generally lasts for the author’s lifetime + 60 years after their death (automatic upon creation)
Can be protected indefinitely as long as the mark is used and renewed every 10 years.
Typically 20 years from the date of filing (no renewal required)
Focus
Originality and expression of ideas
Distinctiveness and consumer identification of the source
Novelty, inventive step, and industrial applicability
Registration
Not required for copyright protection, but registration offers benefits (e.g., easier enforcement)
Recommended for stronger legal protection and enforcement
Required to obtain exclusive rights and enforce protection.
New drug formula, manufacturing process, software, integrated circuit layout
Additional Points
* Copyright protects the expression of an idea, not the idea itself.
* Trademarks can be words, symbols, designs, or sounds, or combinations of these.
* Patents can be utility patents (functional inventions), design patents (appearance of an article), or plant patents (new varieties of plants).
Common FAQs on Copyrights, Trademarks and Parents
1. Q: What is copyright protection in India?
A: Copyright safeguards your original creative work, like a song or painting, from being copied by others in India. It grants you exclusive rights for your lifetime + 60 years.
2. Q: Do I need to register copyright in India?
A: Copyright protection arises automatically upon creation. However, registering with the Copyright Office offers benefits like easier enforcement in case of infringement.
3. Q: What can be trademarked in India?
A: You can trademark logos, brand names, slogans, or even product packaging designs in India. It safeguards your unique identifier from being used by competitors.
4. Q: Is trademark registration mandatory in India?
A: While not compulsory, registering your trademark strengthens legal protection and allows you to take legal action against infringement more effectively.
5. Q: What is patentable in India?
A: You can patent new inventions or processes in India, as long as they are novel, inventive, and have industrial application. This protects your innovation for 20 years.
6. Q: How much does a patent cost in India?
A: Patent filing fees in India vary depending on the complexity of the invention. The Indian Patent Office website provides a fee calculator for estimates https://www.ipindia.gov.in/.
7. Q: What are some trending copyright issues in India?
A: Copyright issues related to online content sharing and piracy are gaining attention in India. The government is actively working on strengthening copyright laws.
8. Q: Are there any government resources for IPR in India?
A: Yes, the Indian Patent Office (IPO) is a valuable resource for information and registration processes related to patents, trademarks, and copyrights https://www.ipindia.gov.in/.
9. Q: How long is a trademark valid in India?
A: Trademarks in India can be protected indefinitely as long as they are actively used and renewed every 10 years. Non-use for five years can lead to revocation.
10. Q: What are the benefits of registering a trademark in India?
A: Trademark registration strengthens your brand identity, deters imitation, and allows you to sue for infringement. It also helps establish ownership in case of disputes.
11. Q: Can an idea be patented in India?
A: No, ideas alone cannot be patented in India. The invention must be a concrete product, process, or design that meets specific criteria for novelty and functionality.
12. Q: What happens after a patent expires in India?
A: Once a patent expires in India (typically 20 years), the invention becomes public domain and anyone can use it without permission.
Contracts are, indisputably, a foundation block in any partnership, collaboration or association between individuals or companies which provides with a clearer perspective to the duties, rights and obligations dispersed to all the parties. The significance of a legally binding document such as a contract is fetched beyond enumerating obligations on both parties, it also encircles the consequences that may arise in an instance where either of the parties lag behind or fail in fulfilling such duties. Such a non-fulfillment can be caused due to various and versatile reasons- which in legal and commercial landscape is termed as ‘breach of contract’.
This article dives deep into the legal landscape surrounding breach of contract, the different types, distinctive nature of the types, causes, implications and the potential consequences. It also explores remedies available to the non-breaching party and the penalties that can be imposed by the court in case the dispute is elevated.
What is Breach of Contract?
A contract is breached or broken when any of the parties fails or refuses to perform its obligations or duties either partially or completely as originally agreed under the contract. Breach of contract is a legal cause of action in which a binding agreement is not honored by one or more parties by non-performance of its promise. A contract involves mutual obligations and rights between parties who have entered into such a contract. A failure, by either of the parties or both, to fulfill the terms of the contract results in a breach of contract.
Some examples of a breach of contract can be:
(a) A contract to perform in a classical music festival is breached if the performing artist does not come to the venue on the day of the performance.
(b) A agrees to buy 100 coconuts from B on a particular date. The contract is breached if A refuses to buy the coconuts on the agreed date or B fails to deliver the promised number of coconuts.
In India, the Indian Contract Act, 1872 (“the Act” hereinafter) governs disputes arising out of instances where a legally binding agreement and contract is breached, and when the terms initially agreed in the contract are not adhered to. Although the Act does not provide for an explicit definition of ‘breach of contract’, it effectively enumerates the particulars of a breach of contract through its focus on obligations and consequences of non-performance. If a party fails to fulfill their contractual obligations, and this failure causes the other party to suffer a loss, it can be considered a breach of contract under the Act. These consequences can include:
Right to Claim Damages: The non-breaching party can claim compensation for any financial loss they suffer as a direct result of the non-performance.
Specific Performance: In certain situations, a court order can compel the breaching party to fulfill their obligations exactly as agreed upon.
Termination of Contract: Depending on the severity of the breach, the non-breaching party may have the right to terminate the contract.
Sections 73 to 75 in the Act enumerate the consequences of the breach of contract such as compensation for loss or damage caused by breach of contract (section 73); compensation for breach of contract where penalty is stipulated (section 74) and instances when a party is rightfully rescinding contract and is entitled to compensation (section 75). The Act addresses breach of contract through several key provisions, following are the particulars of the provisions:
Section 73: This section deals with compensation for loss or damage caused by a breach. It allows the non-breaching party to claim financial compensation for losses that naturally arise from the breach. These losses must be foreseeable and the plausible effects that can be anticipated by parties at the time the contract was formed. This section is based on the rule laid down in Hadley v. Baxendale[1]. In this case, the court established the principle that a breaching party is only liable for damages that are reasonably foreseeable at the time of entering the contract. This section states that compensation for a breach of contract cannot be given for any remote or indirect loss or damage sustained by reason of the breach. However, compensation can be awarded for:
Loss or damage which the parties knew at the time of the contract was likely to result from the breach.
Loss or damage which follows according to the usual course of things from such breach.
Sections 74 & 75: These sections deal with pre-determined compensation. Section 74 allows for ‘liquidated damages’ where the contract specifies a fixed amount payable in case of a breach. Section 75 covers situations where the contract is rescinded (canceled) due to a breach. Here, the non-breaching party can claim compensation alongside canceling the contract.
In the case of Fateh Chand vs. Balkishan Das (1963)[2], the court interpreted section 74, which says that “the contract contains any other stipulation by way of penalty,” was interpreted by the Court. In accordance with the judicial pronouncement, the applicability of this section extends to any contract that includes a penalty. It also applies to instances where there was a delay in payment for money or property delivery due to a contract breach, as well as instances in which the right to receive payment was forfeited for previously delivered property.
Types of Breach of Contract
While the Act doesn’t explicitly list breach types, courts consider factors like the severity of non-performance (material vs. minor breach), timing (actual vs. anticipatory breach) in order to categorize the types of breaches of contract.
Breach of contract may be actual or anticipatory, material or minor. In case of any breach of contract, the affected party can claim the damage from the court by forcing the other party to perform as promised. Remedies for breach of contract include suit for damages, suit for specific performance, canceling the contract, stopping the other party from doing something, suit upon quantum meruit (which means compensation for work done and services carried on before the breach took place). Following is a better explanation for the types of breach of contract and what they entail:
Actual Breach: This occurs when one of the parties fails to meet contractual duties and obligations within the specified time period for performance. In such cases, the other party is not obligated to fulfill their obligations and can hold the defaulting party liable for the breach of contract. In such a case, the decision to enable the defaulting party to complete the contract would be based on whether the contract’s objective revolved around a stipulated time or the duration as decided in Venkataraman vs. Hindustan Petroleum Corporation Ltd[3]. Examples include non-payment for delivered goods, incomplete services, or receiving faulty products.
Anticipatory Breach: Anticipatory breach of contract is a declaration made by one of the contracting parties of his intention not to fulfill the contract. And proclaim that he will no longer remain bound by it. The entire contract is rejected or canceled in the event of an anticipatory breach of contract. In an anticipatory breach of contract, the aggrieved party can rescind or cancel the contract and file a lawsuit for damages without having to wait until the contract’s due date. This breach occurs before the due date of a contract hits. The case of Hari Shankar vs. Anant Ram[4], is an instance in which the court determined an anticipatory breach of contract when the defendant refused to complete a sale of property, hence declaring his intention to not fulfill his duty of participating in the completion of the sale.
Material Breach: A material breach is a serious breach of the terms entailed in a contract. It’s not just a minor inconvenience; it significantly impacts the core purpose of the contract entered by parties. The word “material” emphasizes the seriousness of the breach. It allows the non-breaching party to potentially terminate the contract and seek significant compensation for losses incurred. In the case of State Bank of India vs. Mula Sahakari Sakhar Karkhana Ltd[5], the court determined that the defendant’s failure to repay a loan was a material breach, entitling the bank to enforce its security interest.
Minor Breach: A minor breach, also known as a partial or immaterial breach, occurs when a party receives what they were owed under the contract, but with a slight delay or imperfection. While the breaching party didn’t completely fulfill their obligations, the other party still receives the main benefit of the contract.
The UK Court of Appeal had decided in Rice (t/a the Garden Guardian) v. Great Yarmouth Borough Council (2000), that a clause stating that the contract could be terminated “if the contractor commits a breach of any of its obligations under the contract” should not be taken literally. It was deemed contrary to business norms to allow any breach, no matter how minor, to be grounds for termination.
Difference between Material and Minor Breach
Minor Breach
Material Breach
Impact on Non-Breaching Party
Causes minimal inconvenience or harm
Deals with the objective and purpose of the contract, making it difficult or impossible for the non-breaching party to receive the benefit of the bargain
Example
Delivering a product a few days late
Delivering a completely different product than what was agreed upon
Remedies
– Non-breaching party may seek to:
a) Withhold payment until the breach is cured.
b) Demand the breaching party fulfill their obligations
– Non-breaching party may seek to:
a) Terminate the contract
b) Sue for damages
c) Withhold payment
Termination
Generally not grounds for termination
May be grounds for termination
Meaning
Relatively unimportant deviation from the contract
Serious deviation that undermines the purpose of the contract
Generally, the cause of action for breach of contract claim has four main elements:
The existence of a contract: The existence of a contract, whether it be written or oral, is the first and most important component of a breach of contract.
Performance by the plaintiff or some justification for nonperformance: Secondly, the plaintiff needs to prove that they fulfilled their end of the bargain. There might not be any compensation if both parties assert that the contract was broken, unless one party’s violation was more serious than the other.
Failure to perform the contract by the defendant: Thirdly, the plaintiff needs to demonstrate which clause or condition of the agreement the defendant violated and how the the violation of contract happened.
Resulting damages to the plaintiff: Lastly, In the event that the plaintiff demonstrates all three of these elements, they will also need to demonstrate the extent of the injury.
Causes of Breach of Contract
Contracts clearly define the obligations and expectations of each party, ensuring a smooth exchange of goods, services, or money. However, despite their best intentions, unforeseen circumstances or internal missteps can sometimes lead to a breach of contract. Ranging from an ambiguous linguistic built of the contract to force majeure event, the most common cause that build the foundation a breach of contract are as follows:
Unclear or Ambiguous Contract Terms: The language of a contract must be as transparent as possible. It should not be ambiguous or cryptically knitted to stipulate different interpretations. If two clauses in a contract contradict or if a phrase has more than one reasonable interpretation, the contract is deemed ambiguous.
Failure to meet deadlines: Even if a contract sets a deadline without explicitly stating that time is of the essence, missing the deadline is still considered a breach. It does not, however, grant the party the right to terminate the contract.
Force majeure events: Lastly, indeterminate, unpredictable calamities like pandemics, wars, or natural disasters may also result in a breach of contract. Companies should think about putting words about force majeure in their contracts. In the case of unforeseen events, these clauses may offer relief.
Non compliance with contract terms: Non-compliance with contract terms refers to a situation where a party to a contract fails to fulfill their obligations as outlined in the agreement. This can take various forms, such as delivering a faulty product, missing deadlines, or not completing the agreed-upon service at all.
Incapacity to fulfill a contract: A contract’s validity can be challenged if a party lacked the legal capacity to form the agreement. This could be due to factors like being a minor, mentally incompetent, or under the influence of substances at the time of signing. Additionally, unforeseen circumstances may render performance impossible, or frustrate the contract’s purpose to the point of impracticability.
Void vs Voidable
A breaking of contract generally does not make the contract become void or voidable automatically. In most cases, the contract remains valid, but the non-breaching party has options.
Here’s a breakdown:
A void contract is essentially never a valid contract. It’s like it never existed from the beginning, and neither party has any obligations under it. This typically happens if the contract involves illegal activity or if it’s impossible to perform from the start.
A voidable contract is initially considered valid, but the non-breaching party can choose to cancel it due to certain issues, like fraud, mistake or misrepresentation or lack of capacity or undue influence or more.
Legal Remedies and Penalties
Entering into a contract is a solemn act, establishing a set of expectations and obligations for both parties. However, unforeseen circumstances can disrupt these expectations, leading one party to fail in fulfilling their contractual duties. This constitutes a breach of contract, and the aggrieved party is not left without recourse. The act provides a legal framework for seeking remedies and, in some cases, penalties for such breaches. Hence, sections 73, 74, and 75 specifically address the concept of penalties and compensation for breach. Below is a breakdown of these legal provisions:
Section 73: Compensation for Loss or Damage
This section establishes the general principle that compensation awarded for a breach of contract cannot include any remote or indirect loss or damage. The focus is on compensating the non-breaching party for the actual financial losses they suffer as a direct consequence of the breach.
Section 74: Penalty (Unreasonable) Not Recoverable
This section discourages the use of excessive penalties in contracts. If a contract includes a penalty clause that the court deems unreasonable or unconscionable, the court has the power to reduce the amount payable by the breaching party.
Section 75: Party Rightfully Rescinding Contract Entitled to Compensation
This section applies when a party rightfully rescinds (cancels) the contract due to a breach by the other party. Even after rescission, the non-breaching party can still claim compensation for any loss or damage they have already suffered due to the breach.
Several remedies can be sought by the aggrieved party in India. The act allows you to claim financial reimbursement for losses suffered due to the breach. However, there are limitations. This compensation only applies to losses that were natural consequences of the breach, foreseeable by both parties when signing the contract, and directly caused by the broken agreement. Remote or indirect losses are not covered under the act. Legal Remedies, for the counter-effect of a breach of contract may include:
Recession of Contract
Sue for Damages
Sue for Specific Performance
Injunction
Quantum Meruit
1] Recession of Contract
When one of the parties to a contract does not fulfill his obligations, then the other party can rescind the contract and refuse the performance of his obligations. As per section 65 of the Act, the party that rescinds the contract must restore any benefits he got under the said agreement. And section 75 states that the party that rescinds the contract is entitled to receive damages and/or compensation for such a recession.
2] Suit for Damages
Section 73 clearly states that the party who has suffered, since the other party has broken promises, can claim compensation for loss or damages caused to them in the normal course of business.
Such damages will not be payable if the loss is abnormal in nature, i.e. not in the ordinary course of business. There are two types of damages according to the Act,
Liquidated Damages: Sometimes the parties to a contract will agree to the amount payable in case of a breach. This is known as liquidated damages.
Specific performance is a remedy developed by the principle of equity. A party to a contract who is damaged because the contract is breached by another party has the option to file a suit for specific performance compelling to perform his part of contract. Before an equity court will compel specific performance, however, the contract must be one which can be specifically performed. So if any of the parties fails to perform the contract, the court may order them to do so. This is a decree of specific performance and is granted instead of damages. For example, A decided to buy a parcel of land from B. B then refuses to sell. The courts can order B to perform his duties under the contract and sell the land to A.
4] Injunction
An injunction is basically like a decree or court order for specific performance but for restraining a party to do an act. An injunction is a court order restraining a person from doing a particular act. So a court may grant an injunction to stop a party of a contract from doing something which is causing harm to the other party and is ultra vires to the purpose enshrined in the contract. In a prohibitory injunction, the court stops the commission of an act and in a mandatory injunction, it will stop the continuance of an act that is unlawful.
5] Quantum Meruit
Quantum meruit literally translates to “as much is earned”. At times when one party of the contract is prevented from finishing his performance of the contract by the other party, he can claim quantum meruit. So he must be paid a reasonable remuneration for the part of the contract he has already performed. This could be the remuneration of the services he has provided or the value of the work he has already done.
Mutually Beneficial Breach of Contract
A mutually beneficial breach of contract occurs when both parties involved in an agreement decide to walk away from, or alter, the terms of the contract because it’s in their best interest. This isn’t the same as simply failing to fulfill the contract – there’s an element of communication and agreement between the parties. In a typical breach of contract, one party fails to fulfill their obligations as outlined in the agreement, causing harm to the other party. However, in a mutually beneficial breach, both parties acknowledge that adhering to the original terms might no longer be in their best interests.
An architect designs a building based on the client’s specifications. However, during construction, a critical safety flaw is discovered in the plans. In this situation, breaching the contract to redesign the building to meet safety standards would be beneficial for both parties, even though it might cause delays.
Conclusion
Ultimately, a well-crafted contract serves not just as a legal safeguard, but also as a foundation for a productive and resilient partnership between individuals who decide to join hands for a mutual objective. The world of commerce thrives on agreements, with contracts acting as the sheet music that orchestrates a symphony of successful collaborations. However, just like any complex performance, unforeseen circumstances or discordant notes can lead to a breakdown in communication and a potential breach of contract. The true essence of a successful contract lies in fostering trust, transparency and a closely knitted linguistic built so that the possibility of a breach is less and hence, the terms of a contract are respected and adhered to.
Clearly defined terms, obligations, and expectations within the contract leave little room for misinterpretation and potential breaches. It is important to note that a successful contract with no discrepancies fosters a win-win situation, ensuring all parties fulfill their obligations and achieve their goals.
FAQs on Breach of Contract
What is a breach of contract? A breach of contract occurs when one or more parties involved fail or refuse to perform their obligations under the contract, either partially or completely. This failure can result from various reasons and can be categorized into actual, anticipatory, material, or minor breaches.
What are the consequences of breaching a contract? The consequences include the right to claim damages for financial losses, the option for specific performance where the court compels the breaching party to fulfill their obligations, and the termination of the contract based on its severity.
What legal remedies are available for a breach of contract? Available remedies include claiming damages, specific performance, rescission of the contract, injunctions against further breaches, and quantum meruit for services rendered before the breach.
Can a breach of contract lead to the termination of the contract? Yes, depending on the severity of the breach (particularly in cases of material breaches), the non-breaching party may have the right to terminate the contract.
What is the difference between a material breach and a minor breach? A material breach significantly affects the contract’s core purpose, potentially allowing for termination and significant damages. A minor breach involves a slight delay or imperfection but still delivers the contract’s main benefits, typically not grounds for termination.
How does the Indian Contract Act, 1872 address breach of contract? The Act, while not defining “breach of contract” explicitly, outlines the consequences and remedies available for breaches, including compensation for losses (Sections 73 to 75), and specific performance or termination of the contract.
What if I partially breached the contract? Can the other party still sue me? Yes, even a partial breach can lead to legal action, especially if it significantly affects the other party’s ability to fulfill their obligations. The impact of a partial breach depends on its nature and severity.
How can ambiguities in contracts lead to breaches? Unclear or ambiguous terms can result in different interpretations, leading to breaches if parties fail to meet expectations based on these interpretations.
Are there situations where breaching a contract is mutually beneficial? Yes, in some cases, both parties may find it in their best interest to alter or walk away from the contract, known as a mutually beneficial breach, which involves communication and agreement between the parties to deviate from the original terms.
What role do force majeure events play in contract breaches? Force majeure events, such as natural disasters or pandemics, can render the fulfillment of contractual obligations impossible, potentially excusing breaches under specified contract clauses.
Shark Tank India, the Indian adaptation of the globally renowned business reality show, has taken the nation by storm. Since its debut in December 2021, the show has become a hot topic for entrepreneurs, investors, and viewers alike. But has it truly lived up to the hype?
The show boasts a panel of cutthroat investors (Sharks) like Ashneer Grover, Namita Thapar, Peyush Bansal, Aman Gupta, and Vineeta Singh, all business tycoons (Sharks) in their own right. The high-stakes environment and candid deal negotiations (pitches) have captivated audiences, with each season witnessing a surge in venture capitalist (VC) activity and startup funding. Data suggests that over INR 100 crore was invested across the first two seasons, propelling many innovative direct-to-consumer (D2C) brands and social enterprises into the limelight.
However, Shark Tank India has also faced its share of criticism. Some argue that the emotional appeals employed by contestants overshadow the business fundamentals. Others point out that securing a deal on the show doesn’t guarantee long-term success. While many funded startups have witnessed a post-show funding boost, a significant number haven’t been able to translate the television exposure into sustainable growth.
Despite the debate, Shark Tank India undeniably democratized entrepreneurship in India. It has ignited a startup revolution, inspiring millions to chase their business dreams. Whether it’s a funding platform or simply a launchpad for publicity, Shark Tank India has undoubtedly disrupted the entrepreneurial landscape in the country.
In today’s digital age, the way we conduct business has fundamentally transformed. Gone are the days of paper-based workflows and physical signatures. As businesses embrace the efficiency of electronic transactions, e-signatures have emerged as a critical tool for streamlining operations and ensuring legal certainty. The legal landscape surrounding electronic signatures has undergone a fascinating evolution. With the rise of digital technologies, the validity of eSign in India has been a topic of much debate. In a contemporary perspective, electronic signatures have gained legal recognition due to protection demanded by online procedure requisites of legal transactions such as e-contracts, cross-border MOUs (memorandum of understanding), transnational deals between corporations, online dispute resolution methods etc. The conventional way of signing was hand-written and served a distinct unique representation of one’s identity. Marking a signature on a document has always been a legal requisite, without which the authenticity and legality of the document comes into question. Prior to the digital age, the validity of contracts relied heavily on physical signatures. However, the Information Technology Act (IT Act) of 2000 revolutionized the legal landscape in India by introducing a framework for electronic signatures (e-signatures). The IT Act established the legal validity of e-signatures, provided they meet specific criteria. The IT Act, along with other relevant laws like the Indian Contract Act (ICA), the Electronic Securities Act (ESA), the Information Technology (Electronic Signature Certificate Authorities) Rules (ESECAR), and the Indian Stamp Act, 1899, create a comprehensive legal framework governing the use of e-signatures in India. From the global lens, The UNCITRAL Model Law on Electronic Signatures of 2001 is the foundation stone that transmitted the hybrid concept of electronic signatures into legal systems of various nations. This article will delve into the world of e-signatures in India, exploring their legal validity, use cases, and the benefits they offer.
What is eSign?
eSign, or electronic signature, is the digital equivalent of a traditional handwritten signature. It’s a secure way to approve documents and transactions online, eliminating the need for printing, signing, and scanning physical paperwork. Instead, eSign utilizes electronic methods to verify your identity and bind you to the document. This can involve Typing your name, Drawing your signature or Using dedicated eSign software.
Just like traffic laws differ by country, the definition and legal framework for eSignatures vary around the globe. In India, the IT Act Information Technology Act (IT Act) of 2000 established the legal foundation for e-Sign, ensuring its validity and widespread adoption. By using eSignatures, businesses can significantly streamline record management. Documents are signed electronically, stored securely in a digital format, and easily retrievable whenever needed. This eliminates the need for physical storage and simplifies the entire document lifecycle.
While the core function remains the same (signifying your intent to agree), the technicalities of eSignatures can differ.
eIDAS (EU): Defines an eSignature as “data in electronic form which is attached to or logically associated with other data in electronic form and which is used by the signatory to sign.” eIDAS recognizes three types of eSignatures – simple, advanced, and qualified – each with varying levels of security and legal weight.
ESIGN & UETA (US): Both define an eSignature as “an electronic sound, symbol, or process, attached with a contract or other record and executed or adopted by a person with the intent to sign the record.”
This essentially means that your eSignature can take various forms, from typing your name to using a digital pen on a touchscreen or dedicated eSignature software. The key factor is that the chosen method securely links your eSignature to the document, creating an auditable record of your agreement.
India has taken eSign a step further with Aadhaar-based eSign. This innovative system leverages the Aadhaar identification platform to simplify the e-Signing process for Aadhaar holders. Here’s how it works:
If you possess an Aadhaar card and a linked mobile number, you can digitally sign documents with ease.
The e-Sign service verifies your identity through Aadhaar eKYC, ensuring a secure and reliable experience.
Legal Validity of eSign in India – Laws and Compliance
Remember the days of printing, signing, and physically mailing documents for every agreement? Thankfully, those days are fading with the rise of eSign. But a crucial question remains: Are eSignatures legally valid in India? The answer is Yes, eSignatures are legally valid in India! The Information Technology Act (IT Act) of 2000, established the legal framework for eSignatures, ensuring they hold the same weight as traditional handwritten signatures when used correctly. This act, along with other relevant laws like the Indian Contract Act (ICA) and the Information Technology (Electronic Signature Certificate Authorities) Rules (ESECAR), create a comprehensive legal framework for eSign in India. You can also use Digital Signature Certificates (DSCs) for enhanced security or leverage Aadhaar eSign for a simpler signing experience – both recognized under the legal framework.
Here’s a breakdown of the key aspects that ensure the legal validity of eSignatures in India:
Equivalence to Handwritten Signatures: The IT Act explicitly states that a contract cannot be denied enforceability solely because it was conducted electronically, provided it fulfills the essential elements of a valid contract under the ICA. In simpler terms, an eSignature has the same legal weight as a traditional handwritten signature.
Digital Signature Certificates (DSCs): For enhanced security, the IT Act recognizes Digital Signature Certificates (DSCs) issued by licensed certifying authorities. These certificates act as a digital identity verification tool, adding an extra layer of trust and security to eSignatures.
Aadhaar eSign: India has further simplified eSigning with the introduction of Aadhaar eSign. This innovative system leverages the Aadhaar identification platform to allow Aadhaar holders to digitally sign documents easily. The e-Sign service verifies the signer’s identity through Aadhaar eKYC, ensuring a secure and reliable experience.
Legal Provisions concerning E-signatures in India
Section 2(1)(ta) of Information Technology Act, 2000 provides for the definition of e-signature as “Authentication of any electronic record by a subscriber by means of the electronic technique specified in the second schedule and includes digital signature.” The said definition of electronic signature is inclusive of digital signature and other techniques in electronic form which are specified on the second schedule of the Act. The incorporation of such a definition recognized two methods of signing digitally which are a) cryptography technique (hash functions etc) and b) marking e-signature using other technologies.
Any individual can digitally sign an e-contract in accordance with Section 3 of the IT Act, 2000. Furthermore, section 10A of the IT Act makes contracts created by electronic records and communication legally binding.
Section 5 of the IT Act provides legal recognition to digital signatures based on asymmetric cryptosystems.
Section 65B of the Indian Evidence Act is a significant provision in terms of implicitly providing admissibility to electronic records. Regarding the admissibility of electronically signed documents, the Evidence Act states that they will be allowed as evidence as long as the signer can demonstrate in court the integrity and originality of the electronic or digital signature. Additionally, the Evidence Act establishes an assumption regarding the veracity of electronic signatures and records. But only in relation to a secure electronic signature or record would there be such an assumption.
Section 85A of the Evidence Act, 1872 presumes that all contracts containing electronic signatures are presumed to be final and there shall be no question arising on the validity of such a document on the grounds of it being signed and authenticated digitally . According to Section 85B of the Evidence Act, the court must assume that the person to whom the secure electronic or digital signature pertains is the one who attached it in any process involving such signatures.
Section 67A of the Indian Evidence Act, 1872 stipulates that in circumstances of a dispute concerning the native authorship (authenticity) of an e-signature, the individual whose e-signature is in question has to provide the proof of the originality.
The Madras High Court decided in the Tamil Nadu Organic Pvt. Ltd. vs. State Bank of India that contracts may be enforced by law and that contractual duties might emerge by electronic methods. Furthermore, the Court had declared that, as stipulated in section 3-A of the IT Act, digital signatures are typically used to authenticate electronic records, and that section 10-A of the IT Act permits the use of electronic records and electronic means for the execution of contracts, agreements, and other purposes.
The necessity of digital signatures in electronic transactions was highlighted by the Delhi High Court in the 2010 case of Trimex International FZE Ltd. vs. Vedanta Aluminum Ltd. and Ors. The court decided that digital signatures have the same legal standing as handwritten signatures as long as they are utilized in accordance with the IT Act of 2000. The importance of digital signatures in guaranteeing the reliability and validity of computer-generated records and financial transactions was emphasized by this decision.
Is eSign secure?
While eSign offers undeniable convenience, security is a top priority for any electronic transaction. Concerns might arise around the possibility of forgery or tampering with documents after they’ve been signed electronically.
However, eSignatures often incorporate robust security measures that can even surpass traditional handwritten signatures. Here’s why:
Many eSignature platforms employ encryption technology to scramble the data within the signed document. This makes it virtually impossible for someone to intercept and alter the document without detection.
e-Sign solutions typically create a detailed audit trail that records the entire signing process. This trail includes timestamps, signer identity verification details, and any changes made to the document. This detailed log provides a clear picture of who signed the document, when, and if any modifications were made.
For transactions requiring the highest level of security, Digital Signature Certificates (DSCs) can be used. These act like digital passports, verifying the signer’s identity and adding an extra layer of tamper-proof security to the eSignature.
eSign utilizes a combination of encryption, audit trails, and optional features like DSCs to ensure the security and integrity of electronic documents. This makes eSignatures a reliable and secure way to conduct business electronically.
What documents can I legally eSign in India? – Use Cases
From streamlining business processes to simplifying life for individuals, eSign is making its mark across various sectors.
Boosting Efficiency and Security in Businesses:
Effortless Sales & Procurement: Close deals faster and manage purchase orders efficiently with eSigned sales agreements, invoices, trade and payment terms, and order acknowledgements. eSign ensures secure and legally binding transactions, eliminating the need for physical copies and manual approvals.
Enhanced Security for Contracts & Agreements: Securely manage non-disclosure agreements (NDAs), certificates, and other sensitive documents with eSignatures. eSign creates a tamper-proof audit trail, providing a clear record of who signed the document and when.
Streamlined HR Management: Onboard new employees, manage contracts, and facilitate approvals electronically. eSign allows for pre-approved HR templates and easy updates for each employee, saving valuable time and resources.
Simplifying Life for Individuals:
Faster Banking & Financial Services: Sign loan documents, account opening forms, and investment agreements from anywhere, anytime with eSign. This eliminates the need to visit branches and ensures a secure and convenient experience.
Hassle-Free Real Estate Transactions: Sign lease agreements for both residential and commercial properties electronically. eSign offers a faster and more secure alternative to traditional paper-based signing.
Efficient Government Services: Access and sign government documents like permits, applications, and licenses electronically. eSign makes interacting with government agencies faster and more user-friendly.
The use cases for eSign in India are vast and ever-expanding. From healthcare to education, and from legal contracts to insurance applications, eSign is transforming document management across various sectors.
Limitations of eSign: Inappropriate Use Cases
Here’s a list of situations where a traditional handwritten signature remains the preferred method:
Documents Requiring Physical Possession:
Negotiable Instruments (except cheques): Instruments like promissory notes and bills of exchange often require physical possession for negotiation and enforcement. The IT Act specifically excludes these documents from the purview of eSignatures.
Documents with Specific Formalities:
Power of Attorney: Power of attorney documents often involve specific legal requirements, such as witnessing or notarization, which may not be readily replicated in the digital realm. Currently, the IT Act doesn’t recognize eSignatures on power of attorney documents.
Trust Deeds: Establishing a trust often involves a high degree of formality, and the IT Act doesn’t currently encompass trust deeds signed electronically.
High-Value Transactions and Inheritance:
Sale of Immovable Property: For high-value transactions like the sale of land or property, the law in India still necessitates a physically signed document. The IT Act doesn’t apply to contracts involving the sale or conveyance of immovable property.
Wills and Testaments: Documents related to inheritance, such as wills and testaments, traditionally require a handwritten signature for legal validity. The IT Act specifically excludes wills and testamentary dispositions from the scope of eSignatures.
Advantages Of eSign
eSign saves time and money by eliminating printing, scanning, and mailing physical documents.
Aadhaar eSign simplifies the process with Aadhaar KYC-based verification.
eSign expedites transactions and improves customer experience.
No need for physical documents; eSign works with any device and internet connection.
Easy to use – apply your signature electronically with a typed name, drawn signature, or dedicated software.
Secure signing process with biometric or OTP verification.
Creates a clear audit trail with obvious electronic signatures and identification of the signatory.
Versatile and integrates seamlessly with various applications.
Enhances security – eSignatures are tamper-proof and more difficult to forge than traditional signatures.
How does eSign work?
eSign utilizes a combination of technologies to ensure a secure and legally binding signing process. The document to be signed is first converted into a digital format, typically a PDF. The signer is then presented with various signing methods depending on the chosen security level. Simple signatures might involve typing a name or uploading a pre-defined image, while advanced eSignatures leverage digital certificates issued by trusted authorities to verify the signer’s identity and bind the signature to the document using encryption techniques. In high-security scenarios, biometric authentication through fingerprint or facial recognition can be an additional layer of verification.
Once the signing method is chosen, the eSign solution verifies the signer’s identity. This might involve a simple password or one-time code for basic signatures. For advanced eSignatures, a more complex verification process validates the digital certificate, ensuring its authenticity and validity. After successful verification, the chosen signing method creates a unique electronic signature embedded within the document. This signature is accompanied by a timestamp and other data points. Additionally, a tamper-proof audit trail is generated, meticulously recording the entire signing process – who signed, how they were verified, and the exact time of signature. This combination of measures ensures the integrity and authenticity of eSignatures, making them a secure and reliable alternative to traditional pen-and-paper signatures.
Digital Signature vs Electronic Signature: What’s the Difference?
Feature
Digital Signature
Electronic Signature
Security Level
Higher
Lower
Technology
Uses public key infrastructure (PKI) and digital certificates
Can involve various methods like typed name, drawn signature, or image upload
Verification Process
Verifies signer’s identity using a digital certificate issued by a trusted authority
May or may not verify signer’s identity
Tamper Detection
Any alteration to the document after signing invalidates the signature
May not inherently detect tampering, although some eSign solutions offer audit trails
Legal Validity
Generally considered more legally secure due to stronger verification
Can be legally valid depending on the method used and local regulations
Common Use Cases
High-value contracts, financial agreements, government documents
Less critical documents, contracts with lower risk, user agreements
Legal Admissibility of eSign in Other Countries
UNCITRAL’s Model Law on Electronic Signatures, 2001
In 1996, the United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on Electronic Commerce which encompasses an apt foundation regarding electronic signature with an aim to bring about uniformity in cross-border trades and transnational agreements. The General Assembly of UNCITRAL eventually adopted a Model Law on Electronic Signatures in 2001 as an addendum to the preexisting Model Law.
In accordance with the Model Law’s Article 2(a), electronic signatures are as follows: An “electronic signature” is any data in electronic form attached to, logically connected to, or included in a data message. It can be used to identify the signatory in connection with the data message and to show that the signatory approves of the content inside. After examining with an eagle-eye at the distinct methods of electronic signatures in use, the Model Law recognized two main types of electronic signatures: digital signatures that utilize public-key cryptography and electronic signatures that use alternative methods.
England and Wales (UK)
Electronic signatures are recognized by English law in instances where there is no formality requirement or duty to use a signature. It’s not necessary for the signature to be highly technical. Under English law, a scanned signature or something as casual as a name scribbled at the conclusion of an email might be considered a signature.
In the case of Bassano v Toft, the judge determined that the necessity of an admissible form of electronic signature was met by clicking the ‘I accept’ button on the digital consumer loan agreement and the same is enforceable in consumer credit laws of the state. An electronic signature administered by a third party (like an assistant) would not be acceptable if the law mandates that the signatory personally apply the signature (as a procedural formality) as held in Kassam v Gill.
Argentina
Agreements and collaborations that are not subject to a particular legal form requirement under Argentine law may be carried out in any way that the parties agree upon, including orally, electronically, or in hard copy. Requests for specific legal documents may be made in the form of public deeds or handwritten signatures. For the purpose of satisfying any handwritten requirements mandated by local legislation, digital signatures are deemed effective but it solely will not be viable for substitution as requirements of public deed. Digitally signed documents are assumed to have been signed by the signatory listed with the certifying licensee, and that the content has not been changed, hence the position of admissibility of electronic signatures is partially similar to India. In both the jurisdictions, If a party disputes the authorship of the digital signature, they will need to provide proof to support their claim.
The Future of eSign in India: A Secure and Efficient Path Forward
The COVID-19 pandemic has served as a catalyst for the widespread adoption of eSignatures in India. With the need for remote transactions and the disruption of traditional document processes, e-Sign has emerged as a critical tool for ensuring business continuity. This has paved the way for potential advancements in the legal framework. We can expect updates to the IT Act of 2000 and the online document registration process. These changes could involve streamlining the registration process, expanding the applicability of eSignatures to a wider range of transactions, and creating a more user-friendly experience.
As India embraces this new era of digital transactions, public awareness is crucial. The IT Information Technology Act provides a clear definition and legal framework for eSignatures. However, further efforts are needed to improve user-friendliness and enhance authentication mechanisms. Developing fraud-resistant methods and eliminating security vulnerabilities will be essential for building trust and confidence in eSignatures for the long term. By focusing on legal clarity, user experience, and robust security measures, India can solidify eSign’s position as a cornerstone of a secure and efficient digital future.
Frequently Asked Questions (FAQs) on e-Sign in India
What is eSign and is it legal in India? eSign, or electronic signature, is a secure way to approve documents electronically. India has a robust legal framework around eSignatures, established by the IT Act Information Technology Act (IT Act) of 2000. This act recognizes eSignatures as legally valid when they meet specific criteria.
How secure are eSignatures? eSign solutions often employ encryption and digital signatures to ensure document security. These measures can be even more secure than traditional handwritten signatures. Additionally, eSign creates a detailed audit trail that records the entire signing process, providing a clear record of who signed and when.
What are the benefits of using eSign in India? eSign offers a multitude of benefits, including:
Increased Efficiency: Streamline workflows and expedite document management.
Enhanced Security: Utilize encryption and audit trails for secure transactions.
Reduced Costs: Save on printing, scanning, and postage expenses.
Convenience: Sign documents from anywhere, anytime, using any device.
Environmental Friendliness: Reduce paper usage and contribute to a greener planet.
What are some common use cases for eSign in India? eSign is transforming various sectors in India. Here are some examples:
Real Estate: Lease agreements for residential and commercial properties
Government: Permits, applications, licenses
Can I use eSign for all types of documents in India? While eSign is widely applicable, there are exceptions. The IT Act doesn’t cover documents requiring a wet signature, such as:
Negotiable instruments (except cheques)
Power of attorney
Trust deeds
Wills and testaments
Contracts for sale of immovable property
How does eSign work in India? The eSign process is simple:
Receive an eSign request for a document.
Review the document and choose your signing method (typed name, drawn signature, or dedicated software).
Verify your identity through password, OTP, or biometrics (depending on security level).
The document is signed electronically, and a tamper-proof audit trail is created.
What are the different types of eSignatures in India? There are two main types of eSignatures:
Simple Electronic Signature: Typing your name or uploading a pre-defined image. Offers basic convenience but lower security.
Advanced Electronic Signature: Utilizes a digital certificate issued by a trusted authority for stronger verification and tamper detection.
What is Aadhaar eSign and how does it work? Aadhaar eSign is a simplified signing process for Aadhaar holders in India. It leverages the Aadhaar identification platform to verify the signer’s identity through eKYC, making eSigning fast and convenient.
What are the requirements for using eSign in India? There are no specific requirements to use eSign, but the legal validity of the signature depends on the chosen method and adherence to the IT Act. For maximum security, consider using advanced eSignatures with digital certificates.
The Government of India (“GoI”), on March 04, 2024 has announced significant amendment in the Consolidation FDI Policy, 2020 (“FDI Policy”) pertaining to the space sector, which will be effective from the date of FEMA notification. The amendment has been brought with an objective to liberalize the space sector and promote foreign investment in the Indian space economy.
As on today, the FDI policy allows 100% FDI subject to government approval in establishment and operation of satellites, subject to the sectoral guidelines of Department of Space/ISRO.
Amendments under Article 5.2.12
Vide the press note dated March 04, 2024 issued by Department for Promotion of Industry and Internal Trade, GoI has introduced the following amendments under Article 5.2.12 of the FDI Policy:
1.For manufacturing and operation of satellites, the sector cap for FDI has been set at 100%, wherein upto 74% FDI can be made through automatic route and FDI beyond 74% would require government approval;
2.Satellite data products, ground segment and user segment can have 100% FDI through automatic route;
3.Launch vehicle and associated systems or sub-systems can have 100% FDI, wherein, upto 49% FDI can be made through automatic route and FDI beyond 49% would require government approval;
4.For creation of spacesports for launching and receiving spacecraft, 100% FDI can be made through automatic route; and
5.Manufacturing of components and systems/sub-systems for satellites, ground segment and user segment, can have 100% FDI through automatic route.
Conclusion
Further, the press note sets out definitions of each activity mentioned above which are exclusive in nature, with an intention to avoid any uncertainty going forward.
The amendment is aligned with GoI’s vision to increase the space economy of India five-fold in the next 10 years, to touch $40 billion. By liberalizing the space sector, the foreign investors will find the Indian space sector to be a lucrative opportunity which would lead to immense technological growth in the sector.
Power Play: A Regulatory Guide for Indian Gaming Companies
India’s gaming industry is on the brink of a monumental transformation, evolving from a budding market to a global leader. With over 500 gaming studios now operational, the country is at the forefront of innovation and creativity in the gaming world. The country boasts a substantial gaming community, comprising 568 million gamers, out of which 25% are paying users. Industry analysts predict a future even brighter, forecasting the Indian gaming industry to surpass $3.9 billion by 2025. This phenomenal growth signals a golden era for aspiring entrepreneurs and gaming enthusiasts.
The Indian Gaming Industry: A Snapshot of Facts
As India’s gaming industry navigates through a phase of exponential growth and regulatory evolution, several key facts highlight its current status and forecast its future trajectory.
India is the second-largest gaming market worldwide with a staggering 568 million gamers out of which 25% are paying users.
The segment has attracted consistent investments totaling INR 22,931 crore between FY20 and FY24 YTD from both domestic and foreign investors.
The sector has grown at a CAGR of 28%, reaching INR 16,428 crore in FY23, and is expected to reach INR 33,243 crore by FY28.
The Indian gaming industry is expected to surpass $8.6 billion by 2027 (according to EY and FICCI).
India has produced three gaming unicorns: Dream11, Mobile Premier League, and Games24x7. Furthermore, it directly and indirectly employs around one lakh individuals, with the prospect of expanding to 250,000 job opportunities by 2025.
Diving Into the Ecosystem
At the heart of this revolution are game developers, gaming platforms, esports ventures, RMG (Real Money Gaming) companies, and blockchain gaming innovators. Each segment contributes uniquely to the vibrancy and diversity of India’s gaming landscape.
Navigating Success in India’s Gaming Industry
To thrive in this booming ecosystem, understanding the legal and regulatory frameworks is crucial. The distinction between “games of skill” and “games of chance” forms the legal cornerstone. Moreover, the implementation of the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules 2023 marks a pivotal shift, introducing a regulatory framework tailored for online gaming companies.
Innovation at the Forefront
Protecting innovation is paramount in the competitive gaming industry. Intellectual Property Rights (IPR) serve as the foundation for safeguarding game developers’ creativity and originality, covering everything from trademarks and copyrights to patents and designs. This protective measure ensures companies can maintain their competitive edge and continue to push the boundaries of creativity.
The Road Ahead
Despite facing regulatory challenges and the intricacies of GST and taxation, India’s gaming industry stands on the precipice of a new dawn. The sector’s ability to navigate these hurdles while harnessing its vast potential will shape its trajectory in the years to come. With the promise of increased FDI, job creation, and continued technological innovation, the future of gaming in India shines brightly.
Explore the Full Report
For those looking to dive deeper into the intricacies and opportunities within India’s gaming industry, our comprehensive report, “Power Play: A Regulatory Guide for Indian Gaming Companies” offers an invaluable resource on investment landscape, market size and opportunity, landmark happenings, legal and regulatory framework, compliance essentials and IPR, taxation and anticipated developments. The report equips readers with the knowledge needed to navigate entrepreneurs and enthusiasts in India’s vibrant gaming ecosystem.
Obtaining an FSSAI registration is essential for food business operators (FBOs) in India to ensure compliance with food safety and standards regulations. The Food Safety and Standards Authority of India (FSSAI) mandates that all FBOs, including manufacturers, processors, storage facilities, distributors, and sellers, acquire the appropriate registration or license based on their business size and turnover. For small-scale businesses with an annual turnover of up to ₹12 lakh, a basic FSSAI registration is required. Larger enterprises must obtain either a State or Central FSSAI license, depending on their scale of operations. The registration process involves submitting Form A or Form B through the FoSCoS portal, along with necessary documents such as identity proof, address proof, and details of the food products handled. Compliance with FSSAI regulations not only ensures legal adherence but also enhances consumer trust by affirming the safety and quality of food products.
FSSAI Registration: Mandatory for All Food Businesses in India
Getting an FSSAI registration is a crucial step for anyone starting a food business in India. This includes individuals planning to open restaurants, bakeries, hotels, cloud kitchens, or even food stalls. The requirement applies to all Food Business Operators (FBOs). This broad term encompasses any entity or person involved in the food industry, including those who manufacture, prepare, sell, transport, distribute, or store food products.
FSSAI stands for the Food Safety and Standards Authority of India. This autonomous organization, established under the Ministry of Health and Family Welfare, is responsible for monitoring and regulating the entire food sector in India.The FSSAI was created under the Food Safety and Standards Act, 2006 (FSS Act). This act consolidates all regulations related to food safety in India. By ensuring food products undergo quality checks, FSSAI helps reduce food adulteration and the sale of substandard products. In addition to registering and licensing FBOs, FSSAI also lays down the rules and regulations that govern the operation of food businesses throughout India.
What is FSSAI Registration?
In India, the Food Safety and Standards Authority of India (FSSAI) plays a critical role in safeguarding public health by regulating the food industry. To achieve this, FSSAI mandates FSSAI Registration or Licensing for every entity (individual or company) involved in the food business lifecycle, encompassing manufacturing, processing, storage, distribution, and sale of food products. FSSAI Registration is a 14-digit registration or a license number obtained from FSSAI and printed on food packages. The 14-digit registration number provides details about the assembling state of the product and producer’s permit. Furthermore, the requirement to display the FSSAI registration number on food packaging serves as a nudge for Food Business Operators (FBOs) to prioritize food safety and quality. The Food Safety & Standards (Licensing and Registration of Food Business) Regulations, 2011 form the bedrock for FSSAI’s registration and licensing procedures. These regulations establish clear guidelines regarding the eligibility criteria, application process, and documentation required for FBOs to obtain the necessary authorization.
FSSAI Registration vs. FSSAI License?
The type of FSSAI authorization an entity requires depends on the size and nature of its business operations. FSSAI Registration caters to small-scale food businesses with an annual turnover of up to INR 12 lakh. This includes petty retailers, hawkers, small manufacturers, and temporary stall owners. FSSAI Licenses, on the other hand, are applicable to larger businesses with higher turnovers or specific food business activities. Difference between FSSAI Registration and FSSAI License –
Feature
FSSAI Registration
FSSAI License
Purpose
Basic compliance for small food businesses
Mandatory for medium and large food businesses
Turnover Limit
Up to ₹ 12 lakh per year
Above ₹ 12 lakh per year
Type of Businesses
Small manufacturers, retailers, petty vendors, temporary stalls
Food processing & manufacturing units, large retailers, exporters, importers
Validity
5 years
1 to 5 years (depending on license type)
Process
Simpler online application
More complex process with inspections
Fee
Lower fees
Higher fees
Information Displayed
Registration number displayed at office premises
License number displayed on product packaging
Food Business Operators (FBO) Who Need FSSAI Registration in India
FSSAI registration is a requirement for a broad spectrum of food businesses, encompassing various sizes and activities. Here’s a breakdown of the FBOs that need to register:
Retailers and Shops: This includes permanent establishments like grocery stores, snack shops, bakeries, confectionery shops, and more.
Street Food Vendors: Temporary or fixed stalls selling prepared or packaged food items, such as Gol Gappa stalls, chaat stalls, fruit and vegetable vendors, tea stalls, juice shops, etc., all require registration. Hawkers selling food while moving from one location to another also fall under this category.
Dairy Units: Milk chilling units, petty milkmen, and milk vendors must register with FSSAI.
Food Processing Units:
Vegetable oil processing units
Meat processing and fish processing units
All food manufacturing units, including those involved in repacking food
Facilities processing proprietary or novel food items
Storage and Transportation:
Cold storage facilities that refrigerate or freeze food products
Businesses involved in transporting food products, especially those using specialized vehicles like refrigerated vans, milk tankers, and food trucks
Distribution and Marketing: Wholesalers, suppliers, distributors, and marketers of food products need to be registered.
Food Service Establishments:
Hotels, restaurants, and bars
Canteens and cafeterias, including mid-day meal canteens
Food vending agencies, caterers, and dabhas
PGs providing food service, banquet halls with catering arrangements
Home-based canteens and food stalls operating in fairs or religious institutions
Import and Export: Businesses involved in importing or exporting food items, including food ingredients, require FSSAI registration. This extends to e-commerce food suppliers and cloud kitchens.
Determining Your FSSAI License/Registration Type:
The type of FSSAI license or registration an FBO needs depends on specific eligibility criteria. These criteria consider factors like the business’s annual turnover, production capacity, and the nature of food products handled. The FSSAI website provides detailed information on the eligibility criteria for each type of license and registration.
Types of FSSAI Registration in India
The Food Safety and Standards Authority of India (FSSAI) regulates and ensures food safety across the country. To operate legally within this framework, food businesses (FBOs) need to obtain an FSSAI registration or license. The type of FSSAI registration an FBO requires depends on its size, turnover, and production capacity. Here’s a breakdown of the three main categories:
FSSAI Basic Registration:
Eligibility: This is the most basic form of FSSAI registration and is mandatory for small businesses with an annual turnover of up to Rs. 12 lakh.
Process: Registration is done online through Form A. It’s a relatively simple process requiring basic details about the FBO and its operations.
Suitable for: Small manufacturers, retailers, marketers, or suppliers dealing in:
Homemade food products like jams, pickles, candies, etc.
Small restaurants and cafes
Food stalls and mobile canteens
Small-scale storage units
FSSAI State License:
Eligibility: This license is required for medium-sized businesses with an annual turnover of more than Rs. 12 lakh but less than Rs. 20 crore.
Process: Obtaining a state license involves a more detailed application process through Form B. It may require inspections of the FBO’s premises and adherence to stricter hygiene and safety regulations.
Suitable for: Mid-sized manufacturers, processors, and exporters of food products, such as:
Bakeries and confectionery units
Oil processing units
Packaging and bottling units
Restaurants with a larger seating capacity
FSSAI Central License:
Eligibility: This is the most comprehensive license category, mandatory for large businesses with an annual turnover of more than Rs. 20 crore.
Process: The central license application process through Form B is the most rigorous, involving in-depth inspections, documentation, and compliance with stringent quality standards.
Step By Step Process of Getting FSSAI Registration Online
Obtaining an FSSAI registration online is a convenient and efficient way for food businesses (FBOs) to comply with food safety regulations in India. This section will guide you through the entire online registration process on the Food Safety Compliance System (FoSCoS) portal.
Step 1: Gather the Required Documents
Before applying online, ensure you have all the necessary documents scanned and saved in a digital format. The specific documents required will vary depending on the type of FSSAI registration you are applying for (Basic, State, or Central). Generally, you will need:
Business Details: Business name, nature of business, address of operation, contact details
Food Category Details: Description of food products manufactured, processed, or traded
Authorization Letters (if applicable): For manufacturers, a No Objection Certificate (NOC) from the local authority might be required
Step 2: Access the FoSCoS Portal
Visit the official FoSCoS portal (https://foscos.fssai.gov.in/) and navigate to the “Apply for New License/Registration” section.
Step 3: Register or Login
New Users: Click on “New User Registration” and create an account by providing a valid email address and password.
Existing Users: If you have already registered, simply log in using your credentials.
Step 4: Choose the Registration Type
On the dashboard, select the appropriate registration type based on your business turnover:
FSSAI Basic Registration (Form A): For businesses with a turnover of up to Rs. 12 lakh per annum.
FSSAI State License (Form B): For businesses with a turnover between Rs. 12 lakh and Rs. 20 crore per annum.
FSSAI Central License (Form B): For businesses with a turnover exceeding Rs. 20 crore per annum.
Step 5: Complete the Online Application Form
Carefully fill out the application form with accurate details about your business, including:
Business name and address
Nature of business activity (manufacturing, processing, storage, distribution, etc.)
Food product category details
Details of food manufacturing or processing premises (if applicable)
Source of raw materials (if applicable)
Step 6: Upload Required Documents
Step 7: Fee Payment
Pay the applicable registration fee online using a debit card, credit card, or net banking facility. The fee varies depending on the type of registration you are applying for.
Step 8: Submit the Application and Track Status
Once you have reviewed all the information and ensured its accuracy, submit the online application form. You will receive a confirmation email with a tracking number. Use this number to track the status of your application on the FoSCoS portal.
Step 9: Department Scrutiny and Inspection (if applicable)
The FSSAI department will scrutinize your application and documents. For State or Central licenses, an inspection of your food premises might be conducted to verify compliance with FSSAI regulations.
Step 10: Granting of FSSAI Registration Certificate
If your application is approved, the FSSAI will issue a registration certificate with a unique registration number. You can download the certificate by logging into your FoSCoS account. If your application is not approved, you will be informed by the Department within 7 days from the date of receipt of an application either physically or online through the FoSCoS portal.
Step 11: Display the FSSAI Certificate Prominently
As per regulations, you are required to prominently display the FSSAI registration certificate at your place of business during operating hours. This signifies your compliance with food safety standards and builds trust with your customers.
By following these steps and keeping the necessary documents prepared, you can efficiently obtain your FSSAI registration online and operate your food business legally within India.
Eligibility for FSSAI Registration
FSSAI registration applies to Food Business Operators (FBOs) involved in various small-scale food business activities. Here’s a breakdown of the eligibility criteria:
Turnover: Any FBO with an annual turnover of not more than Rs. 12 lakh needs to register.
Business Type:
Petty retailers dealing in food products (e.g., local grocery stores).
Individuals who manufacture or sell any food article themselves (e.g., homemade bakery owners).
Temporary stall holders selling food (e.g., street food vendors).
Individuals distributing food in religious or social gatherings (except caterers).
Small-scale or cottage industries involved in food production.
Food Production Capacity Limits:
For businesses involved in specific food production activities, registration applies if their daily capacity falls under the following limits:
Food Production (excluding milk and meat): Up to 100 kg/liter per day.
Procurement, Handling, and Collection of Milk: Up to 500 liters per day.
Slaughtering: Up to 2 large animals or 10 small animals or 50 poultry birds per day.
Transportation: Businesses operating a single vehicle for food transportation.
Vending Machines: Up to 12 vending machines operating within a single state/union territory.
Important Note:
While FSSAI registration caters to small-scale businesses, FSSAI licenses are available for larger businesses with higher turnovers or exceeding the mentioned production capacities.
Eligibility for FSSAI License
While FSSAI registration caters to small-scale operations, FSSAI licenses are mandatory for medium and large businesses. Let’s delve into the eligibility criteria for these licenses.
FSSAI License Categories:
FSSAI licenses are categorized into two depending on the business size:
State FSSAI License: Applicable to medium-scale businesses.
Central FSSAI License: Mandatory for large-scale businesses.
State FSSAI License Eligibility:
This license is targeted towards medium-sized manufacturers, transporters, distributors, and wholesalers. Here’s a breakdown of the key requirements:
Turnover: FBOs with an annual turnover between Rs. 12 lakh and Rs. 20 crore (Rs. 30 crore for transportation and wholesale businesses).
Business Activities:
All grain, cereal, and pulse milling units (irrespective of production capacity).
Food business operations limited to a single state.
Food Production Capacity Limits: (Daily Capacity)
Food Production (excluding milk and meat): 1 MT to 2 MT.
Milk Procurement, Handling, and Collection: 501 liters to 50,000 liters.
Slaughtering: 3-50 large animals, 11-150 small animals, or 51-1,000 poultry birds.
Storage capacity: Up to 10,000 MT.
Transportation fleet: Up to 100 vehicles.
Hospitality Establishments: Hotels with one to four-star ratings.
Vending Machines: Up to 100 machines operating within a single state/union territory.
Central FSSAI License Eligibility:
This license caters to large-scale food manufacturers, importers, and exporters. Here are the eligibility criteria:
Turnover: FBOs with an annual turnover exceeding Rs. 20 crore (Rs. 30 crore for transportation and wholesale businesses).
Business Activities:
Food businesses operating in multiple states.
Importers and exporters of food products.
Manufacturers of proprietary foods, non-specified foods, food or health supplements, and nutraceuticals.
Businesses involved in radiation processing of food.
Food business activities at Central Government Agency premises.
Caterers, restaurants, canteens, hawkers, or petty retailers operating at railway stations.
E-commerce food businesses.
Food Production Capacity Limits: (Daily Capacity)
Food Production (excluding milk and meat): More than 2 MT.
Milk Procurement, Handling, and Collection: More than 50,000 liters.
Slaughtering: More than 50 large animals, more than 150 small animals, or more than 1,000 poultry birds.
Storage capacity: More than 10,000 MT.
Transportation fleet: More than 100 vehicles.
Hospitality Establishments: Hotels with five-star ratings and above.
Vending Machines: More than 100 machines located in two or more states/UTs.
License Tenure:
Both State and Central FSSAI licenses are issued for a minimum of one year and a maximum of five years.
Documents Required for FSSAI Registration and License
Here’s a detailed breakdown of the documents needed for FSSAI registration/license:
General Documents (Required for All Categories):
Form A: This is the application form for FSSAI registration/license. You can download it from the FSSAI website https://www.fssai.gov.in/.
Photo ID Proof: A valid government-issued photo ID (PAN Card, Aadhaar Card, Voter ID, etc.) of the food business operator(s).
Business Constitution Certificate:
Proprietorship Declaration (for sole proprietors)
Partnership Deed (for businesses with partners)
Certificate of Incorporation (for companies)
Shop & Establishment License or other relevant business registration certificate.
Proof of Possession of Business Premises: This could be a rental agreement, No Objection Certificate (NOC) from the owner, utility bills (electricity, water), etc.
Food Safety Management System Plan (FSMS Plan): A documented plan outlining your food safety procedures for ensuring hygiene and quality control.
List of Food Products: A detailed list of all food items you manufacture, process, or trade.
Bank Account Information: Details of the bank account associated with your food business.
Additional Documents (Required for Specific Licenses):
FSSAI State License (Turnover between ₹12 Lakhs and ₹20 Crore):
Form B: Duly filled and signed application form.
Processing Unit Plan: A blueprint showcasing the processing unit layout with dimensions and designated areas for each operation (applicable to manufacturers only).
Directors’/Partners’/Proprietor Details: List with complete contact information and photo IDs.
Machinery and Equipment List: Details including names, quantities, and installed capacity.
Authority Letter: A document from the machinery manufacturer nominating a responsible person for the equipment.
Water Analysis Report: A report confirming the potability of the water used in the process.
Cooperative Society Certificate (if applicable): A copy of the certificate obtained under the Coop Act 1861 or Multi-State Coop Act 2002 (for cooperative societies).
FSSAI Central License (Turnover Above ₹20 Crore or Importers/Exporters):
All documents required for the State License (mentioned above).
Ministry of Commerce Certificate (for 100% Export Oriented Units – EOU): A certificate issued by the Ministry of Commerce for EOUs.
NOC/PA from FSSAI: A No Objection Certificate (NOC) or Prior Approval (PA) document issued by FSSAI (depending on the scenario).
Import/Export (IE) Code: A document issued by the Directorate General of Foreign Trade (DGFT) for import/export activities.
Form IX: A specific form required for central license applications.
Ministry of Tourism Certificate (for hotels): A certificate issued by the Ministry of Tourism (applicable to hotels seeking a central license).
Turnover and Transportation Proof: Supporting documents that demonstrate your business turnover and transportation details.
Declaration Form: A signed declaration form as per FSSAI requirements.
FSSAI License Costs
The cost of acquiring a FSSAI license varies depending on your business size and operations.
FSSAI Registration Fee:
This is the most basic tier of FSSAI compliance. It’s ideal for small, home-based businesses or those with a turnover of less than Rs. 12 lakh annually. The FSSAI Basic Registration fee is a minimal Rs. 100 per year.
FSSAI State License Fee:
As your business scales up, you’ll likely need a State License. This applies to businesses with a turnover between Rs. 12 lakh and Rs. 20 crore annually. The FSSAI State License fee ranges from Rs. 2,000 to Rs. 5,000 per year, depending on the specific category of your food business.
FSSAI Central License Fee:
This license is required for large food businesses with a turnover exceeding Rs. 20 crore annually, or those involved in inter-state operations, or exports. The FSSAI Central License has a fixed fee of Rs. 7,500 per year.
Additional Points to Consider:
The fees mentioned above are for a one-year license period. Renewal fees are typically the same as the initial application fee. Businesses must apply online for renewal, 30 days before the expiry of the current license.
In case you require a duplicate license/certificate due to loss or damage, you’ll need to pay 10% of the applicable license fee.
The Food Safety and Standards Authority of India (FSSAI) keeps applicants informed throughout the registration process. Checking the FSSAI registration status is easy via the portal.
Monitoring Your Application Status
The FSSAI provides multiple ways to check your application status:
SMS/Email Alerts: The FSSAI will send alerts via SMS or email at crucial stages of your application’s processing. These alerts keep you informed and ensure you don’t miss any critical updates.
FoSCoS Website: You can actively track your application status on the Food Safety Central System (FoSCoS) website, the official FSSAI online portal. To do this, follow these steps:
Enter your 17-digit application reference number, which you received upon submitting your application.
Click “Search” to view the current status of your application.
Understanding the FSSAI Registration Statuses
The FoSCoS portal displays your application status using various terms. Let’s explore what each status signifies:
Submitted: This indicates that the FSSAI has received your application and is initiating the processing procedures.
Under Scrutiny: The FSSAI is reviewing your application to ensure it meets all the necessary requirements.
Information Required: The FSSAI requires additional information or clarification regarding your application. You’ll receive details about the required information through an SMS/email alert or within the application status itself on the FoSCoS portal. Respond promptly to avoid delays.
Application Reverted: This status signifies that the FSSAI has identified some inconsistencies or missing information in your application. They have reverted the application for necessary modifications or clarifications. You’ll be given 30 days from the reverted date to address these concerns and resubmit your application. Failure to respond within the timeframe can lead to application rejection.
Approved: Congratulations! Your application has been approved by the FSSAI.
Registration Certificate Issued: This is the final stage, indicating that the FSSAI has issued your FSSAI registration certificate. You can download the certificate by logging into your FoSCoS account.
Benefits of Getting a FSSAI Food License
The license, issued by the Food Safety and Standards Authority of India (FSSAI), unlocks a multitude of benefits that can propel your business towards success.
Legal Compliance and Peace of Mind: Operating without an FSSAI license is a punishable offense. The license ensures you adhere to all the regulations set forth by the FSSAI, safeguarding you from hefty fines and penalties.
Building Trust and Brand Reputation: The FSSAI license signifies your commitment to food safety and hygiene. Displaying the FSSAI logo on your products and the registration number at your premises acts as a badge of honor for your customers.
Enhanced Market Access and Growth Potential: An FSSAI license opens doors to new business opportunities. It becomes easier to secure licenses for operating in larger markets, participate in trade fairs, and collaborate with bigger retailers.
Investor Confidence and Funding Opportunities: Investors are more likely to consider funding a business that demonstrates a commitment to quality and legal compliance.
Improved Supply Chain Management: The FSSAI regulations guide not only food production but also storage, distribution, and import/export. By adhering to these guidelines, you establish a more robust and efficient supply chain.
Promoting Food Safety and Consumer Awareness: The FSSAI’s core mission is to ensure food safety for all consumers in India. By obtaining a license, you become part of this vital initiative.
To wrap things up, acquiring an FSSAI food license is an investment in the future of your food business. It’s a mark of quality, a symbol of trust, and a key that opens up a world of possibilities for growth and success.
Non-Compliance for FSSAI Registration
Any business operator involved in the food industry, from manufacturing and processing to storage, distribution, and sale, must comply with the regulations set forth under the Food Safety and Standards Act, 2006 (FSS Act). Failure to adhere to these regulations can result in significant consequences.
Inspections and Compliance Levels:
FSSAI designates Food Safety Officers (FSOs) to conduct regular inspections of food business operator (FBO) facilities. During these inspections, the FSO utilizes a checklist to assess the FBO’s adherence to regulations. Based on the findings, the inspection report reflects one of the following compliance levels:
Compliance (C): The FBO adheres to all applicable regulations.
Non-compliance (NC): The FBO fails to meet specific regulations.
Partial Compliance (PC): The FBO meets some, but not all, of the regulations.
Not Applicable/Not Observed (NA): Certain regulations are not applicable to the FBO’s specific operation, or the FSO could not observe adherence due to limitations during the inspection.
Improvement Notices and License Cancellation:
If the inspection reveals non-compliance (NC) or partial compliance (PC), the FSO may issue an improvement notice under Section 32 of the FSS Act. This notice specifies the areas where the FBO must improve and outlines a timeframe for achieving compliance.
Non-compliance with the improvement notice can lead to serious consequences. The FSO, after providing the FBO with an opportunity to explain their position, may cancel the FBO’s license to operate. This effectively shuts down the business.
Appeal Process:
FBOs who disagree with an improvement notice have the right to appeal. The appeal process involves submitting a petition to the State Commissioner of Food Safety. If the FBO remains unsatisfied with the Commissioner’s decision, they can further escalate the appeal to the Food Safety Appellate Tribunal or even the High Court.
Fines and Imprisonment:
Beyond license cancellation, non-compliance with FSSAI regulations can also result in hefty fines. The penalty amount varies depending on the nature and severity of the violation. In some cases, particularly those involving the sale of unsafe food that causes harm to consumers, the FBO may face imprisonment alongside a fine.
Maintaining Compliance:
Understanding the potential consequences of non-compliance serves as a strong motivator for FBOs to prioritize adherence to FSSAI regulations. By following best practices for food safety, sanitation, labeling, and licensing, FBOs can ensure the safety of consumers and avoid the significant disruptions caused by non-compliance issues.
Fines and Penalties for FSSAI Non- Compliance
Sl. No.
Particulars
Fine Amount
1
Food quality not in compliance with the Act
Up to ₹ 2 Lakh
2
Sub-standard food
Up to ₹ 5 Lakh
3
Misbranded Food
Up to ₹ 3 Lakh
4
Misleading advertisement or false description
Up to ₹ 10 Lakh
5
Extraneous matter in food
Up to ₹ 1 Lakh
6
Failure to comply with Food Safety Officer direction
Up to ₹ 2 Lakh
7
Unhygienic processing or manufacture
Up to ₹ 1 Lakh
8
Operating without a valid FSSAI License
Up to ₹ 5,00,000
9
Sale of Adulterated Food
Up to ₹ 5,00,000
10
Offenses Leading to Public Harm (e.g., food poisoning outbreak)
Variable (may include imprisonment alongside fines)
Sample FSSAI Registration Certificate
Frequently Asked Questions on FSSAI Registration
Q: How can I download my FSSAI registration certificate?
A: Once your FSSAI registration is issued, navigate to the Issued tab on your FoSCoS portal dashboard to download your certificate.
Q: What information does the FSSAI registration certificate contain?
A: The certificate provides key details about your business, including your business name and address, food business location, business type, and the validity period of your registration.
Q: How long is an FSSAI license valid for?
A: The validity of your FSSAI license can range from 1 to 5 years, depending on the specific license type you hold and the food products your business deals with.
Q: How do I renew my FSSAI registration/license?
A: To avoid needing a whole new application, ensure you renew your FSSAI registration/license well before the expiry date. Renew your certificate at https://foscos.fssai.gov.in/
Q: What are the FSSAI renewal fees?
A: The FSSAI renewal fees depend on the type of license you hold:
Basic FSSAI License (Registration): Rs 100 to Rs 500 (varies depending on the number of renewal years chosen).
Central FSSAI License: Rs 7500 per year.
Q: Are there any additional fees associated with FSSAI renewal?
A: There is a Rs 100 application fee for all FSSAI renewals.
Q: Can I convert a manually issued license to online during renewal?
A: Yes, you can! Contact the designated officer to create a user ID and facilitate the conversion of your license to the online system.
Q: What are the different FSSAI license categories?
A: The FSSAI offers a tiered licensing system based on your business’s turnover and production capacity. There are three categories:
Basic FSSAI Registration: For businesses with an annual turnover below Rs. 12 lakh.
State FSSAI License: For businesses with a turnover between Rs. 12 lakh and Rs. 20 crore.
Central FSSAI License: For large businesses with a turnover exceeding Rs. 20 crore per year.
Q: Do medical stores selling dietary products need an FSSAI license?
A: Yes. All food businesses selling food products, including dietary foods and nutraceuticals, require a valid FSSAI license regardless of their category.
Q: Can I modify my FSSAI license information?
A: Yes, you can apply for modifications to your license information, such as a change of address. However, processing fees might be applicable.
Q: What is an improvement notice, and who issues it?
A: A Designated Officer from FSSAI issues an improvement notice if your business is found to be non-compliant with food safety regulations. This notice specifies the areas requiring improvement.
Q: When can my license be suspended?
A: The FSSAI Designated Officer has the authority to suspend your license if you fail to address the issues highlighted in an improvement notice within the given timeframe.
Q: Can I appeal an improvement notice, suspension, or cancellation?
A: Yes. You have the right to appeal against an improvement notice, suspension, or even cancellation of your license. Appeals can be filed with the State Commissioner of Food Safety or higher authorities within the prescribed time frame.
The Karnataka Stamp Act underwent modifications through the Karnataka Stamp (Amendment) Act 2023. On February 3, the Governor granted consent, and the revised rates were promptly published in the gazette on the same day. Despite an average 2-2.5x increase in stamp duty rates, Karnataka continues to stand out as one of the most cost-effective jurisdictions for stamp duty in India, in contrast to Maharashtra and Delhi.
Here are the noteworthy changes affecting startups:
1. Power of Attorney Duty: Formerly INR 100, now increased to INR 500.
2. Any Other Agreement under Article 5:Duty has risen from INR 200 to INR 500.
Let’s face it, contracts are broken, and sometimes, unexpected situations cause financial losses. But what recourse do you have? When it comes to recouping your losses, legal concepts like damages and indemnity come into play. While they both aim to compensate for financial hardship, they differ significantly. This blog post will be your guide to understanding damages vs indemnity. In this Article Difference between Indemnity and Damages, We’ll explore into the situations where each applies, the scope of what you can recover, and the key differences that can make all the difference in your claim. So, whether you’re a business owner, an entrepreneur , or simply someone who wants to be prepared, buckle up and get ready to understand the legalese of damages and indemnity!
Damage, Damages & Compensation
The terms ‘damage’ and ‘compensation’ are often used interchangeably for ‘damages’, it is essential to understand that the two terms hold significant differences to the concept of ‘damages’.
‘Damages’ are related to the compensation that is granted or sought for, whereas ‘damage’ pertains to the pecuniary and non-pecuniary harm or loss for which such compensation is requested or granted.
‘Damage’ can encompass both aspects, such as harm to one’s reputation, physical or mental suffering, while ‘damages’ strictly refer to monetary relief.
Compensation is a comprehensive term that covers payments to address losses or harm resulting from acts or omissions, such as property acquisition by another party, legal violations, wrongful termination. In contrast, damages specifically arise from actionable legal wrongs.
What are Damages?
In Common Cause v Union of India, the apex court observed that damages refer to a form of compensation awarded in case of breach, loss or injury.
Damages are covered under Sections 73 and 74 of the Indian Contract Act, 1872 (Act). While section 73 of the Act encompasses the actual damage incurred upon breach of contract, Section 74 provides for liquidated damages i.e., genuine estimate of the loss incurred by the aggrieved party.
What is Indemnity?
According to section 124 of the Indian Contract Act, a claim for indemnity arises due to the conduct of the indemnifier or by the conduct of any other person. This is a major advantage of claiming indemnities over damages. Indemnity clauses shift the entire risk of future loss to indemnifier.
Indemnity is a form of protection from any third-party losses and is established by way of an indemnity agreement between the claimant and indemnifier. Indemnity clauses are often subject to extensive debate during the commercial contract negotiations since poorly negotiated indemnity clauses can cause serious repercussions to the parties.
Understanding the Differences between Damages and Indemnity
Damages
Indemnity
Defined under Section 73 and 74 of the Act. Damages can be liquidated or unliquidated, and refer to the losses incurred.
Indemnity is an undertaking to make good loss caused by one party to another. The act describes indemnity as “ A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor, himself or by the conduct of any other person.”
In cased of monetary damages, award may be awarded for more than the actual loss occurred or even less than the actual loss occurred.
The primary objective behind indemnity is to restore the original position of the party aggrieved by the breach.
The concepts of foreseeability, reasonability and remoteness bring a duty to mitigate, covering two broad principles: a) The claimant must take all reasonable steps to reduce or contain his loss; and b) The claimant must not act unreasonably so as to increase his loss.
Such an obligation to mitigate may not arise in an indemnity unless specifically stated so in the indemnity clause.
Damages can only be claimed when there is a breach of contract by either party
Relief may be claimed for loss caused by the action of a third party which may not necessarily result from the breach of contract.
Represent a secondary obligation awarded by a court in response to a proven wrongful act. The liable party only incurs the obligation to pay damages after a finding of wrongdoing.
Creates a primary obligation, meaning the indemnifying party is directly responsible for compensating the indemnified party for losses regardless of any other obligations.
Involves at least two parties: the injured party (who suffered the harm) and the liable party (who caused the harm). Courts determine the amount of damages awarded.
Typically involves two parties: the indemnifier (who promises to reimburse) and the indemnified party (who receives the reimbursement).
The liable party must be found to have caused the loss through their wrongful act or breach of duty. They are only liable for the damages directly attributable to their actions.
The indemnifier may not necessarily be the direct cause of the loss. The obligation can arise due to contractually agreed-upon scenarios, even if the indemnifier had no role in causing the loss.
Limited to the actual losses suffered by the injured party due to the specific wrongful act. Courts aim to restore the injured party to their pre-loss position, not provide excessive windfalls.
Can potentially encompass all losses incurred by the indemnified party that fall within the scope of the agreement, even if the losses exceed the actual wrongdoing.
Can be express (written in a formal agreement) or implied (inferred from the circumstances and conduct of the parties).
No formal agreement is involved. Damages are awarded through a court order based on the evidence presented during a lawsuit.
Judges and juries hold greater discretion in determining the appropriate amount of damages based on the specific facts of the case and legal precedents relevant to similar situations.
Limited by contractual terms and established legal principles regarding contract interpretation.
Basis for claim: Damages are awarded for a breach of contract, while indemnity can be claimed for a loss arising from various situations, including a breach of contract, a third-party action, or even a potential future loss.
Scope of recovery: Damages are limited to the actual loss suffered by the injured party, while indemnity can cover a wider range of losses, including consequential, remote, indirect, and third-party losses, unless specifically excluded in the indemnity clause.
Duty to mitigate: The injured party has a duty to mitigate their losses when claiming damages, while there is no such duty for the indemnified party.
Timing of claim: Damages can only be claimed after a breach of contract has occurred, while an indemnity claim may be brought even before a breach occurs, if the potential for loss exists.
Objective vs. contractual: Damages are awarded based on the objective loss suffered by the injured party, while indemnity is based on the specific terms of the indemnity clause in the contract.
We draft effective contracts and protect against damagesLet’s Talk
Conclusion
Damages on breach of contracts are considered to be advantageous than other remedies that may be available to parties suffering losses from breach of contracts. Liquidated damages play a significant role in cases where it is difficult to ascertain the quantum of damages since that is predetermined by inserting a clause on ‘liquidated damages’ in the contract itself. Such clauses for liquidated damages aim at the prevention of litigation to the extent possible. This would also help in reducing the burden to prove actual damage suffered pursuant to breach, in order to claim damages.
However, in certain cases, damages may not suffice in respect of the losses or damage suffered by a party. This may lead to a situation which warrants a specific performance by the other party instead of damages to enable restoration of the position of the party prior to such contractual breach. Such situations may arise if the subject matter of the contract is of rare quality or indispensable for the aggrieved party. Thus, courts may opt to award damages in addition to or in substitution of specific performance, depending on what is warranted by a given situation. Moreover, stipulation for liquidated damages would not be a bar to specific performance.
FAQs on Indemnity v/s Damages
What is the difference between “damage” and “damages”?
Damage: This refers to the harm or loss suffered, both financial (pecuniary) and non-financial (non-pecuniary), such as damage to reputation, physical or mental suffering.
Damages: This specifically refers to the monetary compensation awarded for the harm or loss suffered.
What are damages? Damages are a form of compensation awarded in situations like breach of contract, loss, or injury. In India, they are covered under the Indian Contract Act, 1872. There are two types:
Actual damages: Compensation for the actual loss incurred.
Liquidated damages: A predetermined amount agreed upon in the contract to compensate for potential future losses.
What is indemnity? Indemnity is a contractual agreement where one party (indemnifier) promises to compensate another party (indemnitee) for any losses incurred due to the actions of the indemnifier, another person, or even a third party. This essentially shifts the risk of future loss to the indemnifier.
What are the circumstances where damages might not be sufficient? Damages might not be enough if the subject matter of the breach is unique or irreplaceable, in which case, specific performance might be sought.
When is indemnity more advantageous than damages? Indemnity can be more advantageous because:
It covers losses caused by third parties, beyond just breach of contract.
It may not require proving the extent of the loss suffered.
The duty to mitigate losses might not apply, potentially leading to higher compensation.
What are the drawbacks of indemnity clauses?
Poorly negotiated clauses can expose the indemnifier to unexpected liabilities.
They can be complex and require careful drafting to avoid ambiguity.
Can damages and indemnity be claimed together? It depends on the specific situation and the contract terms. In certain cases, the court might award both damages and specific performance (fulfilling the contract) depending on what best restores the aggrieved party’s position.
What are some situations where specific performance might be preferred over damages? Specific performance might be preferred when:
The subject matter of the contract is unique or irreplaceable.
Monetary compensation wouldn’t adequately address the loss.
What role do liquidated damages play in contracts? Liquidated damages clauses pre-determine the compensation amount for potential future losses, avoiding the need to prove actual damages in case of breach. This helps:
Prevent litigation.
Reduce the burden of proving actual losses.
What are some important considerations when drafting indemnity clauses?
Clearly define the scope of losses covered.
Specify whether the duty to mitigate applies.
Consider potential for future legal disputes and ensure the clause is enforceable.
In the dynamic world of finance, companies constantly seek innovative ways to raise capital and manage their financial health. One such strategy, often overlooked but potentially advantageous, is the conversion of loans into shares. This process essentially transforms a lender from a creditor to a partial owner of the company, offering unique benefits for both parties. Whether aiming to alleviate cash flow pressures, reduce debt, or signal confidence to potential investors, loan-to-share conversion can be a powerful tool.
What are Loans?
A loan is a sort of credit arrangement wherein a certain quantity of money is extended to a third party with the expectation that the principal (or value) will be repaid at a later date. The borrower must return the principal amount plus, frequently, interest or finance charges added by the lender to the principal value. Loans can be made available as an open-ended line of credit with a predetermined maximum, or they can be made for a fixed, one-time sum. There are several varieties of loans, such as personal, business, secured, and unsecured loans. A loan is a type of debt that someone or something else has to pay back. The borrower receives an advance of funds from the lender, which is typically a government agency, financial institution, or company. The borrower accepts a certain set of terms in exchange, including the payment date, interest rate, and any additional stipulations. Collateral may occasionally be needed by the lender in order to guarantee loan security and repayment. Bonds and certificates of deposit (CDs) are other forms of loans.
What are Shares?
A company’s shares are its ownership units. Despite their frequent interchangeability, the phrases “stocks” and “shares” have different meanings when referring to a firm. It all depends on how you talk about a firm and how much ownership you have, despite the fact that this may sound complicated. Let’s take a scenario where the XYZ corporation issued stock and you bought ten shares. You own 10% of the business if each share is worth 1% of the total. Shares of the stock that the firm issued were purchased by you. You don’t buy stock; instead, you buy shares of a stock, to put it another way. Shares are what you actually purchase; stock is a broader phrase used to describe the financial instruments a firm produces. Owners of corporations may decide to issue shares in order to raise funds. Next, businesses split their stock into shares, which are offered for sale to investors. These buyers are typically brokers or investment banks who then sell the shares to other buyers directly or through intermediaries like exchange-traded funds or mutual funds. In a corporation, ownership is represented by shares. The shareholders are not legally obligated to receive their money back from the firm in the event that something goes wrong because they are a representation of ownership rather than debt.
What is a Rights Issue?
A rights issue is a request for current shareholders to buy more shares of the business. Existing shareholders get securities referred to as rights in this kind of offering. With the rights, the shareholder can buy new shares at a future period at a price below market value. The firm is offering discounted stock to stockholders who would like to enhance their exposure to it. Shareholders may trade the rights on the market in the same manner as they would regular shares up to the day on which the new shares are available for purchase. A shareholder’s rights are valuable, making up for any future erosion of the value of their existing shares for present shareholders. Dilution happens when a business distributes its net profit over a higher number of shares through a rights issue. As a result of share dilution caused by the allocated earnings, the company’s earnings per share, or EPS, declines.A company may issue more shares under Section 62(1) of the Companies Act of 2013 if it intends to raise its subscribed capital by new share issuance. By submitting a letter of offer pursuant to the following terms, such shares should be initially made available to current shareholders who, as of the offer date, are holders of equity shares of the firm in proportion.
What is Preferential Allotment of Shares?
A sort of equity issuance known as preferential allotment occurs when a business provides shares at a discount to a certain set of investors. Usually, these investors are preferred investors, strategic partners, or current shareholders. Preferential allocation is usually done to raise funds for the business, and the lower price is meant to entice investors to get involved. Preferring allotment shares are not usually traded on a stock market, and investors may be subject to limitations on how easily they may sell their shares.
Why Convert Loans to Shares?
There are several reasons a company might choose to convert a loan to shares:
Cash Flow Relief: This can free up cash the company would have used for loan repayments, allowing them to invest in growth.
Debt Reduction: Conversion reduces the company’s overall debt burden, improving its financial health.
Attracting New Investors: Existing lenders with a stake in the company’s success can be a good sign for potential future investors.
Things to Consider Before Conversion
Agreement with Lender: Not all loans can be converted. The loan agreement should explicitly mention the option to convert into shares.
Share Price: At what price will the shares be issued? This needs careful consideration to be fair to both the company and the lender.
Shareholder Approval: Most jurisdictions require shareholder approval for such conversions, usually through a special resolution.
Conversions of Loans Into Shares (Detailed Process)
*The same provision is also applicable for the conversion of debt securities.
Review Loan Agreement: Carefully examine the original loan agreement to ensure conversion is allowed and understand the terms.
Negotiate Conversion Terms: Discuss the conversion details with the lender, including the number of shares issued, share price, and any other relevant conditions.
Board Approval: The company’s board of directors needs to formally approve the conversion proposal.
Shareholder Approval: Depending on your location, a special shareholder meeting might be required to vote on the conversion. A majority vote is typically needed for approval.
Legal and Tax Implications: Consult with legal and tax professionals to ensure compliance with all regulations and potential tax consequences for both the company and the lender.
Finalize Conversion Documents: Draft and finalize the necessary legal documents for the conversion, including share issuance certificates.
Record Keeping: Ensure all records related to the loan conversion are properly documented and maintained for future reference.
Case Study of Conversion of Loan to Shares
To better understand the above concepts, lets examine a recent adjudication order passed by the Registrar of Companies, Karnataka (ROC) dated September 09, 2023 (Adjudication order 454-62(3))
Background of the Case:
Dhiomics Analytics Solutions Private Limited filed a suo-moto application to the ROC, acknowledging that they committed a default under section 62(3) of the Companies Act, 2013, while converting loans from their promoter-cum-directors into Equity Shares. They did not pass the Special Resolution required prior for the conversion. Additionally, the company mentioned that they had mistakenly passed a Board Resolution for a Rights Issue under section 62(1)(a), instead of conversion of loans into Equity under section 62(3).
The Decision:
The ROC observed that since the Company did not obtain shareholder approval through a Special Resolution before raising the loans, section 62(3) would not be applicable in this case. Consequently, If a company intends to increase the subscribed capital in accordance with section 62(1)(c), it may be offered to any person provided it is authorized by a special resolution. This offer can be either for cash or for consideration other than cash, with the share price determined by a valuation report from a registered valuer. Additionally, this process is treated as a preferential issue and must comply with section 42. The ROC further clarified that the Company incorrectly issued shares in lieu of the loan under section 62(1)(a) as a Right Issue, which is offered to the holders of Equity Shares in proportion to the paid-up share capital by sending them a letter of offer.
Conclusion
The main conclusions from the previous debate are summarized in this conclusion, which also covers the legal framework, potential advantages and disadvantages, and useful tips for lenders and businesses alike.
Understanding the Fundamentals: Establishing a clear understanding of loans, shares, rights issues, and preferential allotment is crucial for navigating the conversion process effectively. Loans represent borrowed funds with repayment obligations, while shares embody ownership units in a company. Rights issues and preferential allotment are methods for companies to raise capital by offering discounted shares to specific investors.
Legal Framework: The Companies Act, 2013, specifically Section 62(3), governs the conversion of loans into shares. This section mandates a special resolution passed by shareholders before converting a loan into equity. Additionally, regulations pertaining to preferential allotment (Section 42) may apply depending on the circumstances.
Benefits and Drawbacks: Converting loans into shares can offer benefits for both companies and lenders. Companies can avoid debt repayments and potentially improve their financial ratios. Lenders can potentially acquire ownership stakes in the company, aligning their interests with the company’s success. However, it is essential to weigh these advantages against potential drawbacks such as dilution of existing shareholders’ ownership and potential volatility associated with equity ownership for lenders.
Practical Considerations: Companies contemplating converting loans into shares should carefully consider several factors. These include:
Terms of the Loan Agreement: Some loan agreements may explicitly prohibit conversion into shares. Examining the agreement meticulously is essential.
Financial Health: The company’s financial health and future prospects significantly impact the decision. Conversion may be disadvantageous if the company’s future is uncertain.
Shareholder Approval: Obtaining the necessary shareholder approval through a special resolution is paramount. Communication with shareholders and transparent presentation of the conversion rationale are crucial.
Tax Implications: Both companies and lenders should consider the potential tax implications of the conversion. Consulting with a tax professional is advisable.
Valuation: Determining the fair value of the shares to be issued during the conversion process is essential. Utilizing a registered valuer ensures fairness and transparency.
Converting loans into shares can be a strategic financial maneuver, but it requires careful analysis and adherence to legal and regulatory frameworks. Understanding the benefits and drawbacks, meticulously considering practicalities, and seeking professional guidance are crucial steps for ensuring a successful and compliant conversion process. By navigating these complexities effectively, companies and lenders can potentially leverage the unique advantages offered by converting loans into shares while mitigating associated risks.
FAQs on Conversions of Loans into Shares
What is the conversion of loans into shares? It is a process where a company replaces outstanding debt (loan) owed to a lender with shares of the company’s ownership (equity). The lender becomes a shareholder in exchange for forgiving the loan.
Why do companies convert loans into shares? There are several reasons:
Improve financial health: Converting debt to equity reduces the company’s debt burden, improving its financial ratios and potentially making it more attractive to lenders and investors.
Resolve debt issues: If a company is struggling to repay a loan, conversion can be a solution to avoid default.
Attract investment: Offering equity instead of cash can be an incentive for lenders to invest in the company’s future growth.
What are the legal requirements for conversion? The specific requirements vary depending on the jurisdiction, but generally involve:
Shareholder approval: Most jurisdictions require the company to obtain shareholder approval through a special resolution before converting loans.
Valuation: The shares issued in exchange for the loan must be valued fairly, often using a professional valuation report.
Compliance with other regulations: Companies need to ensure the conversion complies with relevant company law and accounting standards.
What are the advantages and disadvantages of converting loans to shares for lenders Advantages:
Potential for higher returns if the company’s share price increases.
May be easier to exit the investment by selling shares on the market (if applicable).Disadvantages:
Shares are subject to market risks, unlike loans with guaranteed repayments.
Lenders may lose voting rights and other privileges typically associated with being a creditor.
What are the advantages and disadvantages of converting loans to shares for companies Advantages:
Reduces debt burden and improves financial health.
Can be an alternative to raising additional capital through traditional methods.
May incentivize lenders to become invested in the company’s long-term success. Disadvantages:
May dilute existing shareholders’ ownership and voting rights.
Can be complex and time-consuming to implement.
What is the difference between a conversion of loans to shares and a rights issue? A rights issue is a method for existing shareholders to purchase additional shares at a discounted price, proportionally to their existing holdings. In contrast, conversion of loans to shares involves issuing new shares to a specific lender in exchange for forgiving a debt, not offered to existing shareholders.
What is the role of the Registrar of Companies (ROC) in loan-to-share conversions? The ROC ensures companies comply with legal requirements during the conversion process. They may review the process, ensure proper shareholder approval, and verify the valuation of shares issued.
What happened in the case study mentioned? The company mistakenly converted a loan from its directors to shares through a rights issue (meant for existing shareholders) instead of the proper conversion method under Section 62(3) of the Companies Act, 2013. As they didn’t obtain prior shareholder approval, the ROC ruled the conversion invalid.
What are some key takeaways from the case study?
Companies must carefully follow the correct legal procedures for converting loans to shares.
Choosing the right method (conversion vs. rights issue) is crucial based on the situation.
Seeking professional guidance is advisable to ensure compliance and avoid legal issues.
Where can I find more information on conversions of loans to shares? You can consult with a qualified financial advisor, legal professional, or research relevant company law regulations and accounting standards in your jurisdiction. Additionally, professional organizations and financial institutions may offer resources and guidance on this topic.
A limited liability partnership (LLP) is a kind of general partnership in which each partner’s personal responsibility for the firm’s obligations is strictly restricted. In accordance with the state, partners may be held accountable for contractual debts but not for the tortious damages of other partners. Larger partnerships and professionals in particular frequently employ limited liability companies (LLPs); in fact, several jurisdictions restrict the use of LLPs to professionals. An LLP, like ordinary partnerships, must consist of two or more partners; however, the structure of the amount of control and profits that each partner keeps is flexible. With the exception of choices involving the modification of the partnership agreement, which call for the consent of all partners, almost all decisions in an LLP can be delegated to specific partners.Limited liability is permitted under LLPs, unlike limited partnerships, even in cases where partners continue to have managerial control over the company. The court may, however, pierce the veil of limited liability to reclaim funds for creditors in cases where it determines that the partners attempted to undermine creditors, for example, through improper distributions. However, the specific actions that would prompt such treatment need to be examined on a case-by-case basis in accordance with applicable state laws. In contrast, consider limited liability companies (LLCs) and limited partnerships. The members (partners) of a limited liability partnership are solely accountable for the money they contribute plus any personal guarantees; the partnership is a distinct legal entity. It is mandatory for partners to furnish the firm with a registered location and preserve a membership registry. The maximum number of partners is unrestricted; nevertheless, upon incorporation, there must be a minimum of two members, who may be either people or limited businesses. An LLP can also be established by one person and a defunct business. Now let us understand Important Amendments to the LLP.
Amendment to LLP Rules: Increased Transparency and Scrutiny
On October 27, 2023, the Ministry of Corporate Affairs (MCA) of the Indian government notified the Limited Liability Partnership (Third Amendment) Rules, 2023. These amendments introduce significant changes aimed at increasing transparency and accountability within Limited Liability Partnerships (LLPs). These changes require LLPs to maintain a record of their partners and disclose information about individuals with a significant financial stake in the partnership.
Who is Affected?
These amendments apply to all Limited Liability Partnerships, both existing and newly incorporated, effective from October 27, 2023.
Impact:
These changes are expected to enhance transparency and accountability within LLPs by:
Providing a clear record of ownership: The register of partners and disclosure of beneficial interest allows for a clearer picture of who ultimately controls and benefits from the LLP.
Combating potential misuse: Increased transparency can help prevent the misuse of LLPs for illegal activities, such as money laundering or tax evasion.
Improving investor confidence: Greater transparency can boost investor confidence in LLPs by ensuring a clearer understanding of ownership and risk profiles.
List of Important Amendments to the Limited Liability Partnership Rules, 2009
Maintaining a Register of Partners in Form 4A (similar to the concept of a Register of Members in a Company).
Every LLP is now required by Rule 22A of the LLP Rules to keep a register of its partners in Form 4A (annexed to the modified LLP Rules); this record should be maintained at the LLP’s registered office. Existing LLPs must comply with this obligation within 30 (thirty) days following the start of the modified LLP Rules, even though the LLP Rules now mandate that any new LLP keep such a register from the date of its creation.The following information about each partner must be included in the register of partners: (i) PAN or CIN; (ii) name, address, and email address;; (iii) Unique Identification Number (if any); (iv) father’s, mother’s, or spouse’s name; (v) occupation, status, nationality, and the name and address of their nominee; (vi) date of partnership formation; (vii) date of cessation; (viii) type and amount of contribution with monetary value thereof; (ix) any other interest (if any). Any modification to the amount of the contribution, the name and contact information of the LLP’s partners, or the termination of a partnership interest must be recorded in the register within seven (seven) days.
Declaration regarding Beneficial Interest in the Contribution of LLPs (similar to the applicability of Companies under Section 89 of the Companies Act, 2013).
Within 30 (thirty) days of the date on which their name was entered in the aforementioned register of partners, each registered partner of the LLP that does not have a beneficial interest (fully or partially) in any contribution is required to file a declaration with the LLP in Form 4B (annexed to the amended LLP Rules), stating the name and details of the person who actually holds any beneficial interest in such contributions. In addition, any modifications to the beneficial interest must be disclosed on Form 4B within 30 (thirty) days of the modification date.In addition, within 30 (thirty) days of acquiring their beneficial interest in the LLP’s contribution, anyone who has a benefit interest in the LLP’s contribution but is not listed in the LLP’s partner registry must file a declaration in Form 4C, which is annexed to the amended LLP Rules, with the LLP, outlining their specifics and the nature of their interest. In addition, any modification to the beneficial interest must be recorded in Form 4C within 30 (thirty) days of the new information being availableThe LLP must enter the aforementioned declarations (if applicable) in the register of partners and submit a Form 4D report to the Registrar of Companies (“ROC”) within thirty (30) days after receiving the declarations, together with any necessary costs.
Declaration regarding Significant Beneficial Owners (“SBOs”) in LLPs (similar to the applicability of Companies under the Companies (Significant Beneficial Owners) Rules, 2018).
According to Rule 22B(4) of the amended LLP Rules, every LLP must designate a designated partner who will cooperate and provide information to the ROC (or any other officer authorized by the Central Government) regarding beneficial interests in the LLP’s contribution. Additionally, it specifies that the previously specified data must be sent in Form 4 (which is appended to the revised LLP Rules) to the ROC. According to the LLP Rules, each designated partner is obligated to provide this information up until a certain designated partner is identified.The Ministry of Corporate Affairs has acted swiftly to incorporate limited liability companies (LLPs) into a regulatory framework that matches their growing usage as a means of conducting business in India. LLPs are nearly as popular as private limited corporations and are far more preferred than traditional partnerships. To prevent the flexibility offered by the LLP structure from being abused to the harm of important stakeholders including financial institutions, creditors, partners, and workers, rules and regulations must be skillfully crafted.
Maintaining a Register of SBOs in Form LLP BEN – 3 (similar to the concept of Register of SBO in a Company).
Register of Partners in LLP
a) Maintain in Form 4A
b) Any change in particulars to be updated within 7 days.
Declaration w.r.t Beneficial Interest in Contribution
a) Note 1: Form 4B & 4C shall be submitted within 30 days from the date when name is entered in the register of partners & after acquiring such beneficial interest in the contribution respectively.
b) Note 2: Form 4D shall be submitted within 30 days from the date of receipt of declaration.
The SBO rules shall not apply to the extent of contribution held by;
Central, State or local Authority
Reporting LLP, Body Corporate or an entity controlled by Central or State Government
Investment vehicles regulated by SEBI, RBI
Conclusion
In a significant move towards enhancing transparency and accountability within Limited Liability Partnerships (LLPs), the Ministry of Corporate Affairs (MCA) introduced key amendments to the LLP Rules, 2009. These amendments represent a comprehensive update, aligning LLP regulations with best practices and bolstering stakeholder confidence. Let’s delve into the core changes and their potential impact.
Unveiling the Register of Partners: Bridging the Information Gap
The introduction of Form 4A mandates maintaining a Register of Partners, mirroring the concept of a Register of Members in companies. This readily accessible record offers transparency into LLP ownership structures, facilitating informed decision-making by investors, creditors, and other stakeholders. The requirement to update the register within 7 days of any changes ensures its accuracy and timeliness.
Demystifying Beneficial Interests: Lifting the Veil
Similar to the provisions of Section 89 of the Companies Act, 2013, LLPs must now file declarations regarding beneficial interests in contributions through Form 4B and 4C. This crucial step sheds light on the ultimate economic beneficiaries of LLP holdings, mitigating potential risks associated with hidden ownership and promoting responsible financial conduct.
Identifying Significant Beneficial Owners (SBOs): Shining a Light on Complex Structures
Building upon the beneficial interest disclosures, the amendments introduce SBO regulations, echoing the Companies (Significant Beneficial Owners) Rules, 2018. LLPs are now required to identify and verify SBOs, defined as individuals with significant control or ownership (exceeding 10%) over partners holding non-individual interests. This additional layer of transparency empowers regulators and stakeholders to hold ultimate beneficiaries accountable, combating financial crime and enhancing market integrity.
Establishing the SBO Register: Centralizing Information
LLPs are mandated to maintain a dedicated Register of SBOs in Form LLP BEN-3. This centralized repository acts as a one-stop shop for accessing crucial information about the ultimate beneficiaries, streamlining due diligence and regulatory oversight.
These amendments are accompanied by stringent compliance timelines. Declaration regarding beneficial interests must be submitted within 30 days of entry into the register and acquiring such interest, respectively. Further, LLPs have 30 days to file form 4D after receiving declarations. These timeframes ensure prompt information disclosure and facilitate effective enforcement.
Impact and Beyond: Building a More Equitable Ecosystem
The revamped LLP Rules offer a multi-pronged approach towards fostering a more transparent and accountable LLP ecosystem. By demystifying ownership structures, identifying ultimate beneficiaries, and establishing robust compliance mechanisms, these amendments empower stakeholders, bolster regulatory effectiveness, and ultimately contribute to a healthier financial landscape. However, the journey doesn’t end here. Continuous stakeholder engagement, capacity building initiatives, and regulatory fine-tuning remain crucial to ensure the successful implementation and long-term impact of these amendments. As the LLP landscape evolves, adapting regulations to best practices will be vital in solidifying India’s position as a global leader in fostering a transparent and responsible financial environment.
FAQs on Amendments to the Limited Liability Partnership Rules, 2009
What are the major changes introduced in the revised LLP Rules? The major amendments to the Limited Liability Partnership Rules, 2009 are
Register of Partners (Rule 22A),
Declaration of Beneficial Interest (Rule 22B),
Designated Partner for Providing Information
What is the purpose of maintaining a Register of Partners in Form 4A? The register provides detailed information about each partner, including their contribution, contact details, and status. It enhances transparency and facilitates communication with stakeholders.
When do existing LLPs need to comply with the Register of Partners requirement? Existing LLPs have 30 days from the implementation date to create and maintain this register. New LLPs must have it from the date of incorporation.
What happens if a partner doesn’t have a beneficial interest in their contribution? They need to file a declaration (Form 4B) disclosing the name and details of the actual beneficiary within 30 days of joining the register.
Who are Significant Beneficial Owners (SBOs), and how are they reported? SBOs are individuals with ultimate control or significant influence over the LLP. They are identified and reported by a designated partner using Form 4 to the Registrar of Companies (ROC).
What is the penalty for non-compliance with these new requirements? Non-compliance may lead to penalties and fines as specified by the ROC.
Do these amendments apply to all types of LLPs? Yes, these amendments apply to all LLPs registered in India, regardless of size or industry.
How will these changes benefit LLPs and stakeholders? Increased transparency and disclosure foster trust, attract investors, and improve corporate governance.
What are the challenges in implementing these changes? Ensuring proper record-keeping and timely reporting within short time frames might require adaptation and support for smaller LLPs.
Where can I find more information about these amendments? One can find information related to the new amendment of LLP’S on The Ministry of Corporate Affairs website and official notifications related to the revised LLP Rules offer detailed information.
Primary / fresh investment in a startup requires the startup and investor to comply with valuation norms under various regulations like company law, income tax and FEMA from different professionals such as CA, merchant banker and registered valuer. This can get very confusing and therefore to help simplify it, we have provided a concise summary of the necessary valuation report requirements based on the instrument being used and the relevant regulations. Let us dive in to learn Simplifying Startup Investment.
Type of Instrument
Under Companies Act, 2013
Under Income Tax Act, 1961
Under FEMA regulations
Equity Shares
Registered valuer Report
Valuation Report
From Merchant Banker (MB) – calculated using DCF method
From chartered accountant (CA) – calculated using BV method (Rule 11UA)
Valuation report from CA or MB or cost accountant – as per internationally accepted pricing methodology
Preference Shares /CCPS/ CCDs/CNs
Valuation report
from MB -calculated using DCF or BV or any other method.
Notes:
We have assumed that the instruments will be allotted under private placement.
The above table is based on provisions of section 62(1)(c) of companies Act, 2013, Section 56(2)(x), and Section 56(2) (viib) of the income tax Act, 1961 read with relevant rules and Rule 21 of the foreign exchange management (non-debt instruments) rules, 2019.
Conclusion:
It can be intimidating to navigate the complex world of startup funding appraisal. Both founders and investors may set out on this road with more clarity and confidence if they are aware of the important legislation, use the accompanying table as a reference, and consult an expert. It is important to maintain open communication, openness, and meticulous evaluation of all pertinent aspects in order to arrive at a just and long-lasting value that is advantageous to all stakeholders.
Three key regulations govern startup valuations:
Companies Act, 2013: Ensures fair allotment of shares by mandating valuation reports under specific circumstances.
Income Tax Act, 1961: Determines tax implications based on the fair market value of issued instruments.
FEMA regulations: Regulate foreign investment and ensure accurate valuation for capital inflow/outflow.
Navigating the Table:
The provided table offers a concise overview of report requirements based on the instrument used for investment:
Equity Shares:
Under Companies Act: A registered valuer’s report is mandatory, typically using the Discounted Cash Flow (DCF) method provided by a Merchant Banker (MB).
Under Income Tax Act: A valuation report is required, but the method is flexible. Choose either a MB’s DCF report or a Chartered Accountant’s (CA) report using the Book Value (BV) method under Rule 11UA.
Under FEMA: No specific mandate, but consider using internationally accepted pricing methodologies for transparency.
Preference Shares/CCPS/CCDs/CNs:
Under Companies Act: A valuation report is mandatory, with flexibility in choosing the method. Options include DCF, BV, or other methods provided by an MB.
Under Income Tax Act: A valuation report is required, again with flexibility in methodology. Consider reports from CAs, MBs, or cost accountants, ensuring adherence to internationally accepted practices.
Under FEMA: No specific mandate, but consider internationally accepted methodologies for compliance.
While the table provides a structured approach, remember that valuation is an art, not an exact science. Consider these additional factors:
Startup stage and potential: Early-stage ventures might rely more on qualitative factors like growth potential, while established startups might have more concrete financial data for DCF models.
Investor expectations and negotiation: Both founders and investors should have clear expectations and engage in open communication to reach a mutually agreeable valuation.
Transparency and documentation: Maintain detailed records of the valuation process, including chosen methodologies and assumptions, for future reference and compliance purposes.
Ever heard of companies going public with a bang, or promising startups receiving mysterious funding? That’s the magic of private equity (PE) and venture capital (VC) at work. Both pump capital into companies, but with distinct tastes. PE prefers established firms, like seasoned chefs perfecting their recipes, seeking growth through operational tweaks. Think buyouts, restructurings, and polished profits. VC, on the other hand, is the adventurous foodie, betting on bold, innovative startups with sky-high growth potential. They invest in the sizzle of new ideas, hoping for a breakout hit. So, whether you’re drawn to the steady hand of a seasoned pro or the thrill of the unknown, PE and VC offer exciting investment landscapes, each with its own unique flavor. Let’s dive deeper and see Core Differences between Private Equity and Venture Capital. As the title suggests Private Equity vs Venture Capital is an understanding which re-defines investment scenario for companies, organizations or startups.
What is Private Equity (PE)?
Private equity (PE) refers to a form of financing where funds and investors directly invest in private companies, or engage in buyouts of public companies, resulting in the delisting of public equity. This investment method is typically utilized by PE firms that pool money from high-net-worth individuals, pension funds, and institutional investors to acquire equity ownership in companies with high growth potential. Unlike public stocks, private equity investments are not traded on public exchanges and therefore offer less liquidity. The main goal of private equity is to generate strong returns by improving the operational efficiencies, growing the strategic value, and eventually selling the companies for a profit, typically over a period of four to seven years.
Understanding how private equity works is crucial for anyone involved in the financial sector or interested in alternative investment strategies. PE firms leverage their expertise and resources to enhance the performance of their portfolio companies through strategic guidance, management improvements, and optimal capital structuring. This active management approach differentiates private equity from other investment forms like public equity and venture capital. As global markets evolve, private equity continues to play a significant role in shaping industries and driving innovation by empowering companies with the capital and strategic insight they need to succeed. This sector attracts substantial attention from investors seeking to diversify their portfolios and achieve above-market returns.
What is Venture Capital (VC)?
Venture Capital (VC) is a pivotal form of financing that focuses on investing in early-stage, high-potential startups and small businesses that are poised for exponential growth and innovation. Unlike traditional bank loans, venture capital investments provide the necessary funding without requiring immediate repayment, making it a vital resource for entrepreneurs who lack the assets for collateral or who are operating at a net loss. Venture capitalists are typically wealthy investors, investment banks, and other financial institutions that offer not only capital but also strategic advice, industry connections, and operational guidance. This financial infusion is crucial for startups needing to scale operations, develop products, and expand their market reach rapidly.
The role of venture capital is indispensable in the tech industry and other sectors driven by innovation and rapid technological advancements. By taking an equity stake in promising companies, venture capitalists share the risks and rewards of their investments. The objective is to drive these companies towards substantial growth and a profitable exit, usually through an IPO or a sale to a larger corporation. This investment approach benefits the entire economy by supporting the commercialization of innovation, creating jobs, and promoting healthy competition in various industries. As such, venture capital is not just a funding mechanism but a cornerstone of entrepreneurial ecosystems, catalyzing significant advancements and economic growth.
Stages of Funding Journey: When Do PE and VC Enter?
Funding Stage
Investors
Pre seed & Seed
Self, family and friends
Micro & Early VC’s
Series A & Series B
Accelerators
Angel Investors
VC’s
Series C & beyond and Mezzanine
PE Firms
Hedge funds
Banks
IPO
Anchor Investors
Retail and Institutional Investors
The world of startup funding can be intricate, with different types of investors coming in at specific stages. Understanding when PE and VC enter the journey is crucial for entrepreneurs seeking the right kind of support at the right time.
Pre-Seed & Seed Stage: At this early stage, founders rely heavily on personal savings, friends & family, and angel investors. PE and VC rarely participate due to the high risk and uncertain potential.
Series A and B: This is where PE and VC start to show interest. Series A companies have validated concepts and initial traction, making them attractive for VCs seeking high-growth potential. PE might enter Series B, but typically focuses on established businesses with proven revenue and profitability.
Series C and Beyond: As the startup matures and scales, PE becomes more relevant. Series C and later rounds attract PE firms seeking larger investment opportunities with lower risk and a clearer path to exit (acquisition or IPO). VC might still participate, but with a smaller stake, focusing on companies with exceptional growth potential.
Mezzanine and IPO: Mezzanine financing bridges the gap between debt and equity, often used for acquisitions or pre-IPO growth. PE firms are well-suited for this stage, providing flexible capital without full control. After a successful IPO, PE firms typically exit their investments, while VC might remain involved if the company’s growth story continues.
In short, PE and VC enter at different stages based on risk tolerance and investment goals. Generally, VC’s take on higher risk for potentially high returns in early stage startups whereas PE focuses on more mature companies with lower risk and established track records. Both type of investors play crucial roles in different stages of a startup journey.
Core differences between Private Equity and Venture Capital
Private equity and venture capital, though similar, cater to different stages. Private equity targets established, profitable companies, aiming to optimize operations and drive growth. They often take controlling stakes. Venture capital, on the other hand, fuels high-risk, high-reward startups with innovative ideas. They invest smaller amounts, seeking explosive growth potential. Here are detailed differences between the two.
Aspect
Private Equity
Venture Capital
Investment Stage
PE firms prefer well-established, lucrative businesses with a track record of success. They are searching for businesses prepared for the next phase, which may involve mergers or expansion.
Venture capital organizations make investments in young, rapidly expanding businesses with creative concepts that are frequently just starting off. They’re betting on future success.
Investment Size
High stakes for high rollers. PE agreements entail large sums of money, frequently in the hundreds of millions to billions of dollars, to acquire substantial shares in businesses.
Less money put on lofty goals. To provide early-stage finance and support fledgling companies, venture capital (VC) deals are usually smaller, ranging from tens of millions of dollars.
Ownership & Control
PE firms frequently buy out the majority of businesses, granting them extensive control over operations and decision-making.
VC firms often accept minority investments, providing direction and assistance without becoming overly involved.
Investment Horizon
PE firms normally keep their assets for three to five years, giving businesses time to grow and reach their full potential before making an exit.
Taking a more patient approach, venture capital firms maintain their investments for seven to ten years or longer in order to support their companies and benefit from their expansion.
Exit Strategy
Aiming for a sizable return on their initial investment, PE firms usually exit their holdings through IPOs or acquisitions by larger businesses.
VC firms hope to hit “home runs” through strategic acquisitions by larger companies or initial public offerings (IPOs) that result in exponential returns.
Industry Focus
PE firms search out well-established businesses with solid fundamentals and make investments across a range of industries.
Venture capital businesses frequently concentrate on niche markets with strong development prospects, such as clean energy, healthcare, and technology.
Risk Profile
Compared to venture capital (VC), PE firms invest in well-established businesses with track records, which entails less risk but possibly lower profits.
Venture capital firms make investments in start-up businesses with uncertain histories, which represent a high failure risk in addition to the possibility of huge gains.
Expected Returns
PE firms seek to create value and enhance operations in order to provide consistent, dependable returns over a predictable period of time.
VC firms look for opportunities with strong growth potential and are willing to take on more risk in the hopes of earning exponential returns.
Management Involvement
PE firms frequently take an active role in the administration of the businesses in their portfolio, offering operational know-how and strategic direction.
VC firms usually adopt a more detached strategy, supporting and advising entrepreneurs strategically while letting them take the lead.
Type of Financing
PE firms acquire and develop businesses using a variety of financing formats, such as growth capital and leveraged buyouts (LBOs).
In the early stages of a company, venture capital firms mainly invest in equity capital and offer further investment as the company expands.
Investment Source
Institutional investors such as endowments, insurance companies, and pension funds provide funding to private equity businesses.
Venture capital firms receive funding from a diverse array of sources, such as private investors, family offices, and corporate venture capital divisions.
Regulation
Less regulated than VC because it makes investments in well-established businesses with lower levels of inherent risk. They may still have to comply with industry-specific rules and operate inside legal frameworks, though.
Is subject to stricter rules because of the greater risk involved in investing in early-stage enterprises. Stricter disclosure standards and investor protection laws must be followed by them.
Impact
Aims primarily for financial gains through increasing the value of the firm and leaving through acquisitions or initial public offerings. Their effects on society are frequently indirect because they result from the target companies’ development of jobs and economic activity.
Prioritizes both financial gains and long-term societal benefit. They put money into businesses that have the ability to turn around industries, address issues, and bring about constructive change. Their influence can be observed in fields such as social innovation, environmental sustainability, and healthcare improvements.
Conclusion
In short, PE focuses on well-established companies with track records of success, much like an experienced investor. They make significant investments, seize power, and use expansion or buyouts to take them to the next level. Consider predictability, stability, and reduced risk.
However, Venture capital (VC) acts as a startup’s cheerleader, investing in promising young companies with innovative concepts. They make early investments, provide guidance, and anticipate rapid expansion. Consider creativity, great risk, and possibly enormous returns.
Frequently asked questions (FAQ’s) about PE and VC
What’s the difference between Private Equity (PE) and Venture Capital (VC)? Private equity (PE) firms invest in established, profitable businesses to fuel further growth and optimize operations. Venture capital (VC) firms, on the other hand, back young, innovative startups with high-growth potential.
How much money do they invest? PE deals are typically larger (in the hundreds of millions or even billions) in exchange for significant ownership stakes (buyout funds). In contrast, VC deals are smaller (tens of millions) for minority stakes in the companies they support.
Who controls the company? Private Equity firms often take majority control of the companies they invest in, actively guiding strategic direction. Venture Capital firms usually have a less involved approach, offering guidance and mentorship while allowing founders to maintain control.
How long do they hold their investments? Private Equity firms typically hold their investments for 3-5 years, focusing on operational improvements and driving near-term growth. Venture Capital investments have a longer horizon, typically lasting 7-10 years or even longer, as they support the long-term vision of the startup.
How do Private Equity and Venture Capital exit their investments(cash out)? Private Equity(PE) firms often exit their investments through IPOs (Initial Public Offerings), where the company goes public on a stock exchange, or through acquisitions by larger companies. Venture Capital(VC) firms typically look for acquisitions by established players in the industry or high-return IPOs that deliver substantial returns on their investments.
What industries do they focus on? Private Equity firms invest across a wide range of industries, seeking undervalued or underperforming companies with turnaround potential. Venture Capital firms are often more sector-specific, focusing on industries with high growth potential, such as technology, healthcare, and clean energy.
Which is riskier, Private Equity or Venture Capital? VC investments are generally considered riskier due to the early-stage nature of the startups they back. However, they also offer the potential for much higher returns if the startup becomes successful. PE investments in established companies are generally considered less risky, offering more consistent and predictable returns.
How involved are Private Equity and Venture Capital in management? PE firms often take a more hands-on approach, actively working with management to implement improvements and drive growth. VC firms typically take a more passive approach, providing guidance and mentorship to founders while allowing them to steer the strategic direction of the company.
Who are the investors of Private Equity and Venture Capital? Private Equity firms typically raise funds from institutional investors such as endowments and pension funds. Venture Capital firms receive funding from a wider range of sources, including private investors, family offices, and even large corporations looking to invest in innovation.
In the ever-evolving world of gaming, innovation and imagination often take the centre stage. Intellectual Property Rights are a crucial foundation in the gaming industry as they safeguard everything we cherish, from our beloved characters to the groundbreaking technologies that fuel immersive adventures. Let us learn about types of intellectual property rights in gaming industry.
Types of Intellectual Properties in Gaming Industry
1) Trademark
Safeguarding brand elements like names, logos, slogans, taglines, sound marks, cartoon images etc. that differentiate one vendor’s products or services from another’s. Trademarks registration is optional but advisable, and once granted will be valid for 10 years, renewable every decade. A recognizable phrase, word, symbol, or emblem that designates a particular product and legally sets it apart from all other items of its sort is referred to as a trademark. A trademark acknowledges the firm’s ownership of the brand and uniquely identifies a product as being owned by that company. Trademarks may or may not be registered and are often regarded as a type of intellectual property. Any term, phrase, symbol, design, or combination of these that uniquely distinguishes your products or services can be used as a trademark. It’s how consumers identify you in the market and set you apart from your rivals. Both service marks and trademarks may be referred to by the same term. A service mark is used for services, whereas a trademark is used for commodities.
Key IP
Names, word-marks,
Logos, symbols,
Tag-lines,
Cartoon/ caricature image,
Short sound marks
Example
XBOX Logo
2) Copyright
Copyright is an inherent right for original works, like literary, artistic, dramatic, musical, cinematographic, architectural works and software codes. Creator owns the copyright 60 years from creation before the work becomes public. The legal word “copyright,” often known as “author’s right,” refers to the ownership rights that authors and artists have over their creative works. Books, music, paintings, sculptures, films, computer programmes, databases, ads, maps, and technical drawings are among the works that fall under the purview of copyright protection. For a specific amount of time, copyright law grants the producers of creative content the only authority to use and replicate their creations. The copyrighted material enters public domain when the copyright expires.
Key IP
Software code,
Cartoon caricature,
Storyline,
Music and sound effects,
Conceptual art and design,
Maps and buildings,
Choreography
Gaming rules and manual
Example
3) Patent
Protection for an original invention, typically granted for 20 years, and covers utility, plant/industrial, or design patents. An innovation is entitled to a patent, which is an exclusive privilege. Put another way, a patent is the exclusive right to a good or service that, in most cases, offers a novel approach to a problem or a fresh technical solution. Technical details of the invention must be made public in a patent application in order to get one. On mutually agreeable terms, the patent owner may provide permission or a license to third parties to exploit the innovation. The patent owner may potentially transfer ownership of the innovation to a third party by selling them the right to use it. An innovation becomes public domain—that is, anybody can use it for commercial purposes without violating the patent—when a patent expires, ending its protection. In return for a thorough disclosure of the innovation, a patent grants the creator the exclusive right to use the patented design, technique, or invention for a certain amount of time. They represent a type of intangible right. Usually, government organizations examine and authorize patent applications.
Key IP
Gaming console, joystick or other hardware device, and
Drastically unique or different technology
User interfaces
4) Design
Protection for the aesthetic appearance of products/articles, including shape, configuration, pattern, ornament, or composition of lines/colours. Intellectual property in design is the result of human creativity. This covers names and pictures that may be used in business, as well as designs, emblems, innovations, and creative and literary works. The legal protection of intellectual property is provided by copyright, patents, and trademarks. These enable individuals to profit monetarily or gain notoriety for the goods they produce. The system fosters an atmosphere where creativity and innovation may flourish by striking the right balance between the interests of inventors and the larger public good. For creative workers, intellectual property is a crucial subject. In legal terms, an article’s decorative or artistic elements are referred to as its industrial design. Two-dimensional elements like lines or patterns may be present, or there may be three-dimensional elements like the contour of an object. A registered or patent-holding owner of an industrial design has the legal authority to prevent other parties from manufacturing, importing, or selling products that imitate their design. A wide range of handicrafts and industrial products are included in industrial designs. They consist of textiles, jewellery, electronics, home items, and containers. These designs may also apply to logos, visual symbols, and graphical user interfaces. To be protected by industrial design laws, the majority of countries mandate that all industrial designs be registered. Some nations’ laws grant unregistered industrial designs—a term used to describe designs that are not registered—limited protection. Certain industrial designs, like works of art, could also be protected by copyright laws. One of the key elements that draws customers to a product and convinces them to choose it over another is its design. An unique, novel, and unobtrusive decorative design for a manufactured item is protected by a design patent. Just the look is protected by the patent; the structural or functional aspects are not. For instance, the outside style of an athletic sneaker or bicycle helmet may be protected. There will be no intermediate maintenance costs, and the design patent will remain enforceable for 14 years after it was first awarded. When it comes to intellectual and copyright property, designers face several challenges. It is more difficult for artists to maintain ownership control when a single idea is presented in a variety of forms and media.
Key IP
Graphic characters,
Gaming cover and
Graphic interface
5) Trade Secret
Trade secrets are confidential, commercially valuable information known to a limited group and protected by the rightful owner through reasonable measures, typically including confidentiality agreements. Economically valuable knowledge that is not widely known, has value for those who cannot lawfully access it, and has been the subject of reasonable attempts to keep secret is referred to as a trade secret. Trade secrets are crucial for gaining financial advantage, strategic positioning, and commercial competitiveness. One can recognize trade secrets and learn how to properly secure them with the aid of this toolbox. One kind of IP is a trade secret. A trade secret is only real for the duration that it is kept secret. Not only is it crucial to keep trade secrets secret from a business perspective, but owners of trade secrets are legally required to take specific actions in order to preserve their rights. Misappropriation happens when someone discloses, obtains, or uses a trade secret after knowing or having reasonable suspicion that it was obtained illegally. Courts have shed light on what constitutes “improper” behaviour via trade secret lawsuits, even if the law doesn’t define it.
Key IP
Algorithms and
Customer lists
What can be protected under copyright protection in Gaming Industry?
The game is qualified for copyright protection, but each component of the game is also protected. This covers the game’s storyline, sound effects, music, graphic designs, characters, and more. A video game is more than just its gameplay; it’s also about its contents and other elements that make it whole and satisfying. Not just the programme itself is deserving of praise; every character, screenplay, game code, piece of music, sound recording, and graphic design has a right to protection under different copyright laws. In the US, video games and other types of media have comparable copyright protection periods. Video games are awarded a copyright that lasts for 95 years from the date of publishing or 120 years from the date of invention, whichever comes first, because the majority of them are made by companies.
What provisions are there for Patent Law in the Gaming Industry?
Patents for video games can cover a broad variety of novel features. Whether they have to do with the game engines, software, or hardware. techniques for application communication, game interfaces, or even gameplay techniques. Novel technological developments such as new methods of avatar transmission or the addition of additional hardware components to controllers can be protected by these patents. Moreover, patents can be acquired for advancements made to current technology. A video game’s components that can entail patents are as follows:
Used algorithms
Editing functions, menu organization, and display representation functions of control characteristics of the user interface,
Data processing, formulas, program languages, compilation processes, translation procedures, and utilities.
The main concern regarding the patentability of video games is the possibility that software may be patented. A software patent is characterized as a patent awarded for computer functions performed by computer programs. The capacity to patent software is now the subject of a contentious discussion, with some advocating for no protection at all and others suggesting protection only under very specific guidelines. The European Patent Convention (EPC) expressly excludes computer programmes from eligibility for patents in Europe. By upholding a regulation that specifies software cannot be patented unless it can establish an extra technical impact beyond the inherent technological interactions between the hardware and the software , the European Patent Office (EPO) sustains this exclusion. Developing video games frequently results in the development of patentable technology that isn’t limited to a single game. Many gaming firms use the same, or nearly the same, technologies in their various titles. Alternatively, they create game-specific technology that form the basis of a whole line of goods. One example of this would be the creation of a first-person shooter game engine platform. a communications platform for interactive mobile games, or a graphical user interface platform for racing games. by locating these crucial innovations and securing patent protection for them. Businesses can obtain a considerable competitive edge. To be eligible for patent protection, it is crucial to remember that. The programme needs to fulfil specific criteria, such being brand-new. Not immediately apparent. Practical. and signed up.
What are the Trademark Law for Video Games?
Securing ownership over these marks owned by developers and producers themselves is the first step in ensuring trademark protection for video games. These people or businesses have legally registered names and logos (words, pictures, and sounds) that serve as their unique identifiers in this industry area. Interestingly, these distinct markers are repeated throughout a game’s graphical user interface and are prominently displayed through splash screens at the game’s opening. In a similar vein, they decorate digital package materials, boxed editions, and online adverts in a manner appropriate for them. In addition to adding unique identifiers associated with a certain video game, unaffiliated parties (such as the game’s developers or producers) may be able to obtain trademarks through creative techniques that meet their specific needs.
What are the Trade Secret Law for Gaming Industry?
Trade secrets are a key component of intellectual property rights (IPR), which are extremely important in the gaming business. Confidential information such as formulae, procedures, methods, or strategies that provide organizations a competitive edge are considered trade secrets. inside the video game business. Character creation, gaming mechanics, game design, algorithms, and other aspects are all considered trade secrets. Trade Secret Example Axel Gembe was accused in 2004 of breaking into the network of Valve Corporation, stealing the computer game Half-Life 2, releasing it online, and creating damages that Valve estimated to be worth more than $250 million. Companies in the gaming business use a number of precautions to safeguard trade secrets, such as: Developers often ask partners, contractors, and staff to sign confidentiality agreements in order to protect private data and stop abuse or unauthorized disclosure. Businesses also use restricted access strategies to safeguard trade secrets. limiting access to just authorised workers who have a real need to know this kind of information. These security precautions guarantee that private information is protected and that unauthorized parties cannot access it or compromise its privacy. To safeguard priceless trade secrets against online attacks and unwanted access. Businesses use both digital and physical security measures. These precautions include of monitoring systems, access controls, secure servers, and encryption. by putting these precautions into place. Businesses can successfully stop unauthorised people from getting their hands on private information. Companies may also ask partners, publishers, distributors, and other third parties to sign Non-Disclosure Agreements (NDAs) in addition to these security precautions. These NDAs work as a formal agreement that guarantees the privacy of disclosed private information. Companies are being proactive in protecting any unauthorized exposure or use of their valuable information by forcing third parties to sign non-disclosure agreements (NDAs).
Conclusion – The Intricate Web of Intellectual Property in Gaming
The world of gaming thrives on creativity and innovation, constantly pushing boundaries and forging unique experiences. But behind the dazzling visuals and immersive storylines lies a complex web of intellectual property (IP) rights. From iconic characters and innovative mechanics to intricate game designs and proprietary software, IP safeguards the very essence of what makes a game unique.
Copyright stands as the cornerstone of game protection, shielding the creative expression of its creators. It covers the game’s code, artwork, music, and storyline, preventing unauthorized copying or distribution. Trademarks like logos, character names, and slogans become instantly recognizable symbols, differentiating brands and protecting consumer trust.
Patents, though less common, play a crucial role in safeguarding novel game mechanics, hardware innovations, and even specific algorithms. They incentivize research and development, fostering advancements in gaming technology and experiences.
Design protection shields the visual identity of games, encompassing everything from character appearance to user interfaces. This ensures the distinct look and feel of a game remains unique, preventing copycats from capitalizing on another’s creative vision.
Trade secrets, on the other hand, cloak vital technical know-how and confidential business information. This could include proprietary game engines, development tools, or even specific algorithms or formulas that drive in-game economies. Protecting these secrets maintains a competitive edge and safeguards the financial viability of studios.
However, the intricate tapestry of IP in gaming isn’t without its challenges. Balancing protection with the freedom to innovate remains a constant concern. Fair use doctrines and limitations on copyright pose questions about permissible inspiration and derivative works. Patent thickets, where numerous overlapping patents stifle competition, can hinder progress. Furthermore, enforcing IP rights across international borders becomes complex due to varying legal frameworks and enforcement capabilities. Piracy and unauthorized distribution continue to plague the industry, demanding collaborative efforts to combat them. Despite these challenges, a robust IP framework remains essential for the gaming industry’s continued growth and vibrancy. It incentivizes creativity, fosters innovation, and protects the investments made in building captivating worlds and experiences. Through ongoing dialogue and collaborative efforts, stakeholders can ensure that IP rights support, rather than hinder, the future of gaming, allowing it to continue delivering immersive experiences that capture the imagination of players worldwide.
FAQs on Intellectual Property Rights in Gaming:
Trademark: Can I trademark my in-game username or clan name?
Yes, potentially! If your username or clan name is unique, distinctive, and used in commerce (e.g., merchandise), you can file for trademark protection. However, be aware of existing trademarks and restrictions by game platforms.
Copyright: Do I own the copyright to my gameplay recordings or screenshots?
Generally, yes, you own the copyright to your creations, including gameplay recordings and screenshots. However, game terms of service might limit use, and copyrighted content within the game (e.g., music) remains protected by its owner.
Design: Can I patent the look and feel of my in-game character or item?
For design patents, it depends on originality and functionality. Simple character designs might not qualify, but unique and non-obvious elements could. Consult an expert for specific advice.
Trade Secret: Can I keep my game’s mechanics or algorithms secret?
Yes, trade secrets can protect confidential information like game mechanics or algorithms. However, maintaining secrecy is crucial, and reverse engineering might expose them. Carefully assess what truly needs trade secret protection.
Copyright: Can I use copyrighted music or characters in my game?
No, not without permission. Using copyrighted material without licenses or fair use exceptions constitutes infringement. Obtain licensing rights or use royalty-free alternatives.
Copyright: What about using assets from the game engine or community-created mods?
Respect licensing terms! Game engine assets usually come with usage restrictions. Community-created mods might have individual copyright ownership, so check and credit accordingly.
Trademark: Can I use another game’s name or logo in my own game?
Trademarks protect brand identity. Using another game’s name or logo without permission, even for criticism, could be infringement. Consider alternatives or seek proper licensing.
Copyright: Can I stream or monetize gameplay walkthroughs of copyrighted games?
Fair use might allow some transformative content like commentary or reviews. However, extensive gameplay footage without significant addition might infringe. Check game terms and fair use guidelines.
Copyright: Can I create and sell fan art or merchandise based on game characters or logos?
Copyright law applies. Using copyrighted characters or logos for commercial gain without permission is usually infringement. Consider fair use for limited, transformative works or seek licensing from the rights holder.
Patent: Can I patent a new game mechanic or concept?
Game mechanics are often abstract ideas, which are generally not patentable. However, specific technical implementations or unique devices involved in the game might be patentable. Consult an expert for specific advice.
**Images shown are for representation purposes only and all rights belong to respective owners.
In the bustling corporate landscape of India, companies thrive on the dedication and expertise of their employees. However, with great power comes great responsibility, and the actions, or sometimes, even the lack thereof, of an employee can have significant legal ramifications for the company itself. This post aims at explaining the legal implications a company can face on behalf of its employees, and summarizing the legal concepts underlying the same.
Vicarious Liability: Carrying the Weight of Another’s Wrongdoing
The concept of vicarious liability, or imputed liability, forms the bedrock of understanding a company’s accountability for employee conduct. Stemming from the Latin phrase “Respondeat Superior” which translates to “let the master answer” this principle holds an employer liable for the torts (civil wrongs) committed by their employees while acting within the scope of their employment. The basis of holding a company vicariously liable for the actions or inactions of its employees is that employers are in a position to limit and/or curtail such actions or inactions. However, it often becomes practically difficult to determine situations where an employee acted within the scope of their employment.
Scope of Employment: Defining the Line between Work and Personal
Determining whether an employee’s actions fall within the scope of employment is crucial in establishing vicarious liability of the employer. Generally, acts undertaken:
During work hours,
At the place of work,
While performing duties assigned by the employer/company, or
While furthering the employer/company’s interest, are considered to be within the scope of an employee’s employment.
However, exceptions exist for the following:
Frolic and Detour: Acts of an employee that are motivated by personal agendas, and completely deviating from the duties and responsibilities of the employee, as determined by the company, fall outside the scope of his/her employment.
Intentional Torts: Malicious and intended acts of an employee that exceed the boundaries of reasonable conduct expected from them are deemed outside the scope of their employment,
Beyond Civil Wrongs: The Shadow of Criminal Liability
In certain situations, a company can also face criminal liability for the actions of its employees. The Indian Penal Code, 1860, outlines specific offenses where a company can be held accountable for offenses committed by employees. These include situations where:
The offense was committed by the employee for the company’s direct or indirect benefit.
The offense was committed by the employee with the knowledge or consent of the company’s management.
The offense committed by the employee was facilitated by a lack of proper due diligence or oversight by the company.
Proactive Measures: Shielding the Company from the Storm
While the law holds companies accountable for employee conduct, proactive measures can mitigate the risk of legal and financial repercussions. These include:
Robust Employee Training: Regularly training employees on company policies, ethical conduct, and legal compliance can minimize the chances of misconduct.
Clear Codes of Conduct: Establishing and disseminating clear codes of conduct outlining acceptable and unacceptable behavior provides a framework for employee actions.
Effective Supervision: Implementing proper supervision and monitoring systems can help identify and address potential issues before they escalate.
Adequate Insurance Coverage: Investing in comprehensive liability insurance can provide financial protection against legal claims arising from employee actions.
Navigating the Legal Labyrinth: Seeking Expert Guidance
The legal landscape surrounding company liability for employee actions can be complex and nuanced. It is crucial for companies to seek the guidance of experienced legal counsel to deal with such scenarios as well as while framing its internal policies to minimize the risk of attracting such liability. Indian courts have, from time to time, set out certain guardrails and principles to address the issue of employers’ liabilities for their employees, which form the basis of the concept of vicarious liability in India.
Landmark Judgments
State of Rajasthan v. Mst. Vidhyawati & Anr. (1962): The Hon’ble Supreme Court held that the State of Rajasthan was vicariously liable for the tortious act of its employee who carried out such act during the course of his employment, despite the State not directly authorizing or condoning the act so carried out by the employee. It was also held that the liability of the State in such matters would be the same as any other employer, and that the State would not enjoy any immunity in matters of vicarious liability.
State Bank of India v. Shyama Devi (1978): The respondent gave some cash and a cheque to her husband’s friend, who was an employee of the appellant bank, for depositing the same in her account. No receipt or voucher was obtained indicating the said deposit. The employee, instead of making the deposits in the respondent’s account, got the cheque cashed and misappropriated the amounts. To cover up his act, the employee made false entries in the respondent’s passbook. The Hon’ble Supreme Court held that the employee had acted outside the scope of his employment and without the directions, orders or knowledge of the bank. Hence, the appellant bank was not held liable for the fraud committed by its employee in this matter.
State of Maharashtra & Ors. v. Kanchanmala Vijaysingh Shirke & Ors. (1995): In this matter, Vijaysingh died in an accident when a jeep, which belonged to the State, dashed against his scooter. The 3rd appellant was the driver of the jeep but at the time of the accident, the 4th respondent, who was then a clerk in a separate department of the State Government, was driving the jeep. The State contended that since the act was not authorized by it, the State could be held vicariously liable. The Bombay High Court affirmed this stance and penalized only the 4th respondent. The Hon’ble Supreme Court, while overruling the High Court’s decision, held that the accident took place when the act authorised by the State was being performed in a mode which may not be proper but nonetheless it was directly connected with ‘the course of employment’ and it was not an independent act for a purpose or business which had no nexus or connection with the business of the State so as to absolve the appellant-State from the liability. Further, it was held that in its capacity as an employer, the State has to shoulder the responsibility on a wider basis and will be responsible to third parties for acts which it has expressly or implicitly forbidden its servant (the driver) to do.
Anita Bhandari v. Union of India (2002): In this matter, the husband of the petitioner went to a bank and happened to enter at the same time as the cash box of the bank was being carried inside the bank. The security guard thought of him as an attacker and shot him, causing his death. The petitioner claimed that the bank was vicariously liable because the security guard had done such an act in the course of his employment. Despite the bank’s defense that it had not authorized the security guard to shoot, the Gujarat High Court opined that the act of giving the guard a gun amounted to authorizing him to shoot when he deemed it necessary.
M Anumohan v. State of Tamil Nadu & Ors. (2016): The State was held liable for the acts of a police officer who falsely implicated certain individuals under the NDPS Act, 1985, and attempted to blackmail victims and extort money from them. The Court emphasized that acts directly connected with authorized acts that can be carried out by a police officer would be within the course of employment and held that the act of filing a false complaint is directly connected to an authorized act by the State and hence, vicarious liability for such matters can be attached to the State.
Examples
Here are some examples to illustrate where the line is drawn in cases pertaining to vicarious liability of a company/employer:
Company Liable: a) Delivery driver causing an accident while on a delivery route – The driver is acting within the scope of employment, fulfilling company duties and hence, the company is vicariously liable for the driver’s act. b) Security guard assaulting a customer in the company parking lot – This act, though wrong, falls within the guard’s responsibility to maintain safety on company premises, and therefore, the company would be held vicariously liable.
Company not Liable: a) Employee getting into a car accident after work hours while driving their own car – The act is purely personal and outside the scope of the employee’s employment. Hence, the company will not be liable here. b) Salesperson making offensive jokes to a client at a bar after work – Though inappropriate, the act doesn’t involve company time, resources, or duties, and the company will not be held liable.
Understanding and managing the potential liabilities arising from employee conduct is an essential aspect of responsible corporate governance in India. By implementing proactive measures and fostering a culture of ethical conduct, companies can create a safe and compliant work environment while minimizing the risk of legal entanglements. Remember, an ounce of prevention is worth a pound of cure. By prioritizing employee training, clear policies, and effective supervision, companies can not only safeguard their legal standing but also foster a more ethical and productive work environment for all.
Conclusion
The concept of company liability for employee actions in India is a complex and evolving landscape. Rooted in principles of vicarious liability, the extent of an employer’s responsibility rests on a delicate balance that takes into account factors like the nature of the employee’s wrongful act, the scope of their employment, and the connection between the action and the employer’s enterprise.
The cases and legal principles discussed in this analysis highlight the nuances involved. Employers carry a substantial burden to ensure that their workplaces are safe, free from discrimination, and operate within a framework of ethical conduct. Understanding the legal nuances of employer liability in India is not only a matter of compliance but a fundamental aspect of responsible business operation and risk management.
Robust Policies and Procedures: Implement clear and comprehensive policies addressing workplace harassment, discrimination, data protection, and other areas of potential risk. These policies should clearly define acceptable and unacceptable behaviours, provide mechanisms for grievance redressal, and outline the company’s commitment to upholding ethical behaviour.
Thorough Training and Education: Conduct regular training programs to educate employees on their responsibilities under company policies, as well as relevant labour and anti-discrimination laws. Training should not only convey rules but also help employees understand the principles behind them and the real-world impact of their actions.
Effective Reporting and Investigation Mechanisms: Establish channels for employees to report concerns or suspected violations without fear of retaliation. Investigate all allegations promptly and thoroughly, taking corrective action where necessary.
Due Diligence in Hiring: Conduct thorough background checks for potential hires, especially for sensitive positions. Consider not only technical skills but also integrity, past conduct, and suitability for the company culture.
Proactive Risk Management: Identify potential areas of risk within the company’s operations and implement measures to mitigate those risks. This includes potential risks related to employee interactions with clients, handling sensitive data, and the use of company resources.
Insurance Coverage: Explore relevant insurance products to cover potential liabilities arising from employee actions.
FAQs on the Burden of the Employer: A Look at Company Liabilities for Employee Action in India
What is the concept of vicarious liability and how does it apply to companies in India? Vicarious liability holds employers responsible for the torts (civil wrongs) committed by their employees while acting within the scope of their employment. This means the company can be sued for the employee’s actions, even if the company didn’t directly authorize them.
What factors determine whether an employee’s action falls within the scope of their employment? Generally, actions undertaken during work hours, at the workplace, while performing assigned duties, or furthering the company’s interests are considered within the scope of employment. However, exceptions exist for personal errands, intentional torts exceeding expected conduct, and actions outside working hours.
Can companies ever be criminally liable for employee actions in India? Yes, under certain circumstances. The Indian Penal Code outlines specific offenses where companies can be held accountable for employee actions, such as when the act benefits the company directly or indirectly, is committed with the management’s knowledge or consent, or results from a lack of proper oversight by the company.
What proactive measures can companies take to minimize the risk of legal repercussions from employee actions?
Implement robust employee training on company policies, ethics, and legal compliance.
Establish and disseminate clear codes of conduct outlining acceptable and unacceptable behaviour.
Implement effective supervision and monitoring systems to identify and address potential issues.
Invest in comprehensive liability insurance to provide financial protection against legal claims.
What are some landmark judgments in India that have shaped the understanding of vicarious liability?
State of Rajasthan v. Mst. Vidhyawati & Anr. (1962): Established the principle of vicarious liability for employers even without directly authorizing the employee’s act.
State Bank of India v. Shyama Devi (1978): Highlighted that acting outside the scope of employment, without the company’s knowledge, exempts the company from liability.
State of Maharashtra & Ors. v. Kanchanmala Vijaysingh Shirke & Ors. (1995): Clarified that unauthorized acts directly connected to authorized duties can still attract liability.
Can you provide some examples to illustrate theconcept of vicarious liability in action?
Company Liable: A delivery driver causing an accident while on duty, or a security guard assaulting a customer at work.
Company Not Liable: An employee’s car accident after work or a salesperson making offensive jokes to a client outside work hours.
What are the key takeaways for companies regarding employee conduct and associated liabilities? Understanding and managing potential liabilities is crucial for responsible corporate governance. Companies can minimize risks by prioritizing employee training, clear policies, and effective supervision, fostering a culture of ethical conduct, and adhering to relevant legal guidelines.
An officer-in-default is a person associated with a company who is held liable for any penalty or punishment in case of default committed by the company under the Companies Act, 2013.
Who is qualified as an officer in default? Section 2(60) of the Companies Act 2013 makes provision for identifying specific persons who may be held liable in case of a default by the company:
Based on an article published in Economic Times (ET Article Link – https://lnkd.in/dVUdVza8), MNCs might be facing a retro tax demand of INR 11,000 Cr following a Supreme Court ruling on the interpretation of the MFN clause included in various Indian tax treaties.
So, what is the MFN clause, and how does the Supreme Court ruling impact existing arrangements entered into between group companies of MNCs?
The MFN clause allows for a reduction in the TDS rates on dividends, interest, royalties, or fees for technical services (FTS), as applicable. Also, it can limit the scope of royalty/FTS (for example, make available) in the treaty entered with the First Country. These adjustments only come into play if, at a later date, such concessions are extended by India to another OECD member (Third Country).
Example
1986 DTAA notified between India and Canada (First Country) which contained the MFN provision.
1988 DTAA entered between India and Sweden (OECD member) which contained more favourable benefits than what was given to Canada.
1992 CBDT amended the DTAA with Canada (First Country) under section 90 to extend beneficial provisions present in the India-Sweden DTAA (Third Country).
What was happening?
The bilateral treaties between India and the Netherlands, France, and Switzerland contained the MFN clause.
Entities based in the Netherlands, France, and Switzerland automatically claimed the beneficial provisions present in subsequent tax treaties signed by India with Third Countries, based on the MFN clause in their respective DTAAs with India.
Certain Third Counties were not an OECD member at the time of signing the DTAA with India and became OECD members later.
Example
DTAA entered between India and Slovenia contained lower tax rate of 5% on Dividend.
India-Slovenia DTAA came into force on Feb 17, 2005.
Slovenia became an OECD member on July 21, 2010. Entities from the First Country with whom India had entered into DTAA before Slovenia (Third Country) claimed beneficial provisions present in the India-Slovenia DTAA under the MFN clause automatically without CBDT notification.
Supreme Court Ruling –
Issues raised
Whether there is any right to invoke the MFN clause when the Third Country with which India has entered into a DTAA was not an OECD member at the time of entering into such DTAA?
Whether the MFN clause is to be given effect to automatically or if it is to only come into effect after a notification is Issued.
Held
Notification under Section 90(1) is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law.
Third Country should be a member of OECD at the time of entering into DTAA with India, for the earlier treaty beneficiary (First Country) to claim parity.
MFN clause present in a tax treaty does not automatically lead to the benefit present in DTAA entered with a Third Country being extended automatically to the First Country. The terms of the earlier DTAA entered with the First Country are required to be amended through a separate notification under Section 90.
Treelife comments:
Going forward, entities from First Country should claim beneficial provisions present in DTAA entered between India and the Third Country under the MFN clause if: 1. Third Country is OECD member at the time of entering the DTAA with India 2. CBDT has issued a notification extended the benefits present in DTAA entered with a Third Country to the DTAA entered with the First Country.
As modern finance continues to be influenced by advancements in technology, two terms have emerged to delineate the evolving intersection of technology and financial services: “FinTech” and “TechFin”. While these terms may sound similar, they represent distinct paradigms that are reshaping the way financial services are delivered and consumed, particularly in markets like India: “FinTech”, characterized by innovative startups leveraging technology to disrupt traditional financial services, has gained momentum as a driver of financial inclusion and efficiency. On the other hand, “TechFin” refers to established technology companies integrating financial services into their existing platforms, leveraging vast user bases and data analytics to offer a wide array of financial products.
This article delves into the nuances of FinTech and TechFin, exploring their origins, key players, and implications for the Indian financial ecosystem. By understanding the difference between these two approaches, stakeholders can better navigate the evolving landscape of digital finance and harness its transformative potential for the benefit of India’s diverse population.
What is FinTech?
Fintech, short for financial technology, refers to the convergence of finance and technology, revolutionizing traditional financial services through innovative, technology driven solutions. Fintech thrives at the intersection of two broad domains: finance (including sectors such as banking, payments, non-banking financial companies, security broking, wealth management, insurance, digital lending and regulatory technology) and technology (including providers in sectors such as hardware, software, cloud, platform, blockchain, Artificial Intelligence and Machine Learning, cybersecurity, and data analytics and big data) –
On the finance side, Fintech transforms sectors like banking, payments, digital lending, insurance and wealth management, enhancing efficiency, accessibility and user experience.
On the technology side, advancements like cloud services, blockchain, AI/ML and data analytics power financial innovations, creating smarter, faster and more secure financial services.
By integrating finance and technology, Fintech is revolutionizing how financial services are delivered, making them more efficient, secure and accessible.
Segments of Fintech
Fintechs generally operate in the following sectors: (i) Accounting & Finance; (ii) Business Lending & Finance; (iii) Asset Management; (iv) Core Banking & Infrastructure; (v) Capital Markets; (vi) Financial Services & Automation; (vii) Mobile Wallets & Remittances; (viii) Credit Score & Analytics; (ix) Payments Processing & Networks; (x) General Lending & Marketplaces; (xi) Real Estate & Mortgage; (xii) Payroll & Benefits; (xiii) Personal Finance; (xiv) Retail Investing & Secondary Markets; and (xv) Regulatory & Compliance.
India boasts participants in following segments of Fintech:
BankingTech – aids unbanked/underbanked services that aim to help underprivileged or low-income people who are neglected or underserved by conventional banks or financial services firms (eg: Jupiter Money, RazorpayX, Fi Money);
PayTech – suite of financial technologies that enable seamless, secure and real-time payment solutions (eg: PhonePe, Paytm, Razorpay, BharatPe);
LendingTech – technology-driven platforms and solutions that streamline and enhance the process of borrowing and lending money. Enables faster loan approvals, broader financial access and data-driven risk assessment that provides an efficient alternative to traditional lending methods (eg: Slice, ZestMoney, KredX);
InsureTech – innovative technology to enhance and streamline traditional insurance industry by way of digital platforms for policy comparison, purchase, claims processing, microinsurance and AI-driven risk assessments. Aims to increase accessibility, affordability and efficiency of insurance by leveraging data analytics, AI and digital platforms (eg: Acko, PolicyBazaar, Coverfox, Turtlemint);
WealthTech – technology is used to deliver investment management, financial planning and wealth advisory services. Democratizes access to sophisticated financial products and services, enabling wealth and investment management and future planning for users (eg: Zerodha, Groww, Scripbox, AngelOne);
RegTech – shorthand for regulatory technology, providing a set of tools to help businesses manage regulatory compliance and risk management (eg: Digio, IDfy, HyperVerge, Electronic Payments and Services).
Crypto & Blockchain – digital tokens (such as non-fungible tokens, or NFTs), digital cash, and cryptocurrency (such as Bitcoin, Ethereum, etc.) frequently make use of distributed ledger technology (DLT) called blockchain, which keeps records on a network of computers without the need for a central ledger. Smart contracts, which use code to automatically carry out agreements between parties like buyers and sellers, are another feature of blockchain technology.
Importance of Fintech
Fintech plays a pivotal role in shaping the modern financial landscape, with its significance stemming from several key factors:
Financial Inclusion: FinTech has democratized access to financial services, breaking down traditional barriers and reaching underserved populations. By leveraging innovative technologies like mobile banking and digital wallets, FinTech has made financial services more accessible to people around the world, empowering them with greater control over their finances.
Efficiency and Cost Savings: FinTech solutions streamline processes, automate tasks, and reduce overhead costs for financial institutions. Whether it’s through algorithmic trading, robo-advisors, or blockchain technology, FinTech enhances operational efficiency, driving down costs and improving the bottom line.
Enhanced Customer Experience: FinTech companies prioritize user experience, offering intuitive interfaces, personalized recommendations, and real-time access to financial information. By leveraging data analytics and artificial intelligence, FinTech enhances customer engagement, satisfaction, and loyalty, fostering long-term relationships in an increasingly competitive market.
Innovation and Disruption: FinTech thrives on innovation, constantly pushing the boundaries of traditional finance and challenging incumbents to adapt. From peer-to-peer lending and crowdfunding to cryptocurrencies and decentralized finance (DeFi), FinTech disrupts entrenched industries, catalyzing innovation and fostering a culture of experimentation.
Financial Literacy and Education: FinTech platforms provide educational resources, tools, and insights to help individuals make informed financial decisions. By offering financial literacy courses, budgeting apps, and investment tutorials, FinTech promotes financial literacy and empowers consumers to take control of their financial futures.
Financial Freedom: Peer-to-peer lending platforms connect borrowers with lenders directly, potentially offering lower interest rates and more accessible loans.
Investing Made Easy: Robo-advisors, powered by technology, can create personalized investment plans based on your risk tolerance, making investing more approachable.
Democratization of Finance: Fintech tools and services are often cheaper and easier to use than traditional options, allowing more people to participate in financial activities.
What is TechFin?
The term “Techfin” refers to technology companies operating in the financial sector to provide advanced or innovative technological solutions primarily designed to support the financial industry with cutting-edge offerings that, of course, meet the demands of the business. This explains how it relates to banking and financial commitments. To put it briefly, Techfin describes businesses that introduce financial solutions that are incorporated into internal management systems, utilizing financial resources and offering a consolidated view of data through a single interface.
Alibaba’s (dubbed the “Amazon of China”) founder, Jack Ma, is credited with coining the phrase. Financial goods were integrated into well-known apps by the investor and entrepreneur, who also included the BATs (Baidu, Alibaba, Tencent) to build the first techfin model and enhance activities related to financial products, services, and institutions. These are typically Business 2 Business (B2B) in nature, where they have tech products which can be used by financial institutions for their operations. Some examples of these in India include – Finacle (by Infosys), Mambu, BrokerEdge, InsureCRM and ODIN.
While FinTech firms start with finance and use technology to improve upon these services, TechFin companies start with technology and venture into the financial sector leveraging their tech strengths. One of the main issues that techfins resolves is the process of integrating and updating financial information, which is a major barrier to effective customer service for banks and cooperatives. Tech platforms are said to be able to cut the amount of time that specialists need to spend integrating a file in half with the innovative solutions offered by techfin companies. While initially focused on the distribution side of the financial services industry, techfin is content for banks to manage regulatory compliance obligations.
A sizable contribution of Techfin companies lies in data analytics. Banks, for example, are interested in acquiring access to clients’ financial transaction data, which diversifies their existing customer data and provides a true financial portrait of their customers. Similarly, each technology company has unique consumer information. Social media firms collect information on the social interests and activities of their users, whereas e-commerce companies collect information on client demand, transactions, and payment history. Google has data on nearly every area of customer life, whereas Apple and other telecommunications firms have data on user behavior, location, and activities. TechFin firms are interested in augmenting existing client data with transactional information in order to enhance their main product and provide supplementary financial services.
TechFin’s platform-centric, data-driven business models are independent of the financial services margin. Therefore, banks and financial services firms face bigger obstacles than Fintech. TechFin companies in India include technology giants like Google, Amazon, and Facebook, which have integrated financial services such as digital payments, lending, and insurance into their platforms.
Importance of TechFin
Expanded Access to Financial Services: TechFin platforms leverage their large user bases and advanced technology infrastructure to extend financial services to a wider audience. By integrating financial products seamlessly into their existing platforms, they can reach previously underserved populations, promoting financial inclusion and empowering individuals with access to banking, payments, and investment services.
Seamless Integration: Tech companies you already use, like social media or e-commerce platforms, can offer financial services like payments or budgeting tools within their existing apps.
Enhanced Security: Techfin companies often have robust security measures in place, potentially offering a safe and familiar environment for financial transactions.
Faster Adoption: By leveraging existing user bases of tech giants, techfin can accelerate the adoption of new financial services.
Focus on User Experience: Techfin companies prioritize user-friendly interfaces and intuitive designs, making financial tools more accessible and engaging.
How do FinTech and TechFin contribute to financial inclusion in India?
FinTech companies in India have played a significant role in expanding access to financial services, particularly among underserved populations, by offering digital banking, mobile payments, and micro-lending solutions. Similarly, TechFin companies have leveraged their vast user bases and technology infrastructure to extend financial services to a wider audience, promoting financial inclusion in the country.
How will Fintech and TechFin impact the future of the financial and economy?
All financial products and asset classes, whether utilized by retail clients, small and medium-sized companies (SMEs), or large institutions, will be digitized. The original wave of digitization included traditional products and services, including equities and government bonds, as well as consumer banking products like payments, loans, brokerage services, and vehicle insurance.
The second phase of digitizing consumer banking, SME and commercial banking, financial services, capital market, mortgage market, and fund management will be led by fintech. Mobile applications will facilitate the implementation of digitization projects across all corporate sectors. The future of finance and the economy is likely to be heavily influenced by the continued development and integration of Fintech and TechFin. Here’s a glimpse into some potential impacts:
Increased Financial Inclusion: Fintech and TechFin tools can reach a wider audience compared to traditional financial institutions. Mobile banking apps and peer-to-peer lending platforms can bring financial services to underserved communities, boosting financial inclusion and participation in the economy.
Democratization of Finance: With user-friendly interfaces and potentially lower fees, Fintech and TechFin can empower individuals to take more control of their finances. Robo-advisors can make investing more accessible, while mobile budgeting tools can promote better financial literacy.
Rise of the Cashless Society: As digital payment solutions become more convenient and secure, cash usage may decline. This could lead to a faster and more efficient flow of money within the economy.
Evolving Financial Products and Services: Innovation in Fintech and TechFin will likely lead to the creation of new financial products and services tailored to specific needs. This could include personalized insurance plans, AI-powered financial planning tools, and alternative investment options.
Enhanced Security and Fraud Prevention: TechFin companies often prioritize robust security measures, potentially leading to a decline in financial fraud. Additionally, advancements in data analytics can help identify and prevent suspicious activity.
Conclusion
In a nutshell:
Fintech disrupts with new ideas, while TechFin leverages existing tech for financial services.
Fintech may be smaller but innovative, while TechFin has a wider reach but integrates finance into existing services.
Both Fintech and TechFin are transforming the financial landscape, making it more convenient, accessible, and potentially more secure.
Fintech and TechFin are both disruptive forces within the financial services business. If traditional institutions wish to survive the digital revolution, they must immediately digitize their corporate structures. Fintech tackles a particular financial service issue for clients by providing an innovative financial solution or process based on technological capabilities in the form of a new product or service. TechFins integrates different existing financial and technological solutions into its business model.
The increased value of data makes it attractive for large tech companies to profit from their collected data, and it has been easy for them to be successful with the implementation of their products thus far due to their large customer base and the advantage they have with customers granting permission to use their data by agreeing to their terms and conditions (which are periodically updated in the benefit of the company). Moreover, when they become TechFins, they often experience no early fundraising concerns. Initial funding is typically difficult to get for fintech businesses, which rely heavily on angel investors and banking institutions. Crowdfunding has proved advantageous for FinTech funding, although it still faces challenges and is not yet internationally accessible. The incorporation, regulation and governance of fintech and techfin solutions (including for funding) remains an evolving challenge for authorities.
Frequently Asked Questions on Fintech vs Techfin
What is the main difference between FinTech and TechFin?
FinTech refers to companies that originate in finance and leverage technology to disrupt and improve financial services. In contrast, TechFin describes tech-first companies that integrate financial services into their existing platforms, often using their large user bases and data capabilities to deliver financial solutions.
How do FinTech and TechFin contribute to financial inclusion in India?
FinTech companies have expanded access to financial services for underserved populations by providing mobile banking, digital wallets, and lending platforms. Similarly, TechFin companies leverage their vast user networks to integrate financial services, extending access to a broader audience and fostering financial inclusion.
What types of financial services do FinTech and TechFin companies offer in India?
FinTech companies like PhonePe and KredX focus on sectors like digital payments, lending, insurance, wealth management, and regulatory compliance. TechFin firms, such as Google and Amazon, incorporate financial services like digital payments, lending, and insurance into their existing platforms, offering a more integrated user experience.
What role does data play in the operation of TechFin companies?
TechFin companies rely heavily on data analytics to offer personalized financial solutions. By using customer data from their tech platforms, TechFin firms can create a financial portrait of users, improving service personalization and security while gaining insights into user financial behavior.
How do FinTech and TechFin impact the future of finance and the economy in India?
FinTech and TechFin are expected to enhance financial inclusion, promote a cashless society, democratize finance, and lead to the development of secure and innovative financial products. Their continued growth could reshape economic participation and the delivery of financial services in India.
Exploring the complex landscape of taxation and returns for restaurants in India is crucial for compliance and financial health. Restaurants are subject to both Direct Taxes, like Income Tax, and Indirect Taxes, primarily the Goods and Services Tax (GST). Income is computed under the ‘Profits and Gains from Business or Profession’ category, with various deductions and disallowances applicable as per the Income Tax Act, 1961. GST rates for restaurants vary based on factors such as the establishment’s type and location, ranging from 5% to 18%. Compliance includes timely filing of returns, with forms like GSTR-3B required monthly and GSTR-4 quarterly for those under the composition scheme. Understanding these obligations ensures legal compliance and promotes financial stability.
Introduction
Every restaurant has to comply with some taxation regulations and also file its returns on a regular interval as required under the specific laws in India. Among others, the Income Tax Act, 1961 (“Act”) and the Goods and Service Tax, 2017 (“GST Act”) are the main governing regulations for taxation of restaurant business income. In this article we provide a detailed insight on Tax and Returns for a Restaurant in India.
Taxation in India is divided into two parts – A. Direct Tax and B. Indirect Tax.
Direct Tax is the tax that is levied and paid directly by the restaurant while, Indirect taxes are those taxes that are levied on goods or services. They differ from direct taxes because they are not levied on a person who pays them directly to the government, they are instead levied on products and are collected by an intermediary, the person selling the product. These taxes are levied by adding them to the price of the service or product which tends to push the cost of the product up.
A. Understanding Direct Tax
Income Tax
Income from restaurants is governed by ‘Profits and Gains of Business or Profession Chapter’ as provided under the Act. Section 2(13) of the Act has defined the term ‘Business’ as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Section 2(36) states that ‘Profession’ includes vocation’ without defining what the profession means. Generally, the profession involves labour skills, education and special domain knowledge.
All the businesses, including the food industry, must have a PAN and TAN in the name of the business or in the name of the owner (in case of a Sole-Proprietorship) in whose name the transactions are to be carried out. PAN and TAN are two ten-digit different alphanumeric numbers provided by the IT Department. Every person who deducts or collects tax at the source has to get a TAN.
In case the business is set up in the form of a company or a LLP, there are different rates of tax applicable. In case of an individual the income from PGBP (defined hereinafter) shall form a part of the income of the assessee.
Principles of Computation of business income
1.
Business must be carried by the assessee himself or through his agent.
2.
Business must be carried on during the previous year.
3.
Business profits of the previous year must be taxable.
4.
Business profits should be understood in its true commercial sense.
5.
Business profits should be real and not fictional.
Most Relevant Income Tax Provisions
Section 28 of the Act states that – The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession” (“PGBP”) — 1) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. Along with specific provisions as detailed in Section 28(ii) to 28(vii) of the Act.
Section 41 “Profits chargeable to tax” of the Act deals with a situation where: 1) A loss, expenditure or trading liability has been incurred in the course of business or profession; 2) Allowance or deduction has been made in respect of such loss, expenditure or trading liability in the course of assessment; and 3) A benefit is subsequently obtained in respect of such loss, expenditure or trading liability by way of remission or cessation thereof. In such a situation, the value of the benefit accruing to the assessee is deemed to be profits and gains of business or profession.
Section 176(3A) states that – Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance
Any other incomes received during the course of business such as income from house property or rental income, bank interest, etc.
Presumptive taxation – Section 44AD of the Act states that in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head PGBP. However, eight percent shall be replaced with ―six per cent in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account during the previous year. Here eligible business shall mean – (i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and (ii) whose total turnover or gross receipts in the previous year does not exceed an amount of 2 [two] crore rupees.
Deductions under Section 30 to 37 of the Act – Deductions available from the income under the sections pertaining to rent, repairs, depreciation, additional depreciation (if applicable), deduction under section 32AC is available if actual cost of new plant and machinery acquired and installed by a manufacturing company during the previous year exceeds Rs. 25/100 Crores, as the case may be (in case the business is engaged in manufacturing), Non-corporate taxpayers can amortise certain preliminary expenses (up to maximum of 5% of cost of the project) (Subject to certain conditions and nature of expenditures), insurance premium paid, bonus or commission paid to employees, interest on borrowed capital, employer’s contribution to provident fund and gratuity fund, bad debts written off, securities transaction and commodities transaction tax paid etc. and other such deduction as may be applicable.
Disallowances – There are some disallowances that have been specifically mentioned in the Act which shall not be eligible to be deducted from the income for the purposes of calculation of PGBP, some of them are wealth-tax or any other tax of similar nature shall not be deductible, Any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance if it was paid without deduction of tax at source or if tax was deducted but not deposited with the Central Government till the due date of filing of return, Any sum (other than salary) payable outside India or to a non-resident, which is chargeable to tax in India in the hands of the recipient, shall not be allowed to be deducted if it was paid without deduction of tax at source or if tax was deducted but not deposited with the Central Government till the due date of filing of return etc.
We take care of all your restaurant taxation needsLet’s Talk
Computation of PGBP (Profit and Gains from Business & Profession)
Business Profit should be calculated through Profit & Loss Account. On the Credit side of Profit & Loss Account there are some Incomes which are tax free or not taxable under the head Business/Profession.
Balance as per P & L A/c
(+) Profit
(-) Loss Amount
Add Expenses claimed but not allowed under the Act
All Provisions & Reserves (Provision for Bad Debt/Depreciation/Income)
All Taxes (Except Income Tax, Wealth Tax etc.) except sales Tax,Excise
Duty & Local Taxes of premises used for business.
All Charities & Donations
All personal expenses
Any type of fine / penalty
Speculative Losses
All capital losses
Any Difference in Profit & Loss Account
Previous year expenses
Rent paid to self
All expenses related to other head of Income
Payments made to the partner (in terms of salary, commission or any other way.)
All capital expenses except scientific research
Loss by theft
Expenses on illegal business
Rent for residential portion
Interest on Income tax, TDS etc
Total of these Items is added to the profit or adjusted from loss
Business Tax Returns
A business tax return is an income tax return. The return is a statement of income and expenditure of the business. Any tax to be paid on the profits made by you is declared in this return. The return also contains details of the assets and liabilities held by the business. Items like fixed assets, debtors and creditors of business, loans taken and loans were given are declared here.
In the case of a sole proprietor, business income and other personal income like salary, income from house property and interest income have to be stated on the same return. If your total income before deductions is above the basic taxable limit it is mandatory to file the income tax return irrespective of profit or loss in the business. The basic taxable limit is Rs. 2.5 lakh.
For companies, firms and Limited Liability Partnership (LLP) a business tax return has to be filed irrespective of profit or loss. Even if there are no operations undertaken, a return has to be filed. Companies, firms, and LLPs are taxed at a rate of 30%.
Every taxpayer whose turnover is above Rs. 1 Crore in case of businesses and Rs. 50 Lakh in case of professionals is required to get a tax audit done. The taxpayer has to appoint a Chartered Accountant to audit their accounts. A tax audit is necessary even when the profits declared by you is less than 8% (6% on Digital transactions) of the turnover in case of presumptive taxation.
Additionally, surcharge is applicable in the following cases –
Particulars
Tax Rate
If total income exceeds Rs. 1 crore but not Rs. 10 Crore
7% of tax calculated on domestic company
If total income exceeds Rs. 10 crore
12% of tax calculated on domestic company
Health & education Cess: Further 4% of income tax calculated and applicable surcharge will be added to the amount of total tax liability before this cess.
Alternate Minimum Tax (“AMT”)
AMT provisions are applicable to following taxpayers:
All non-corporate taxpayers; and
Taxpayers who have claimed deduction under:
Chapter VI-A under the heading “C. — Deductions in respect of certain incomes’ – These deductions are under Section 80H to 80RRB provided in respect of profits and gains of specific industries such as hotel business, small scale industrial undertaking, housing projects, export business, infrastructure development etc. However, deduction under Section 80P which provides deduction to co-operative societies is excluded for this purpose; or
Deduction under Section 35AD – While capital expenditure in assets usually qualify for depreciation year on year, under this Section 100% deduction is allowed on capital expenditure incurred for specified business such as operation of cold chain facility, fertiliser production etc; or
Profit linked deduction under Section 10AA – Deduction of profit varying from 100% to 50% is provided to units in Special Economic Zones (SEZs).
Based on the above, it can be concluded that AMT provisions are applicable only to those non-corporate taxpayers having income under the head ‘Profits or Gains of Business or Profession’. Further, as mentioned above AMT provisions are applicable only when normal tax payable is lower than AMT in any financial year.
Minimum Alternate Tax (“MAT”)
Alternatively, all the companies (including foreign companies) are required to pay minimum alternate tax at the rate of 15% on book profits if the tax calculated as per above rates are less than 15% of book profits.
Returns under the Act
ITR -3 is to be filed by individuals and HUFs having income from PGBP
ITR -4 SUGAM for Individuals, HUFs and Firms (other than LLP) being a resident having total income upto Rs.50 lakh and having income from business and profession which is computed under sections 44AD, 44ADA or 44AE
ITR -6 is to be filed by companies other than companies claiming exemption under section 11 of the Act.
All restaurants having business in the individual capacity shall file the ITR -3 while those in the capacity of the company shall be required to file ITR -6.
B. Understanding Indirect Tax
Tax concepts under Indirect Tax include GST.
GST (Goods and Services Tax)
It was introduced in July 2017. What this tax regime does is it unifies all the taxes that the restaurant and customers had to pay earlier. The Minimum turnover is required to be Rs 20 Lakhs for registration in GST.
Therefore, this variety of taxes is now just consolidated into State Goods and Services Tax (SGST) and Central Goods and Services Tax (CGST). Moreover, GST registration is a state-centric matter; therefore, if the restaurants have different outlets, each outlet must be registered separately under that particular state. Furthermore, there are different tax slabs as well for different restaurants. The restaurant GST rates are laid down below:
Category 1: For the restaurants without an AC or liquor license
Category 2: For the restaurants with AC
Category 3: For 5-star hotels or luxury hotels that serve liquor and food.
GST tax has replaced the Value Added Tax (“VAT”) and service tax regime on food services. However, the point to note here is the service charge by restaurants is separate from GST.
Alcoholic beverages have applicable VAT, which is a state-level tax, therefore restaurants serving both food and alcoholic beverages will levy separate taxes with GST applying to food and non-alcoholic beverages; however, VAT will be charged on alcoholic beverages served only.
Types of GST
There are three types of GST namely CGST, SGST, and Integrated Goods and Services Tax (IGST). CGST is the tax charged by the central government on the intrastate supply of goods and services. In the same way, SGST is the tax applied to the same intrastate supply of goods and services by the state government and IGST is Integrated Goods and Services Tax, which is levied for the interstate transfer of goods and services. The GST rate on food items and GST rate on restaurants is governed on the whole by the central government.
Composition Scheme in GST
The composition scheme under GST means that a taxable person under a certain turnover limit has to pay tax at a lower rate concerning certain conditions. This scheme is developed for the timely recovery of taxes, filing of returns, and to provide a simplified way of record maintenance for small businesses.
Since the objective of the GST composition scheme for restaurants or any other business is basically to bring all businesses under one roof, this composition scheme will be provided to a taxable person only if he/she registers all the other registered taxable persons who are using the same. Food Tax in India can be 5%, 12%, or 18% based on factors such as the establishment type and location of restaurants or food service providers among others. Goods and services tax has replaced the VAT and Service tax regime on food services. 18% GST rate applies to accommodation in hotels including 5 stars and above rated hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes, where room rent ranges from Rs.5000 and above per night per room.
The rate at which restaurants are required to pay GST is fixed at a concessional rate of 5% which is to be levied on the turnover subject to the following restrictions:
The Turnover of the restaurant should not exceed Rs 1.5 Crores (Rupees 150 lakhs). However, this limit is Rupees 1 Crore for special category States.
The restaurant should not be engaged in any services other than the restaurant subject to certain exemptions.
The restaurant can’t be engaged in the interstate supply of goods
The restaurant can’t supply any items exempt under GST.
The restaurant can’t supply goods through an e-commerce operator
The restaurant can’t avail any Input Tax Credit (“ITC”)
The restaurant can’t collect taxes from the customer
Rates of GST
Types of restaurants
GST Rate (Normal Scheme)
GST Rate (Composition Scheme)
Standalone restaurants
5% without ITC
5% without ITC provided turnover for the whole financial year does not exceeds 1.5 crores
Standalone outdoor catering services
5% without ITC
Restaurants within hotels (where room tariff is less than Rs. 7,500/-)
5% without ITC
Normal / composite outdoor catering within hotels (where the room tariff is less than Rs. 7,500/-)
5% without ITC
Restaurants within hotels (where the room tariff is less than Rs. 7,500/-)*
18% without ITC
Restaurants within hotels (where the room tariff is more than or equal to Rs. 7,500/-)
18% without ITC
Normal / composite outdoor catering within hotels (where the room tariff is more than or equal to Rs. 7,500/-)
18% without ITC
Supply of food / drinks in restaurant having facility of air-conditioning or central heating at any time during the year
18% without ITC
Restaurants serving alcohol
18% without ITC
*This covers individuals supplying catering or other services in hotels (having room tariff of Rs 7,500 or more) and not any hotel accommodation services.
Returns under GST
All businesses need to file the GST return. GSTR 1 is to be filed on a monthly basis.
GSTR 3B needs to be filed by all restaurants and hotels. The GSTR 3B needs to be filed by the 20th of every month.
Return filing under GST composition Scheme for Restaurants
A person engaged in Restaurant business can pay tax under GST normal provisions without opting GST composition scheme and have to file monthly GST returns. On the contrary, restaurants opting the composition scheme will have to file GST returns quarterly in Form GSTR-4 on the common GSTN portal by the 18th of the month following the quarter. For example, a GST return in respect of supplies made by the restaurant from October to December is required to file the return by 18th January.
Conclusion
Complying with Tax regulations for your Restaurant in India
In conclusion, navigating the tax landscape for restaurants in India requires a comprehensive understanding of various aspects, including income tax on restaurant business, GST rates, and tax deductions for restaurant owners. Restaurant owners must be aware of taxes such as income tax, payroll taxes, and GST on restaurant food. Understanding how tax is calculated in a restaurant is crucial for financial planning and compliance. Additionally, restaurants must stay informed about changes in tax laws and rates to ensure accurate tax filings and avoid penalties. While taxes can pose challenges, they are essential for funding government services and infrastructure. By managing taxes effectively, restaurant owners can optimize their financial performance and contribute positively to the economy. Moreover, leveraging tax refunds and deductions can provide additional financial benefits for restaurant businesses. In summary, staying informed about tax concepts and regulations is vital for the success and sustainability of restaurants in India.As per the National Restaurant Association of India (NRAI) report, the restaurant market has reached Rs.5.99 lakh crore, growing at a compounded annual growth rate of 9%.Running a successful restaurant in India requires not only culinary expertise but also a firm grasp of the various tax regulations governing your business.The restaurant monthly income have gradually trimmed down due to the market acquired by popular third-party platforms such as Swiggy, Zomato and UberEats that have embedded the concept of discounts and freebies in the mind of all customers. This blog has provided a comprehensive overview of the key direct and indirect taxes applicable to restaurants, including income tax under the Income Tax Act, 1961, and Goods and Services Tax (GST) under the GST Act, 2017.The payroll department can be a big challenge for restaurant owners.
Income Tax : File income tax returns under the appropriate form (ITR-3, ITR-4 SUGAM, or ITR-6) based on your business structure and income.
GST : Register for GST if your turnover exceeds Rs. 20 lakhs and comply with applicable rates and return filing requirements. Consider the composition scheme for simplified compliance if eligible.
Stay informed : Tax laws and regulations can change. Regularly consult with a tax advisor or accountant to ensure your restaurant remains compliant.
By understanding and adhering to these tax regulations for 2026, you can ensure your restaurant operates smoothly and avoids potential penalties. A restaurant owner needs to diligently keep track of all expenses to ensure accurate income tax filings. Moreover, restaurants must stay abreast of changes in tax laws and rates to optimize their financial performance and capitalize on tax refunds where applicable.
Frequently Asked Questions (FAQ’s) about Tax and Returns for Restaurant
1. What are the main taxes applicable to restaurants in India? Restaurants in India comply with both Income Tax under the Income Tax Act, 1961 and Goods and Services Tax (GST) under the GST Act, 2017.
2. Which ITR form should I file for my restaurant? The applicable ITR form depends on your business structure:
ITR-3: Individuals and HUFs with profits under PGBP.
ITR-4 SUGAM: Individuals, HUFs, and firms with income up to Rs. 50 lakh and taxed under sections 44AD, 44ADA, or 44AE.
ITR-6: Companies (except those exempt under Section 11).
3. When do I need to register for GST for my restaurant? Registration is mandatory if your annual turnover exceeds Rs. 20 lakh.
4. What are the different GST rates for restaurants? Rates vary depending on factors like air-conditioning, liquor service, and hotel presence. Check the blog for details.
5. Does my restaurant qualify for the GST composition scheme? This scheme offers a 5% flat tax rate for eligible restaurants with a turnover less than Rs. 1.5 crore (Rs. 1 crore in special states). See the blog for eligibility criteria.
6. How often do I need to file GST returns for my restaurant? Restaurants generally file GSTR-3B monthly and GSTR-4 quarterly under the composition scheme.
7. What are the key points for ensuring tax compliance for my restaurant?
Maintain proper records and invoices.
File returns accurately and on time.
Pay taxes due promptly.
Seek professional guidance if needed.
8. Where can I find more information on restaurant taxation in India? Consult a tax advisor like Treelife, refer to the official websites of the Income Tax Department and GST Council, or revisit this blog for a deeper dive!
Why due diligence is conducted for startups in India?
Investment in a startup business could be risky and thus, venture capitalists and angel investors appoint startup consultants having the relevant expertise in the area to conduct startup due diligence before making such an investment. A potential investor in startup companies should gain a holistic understanding of the startup business they are investing in and performing a startup due diligence furthers the cause.
Startup Due Diligence is most often performed by potential startup investors before making the decision of capital entry into a startup business. During this process, the financial, commercial, legal, tax and compliance conditions of the startup are thoroughly analyzed based on historical data in order to objectively assess the operational situation of the company in the near future. This allows the startup investors to estimate the potential risks, SWOT directly or indirectly affecting the value of the target company. Due diligence immediately precedes the negotiation stage, after which the startup due diligence report prepared by the startup consultants is reviewed by the investors and the shareholder’s subscription agreement (SSA) is signed if everything goes smoothly.
Most common due diligence mistakes in 2025
Here are a few common mistakes we have observed after working on startup due diligence for multiple startup business:
A. Legal Due Diligence Mistakes:
Legal due diligence is an essential aspect of the entire due diligence process, especially in the context of procurement. It looks for and assesses any legal risks related to the target company or sector that is being purchased. Contract compliance, litigation risk, intellectual property rights, and many more subjects are covered by legal due diligence. Legal due diligence focuses on a number of things, one of which is government rule and regulatory compliance. This kind of due diligence comprises reviewing all essential documents to ensure that the target firm has complied with all applicable national and international regulations in its operations. The purchasing company may be subject to significant liabilities if they don’t comply. The following factors are involved in Legal due diligence –
Inconsistent terms in agreements – Plainly, if a contract term means one thing when it is considered on its own and means something very different when it is considered in the light of a printed term in a set of standard conditions, that is likely to shed considerable light on that issue. When two clauses conflict and one of them is a conventional term of one party and the other is the result of bespoke drafting, the bespoke drafting will usually take precedence. If a contract calls for something to be produced in line with a prescribed design and to satisfy specified standards, the parties must share the risk if the prescribed design falls short of the prescribed standards.
Agreements Inadequacy – Employee stock options are a common topic on investor due diligence questionnaires that founders get. Investors should be wary if you claim to have given your key staff options and have represented this in the cap table, but there are no stock option agreements or plans in place. It is quite probable that investors will request that the founders address this issue as quickly as possible. The solution to avoid the above scenario is to maintain current option valuation. External parties perform this appraisal for any noteworthy occasions, such as the opening of new investment rounds. Initially, your staff members might be curious about the true worth of their options-based shares at any given moment. Secondly, upon employing staff in the nation where your business is registered , they will be required to notify local tax authorities of any appreciation in the value of their shares. The importance of having an updated firm value increases with your organization’s worldwide reach and workforce diversity.
Stamp duty not paid on agreements – Like income tax and sales tax that the government collects, stamp duty is a tax that needs to be paid in full and on schedule. Penalties are incurred for payment delays. An instrument or document that has paid stamp duty is regarded as legitimate and lawful, and as such, it has evidential value and may be used as proof in court. The court will not accept instruments or papers that are not properly stamped as evidence. A penalty of 2% per month will be applied to the outstanding stamp duty balance if it is not paid on time.
Equity promises without documentation – Written documentation in the form of a signed binding pledge card or other written correspondence would typically provide sufficient evidence of a promise. Three primary forms of equity are granted to employees by startups: The right to purchase or sell a specific number of founders’ shares at a fixed price is known as a stock option. Between the vesting date—which occurs after an employee has earned stock options—and the expiration date, the employee may exercise this right. This is the most typical kind of equity that entrepreneurs decide to provide their staff members.The right to purchase or sell a specific number of business shares at a fixed price is known as a stock warrant. Although warrants often have longer expiry dates than stock options, they can also only be exercised between the vesting and expiration periods.The ownership of a certain number of shares is known as a stock grant. No vesting is present. The main problem that occurs in startups are that they promise equity without doing proper documentation.
Inadequate IPR protection – During the frantic process of developing new products, it is not uncommon for entrepreneurs to forget to sign the appropriate contracts with all of the consultants and contractors they have recruited. Investors will always ask about the agreements for the transfer of intellectual property of all the product’s components—codebase, designs, texts, etc. during the due diligence process. It’s suspicious if these agreements weren’t in place. Investor ownership would be at danger in the event that any former workers or contractors choose to sue the business.
B. Financial Due Diligence Mistakes:
Financial due diligence is one of the most important things in the current society. Before completing any deal, firms should be informed about the risks, stability, and financial information. Financial due diligence is carried out extensively to guarantee the correctness of all the financial details included in the confidential information memorandum (CIM). For example, financial statements, company predictions, and projections may be considered in a financial audit.
Irregularities in filing returns – Due diligence on taxes refers to a comprehensive examination of all possible taxes that might be imposed on a particular firm and all taxing authorities that could have a strong enough connection to hold it accountable for paying those taxes. Buyers in a deal typically use tax due diligence to identify any significant tax obligations that could be a concern. Tax due diligence is more concerned with greater financial statistics than the preparation of yearly income tax returns, which may concentrate on little inconsistencies or errors (e.g., whether a rejected meal and entertainment deduction should have been Rs10,000 instead of Rs5,000). These numbers have the ability to influence a buyer’s negotiating position or choice to proceed with a deal. If the contract only relates to a portion of the shares, the threshold for what is deemed substantial may change based on the entire value of the transaction or the goal.
Book of accounts not updated on a regular basis – Every registered person is required by the Goods and Services Tax Law to keep accurate and truthful books of accounts and records. If the same is not maintained, the defaulter may face penalties and maybe have their items seized. If, as per section 35(1), books of accounts are not kept up to date, the appropriate official would ascertain the tax owed on unaccounted goods and services in accordance with section 73 or section 74 requirements. Furthermore, failure to preserve or maintain the books of accounts may result in a penalty higher than INR 10,000 or the relevant amount of tax, per penalty section 122(1)(xvi). The Central items and Services Tax Act, 2017’s Section 130 permits the seizure of items and the imposition of fines. Therefore, in accordance with section 130(1)(ii), if the defaulter fails to account for any items for which they are required to pay tax, they will be subject to the seizure of their goods and a penalty under section 122.The investor wouldn’t want to invest in any startup where the books of accounts aren’t maintained which would attract unnecessary penalties and fines.
Adhoc accounting treatments – Ad hoc journal entries are those impromptu changes to the books of accounts that are made in order to preserve financial correctness. These entries are essential for maintaining accuracy and providing a genuine and impartial picture of the organisation, whether they are made to account for unique or unusual transactions, repair errors, or make necessary modifications outside of the regular accounting cycle. A realistic and fair image of the financials requires, in accordance with basic accounting rules, the creation of provisions for incurred costs under the mercantile system of accounting. As a result, all companies that use the mercantile accounting system must make year-end provisions for the costs incurred related to services rendered through March 31 of the next fiscal year. When the actual invoice is received in a later month or months, the allowance for expenditures is almost always reversed. ITAT Delhi ruled that it is irrational and subject to be removed to prohibit ad hoc spending as a proportion of gross profit in the absence of particular findings.
Statutory payments not made – Statutory payments are those that, according to applicable law, must be given to government authorities. Almost all countries have statutory deductions from pay. The law mandates these deductions. Different nations have different kinds of statutory deductions, but common ones are income tax, social security tax, government payments to health insurance plans, unemployment insurance, pensions, and provident funds, as well as required union dues. Statutory deductions lower employees’ take-home income, which lowers their ability to maintain a reasonable standard of living. As a result, living wage calculations must account for statutory deductions. As an employer, there are several statutory payments that you may need to pay your employees. Normally, employers may recoup 92% of this, but small businesses may be able to recover 103% of it.
No compliance for foreign payments – Simply put, foreign payments, also known as cross-border payments, is sending or receiving payments from one country to another. This might be done as a bank or supplier payment, and it often entails a foreign exchange, or FX, of two distinct currencies. Every Indian Resident company that has made a Foreign Direct Investment (FDI) in the preceding year, including the current year, must submit the Foreign Liabilities and Assets (FLA) Return. All borrowers must report all External Commercial Borrowing transactions to the RBI through an AD Category – I Bank every month in the Form ‘ECB 2 Return’. When an Indian business obtains foreign investment and allots shares in response, it must register the allocation with the RBI. Within 30 days following allotment, the corporation must provide the details of the allotment to the RBI in Form FC-GPR (Foreign Currency – Gross Provisional Return).Form ODI must be submitted by an Indian resident who invests overseas. Within 30 days of receiving them, share certificates or any other documentation proving involvement in a foreign joint venture or wholly owned subsidiary must be turned in to the authorized AD. The maximum fine for non-compliance of foreign payments is two lakh rupees, or three times the amount that was violated. For every day after the first that the violation persists, the fine may be as much as Rs 5,000. Therefore, all businesses and Indian citizens who conduct business abroad must make sure that the FEMA regulations are followed.
TDS non compliances – TDS means Tax Deducted at Source. The goal of the TDS idea was to collect taxes right at the source of income. According to this idea, a person (deductor) who owes another person (deductee) a payment of a certain kind is required to deduct tax at the source and send it to the Central Government. Based on Form 26AS or a TDS certificate that the deductor issues, the deductee whose income tax has been withheld at source is entitled to a credit of the amount withheld. The assessee should pay ₹ 200 per day as a penalty under U/S 234E if he does not file the TDS return within the allotted period. However, the penalty may not be greater than the TDS amount that must be paid. Furthermore, if the assessee provides false information or neglects to file the return within the allotted time frame, he may be penalised between ₹ 10,000 and ₹ 1 lakh under U/S 271H. This penalty will also be applied to the penalty specified in U.S. 234E.
Under certain circumstances, the following can be done to avoid the penalty U/S 271H:
Send the central government the tax that was withheld at the source.
If the government is owed money, pay the late penalties and interest.
Submit the TDS return no later than
C. Compliance Due Diligence:
The process of carrying out a comprehensive examination, audit, or study of a business’s compliance with governmental and non-governmental regulatory organizations is known as compliance due diligence. It basically aims to determine if a business is abiding by the regulations. The possibility that some businesses have discovered ways to get around certain laws is one of the problems that compliance due diligence looks for.
Failure to maintain minutes and update statutory registers – In accordance with the terms of the Companies Act of 2013, statutory registers are registers that are kept at the company’s registered office and contain particular details of the directors, shareholders, deposits, loans, and guarantees, among other things. The Companies Act of 2013 and the associated regulations outlined in the Companies (Management and Administration) Rules of 2014, together with other applicable requirements, necessitate the maintenance of statutory registers. A corporation must keep the stated statutory registers that are appropriate to them based on their business and activities, even if there are additional registers that must also be kept up to date in accordance with the terms of the Companies Act 2013.Since the corporations Act of 2013 requires the upkeep of the statutory register, any violation of these provisions and regulations carries serious consequences for both the corporations and the defaulting executives of the firm. Keep the necessary statutory registers up to date for the sake of good company governance and to prevent such fines. Penalties under sub-section (5) of section 88 of the Companies Act 2013 stipulate that a company will be fined three lakh rupees and that each officer of the company in default will be fined fifty thousand rupees if it fails to maintain a register of its members, debenture holders, or other security holders, or if it fails to maintain them in accordance with the provisions of sub-section (1) or sub-section (2).
Missing share certificates – A share certificate is a written document that is legally proof of ownership of the number of shares stated on it, and it is issued and formally signed by authorised signatories on behalf of a firm. A share certificate is issued to a shareholder as proof of purchase and as proof of ownership of a certain number of the company’s shares. Subsection 4 of Section 56 of the Companies Act 2013 states that all companies are required to submit the certificates of any securities that are assigned, transferred, or communicated, unless prohibited by any legislation or by an order from a court, tribunal, or other authority.-(a) For those who subscribe to the company’s memorandum and articles of association, within two months of the date of formation; (b) For any shares that are allotted, within two months of the date of allocation;(c) Within a month of the date on which the firm received the transfer instrument under sub-section (1), or, in the event that a transfer or transmission of securities, the notification of transmission under sub-section (2); (d) In the event that any Debentures are allocated, during a six-month period from the date of allocation. The above section’s proviso stipulates that: (i) in cases where securities are handled by a depository, the company must notify the depository of the specifics of the securities’ allocation as soon as they are made; and (ii) additionally, that certificates of all securities shall be delivered to subscribers by a Specified IFSC public company within sixty days of its incorporation, allotment, transfer, or transmission, and by a Specified IFSC private company within the same sixty-day period. Section 56 of the Companies Act of 2013 contains the punitive penalty pertaining to non-compliance or default, specifically in sub-section (6). Subsection (6) of section 56 of the Companies Act states that in the event that any of the provisions of sub-sections (1) to (5) are not followed, a penalty of fifty thousand rupees will be imposed on the business and each officer involved.
Lack of govt registrations – When business owners get due diligence questionnaires from investors, data protection will undoubtedly be on the list of topics covered. They want to make sure you have all the procedures and guidelines needed to safeguard the information of your clients and abide by international data protection laws like the CCPA and GDPR. This is particularly true if your firm plans to sell its products in the European Union. You’ll be operating in the EU by default if you’re aiming for a worldwide market.: By implementing appropriate rules and procedures, you may reduce the likelihood of data breaches and improve your ability to collaborate with B2B clients. Investors will also place a high value on your company’s and your business model’s compliance with all applicable laws in the operational jurisdictions. Your startup’s business license and good standing might be suspended if it does not have the necessary permissions. If you work in banking, healthcare, or other delicate industries, this is very likely to happen. Regarding the KYC and AML policies and procedures, they will assist you in adhering to sanctions legislation, anti-corruption laws, and anti-bribery laws. If these protocols are followed, prospective investors and major partners will instantly verify that your firm isn’t included in any harmful databases.
Conclusion
Indian startups must navigate a complex legal and financial landscape, and failing to conduct thorough due diligence can have severe consequences. Here are critical areas to avoid common pitfalls.
Legal:
Contract Confusion: Ensure all agreements have consistent terms, are comprehensive, and bear proper stamp duty. Verbal equity promises can lead to disputes; formalize them! Avoid simply copying old agreements – tailor them to each scenario.
IP Inattention: Inadequately protecting intellectual property leaves your core assets vulnerable. Secure proper registrations and maintain confidentiality agreements.
Financial:
Accounting Ambiguity: Maintain updated and accurate books of accounts, avoiding ad hoc treatments. Regularly file tax returns and comply with statutory payments. Address foreign exchange regulations and TDS (Tax Deducted at Source) requirements diligently.
Compliance:
Paperwork Paralysis: Don’t neglect record-keeping! Maintain meeting minutes, statutory registers, and share certificates. File all necessary statutory forms and obtain government registrations to operate smoothly.
By addressing these due diligence gaps, Indian startups can mitigate risks, ensure compliance, and pave the way for sustainable growth. Remember, due diligence is an investment, not a cost.
Exit provisions determine how, when and at what price investors can sell their stake in a company and procure an exit from the Company, thereby, being the most crucial exit rights that an investor seeks in an investment transaction.
Important aspects of an Exit provision –
Exit period: This determines the maximum period within which the Company and the Founders are required to provide returns to the Investors on their investment. Typically Investors agree upon an exit period of about 5-7 years.
Exit Price: Investors usually do not incorporate an exit price in the documentation at an early stage as it is difficult to determine the growth trajectory of a company so early on, hence, exit is to be procured at the fair market value at the time of such exit
Exit Mechanisms: The investment documentation sets out the manner in which an exit can be provided such as IPO, third party sale, etc.
Various Exit Mechanisms
IPO: An investor can procure an exit by ensuring their shares are sold in an initial public offer, in case the Company decides to be listed on a stock exchange.
Strategic Sale and Third Party Sale: In case the Company has an offer from a strategic buyer to buy substantial amount of shares/assets of the Company, the Investor can procure an exit by selling their shares in such a strategic out, whereas, a third party sale is a simple secondary transfer between the investor and a proposed buyer.
Buyback: In the event the Company/Founders are unable to provide an exit to the Investors within the exit period, the Investors may require the Company to repurchase the shares held by them.
Put Option: Considering the legal barriers in executing a buyback, investors seldom insist on having a Put Option on the Founders, i.e., at the option of the Investors, the Founders are required to purchase the shares held by the Investors.
Sale in a new fundraise: In case the Company raises a new round of funding, they could offer the investors exit by way of facilitating a secondary transfer of their shares to the new Investors.
Liquidation Preference: The Company may provide an exit to the investors at the time of a liquidity event ,i.e., an event including but not limited to merger, acquisition, corporate restructure, change of control of a company, liquidation, etc. by providing them at least 1x of their investment amount or such amount from the proceeds of a liquidation event, proportionate to their shareholding in the Company.
Tag Along Right: This is right enables the investors to tag alongside the Founders in case the Founders find a third party buyer for their shares.
Drag Along Right: In the event the Company is unable to provide an exit to the Investors, the investors have a right to invoke a right to drag all the shareholders of the Company in a drag sale (sale of substantially all shares of the Company) facilitated by such investors.
Founders’ Perspective on Exit
Let us look at certain exit provisions from a Founders’ perspective and what kind of safeguards do founders need to build in the exit rights:
Exit Right
Founder specific provisions
Exit Period
Founders can be about providing an exit period of not less than 5 years.
Exit Price
Founders of especially early stage companies should not agree on a delta on the investment amount, and instead provide the exit price equivalent to the fair market value at the time of such exit.
IPO
It is important to ensure that while Investors would be able to sell their shares in an IPO, the Founders should also have the right to do so in order to realise the value of their shares.
Put Option
A Put Option ensures a direct obligation on the Founders to purchase the shares held by the Investors from their own funds and hence, it is not recommended to sign up to such provisions.
Sale in a new fundraise
While this right is not a major redflag for the founders, it may act as an impediment to raise funds in the Company. In case such rights are exercised, a substantial portion of the investment will be provided to such existing investor leading to shortage of funds to the Company.
Liquidation Preference
Founders should be wary of the mechanism of liquidation preference clause. Some investors require more than 1x of their investment amount along with a participating liquidation preference, meaning, once they are provided with their investment amount, they will have a right to participate in distribution of funds to the other investors as well on a pro-rata basis. This is to the detriment of the other investors and especially founders, as, they are at the lower end of the liquidation preference recipients and leaves very little funds for distribution amongst the Founders.
Tag Along Right
Founders to ensure that in case they provide a tag along right to the Investors, they must provide only a proportionate tag along right, i.e., in the event the Founders transfer 10% of their shareholding in the Company, they facilitate only a 10% exit of such investor’s shareholding. Having a complete tag on Founder’s shares leaves very little opportunity for the Founders to procure liquidity on their shares.
Drag Along Right
Founders should ensure that while Investors have a right to drag all the shareholders (including the Founders), the Founders should get an exit on terms which are pari passu with the terms provided to such dragging investors for their shares.
Conclusion
In conclusion, ensuring safeguards for the Founders/Company in the exit clauses of shareholders’ agreements is not merely a legal formality, but crucial for the interests and vision of the Company. These provisions ensure that founders retain a degree of benefit from the company’s growth, even as they navigate the complex waters of investment and potential corporate events such as mergers/acquisition. This careful consideration of exit strategies reflects a mature approach to entrepreneurship, recognizing the importance of legal foresight in the unpredictable journey of business growth.
Here are some highlights of the Indian Interim Budget 2024:
Focus on Infrastructure Development: The government has allocated significant funds for building highways, railways, airports, and other critical infrastructure projects to achieve the vision of ‘Viksit Bharat’ (Developed India) by 2047 https://innovateindia.mygov.in/viksitbharat2047/. This push for infrastructure spending is expected to create jobs and boost overall economic growth.
Boost to Social Welfare Schemes: The budget aims to uplift people out of poverty by increasing spending on social welfare programs like education, healthcare, and poverty alleviation. This focus on social welfare should benefit a large portion of the Indian population.
Investment in Research and Innovation: The government announced a corpus of ₹1 lakh crore to provide long-term financing for research and development in sunrise sectors. This initiative is expected to propel India’s technological advancements and self-reliance (Atmanirbharta) https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1845882.
Measures for Sustainable Development: The budget promotes sustainability through initiatives like rooftop solarization. A target has been set to enable one crore households to generate their own solar power and potentially even sell surplus electricity back to the grid. This scheme is likely to increase clean energy adoption and reduce dependence on fossil fuels.
Support for MSMEs and Farmers: The budget proposes measures to support small businesses (MSMEs) and farmers. This may include tax breaks for MSMEs and continued financial assistance to farmers under schemes like PM-KISAN. These initiatives are expected to give a leg up to these crucial sectors of the Indian economy.
Critical Factors in Initial Public Offering (IPO) Outcomes: Lessons from Past IPOs
Navigating the complexities of an IPO is a pivotal moment for companies, with the potential for significant growth and capital increase. Companies aiming to transition from private to public spheres have encountered a variety of challenges, yet there have also been remarkable stories of triumph. In this article, we deep dive into the successes and challenges of previous public listings.
IPO
Key factor
What went wrong?
Learnings
Zomato
Valuation
When Zomato, India’s first unicorn to venture public, made its debut on the National Stock Exchange, its shares surged, opening at a staggering 52.63% premium. This catapulted the company’s market capitalisation beyond the INR 1 lakh crore mark. After a promising debut on the National Stock Exchange, Zomato’s shares took a significant hit, falling to a low of Rs 46 in July nearly 40 per cent down from its issue price of Rs 76. Such a decline moved closer to expert evaluations that pegged the company’s genuine share value at around Rs 41.
Realistic valuations of companies planning to launch an IPOs are of paramount importance for both investors and the companies aiming to go public. Overvaluations might result in unrealistic expectations and potential future corrections, which could dent investor confidence. On the other hand, a firm grounded in its intrinsic value will likely offer more stability and transparency to its shareholders.
OYO
Good governance and Transparency
The case of OYO, a prominent hospitality company in India, serves as an example of the challenges that can arise when governance and transparency are perceived to be inadequate. OYO’s journey towards an IPO has been fraught with scrutiny, primarily due to concerns regarding its governance practices and the clarity of its business operations. Questions have been raised about the sustainability of its growth, the clarity of its revenue model, and the management’s decision-making processes. Legal disputes and questions about its asset-light business model have further compounded these concerns, leading to a delay in its IPO plans.
Good governance and transparency are paramount in the complex process of launching an IPO, as they instill confidence among potential investors and ensure a fair and smooth transition to the public market. Good governance involves the establishment of robust internal controls, adherence to ethical standards, and accountability to all stakeholders, while transparency requires clear and honest communication about the company’s financial health, business model, and potential risks. For companies looking to go public, the lesson from OYO’s experience is clear – prioritize good governance and transparency, not just as a means to facilitate a successful IPO, but as a fundamental business practice. This commitment to ethical practices and clear communication is crucial for building trust with investors and laying the groundwork for long-term success in the public domain.
IPO
Key factor
What went right?
Learnings
Avenue Supermarket
Right timing
The IPO of Avenue Supermarts Ltd, which operates the DMart chain of supermarkets in India, serves as an illustrative example. The company went public in March 2017, a period that was characterized by a strong bull market in India. The IPO was priced at INR 299 per share, and due to the positive market conditions and strong fundamentals of the company, it received an overwhelming response from investors. On its debut on the stock exchanges, the stock listed at INR 604, a 102% premium over its issue price. Investors who had participated in the IPO were rewarded with substantial gains, showcasing the importance of choosing the right time to invest in an IPO.
Companies aspiring to go public should aim to initiate their IPO during a bullish market, where stock prices are climbing, and investor optimism is palpable. Moreover, a stable or rising interest rate environment is preferable for launching an IPO. During such periods, the financial markets are generally considered to be in a healthy state, inspiring confidence among investors. From the company’s perspective, strategically timing the IPO to align with favorable market conditions can significantly enhance the success of the public offering. It not only helps in maximizing the capital raised but also contributes to establishing a strong investor base and a positive market perception, which are vital for the company’s long-term growth and stability in the public domain.
Conclusion:
Embarking on an IPO journey necessitates a careful balance of several critical elements to ensure success and sustainability in the public domain. Companies must prioritize realistic valuations, uphold the principles of good governance, effectively communicate their value proposition, and choose the right market conditions to launch their public offering. The examples of Zomato, Paytm, and others in the Indian context underscore the varying outcomes that can result from this complex process, demonstrating that while the rewards of a successful IPO can be substantial, the road to achieving it is fraught with challenges. Ultimately, for companies aiming to make a successful transition to the public markets, a combination of transparency, accountability, ethical decision-making, and strategic timing emerges as the indispensable formula for success.
In the corporate environment today, you may often come across the term “POSH”. Whether the company you’re working at is talking about it, or the HR is circulating a document called “POSH Policy”, or you hear about a POSH Committee, or learn about someone initiating action under the POSH Act.
But do you know what POSH is? What does it stand for? Who can claim under POSH and when? What are your rights and how does it impact you? What can you do in a POSH-related situation?
If the answer is no, here’s a quick read giving you the basics of POSH.
Sexual harassment in workplaces is a global issue, including in India. However, as India was a very patriarchal country, women oriented laws were few. Sexual Harassment against women was also majorly neglected in our country until about a decade ago when Supreme Court and the Government of India finally took some measures and regularised it by passing a legislation called: “Sexual Harasment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013”, better known as “POSH” Act.
Physical contact or advances
Making sexually coloured remarks
Demand or request for sexual favours
Eve-teasing and any other unwelcome physical, verbal or non-verbal conduct of a sexual nature
Showing Pornography
Staring, leering, obscene gestures, making kissing sounds, licking lips
Stalking, blocking, cornering
Implied or explicit preferential treatment or threat about jobs
Making work discussions sound sexual and using innuendos
Physical assault and molestation
So what is not sexual harassment?
While sexual harassment can encompass a wide range of behaviours, there are certain actions and interactions that, in isolation, may not be considered sexual harassment. Here are some examples of such actions:
Compliments: Giving compliments or making polite comments about someone’s appearance or attire, as long as they are respectful and not objectifying.
Single, Non-Offensive Jokes: Telling a single, non-offensive joke that has a sexual theme may not necessarily be sexual harassment, especially if it’s not directed at someone in a demeaning or offensive way.
Non-Sexual Touching: Non-sexual physical contact, like a friendly hug or handshake.
Whether something constitutes sexual harassment often depends on the context, intent, and impact it has on the victim.
Where can an incident occur?
Any department, organization, undertaking, establishment, enterprise institution, office or branch unit of the Company.
Any place visited by the employee during the course of employment, including the following:
Cafeteria
Meeting room
Staircase
Premises
Car Park
Elevator
Cabins
Cab
Online or over the phone
What is a POSH Policy?
Every employer with female employees is required to adopt and enforce a POSH Policy elaborating on its scope, acts considered as sexual harassment covered, applicability, complaint and redressal mechanism,details and contact information of POSH committee members.
Today, a lot of organisations internationally are embracing a gender neutral and “all inclusive” policy, to protect every individual employee from sexual harassment regardless of their gender or orientation or identity.
What’s a POSH Internal Committee?
It’s a committee appointed by employers with more than 10 employees including female employees, comprised of 4 members, with atleast 50% women, one being an external independent member, to whom any victim can complain about any incident of sexual harassment.
The Committee’s responsibility is to acknowledge the complaint filed, investigate and prepare a report with details of the incident, and to recommend a suitable course of action to the employer.
What to do if you are a victim but your organisation does not have a POSH Internal committee?
If your organisation is not required to appoint a committee under the law, or has failed to appoint, you can always file a complaint with the Local Committee, appointed for each District by the respective State Government.
What to do if you have a complaint?
Complaints can be filed with IC within 3 months of the incident or the last incident in a series. IC can extend this period up to 3 months for any valid reasons.
If a complainant is physically incapacitated, a complaint can be lodged with their prior written consent by a relative, friend, co-worker, an officer of the NCW or SCW, or any individual with knowledge of the incident.
If a complainant is mentally incapacitated, a complaint can be made with their prior written consent by a relative, friend, special educator, qualified psychiatrist, psychologist, guardian, authority responsible for their care, or any person knowledgeable about the incident.
If a complainant has passed away, a complaint can be filed with the prior written consent of the deceased employee’s legal heir or any designated person.
If the complaint is made to an employee (not a member of the IC), the employee shall promptly report it to the IC.
What actions can the Internal Committee recommend and/or employer take against the offender / accused?
Censure or reprimand
Written warning
Withholding promotion and/or increments
Suspension
Termination
Deduction of compensation payable to the victim
Community service or counseling
Or any other action that the management and/or the board of directors of the Company may deem fit.
What to do if you are a witness or a colleague?
As observers or witnesses:
Intervene If Safe
Document What Was Seen
Support the Victim
Report the Harassment
As colleagues:
Create a Supportive Environment
Encourage Reporting
Cooperate with Investigations
Respect Privacy
Maintain confidentiality
What not to do?
Do NOT ignore it – reporting is essential
Do NOT accept inappropriate or uncomfortable behaviour
Do NOT retaliate or mock the victim – Instead be supportive, instead of socially ostracizing or demeaning or intimidating the victim
The confidentiality of all aspects related to the complaint has to be strictly maintained. Do not disclose this information to the public or media in any way.
The internal committee possesses the authority to initiate actions against the accused when found guilty and against the complainant in the event that false claims are proven.
Any party not satisfied by the recommendations of IC, can appeal to the appellate authority within 90 (ninety) days of the recommendations being communicated.
Conclusion
It is every employer’s duty to provide a safe working space to all employees, and the Internal Committee is obligated to not only redress complaints but also ensure sexual harassment is prevented and does not happen at the workplaces. All complaints and proceedings
Our Engagement: We worked with the company right from incorporation through till the acquisition in various engagements of legal, finance, compliance and advisory. We closely reviewed the founders exit, the acquisition and liaised for regulatory of their international expansion.
Actions carried out:
Setting up the entire initial finance and legal framework and executing it.
Represented the company in their due diligence and legal functions while raising their investment rounds.
Liaise with global consulting firms and legal firms to explore setting up the international business.
Represent interest of founder and company along with other firms consulting on a transaction
Impact:
Considering our robust initial setup of the processes, it was easier to migrate the legal and financial processes inhouse at scale.
Our deep understanding of the business since the inception made us a key PoC for stakeholders to validate their ideas from a regulatory perspective.
High vote of confidence in key business decisions of the company.
Expanding your startup into foreign markets presents a global business expansion opportunity that can be daunting yet rewarding. It’s important to keep an informed eye on regulations, compliance, and technical aspects of the countries you want to venture into. The reasons for international business expansion are many. However, before extending your global footprint, startups must address the following key compliance considerations to be global business ready:
International Investment Regulation Compliance
Establishing lawful compliance with investment regulations and rules is a key factor in setting up a business internationally. Private capital investment structuring is vital for raising funds through Alternative Investment Funds (AIFs). Startups should also consider bilateral and multilateral agreements that promote foreign investment and provide substantial protection to investors. The growth of international business is driven by these agreements and policy announcements that encourage businesses to invest in foreign markets, such as the Indian government’s recent directive allowing Indian startups to offer public listings in foreign markets.
CapOne Research Case Study
CapOne Research is a thriving fintech startup that launched in 2016 and uses blockchain and AI to design payment systems. The company’s founder initially planned to incorporate the business in the US but faced roadblocks with visa compliance and structuring expenses.
Instead, CapOne took advantage of Estonia’s Startup Programme, gaining access to EU-based venture capital markets and angel investors. The ease of business and personnel availability were key factors in the company’s growth. CapOne’s experience is a valuable lesson in understanding the opportunities and challenges of international business.
Data Protection and Policy
Data protection and policy regulations vary between countries. It’s essential to adhere to strict data privacy guidelines and ensure proper security measures are in place. Incorporating the latest advancements in technology, such as blockchain and AI, to design payment systems provides exceptional opportunities for global business expansion.
As companies handle and process personal data, it is crucial to ensure strict compliance with processing guidelines under EU-GDPR privacy regulations, which are now considered a global standard for privacy protection. To comply with these regulations, business entities that handle personal data must follow specific consent, disclosure, and collection mechanisms. Moreover, these regulations may restrict the transfer of data outside the region from where it was collected.
Data privacy law and compliance are at the forefront of not just the technology industry but also the service and sales industry to ensure the free, fair, and safe processing of sensitive consumer data. Indian startups such as Paytm have taken positive steps to match global giants like Google and Facebook in ensuring data welfare and protection.
Paytm and Privacy Case Study
Paytm recognizes that in an era where data is ‘the new gold,’ regulatory authorities must create a strong consumer data protection framework that respects the privacy concerns of citizens. Paytm deems all financial data (KYC, Aadhar, and other identification-related biodata) as ‘Critical Personal Data’ and takes measures to store and process the same within India alone.
Likewise, startups wanting to expand to foreign jurisdictions can expect to deal with regulations that enforce cooperation and compliance in matters of private data. Paytm has expanded to Canada and Japan and is compliant with related data privacy regulations – Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA) and Japan’s Act for Protection of Personal Information (APPI).
To summarize, the basic tenets that an enterprise must follow to ensure data protection include accountability, consent, limitation of use, disclosure, and retention, and data security systems.
Human Resources & Labour Law Compliance
Startups expanding into new markets must comply with local labour laws regarding employment contracts, minimum wage, and working hours. Companies must also be mindful of cultural differences in regards to communication and working styles. The advantages of expanding a business internationally are vast, but understanding the challenges and opportunities of international business is critical to success.
Each jurisdiction has specifics and standards on HR and Labour law that need to be incorporated into employee contracts and other agreements on personnel and conduct. Anti-Corruption policies and Insider Trading Disclosure mechanisms need to be in place to regulate fair and lawful business conduct. Startups that enter new countries often take advantage of ‘floating employee’ arrangements that constitute a network of consultants and independent contractors.
Intellectual Property
Intellectual property protection laws, such as patents, trademarks, and copyrights, differ between countries. Startups must protect their intellectual property by adhering to proper regulations to prevent infringement. Avoiding problems in international business is possible by investing in the right legal expertise and understanding the comprehensive international expansion strategy.
It is important to refile for intellectual property, such as trademarks, copyrights or patents, in a new territory to ensure global recognition. The business may either apply for the same individually in each country or go for a comprehensive filling such as that offered by the EU Intellectual Property regime that holds valid for all European Union countries. Trademark incorporation and registration in North America, as done by giants such as Flipkart and Myntra, is a route preferred not only to ease tax burdens in India but also to increase valuation and reputation in business.
Case Study
A very well-known startup in India recently started expanding in the UK and posted vacancy ads on LinkedIn. The public, at large, including some prospective recruiters mistook this Indian startup for a UK-based startup that had a similar sounding name. This came into the eyes of the UK-based startup and rounds of to and fro legal notices were ensued on the Indian startup. This delayed the Indian startup’s expansion plans and also cost a substantial legal fee on top of settlement offers for coexisting in the UK market.
Tax Obligations
Startups must also be aware of tax laws and obligations when operating in a foreign market. These can vary significantly depending on the nature of business and location. Engaging with authorities at different levels including legal and taxation experts will help startups establish a scalable international business expansion.
Tax structuring and management may help minimize tax obligations. Ensure that taxes deducted at the source such as employee payment and post-sale/service VAT are dealt with in a timely manner. Different geographies are subject to different rates and methods of taxation, with jurisdictions even incentivizing small to medium business entities that can take advantage of international agreements between states that support and ease business activities.
The Vodafone Tax Case: A Case Study on Global Expansion & Taxation
Vodafone International, a leading telecom giant based in Amsterdam, acquired Hutchison Telecommunications International Limited (HTIL), based in Hong Kong, by acquiring its subsidiary, CGP Investments (Holdings) Ltd based in the Cayman Islands. However, Vodafone’s entry to the Indian market through Hutch brought them under the Indian Income Tax authorities’ radar for Capital Gains Tax on CGP. As CGP was not based in India but held essential Indian asset companies in operation, a legislative change introduced in India, called ‘Retrospective Taxation,’ presented Vodafone with a liability of over INR 22,100 Cr.
Vodafone faced a prolonged legal battle in the highest Indian courts before the recent International Tribunal hearing. Vodafone was able to plead protection under India-Netherlands Bilateral Investment Protection Agreement (BIPA), and the tribunal ruled that India had breached its ‘guarantee of fair and equitable treatment.’
Exploring acquisition opportunities or joint ventures with established businesses in foreign markets can help startups navigate local regulations and establish a strong foothold in the market. Acquiring the right companies with the right international business expansion examples create both opportunities and challenges of international business from which startups can learn.
Acquiring foreign entities in similar fields to allow for expansion is now a popular way of global expansion for India’s biggest startups. One example is when Oyo acquired Amsterdam-based Leisure Group for €369.5 Mn, while Byju’s acquired US-based ‘Osmo’ for $120 Mn, making it the world’s biggest EdTech company.
InMobi Goes International: A Case Study
InMobi is a mobile advertising company that rose from humble beginnings in 2007 as an SMS-based service to become India’s first unicorn startup company. To extend its growth and resources, InMobi sought to operate in new markets by expanding resource and technical partnerships.
In 2018, InMobi strategically partnered with telecom giant ‘Sprint’ for digital marketing and data services to make inroads in the US market. Setting up offices in locations such as Kansas City and San Francisco, it acquired Pinsight Media, the mobile advertising branch of Sprint that operates and advertises across verticals, including consumer goods, retail, entertainment, and finance. The acquisition of Pinsight offers InMobi an infrastructure to combine network mobile services and integrating customer information, helping companies better target ads on smartphones to the right audiences. Naveen Tewari, Founder and CEO at InMobi, said, “this industry-first acquisition allows InMobi and Sprint to work on our respective strengths together and provides a global template for partnerships between advertising platforms and telcos.”
Conclusion
Expanding your startup globally can offer significant opportunities and pave the way for the growth of international business. Understanding the necessary compliance and regulations upfront is critical. Incorporating in business-conducive territories or exploring a startup accelerator program can be viable options for startups looking to go global. The opportunities and challenges of international business are numerous, but with the right international expansion strategy, startups can find success.
FAQ’s
Q: What is the major reason for international business expansion?
A: The major reason for international business expansion is to increase the market share, gain new customers, exploit new opportunities and diversify the risks involved in operating a business.
Q: What is an international business expansion example?
A: An example of international business expansion is when a company based in the United States establishes store locations in other countries such as China, Japan, and Italy.
Q: What are the four types of international business?
A: The four types of international business are exporting, licensing, franchising, and direct investment.
Q: What are the 5 stages of international business?
A: The five stages of international business are no direct foreign market involvement, export via an independent representative, the establishment of sales subsidiaries, production and sales subsidiaries, and a global service provider.
Q: What to consider when expanding a business internationally?
A: When expanding a business internationally, factors to consider are market conditions, cultural differences, currency exchange rates, taxes and tariffs, language barriers, legal and regulatory requirements, and logistics and infrastructure.
What is Tyke? Founded in 2021, Tyke claims to be a private investment gateway that enables private capital transactions in a seamless manner. With a ticket size as low as INR 5,000, Tyke enables individuals to become angel investors and invest in startups. This opens up the angel investing market to a large community of investors, which was earlier restricted to a small circle of HNIs.
This also allows startups to raise capital from a larger pool of investors.
For the above services, as per their website, Tyke charges a standard listing fee from the startup and a success fee on the total amount raised via a successful campaign. Further, it also charges a 2% convenience fee on the subscription amount. It does not charge anything from the investors.
In a short span of two years, Tyke has impressively mobilized over INR 100 crore via 200+ campaigns. The rising public fascination with platforms like Shark Tank further fuels this enthusiasm towards the startup ecosystem.
Startups can launch various campaigns on Tykeinvest, ranging from CCD and CCPS to CSOP, NCD, and Invoice Discounting campaigns.
While CCDs and CCPS offer investors a seat at the startup’s cap table, Tyke accentuates that their Community Stock Option Plan (CSOP) doesn’t influence the company’s cap table. They describe CSOP as a contractual agreement executed between a subscriber (investor) and the startup which entitles the subscriber to community benefits and the potential to be granted Stock Appreciation Rights.
Recent MCA order in the case of SustVest which raised funds on Tyke
Gurugram-based ‘Solargridx Ventures Private Limited’ (“the Company”), in its bid to attract investments, used the CSOP campaign on the Tyke platform under the brand name ‘SustVest’. It managed to raise around ~INR 52 lakhs from more than 500 investors through this campaign.
The Company issued 6,186 CSOPs to 565 subscribers. The Company issued the CSOPs for a subscription fee of INR 1,000 inclusive of applicable taxes and GST. Invoices were issued to the subscribers for such fee. The Company treated the revenue received from CSOPs of INR 52.42 lakhs under the head of “other income” and paid 18% GST on the same as was filled in the GSTR3B return for the month of March 2022.
However, the MCA issued an order against the Company on September 22, 2023, imposing a total penalty of INR 10 lakhs on the Company and the 3 directors for breach of section 42 of the Companies Act, 2013 (“CA 2013”). The MCA has also asked the Company to refund the total money received of ~INR 52 lakhs along with interest of ~INR 7 lakhs to the investors.
The crux here was: Do CSOPs issued by the Company classify as “securities”? If so, this would necessitate the Company’s compliance with section 42 of the CA 2013, which pertains to the ‘Issue of shares on a Private Placement basis’.
Key Matters of Contention
1. Whether CSOPs can be regarded as a “security”
The first and key matter of contention is whether the CSOPs issued should be classified as “securities” or not. If yes, the MCA has alleged that the Company has not complied with the provisions of section 42 of the CA 2013 dealing with ‘Issue of shares on a Private Placement basis’. Section 42 of the CA 2013 is reproduced in Annexure 1.
Before discussing the arguments on this matter by both parties, it is imperative to understand the term “security”.
The term “security” is defined in section 2(81) of the CA 2013 where it directs us to section 2(h) of the Securities Contracts (Regulation) Act, 1956. Reading these two laws in conjunction, broadly, “securities” includes derivatives which, in turn, includes:
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security
(B) a contract which derives its value from the prices, or index of prices, of underlying securities
An extract of the relevant sections from the CA 2013, and the Securities Contracts (Regulation) Act, 1956 are reproduced in Annexure 1.
Company’s contention
The Company submitted that CSOPs are merely an agreement by the company to engage its Subscribers / Evangelists through a closed community with a view to grow the customer base and business. The company aims to leverage the network effect created through this community to achieve its objectives, including increased sales, improved brand identity, better adaptation to new trends, and reliable user feedback.
The Company partnered with Tyke, a technology-based community platform, to conduct an online pitching session to introduce itself to Tyke members and educate them about its achievements and growth prospects. After the pitching session, the Company created a closed group for subscribers to access the community benefits and perform the role of evangelizers on behalf of the Company. Thus, according to the Company, it can be seen that it has neither released any public advertisements nor utilized any media, marketing or distribution channels or agents to inform the public at large about such an issue of securities.
Further, the amounts received from the subscribers are in the nature of ‘membership fees’ and invoices have been raised by the Company. Such amounts are shown under the head “other income“ and offered to tax as such. Further, GST has also been paid on such income.
The Company submitted that CSOP does not derive its value from any underlying variable like share price/ stock index. To qualify as “rights or interest in securities” there has to be an underlying security that is absent in the present facts.
MCA’s contention
The MCA pointed out that the CSOP holders were ostensibly promised that they would be rewarded based on future valuation of the Company. Further, the financial statements unequivocally declare that CSOP holders would be able to unlock value based on future valuation.
The CSOP agreement submitted by the Company had the following key clauses:
•The payout amount to the CSOP holders means settlement paid by the Company by way of cash, by way of equity securities, or partly cash and partly equity securities.
•The total amount to be paid to a CSOP Holder for the CSOP, upon the occurrence of a Payment Event, shall be equal to the number of CSOPs multiplied by the Ratio of the Fair Market Value of an Equity Security determined in the Liquidity Event or at the time of exercise of the CSOPs by the CSOP Holders as may be intimated by the Company
•Each CSOP is equal to the proportionate amount of Equity Securities as on the pre-money valuation of the Company of INR 4,10,00,000.
•Any restructuring undertaken by the Company will adjust the payout of the CSOP holders
Thus, according to MCA, the value of the CSOPs is linked to the equity securities at inception stage, capital restructuring stage and payout stage. CSOPs also have other trappings of securities like transferability, maintenance of a register, etc as per the agreement.
The MCA, also reached out to the subscribers to give their comments/views along with documents supplied to them by the Company for cross verification. Reply from one the subscribers, enclosing a copy of the email received from Tyke clearly suggested that the said subscriber had got an “invite to invest” in the subject company through the Tyke platform.
In light of the above, as per the MCA, CSOP is clearly a ‘derivative’ as it derives its value from equity shares and thus should be treated as a “security” requiring the Company to comply with the provisions of section 42 of the CA 2013.
Ourthoughts
The issue isn’t simply about labelling the CSOPs but understanding their inherent nature. If an instrument behaves like a security and is perceived as such by its holders, then it should be treated accordingly, irrespective of its nomenclature.
In this case, given the evidence at hand, it seems that the regulators’ view holds substantial merit. The CSOPs, by their very structure and intent, appear to have characteristics inherent to securities.
Applicability of IndAS
Company / Tyke’s contention
The Company submitted a legal opinion which was obtained by TYKE from one of the law firms which stated that the companies whose financials have been prepared in accordance with the provisions prescribed under ‘IndAS’ can issue CSOP and the same will not fall under the definition of securities.
Our thoughts
The Company is following the Indian GAAP and not IndAS, therefore the legal opinion does not apply to the Company.
Further, most Indian startups who raise money from platforms like Tyke are operating at a scale where they are not mandated to follow IndAS provisions. Refer Annexure 2 for details on applicability of IndAS
Applicability of SEBI guidelines
Tyke’s contention
In a recent article, Karan Mehra, Tyke’s CEO, says, “Understanding the legal landscape surrounding an instrument such as CSOP and SARs is imperative. In its interactions, SEBI has clarified that cash-settled SARs, like those under the CSOP agreement, fall outside the purview of specific SEBI regulations, being governed instead by the contractual terms and the Indian Contract Act ‘1872. Furthermore, they do not qualify as derivatives per the Securities Contract Regulation Act 1956. Similarly, from an accounting standpoint, SARs are meticulously governed by established standards, specifically Ind AS 102 and the Guidance Note on Accounting for Share-Based Payments issued by ICAI. This ensures transparency and adherence to best practices in financial reporting.”
In this article, the Tyke team reckons that CSOP is not merely an investment tool but a bridge connecting startups with evangelists who believe in their vision and mission. As stated in the legal opinion from Shardul Amarchand Mangaldas & Co., “CSOP is a contractual agreement where startups onboard persons to evangelize its brand, becoming a part of its community, and contributing to its growth and mission.”
They also added that CSOP “is not classified as a security, and it operates under the purview of the Contract Act”, thus remaining outside the SEBI purview. The legal opinion also elaborated by saying, “SEBI has clarified that SEBI (Share Based Employee Benefits) Regulations, 2014 would be inapplicable to any cash-settled option which is issued at a pre-determined grant price. This clarification enables listed companies to offer options at a pre-determined grant price without having to comply with any SEBI regulations.” On the other hand, the SAR is designed to allow stakeholders to benefit from appreciating a company’s stock value without the direct ownership or the associated complexities. In essence, it’s a way to reward those who believe in a company’s potential and future growth.
Income neutral treatment in the books of accounts
Company’s contention
In its submissions, the Company has claimed that the money raised from Tyke of INR 52.42 lakh has been offered to tax as CSOP Subscription Income in its profit and loss account. Further, GST has been paid on such income by the Company.
However, the Company has also booked an expense as “CSOP Expenditure” and has created a provision for “CSOP Liability” of the same amount.
Extracts of the financial statements of the Company for FY 21-22 are reproduced in Annexure 3.
Our thoughts
The CSOP subscription income and CSOP expenditure offset each other, resulting in an income-tax neutral impact on the Profit and Loss.
Tyke remains out of regulatory purview
What’s interesting is that Tyke, the platform facilitating these investments, hasn’t faced any penalties or regulatory actions.
This brings up questions about who is responsible for such new investment models and how intermediaries like Tyke fit into the regulatory landscape.
Conclusion
While platforms like Tyke are revolutionizing the investment landscape by educating startups and investors about the nuances of modern investments, it’s vital to tread with caution. By democratizing access to early-stage investments and pioneering novel financing structures, these platforms have broadened opportunities for many. However, startups and investors must approach these opportunities with a comprehensive grasp of the associated regulatory framework to avoid potential pitfalls. This ensures that the evolution of investment strategies remains both innovative and compliant.
While platforms like Tyke are revolutionizing the investment landscape by educating startups and investors about the nuances of modern investments, it’s vital to tread with caution. By democratizing access to early-stage investments and pioneering novel financing structures, these platforms have broadened opportunities for many. However, startups and investors must approach these opportunities with a comprehensive grasp of the associated regulatory framework to avoid potential pitfalls. This ensures that the evolution of investment strategies remains both innovative and compliant.
As the startup ecosystem continues to evolve, startups and investors must remain vigilant and proactive in addressing emerging regulatory issues especially while raising funds.
Timeline Of Events
Aug 2020 – Solargridx Ventures Private Limited was incorporated
Feb 2022 – Solargridx granted 6,186 CSOPs to 565 subscribers, raising INR 52.42 lakhs
March 02, 2022 – Company received the total subscription amount from Tyke
April 20, 2023 – MCA issued a Show Cause Notice (SCN) to the Company requesting reply why MCA should not impose penalty and take actions for violation of section 42 of the CA 2013
May 12, 2023 – The Company filed its 1st response to SCN and submitted a copy of an unsigned CSOP agreement (1st version of agreement). In the reply, the Company stated CSOPs were issued with intent to build brand loyalist and increase sales of its solar projects business, subscribers would receive community benefits, engaged with a closed community on Tyke platform and link shared with them separately, build goodwill. Company also submitted in the reply that no public advertisements or marketing or distribution channels were used to inform the public at large.
May 17, 2023 – 1st hearing before Adjudicating Officer (AO) attended by one of the Directors – and two Practicing Company Secretaries. Despite auditor’s (Nischal Agrawal) presence being requested by AO, he remained absent citing medical reasons but he filed a separate response via email in which he conveyed that the CSOP transaction was novel and thus he disclosed the transaction under “Emphasis of Matter” based on management’s representation.
Further, at the hearing the AO had directed the Company to provide following additional information:
i) list of subscribers to the CSOP;
ii) copy of 5 signed CSOP agreements with subscribers
iii) Basis for treating amount received from subscribers as ‘Other Income’ and accounting standard applied, and opinion from Tyke’s legal team.
iv) Clarification on CSOP settlement and payment & exit to subscribers;
v) whether CSOP is in form of SARs and how Company’s CSOPs are different from other CSOPs on the Tyke platform
vi) Details of events and banking transaction modes, and payment made to Tyke.
May 29, 2023 – The Company filed its 2nd response to SCN, as per requirements of AO directed during the hearing providing following details:
i) Copies of 5 agreements submitted and clarification given that contractual business relation entered into with 565 subscribers on Tyke platform, and all agreements had similar contents (2nd version of agreement, materially different from 1st version submitted as draft).
ii) Subscription money received was for ancillary activity and not main business and intention of CSOP is to collaborate with subscribers for future growth and brand loyalty, hence treated as ‘other income’.
iii) One-pager unsigned legal opinion of Tyke’s team which did not clearly indicate the specific accounting standard and thus the accounting treatment was not properly explained
iv) Company denied the CSOPs were in the nature of SARs.
v) Company provided timelines and details of payment received for subscription fees from Subscribers, through Tyke platform. The Company had in its 2nd Response to SCN also categorically mentioned that all 565 agreements were signed.
July 07, 2023 – Email sent to Company seeking clarifications regarding inconsistencies in agreement copies submitted on 12 May 2023 and 29 May 2023, and regarding SARs
Because the Company had submitted different versions of the Agreement, and different facts with no clarity, the AO even had to invite some of the subscribers to provide their views and documents regarding the offer from the Company.
July 25, 2023 – The Company clarified that initially on 12 May 2023, draft versions were submitted, and later on 29 May 2023 signed versions of the agreements were submitted as per direction of the AO.
Stance regarding SAR’s remained the same, that the CSOPs were not in the form of SARs, however, the Company submitted that not all agreements were signed with all subscribers.
At this point it is also important to note that the Company informed the AO that out of total 565 agreements, 114 agreements were still unsigned and had to be finalised (i.e. pending since February 2022).
July 31, 2023 – Another reply sent by company via email, with a copy of digitally signed agreement with one of the subscribers (3rd version of agreement which matched with agreement copy received form one of the subscribers directly. It is pertinent to note that the 3rd version was, once again materially different from earlier two versions).
August 21, 2023 – 2nd hearing before AO, wherein following submissions were made:
a. Company was a zero-revenue company in FY 2021-22
b. Company has duly paid GST
c. The CSOP agreement was entered into with subscribers to grow customer base and rewards would be in the form of discount/ concessions on the products of the Company amount received was treated as subscription / membership fees. d. CSOP was not a Derivative, and relied on a couple of judgments in support
e. Director being unaware of communication sent to subscribers by TYKE on behalf of the Company, regarding SARs and addendum to primary agreement
Additionally, Auditor submitted that he had received Management Representation Letter from the company wherein it was mentioned that management was yet to finalize the contracts and thus sample invoices.
September 22, 2023 – Order passed by AO, imposing total penalty of INR 10,00,000/- on the Company and on the 3 directors for breach of various provisions of section 42 of CA 2013 and asked Company to refund the total money received – INR 61,86,000/- along with interest of INR 7,17,576/- to subscribers respectively
Note: Text marked in bold depicts discrepancies identified by MCA
Annexure 1 – Extract from CA 2013 and Securities Contracts (Regulation) Act, 1956
Extract from CA 2013:
Section 2: Definitions
“(81) “securities” means the securities as defined in clause (h) of section 286-87 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);”
Section 42: Issue of shares on private placement basis
42. (1) A company may, subject to the provisions of this section, make a private placement of securities.
(2) A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher number as may be prescribed6 [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed6.
(3) A company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed:
Provided that the private placement offer and application shall not carry any right of renunciation.
Explanation I.—”Private placement” means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in this section.
Explanation II.—”Qualified institutional buyer”7 means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended from time to time, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).
Explanation III.—If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed6 number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter.
(4) Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person alongwith subscription money paid either by cheque or demand draft or other banking channel and not by cash:Provided that a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8).
(5) No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company:
Provided that, subject to the maximum number of identified persons under sub-section (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.
(6) A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day:
Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities
(7) No company issuing securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.
(8) A company making any allotment of securities under this section, shall file with the Registrar a return of allotment within fifteen days from the date of the allotment in such manner as may be prescribed8, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed8.
(9) If a company defaults in filing the return of allotment within the period prescribed under sub-section (8), the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.
(10) Subject to sub-section (11), if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty.
(11) Notwithstanding anything contained in sub-section (9) and sub-section (10), any private placement issue not made in compliance of the provisions of sub-section (2) shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be applicable.
Extract from Securities Contracts (Regulation) Act, 1956
“(ac) “derivative” includes—
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;”
“(h) “securities” include—
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ia) derivative;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(id) units or any other such instrument issued to the investors under any mutual fund scheme;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interest in securities;”
Annexure 2 – Applicability of IndAS
There are mainly four phases of applicability of IndAS. These phases are applicable on the basis of the net worth and the listing status of the company. These phases are divided by the MCA (Ministry of Corporate Affairs).
Phase I
Mandatory applicability to all companies from April 01, 2016, provided: •It is a listed or unlisted company •Its Net worth is greater than or equal to INR 500 crore in previous three Financial Years
Phase II
Mandatory applicability to all companies from April 01, 2017, provided: •It is a listed company or is in the process of being listed (as on 31 March 2016) •Its Net worth is greater than or equal to INR 250 crore but less than INR 500 crore in any of the previous four Financial Years
Phase III
Mandatory applicability to all Banks, NBFCs (including core investment companies, stock brokers, venture capitalists, etc) and Insurance companies from April 01, 2018, whose: •Net worth is more than or equal to INR 500 crore with effect from April 01, 2018 in previous three financial years
Phase IV
All NBFCs whose Net worth is more than or equal to INR 250 crore but less than INR 500 crore shall have IndAS mandatorily applicable to them with effect from April 01, 2019.
Notes:
1. If IndAS becomes applicable to any company, then it shall automatically be made applicable to all the subsidiaries, holding companies, associated companies, and joint ventures of that company, irrespective of individual qualification of such companies.
2. Companies can voluntarily choose to incorporate IndAS in their reports for accounting periods beginning on or after April 01, 2015.
3. Once a company has started reporting as per the IndAS, it cannot change to reporting as per previous laws.
Annexure 3 – Extract of financial statements of the Company
Emphasis of Matter
We draw attention to Note 20 and Note23 of the financial statements, wherein, the company has adopted and approved the Community Stock Option Plan (“CSOP Plan”) for granting to eligible community members identified and approved by the Board, the right to receive Payouts pursuant to the Plan. Each CSOP Holder is an evangelist of the Company’s products & services and accordingly the Company has agreed to reward the CSOP Holder through payouts. The Company issued 6,186 Community Stock Options as per the Company Stock Option Plan to 565 subscribers. The Company issued the CSOP per unit for subscription fee of Rs.1,000/- inclusive of applicable taxes and GST. The total amount received from such subscriptions have been recognised as Other income. The Company has agreed to reward the holders based on the future valuation of the Company and the reward may change over a period. Thus, the Company has created a provision for ‘CSOP Liability’ and the expense has been recognised as ‘CSOP Expenditure’ of Rs.52,42,373/-
Long Term Provisions
Particulars
As at 31.03.2022
As at 31.03.2021
(b) Provision – Others
Provisions for CSOP Liability
52,42,373
–
Total
52,42,373
–
Other Income
Particulars
For the year ended 31.03.2022
For the year ended 31.03.2021
CSOP Subscription*
52,42,373
–
Interest on Bank Deposit
13,268
–
Profit from Sale of Mutual Fund Units
19,766
–
Total
52,75,407
–
Note:
During the year, the Company has adopted and approved the Community Stock Option Plan (“CSOP Plan”) for granting to eligible community members identified and approved by the Board, the right to receive Payouts pursuant to the Plan. Each CSOP Holder is an evangelist of the Company’s products and services and accordingly the Company has agreed to reward the CSOP Holder through payouts. The Company issued 6,186 Community Stock Options as per the Company Stock Option Plan to 565 subscribers. The Company issued the CSOPs for a subscription fee of Rs. 1,000/- inclusive of applicable taxes and GST. The total amount received from such subscriptions has been recognised as Other Income. The Company has agreed to reward the holders based on the future valuation of the Company and the reward may increase/decrease over a period. Thus, the Company has created a provision for ‘CSOP Liability’ and the expense has been recognised as ‘CSOP Expenditure’ of Rs. 52,42,373/-. Basis recommendation issued by the legal team hosted on the Tyke platform.
The Central Board of Direct Taxes (CBDT) notified amendments to Rule 11UA of the Income-tax Rules, 1962 applicable for computing angel tax on September 25, 2023 pursuant to the draft rules introduced earlier and feedback received from stakeholders and general public.
In addition to the proposed changes, the CBDT has introduced rules for valuation for Compulsorily Convertible Preference Shares (CCPS).
Timeline
May 19, 2023 – CBDT proposes changes to Angel tax rules and notify list of excluded non-resident entities
May 24, 2023 – The Central Government notifies entities to whom Angel tax provisions will not apply
September 25, 2023 – The CBDT notifies amendments to Rule 11UA
New Valuation methods
In addition to the existing valuation methods [i.e., Book / Net Asset Value (NAV) and Discounted Cash Flow (DCF)] the CBDT has introduced the below options:
•Price offered to Venture Capital (VC): A VC undertaking can consider the investment valuation received for the issuance of unquoted equity shares from either a VC fund, a VC company, or a specified fund (Cat I / II AIF) as a valuation benchmark for determining FMV of equity shares issued as long as it does not exceed the aggregate investment so received. Consideration from other investor should be received within a period of 90 days before or after the date of issue of shares which are the subject matter of valuation
•Price offered to notified entities: The valuation of investment received by a company from notified entities can also be considered subject to conditions mentioned above
•International pricing methods: For investment by non-residents, they have an additional option to determine FMV by a Merchant Banker as per any of the below 5 methods:
(i) Comparable Company Multiple Method
(ii) Probability Weighted Expected Return Method
(iii) Option Pricing Method
(iv) Milestone Analysis Method
(v) Replacement Cost Method
Applicability of valuation methods
Method
Report issued by
Investment received from Resident
Investment received from Non-resident
Equity shares
CCPS
NAV²
Not specified
Yes
Yes
DCF²
Merchant Banker³
Yes
Yes
Price offered to venture capital
–
Yes
Yes
International pricing methods²
Merchant Banker³
–
–
Price offered to notified entities
–
Yes
Yes
1 CCPS can also be valued as per valuation of equity shares determined in line with the above methods as applicable
2 Safe Harbour available i.e. 10% upside variation is allowed
3 Date of merchant banker report not older than 90 days from date of issue of shares can be considered as valuation date
Do reach out to us at support@treelife.in if you need further help in understanding this or obtaining valuation reports
The following article offers an understanding of the funds received and disbursed by involved parties in a settlement outside the courtroom. It also outlines how such funds are handled according to the Income Tax Act and GST Act.
1.Treatment as per Income tax in the hands of a recipient
2.Treatment as per Income tax in the hands of the settling party
3.Understanding GST applicability on the same
4.Case laws
5.Conclusion
Treatment as per Income tax in the hands of a recipient
In the realm of taxation concerning out-of-court settlements, a pivotal aspect to consider is the categorization of receipts into revenue and capital under the Income Tax Act, 1961 (“IT Act”). This distinction helps identify whether the settlement amount is taxable or not.
Revenue receipts
Arise from the regular and routine business operations of an entity and are generally recurring in nature.
In out of court settlement, compensation for loss of trading stock or loss of profits can be considered as Revenue receipts.
Generally, revenue receipts are taxable unless specifically exempted.
Examples – amounts received for sale of goods, interest on loans, rental income.
Capital Receipts
Do not arise from the normal business operations and usually one-time receipts and are not recurrent.
In out of court settlement, compensation for damages leading to the diminution of the asset’s value or for the termination of a business can be considered as Capital Receipts.
Generally not taxable, unless it’s mentioned otherwise under the IT Act
Examples – Receipts include sale proceeds from selling an asset, money received from a share issue.
Distinguishing between compensatory and punitive nature is crucial for determining if compensation payments can be treated as allowable expenses. The following points outline this differentiation clearly.
Compensatory Expense
Paid damages or losses in business operations are compensatory expenses.
Paid to end a lawsuit for alleged damages or harm caused or payments to businesses for losses incurred due to contract breaches are compensatory expenses.
Examples include Payment for breach of contract or business losses.
Penal Expense
Paof toward fines or penalties levied for legal or regulatory violations are penal expenses.
In out of court settlement context, amounts paid to end a lawsuit for regulatory violations or payments for statutory non-compliances are penal in nature.
Common examples include fines for legal infringements or regulatory non-compliances
Untangling GST Applicability in Out-of-Court Settlements
The taxable event in GST is supply of goods or services or both. Hence its important to understand the meaning and scope of “Supply” under GST which clearly defined in the following 6 parameter
1. Supply of goods or services. Supply of anything other than goods or services does not attract GST
2. Supply should be made for a consideration
3. Supply should be made in the course or furtherance of business
4. Supply should be made by a taxable person
5. Supply should be a taxable supply
6. Supply should be made within the taxable territory
Compensation paid in out of court settlements does not qualify as a ‘supply’ under the GST regime. Therefore, it is not liable to GST. However, it’s vital to analyze the nature and purpose of the compensation to ascertain the exact GST implications.
Taxability of compensation paid under GST depends on whether the compensation is for
breach of contract – be considered as consideration for supply of a service and would be taxable under GST
for any other reason – it would not be taxable under GST as they cannot be treated as any sort of service and they lack the element of mutual consideration
For damages / liquidated damages – may be considered as supply of goods or services considering such receipt fall within the ambit of ‘agreeing to obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’.
GST is not payable on damages/compensation paid for a legal injury as payment lacking the element of mutuality of consideration.
Conclusion
•Classification of receipts, whether revenue or capital, especially in the context of out-of-court settlements, might require a detailed analysis of the nature and purpose of the receipt.
•Decisions from judiciary and expert advice can aid in providing clarity.
•In practice, nature of receipt shall be determined by extensive scrutiny of pleadings in suit and / or recitals contained in the settlement agreement and careful drafting will be quintessential.
Often founders are confused about creating an ESOP pool on the cap table when investors require them to create one before making the investment.
An ESOP pool is a set of shares earmarked for the company’s employees – which will be issued to them under ESOP Scheme.
Creation of ESOP pool leads to dilution of founder and investor shareholding at the time of creation of the pool.
The shares forming part of the pool are not issued yet. They are just notionally carved out shares which are represented on the fully diluted cap table of the company.
Sample cap table on a fully diluted basis :
Shareholder
Pre-ESOP
On creation of ESOP pool
# of shares
% shareholding
Founder 1
5,000
50%
Founder 2
5,000
50%
ESOP Pool*
–
–
Total
10,000
100%
These are just notional shares and not issued to any employee benefit trust*
We have also created a sample cap table with an ESOP pool for your ready reference: Click to know more https://bit.ly/3pYF4zH
Practical Insights
Founders typically create an ESOP pool of 10-15%. As the company grows and raises rounds of funding, the ESOP pool dilutes to approx. 3-4%
Mature investors usually ask founders to create an ESOP pool before making investment so that their stake does not dilute during later stages of funding
Creation of an ESOP pool only requires passing of a simple board resolution.
In today’s globalized era, the world feels more interconnected than ever. Many companies are expanding internationally, setting up offices worldwide, and seeking new markets for their products. Some startups, including some unicorns, have relocated their holding company outside India in a process known as “flipping” to capitalize on global opportunities.
Understanding the Flipping Phenomenon
Flipping, in the Indian startup realm, refers to the practice where startups, originally based in India, restructure their corporate structure to relocate their holding company and intellectual property (IP) to foreign jurisdictions, usually the United States or Singapore despite having a majority of their market, personnel and founders in India.
The primary reasons for startups to externalize their corporate structure inter-alia are access to deeper pools of venture capital, favorable tax framework, market penetration and brand positioning as an international entity, which can be beneficial in terms of attracting global talent and customers.
However, recent times have seen an emergence of an interesting counter-trend: ‘Reverse Flipping’ or ‘De-externalization’.
However, recent times have witnessed an intriguing counter-trend: ‘Reverse Flipping’ or ‘De-externalization’ i.e. Indian startups are opting to reverse flip back into India due to its favorable economic policies, burgeoning domestic market, and growing investor confidence in the country’s startup ecosystem.
The Emergence of Reverse Flipping
Reverse flipping, as the name suggests, is the antithesis of the flipping trend. Here, startups that once relocated their holding companies outside India are now considering a strategic move back to their home ground, India.
As mentioned above, one of the primary reasons for reverse flipping back to India is the fact that the Indian startup ecosystem has matured significantly in recent years. There is now a large pool of untapped domestic retail investors who want to invest in emerging companies they believe have the potential to grow. Additionally, the Indian government is taking steps to make it easier for startups to go public, which could make it more attractive for startups to reverse flip.
Take, for example, PhonePe. Originally an Indian entity, it flipped its structure to Singapore but has now moved its base back to India. In doing so, the founders have gone on record to say that the investors had to pay almost INR 8,000 crore of taxes to the Indian Government. It also stands to lose the chance to offset its accumulated losses of almost INR 7,000 crore against future profits due to this restructuring. Also, all employees had to be migrated to a new India-level ESOP plan which stipulates a minimum 1 year cliff thereby resetting the vesting status to zero with a 1 year cliff.
PhonePe is not alone. Several startups like Razorpay and Groww are also evaluating this shift, acknowledging the promise that the Indian market holds.
How to Reverse Flip?
Structuring a reverse flip is not easy and startups considering this reverse journey have to navigate a maze of regulations. Some popular methods include share swaps, mergers, etc and could also require approval from NCLT.
Startups need to be aware of the potential tax and exchange control implications that come with such a restructuring exercise.
When a startup’s valuation has increased significantly since its initial flip, there can be significant tax consequences upon reverse flipping. The process can be perceived as a ‘transfer of assets’, leading to capital gains tax implications in India and possibly even in foreign jurisdictions. This can also technically lead to a change in beneficial ownership, thereby risking the accumulated losses for setoff against future profits. Startups also need to navigate the exchange control regulations when repatriating funds or assets to India, ensuring all compliances are met.
While the above provides a birds-eye view, it’s imperative for startups to consult experts for a tailor-made approach, aligning with their unique business needs and ensuring compliance with the tax and regulatory framework.
What is the Government saying?
Indian Economic Survey 2022-23 acknowledged the concept of reverse flipping and has listed possible measures that can accelerate the reverse flipping process for startups including simplifying the process for granting tax holidays to start-ups, simplification of taxation of ESOPs, simplifying multiple layers of tax and uncertainty due to tax litigation, simplifying procedures for capital flows, etc.
The International Financial Services Centres Authority i.e. IFSCA has also constituted an expert committee to formulate a roadmap to ‘Onshore the Indian innovation to GIFT IFSC’. IFSCA plans to make GIFT City, India’s first IFSC, the preferred location for startups to reverse flip into. This expert committee submitted its report1 on 25 August 2023 with recommended measures to be undertaken by various stakeholders such as ministries and regulatory bodies in implementing the idea of onshoring the Indian innovation to GIFT IFSC.
In Conclusion
The trend of reverse flipping underscores the belief in India’s potential as a global startup hub. While challenges exist, the long-term benefits of tapping into the domestic market, coupled with the strengthening startup ecosystem, are compelling many to look homeward. It will be intriguing to witness how this trend evolves and shapes the future.
Looking for expert contract advice? Call us at +91 99301 56000 today.
1. Play Games24x7 Private Limited v. Reserve Bank of India & Anr.
Factual Matrix
Play Games24x7 Private Limited (“Petitioner”) is engaged in the business of designing and developing software related to games of skill (“Business”), and offers the games ‘Ultimate Teen Patti’ and ‘Call it Right’ (“Impugned Games”). However, these Impugned Games do not involve any real-money winnings or cash prizes as rewards.
During the period 2006-2012, the Petitioner received several foreign remittances, for which the necessary reporting with the Reserve Bank of India (“RBI”) under the Foreign Exchange Management Act, 1999 and the rules made thereunder (“FEMA”) was pending from the Petitioner’s end. In 2012, the RBI, directed the Petitioner to file an application such that all the FEMA contraventions could be compounded together (“Compounding Application”).
In early 2013, the foreign exchange department of the RBI returned directed the Petitioner to approach the then Department of Industrial Policy and Promotion (now the Department from Promotion of Industry and Internal Trade (“DPIIT”)), to seek a clarification whether the Petitioner was eligible to legally receive FDI (“DPIIT Clarification”), which the Petitioner had applied for, but to no avail.
Thereafter, in March 2020, the Petitioner filed yet another Compounding Application with the RBI, which the RBI returned to Petitioner, citing that the DPIIT Clarification was still not obtained by the Petitioner.
Despite multiple communications with the RBI, there was no tangible outcome with regards to the DPIIT Clarification. In light of the same, in May 2021, the Petitioner filed the present petition against the RBI before the Hon’ble Bombay High Court alleging that the Compounding Application was being unreasonably delayed by the RBI.
Contentions and the question in point
Party
Contentions
Petitioner
The Impugned Games were casual/ social games which did not involve any real-money winnings or cash prizes as rewards. The Petitioner earned revenue through the Impugned Games only through in-app purchases by players and through in-game advertisements. Since the Impugned Games, although ‘games of skill’, did not have any real-money winnings or rewards, they could not be construed as ‘gambling’ under gaming laws in India.
RBI
It was not concerned with the assessment of the Petitioner’s nature of Business and that it just required for its records, the DPIIT to state that the Petitioner’s Business was not illegal in nature. If the DPIIT Clarification would identify the Petitioner’s Business as permissible, the Compounding Application would be processed by the RBI.
DPIIT
The Impugned Games, being ‘games of chance’ under Indian laws, fell under the purview of ‘gambling’, which is a prohibited sector under the FDI Policy 2020 (“FDI Policy”).
Question in point before the Hon’ble Bombay High Court
Whether the Petitioner’s Business would constitute ‘gambling’ (which is a prohibited sector under the FDI Policy) and thus, disqualify the Petitioner from being entitled to FDI.
Judgement and Key Takeaways
JUDGEMENT
The Hon’ble Bombay High Court primarily placed reliance on the Hon’ble Supreme Court of India’s decisions in RMD Chamarbaugwala v. Union of India (AIR 1957 SC 628) and Dr. K.R. Laxmanan v. State of Tamil Nadu & Anr. [1996 (2) SCC 226] in order to determine the legality of the Petitioner’s Business and whether the same constitutes ‘gambling’.
The Hon’ble Bombay High Court held that in order to be construed as ‘gambling’, the game shall: (i) predominantly be a ‘game of chance; and (ii) be played for a reward. Since there was no real-money reward involved, the Impugned Games could not be brought under the purview of ‘gambling’.
The Hon’ble Bombay High Court also directed the RBI consider the Petitioner’s Compounding Application in an expedited manner.
KEY TAKEAWAYS
FDI in entities offering games with no real-money rewards is legal and shall not be prohibited under the FDI Policy.
For an online game to be considered ‘gambling’, it shall: (i) predominantly be a ‘game of chance’; and (ii) be played for a real-money reward.
2. Gameskraft Technologies Private Limited v. Directorate General of Goods Services Tax Intelligence & Ors.
Factual Matrix
Gameskraft Technologies Private Limited (“Petitioner”) is a company engaged in developing skill-based online games such as ‘Rummyculture’.
In November 2021, the GST authorities (“Respondents”) having conducted search and seizure operations at the Petitioner’s premises, alleged that the Petitioner had suppressed taxable amounts and passed certain orders (“Attachment Orders”) attaching the Petitioner’s bank accounts (“Attached Accounts”), to which the Petitioner filed several objections in the Hon’ble High Court of Karnataka, but to no avail.
In December 2021, the Petitioner challenged the Respondent’s orders attaching the Attached Accounts pursuant to which, the Hon’ble High Court of Karnataka issued an order, allowing the Petitioner to operate the Attached Accounts for limited purposes.
In August 2022, the Hon’ble High Court of Karnataka directed that no further action be initiated against the Petitioner by the Respondents. However, soon thereafter, in September 2022, the Respondents issued an intimation notice to the Petitioner under the applicable GST provisions, demanding that the Petitioner deposit a sum of approximately INR 21,000 crores along with applicable interest and penalty (“Intimation Notice”).
Thereafter, in March 2020, the Petitioner filed yet another Compounding Application with the RBI, which the RBI returned to Petitioner, citing that the DPIIT Clarification was still not obtained by the Petitioner.
Despite multiple communications with the RBI, there was no tangible outcome with regards to the DPIIT Clarification. In light of the same, in May 2021, the Petitioner filed the present petition against the RBI before the Hon’ble Bombay High Court alleging that the Compounding Application was being unreasonably delayed by the RBI.
Contentions and the question in point
Party
Contentions
Petitioner
– The Petitioner merely hosts the ‘rummy’ game and the discretion to play a game and the stake for which it is to be played lies entirely with the players. The Petitioner merely charges 10% of the players’ winnings as ‘platform fees’. – The Respondents’ contentions under the Impugned Notice were completely false, perverse, malicious and deserved to be disregarded on the following grounds: the game ‘rummy’ is a ‘game of skill’ as per well-established judgements of the Hon’ble Supreme Court of India and thus, the Petitioner cannot be said to have been engaged in betting/ gambling. – The Respondents had maliciously inflated the ‘buy-in’ amounts for the ‘rummy’ game and had shown the same as revenue derived by the Petitioner, whereby in reality, the ‘buy-in’ amount is not the Petitioner’s property and the same is reimbursed to the winner by the Petitioner, once the game is over. – The Terms & Conditions mentioned on the Petitioner’s portal, which were not referred to by the Petitioner, clearly mention that the monies deposited by the players are held in ‘trust’ by the Petitioner and that the same completely negated the Respondent’s contention that the entire ‘buy-in’ amount was the Petitioner’s income.
Respondents
– The Petitioner’s provision of the platform, which allows users to play online ‘rummy’ and from which the Petitioner derives profits and gains, amounts to ‘betting and gambling’ under the CGST Act, since rummy is a ‘game of chance’. – The Petitioner’s contention that it charged 10% of the stakes placed by users as ‘platform fees’ was not acceptable, as the same shall be only collected in order to meet expenses and shall not be in the nature of commission. – In light of the above points, the Petitioner’s contention that ‘rummy’ is a ‘game of skill’ shall be rejected.
Question in point before the Hon’ble High Court of Karnataka
Whether games such as ‘rummy’, being predominantly ‘games of skill’, would tantamount to ‘gambling or betting’ as contemplated under the CGST Act.
Judgement and Key Takeaways
JUDGEMENT
The Hon’ble High Court of Karnataka held that ‘rummy’ would predominantly be a ‘game of skill’ and not a ‘game of chance’.
A ‘game of skill’ whether played with or without stakes would not amount to ‘gambling’.
The meaning of the terms “lottery, betting and gambling” under the CGST Act shall not include games of skill, and thus the same shall not apply to ‘rummy’, whether played with or without stakes. In light of the same, the game ‘rummy’ on the Petitioner’s platform, shall not be taxable as “betting and gambling” as contended by the Respondents under the Impugned Notice.
The Hon’ble High Court of Karnataka, finding the Impugned Notice illegal, arbitrary and without jurisdiction or authority of law, passed orders to quash the same.
KEY TAKEAWAYS
A game of skill whether played with or without stakes and whether played online/ offline does not amount to gambling. Thus, ‘rummy’, predominantly being a ‘game of skill’, whether played with or without stakes and whether played offline/ online, is not gambling.
A game of chance and played with stakes, is gambling.
A game of mixed chance and skill is not gambling, if it is predominantly a game of skill and not of chance.
A game of mixed chance and skill is gambling, if it is predominantly a game of chance and not of skill.
A Liquidation Preference provision sets out the level of priority that an investors’ shares receive for the purpose of recovering their initial investment (or a multiple thereof) upon trigger of a liquidation event. A liquidation event typically includes winding up, sale of substantial assets of a company, change of control, merger, acquisition, reorganization and other corporate transactions, among others.
How Liquidation Preference Helps an Investor?
1
Recovery of Initial
A liquidation preference allows the investors to recover at least their initial investment in a company.
2
Multiple on the Initial Investment
A liquidation preference provision also allows the investors to earn a multiple on their initial investment, i.e., instead of 1x, investors may seek 2x or more, if so agreed.
3
Distribution in order of seniority
A liquidation preference clause allows the distribution of the proceeds to be in an order of priority on the basis of the series of securities held by the investors.
.
Types and Mechanics of Liquidation Preference
Types of Liquidation Preference
Type of LP
Particulars
Non-participating Liquidation Preference
1x
Allows the investors to recover only their initial investment in the company.
1x or pro-rata, whichever is higher*(single dip)
Allows the investors to recover their initial investment or entitles them to the proceeds from the liquidation event, basis their pro-rata shareholding in the company (on an as-if converted basis), whichever is higher.
Participating Liquidation Preference
1x(double-dip)
Allows the investor to recover their initial investment (or a multiple thereof) in addition to a right to participate in the remaining proceeds basis their pro-rata shareholding in the company.
*Note:The multiple on the liquidation preference may be more than 1x and the amount of distribution of the liquidation preference shall be determined basis such a multiple.
Let us understand the mechanism of different types of liquidation preference through the below illustration:
*Note: The total liquidation proceeds are the total proceeds from a liquidation event which are subject to distribution between the shareholders.
2x or pro rata, whichever is higher
Total Liquidation proceeds*
Investors’ liquidation entitlement (2x)
Investors’ liquidation entitlement (pro-rata)
Actual entitlement
INR 20cr
INR 20cr
INR 2cr
INR 20cr.
INR 400cr
INR 20cr
INR 40cr
INR 40cr.
.
This form of liquidation preference is most desirable as, while it allows the investors to recover their initial investment, it also enables them to take advantage of the upside in case the larger proceeds are accumulated from a liquidation event.
It is however, not recommend signing up for a multiple on the investment amount.
While this may seem like a desirable form of liquidation preference, in the event the structure of a liquidation is not pari passu, i.e., in case the liquidation clause provides for a seniority, this may lead to disadvantage to the holders of equity shares (in most cases, the founders).
Conclusion
In conclusion, while liquidation preference is a crucial right for the investors, it is important for the founders to be mindful about the construct of this provision.
Early stage founders are recommended to consider the 1x non-participating liquidation preference, preferably provided in Scenario 1. Excessive or stringent liquidation preferences can deter future investment rounds and put the founders at risk of reduced share in the liquidation proceeds.
“Reverse flip” or “re-domiciliation” refers to a corporate restructuring process in which a company changes its country of domicile or legal registration from one jurisdiction to another.
Background
PhonePe was incorporated in 2015 in India
In April 2016, PhonePe was acquired by Flipkart. As part of the acquisition, PhonePe flipped its structure to Singapore
In 2018, PhonePe became a part of Walmart after it acquired Flipkart
In October 2022, PhonePe announced that it has moved its domicile to India (reverse flip) for following key reasons:
PhonePe wants to focus on India markets for the next couple of decades. PhonePe is a digital payments company that operates primarily in India. By redomiciling to India, PhonePe can be more responsive to the needs of its customers and partners.
The Indian government has been tightening regulationsfor digital payments companies in recent years. By redomiciling to India, PhonePe can be more easily compliant with these regulations.
To be better positioned for an IPO. PhonePe is expected to go public in the next few years
What Happened?
Steps undertaken
PhonePe moved all businesses and subsidiaries of PhonePe Singapore to PhonePe India directly
PhonePe created a new ESOP plan at India level and migrated all group employees to this new plan
IndusOS, owned by PhonePe, also shifted operations from Singapore to PhonePe India
Key Consequences of Reverse Flip to India
Lapse of accumulated losses of USD 900 million
PhonePe stands to lose the chance to offset its USD 900 million (~INR 7,380 crore) of accumulated losses against future profits as shifting the domicile from Singapore to India is viewed as a restricting event under Section 79 of the Income Tax Act, 1961
As per the provisions of Section 79, a company is not allowed to carry forward the losses if the change in beneficial ownership of shareholding of more than 50% occurred at the end of year in which losses were incurred
Reset of ESOPs to zero vesting with 1 year cliff
All employees of PhonePe were migrated to the new India level ESOP plan which stipulates a minimum 1 year cliff.
Thus, the employees vesting status was reset to zero with a 1 year cliff
Tax payout by investors of almost INR 8,000 cr
PhonePe investors, led by Walmart, sold their stake in the Singapore entity and invested in PhonePe India
This means that there was a capital gains tax event in India for the the investors leading to a tax-pay-out of almost INR 8,000 cr
Other Startups looking at Reverse Flip
Razorpay is in process to move its parent entity from the US to India
Groww is planning to move its domicile from the US to India
Pepperfry has reverse flipped their structure to India via amalgamation
Who Should Consider a Reverse Flip?
US Holding Company Founders Preparing for IPO
If your company is incorporated in Delaware or any US jurisdiction but operates primarily in India and plans to go public on Indian exchanges (NSE/BSE), reverse flip is essential. Indian regulators prefer domestic listed entities for governance and regulatory oversight. PhonePe, Razorpay, and Groww all recognized that a Singapore or US entity listing in India would face scrutiny. Moving domicile to India eliminates this friction during IPO roadshows and regulatory approvals.
Founders Facing Regulatory Arbitrage Pressure
RBI and government regulations on fintech, payments, e-commerce, and data localization keep tightening. If you are a foreign-incorporated entity managing Indian customer data, processing Indian rupees, or handling payments, you face compliance questions daily. A reverse flip positions you as a domestic entity subject to Indian regulations from day one, reducing legal ambiguity and investor concern. This is especially critical for payments companies, lending platforms, and data-heavy SaaS firms.
Pre-IPO India-Focused Startups (3 to 5 Years to IPO)
If your IPO timeline is 3 to 5 years and India is your primary market, reverse flip makes sense now. The longer you wait, the more complex the unwinding. PhonePe did this in October 2022, approximately 2 to 3 years before expected IPO (likely 2024 to 2025). Early reverse flip gives you time to settle into Indian regulatory framework, rebuild investor relationships, and demonstrate consistent India-domiciled governance.
Startups Facing Investor Pressure to “Prove India Commitment”
Late-stage investors and PE firms increasingly ask: “Are you really India-focused or is this a tax optimization play?” A reverse flip is a credible signal. Moving your legal domicile, reincorporating subsidiaries, and resetting ESOP structures shows serious commitment. It is no longer just about tax benefits; it is about operational alignment with your market.
Founders NOT Ready for Reverse Flip
Early-stage startups (Seed to Series A) should not reverse flip. The costs (legal, tax, ESOP reset, loss carry-forward forfeiture) exceed benefits. Wait until Series B or C when you have institutional investors and clearer IPO trajectory. Also skip reverse flip if you operate across multiple geographies. If India is just 30 to 40% of revenue, the regulatory and tax burden may not justify the move. Finally, if you have no IPO plans in next 5 years, reverse flip is premature. The tax loss lapse (like PhonePe’s USD 900 million) is painful if you are not profitable soon.
The Digital Personal Data Protection Act, 2023 (“Act”) is intended to safeguard and protect digital personal data, and (inter alia) govern the manner in which it can be collected, stored, processed, transferred, and erased. The Act imposes requirements on data fiduciaries/collectors and data processors, as well as certain duties on the data subject/individual with respect to personal data.
“Personal Data” under the Act includes any digital or digitized data about an individual (including any data which can be used to identify an individual). This excludes any non-digital data, or any data which cannot be used to identify an individual in any manner (including in concert with any other data).
This document is intended to provide a summary of the obligations of B2B-based SaaS business, which arise from the Act.
An Overview
The key obligations of businesses towards complying with the Act include:
Identify the extent of Personal Data collection, storage and processing which your business undertakes, and how much is necessary.
Prepare notices for procuring consents from individuals whose Personal Data you collect, store, and process (including those individuals whose Personal Data has already been collected and/or is being stored or processed), specifying:
Type/s of Personal Data you will use;
The specific purpose/s you will use it for;
The manner in which they can withdraw consent or raise grievances; and
The manner in which they can make a complaint to the Data Protection Board of India.
Maintain a record of consents procured and provide the following rights:
Right to request for (i) summary of their Personal Data being used; and (ii) identities of parties to whom their Personal Data has been transferred;
Right to correct, update and/or delete Personal Data (unless required to be retained for compliance with law);
Right to redressal for grievances and complaints;
Right to nominate another individual to exercise their rights (in the event of death or incapacity)
Action Items
While B2B SaaS platforms have limited Personal Data collection, Personal Data can still be collected and processed in case of user accounts for individuals/employees/representatives of enterprise customers. Businesses can take the following actions towards compliance with the Act:
Data audit: Carry out an internal data audit, including identifying Personal Data collection, storage and processing requirements;
Limit Personal Data usage: Erase or anonymize Personal Data to the extent feasible to reduce the compliance and associated risks, or limit the Personal Data points which are collected;
Update your product to enable privacy rights: Businesses should therefore make available on the SaaS tool / platform functionalities to:
Issue notices for procuring consent for Personal Data collection, storage and processing prior to any such collection, storage or processing. These notices can be worded in simple and clear terms so as to enable individuals to know their rights, and should include language which clearly states that consent is provided for collection, storage, and processing (including processing by third-parties); specify the purpose/s for the type or types of processing. For example – in case the processing will be done for purposes A, B and C, consent will have to procured specific for each of A, B and C; mention that consent can be withdrawn
Request modification, correction, updating, or erasure of Personal Data. Other than any Personal Data which is necessary for providing the services (for example, corporate email IDs), all Personal Data should be subject to modification or erasure pursuant to withdrawal of consent.
Appoint person/s who can handle complaints, grievances, or requests from individuals. This can be an individual assigned specifically for this task or a team responsible for ensuring speedy response.
Implement technical measures to protect against and mitigate data breaches and their consequences. The Act requires fiduciaries/collectors to “take reasonable security safeguards to prevent personal data breach”, which can include cloud monitoring, penetration testing, ISO certification, etc., depending on the sensitivity and extent of Personal Data.
The Office of Principal Scientific Advisor to the Government of India published the Draft National Deep Tech Startup Policy (NDTSP) for public recommendations. According to Startup India’s database, as of May 2023, more than 10,000 startups in India can be classified within the deep tech space and it is imperative to address the complex problems in the ecosystem.
Deep tech Definition
Deep tech refers to technologies which are based on pioneering scientific breakthroughs, which help providing solutions to complex problems. Deep tech conceptually includes the segment of Artificial Intelligence, Big data and analytics, Robotics, Internet of Things, Blockchain, etc., however, it is seldom difficult to make that identification.
The NDTSP recognizes that in order to understand the issues in the ecosystem, it is important to focus on identifying what qualifies as ‘deep tech’. While doing so may be challenging, the NDTSP aims to establish a framework of a working group that would be responsible in identifying the techno-commercially viable startups, which would further enable the creation of a definitive criterion for determining whether a startup can be qualified as ‘deep tech’.
Objective of the NDTSP
The NDTSP seeks to address the needs, complex challenges and strengthen the deep tech startup ecosystem by complimenting the current Start-up India policies and initiatives. The NDTSP aims to thematically prioritize the areas that require intervention and propose policy level changes in order to create a conducive ecosystem for the deep tech startups in the following manner:
Nurturing Research, Development & Innovation
The NDTSP aims to bolster research, development and innovation by incentivizing researchers, facilitate seamless dissemination of knowledge and set up platforms for protection and commercialization of IP. The primary priority of the policy is to increase gross expenditure on research and development by encouraging public and private investment through patient capital.
Strengthening Intellectual Property Regime
The NDTSP recognizes that the deep tech ecosystem lacks specialized support in obtaining patents required for such cutting-edge technology. In order to streamline the process of obtaining IP registrations, the NDTSP focuses on building framework for obtaining and managing the IP specifically in the deep tech space, capacity building for patent landscaping, monetary incentive for developing technologies with the government and other amendments in the current IPR Policy, 2016.
Facilitating Access to Funding
The NDTSP aims to enhance the already existing policies and programs of the government in order to tailor them for the requirements of the deep tech space by various initiatives such as setting up a centralized window to capture the lifecycle of government grant payments, assessment of the current CSR laws in order to facilitate CSR funding into the deep tech sector, building a dedicated deep tech guidance fund with longer tenure to match the gestation period of the deep tech startups, to mobilise the government, private and foreign funding in the ecosystem, reducing the compliance burden and onerous taxation in order to curb the relocation of startups to other countries with better taxation regimes, among others.
Enabling Infrastructure Access and Resource Sharing
The NDTSP recognizes the high cost required for the primary R&D in the frontier technology space and hence, it endeavours to provide access to shared infrastructure to deep tech startups at nominal fees. The NDTSP also aims to build other resource sharing mechanisms for dissemination of data to such startups, as well as dissemination of data expertise.
Creating Conducive Regulations, Standards and Certifications
The NDTSP encourages establishment of mechanisms such as regulatory sandboxes that would help startups, end-users, industry, and regulatory experts to test the technology in a controlled environment while gathering evidence on functionality and potential risks of the technology. The NDTSP also focuses on providing subsidies and exemption in certification and accreditation costs for deep tech startups. This enables experimentation of frontier technology to comply with existing regulatory frameworks.
Attracting Human Resource & Initiate Capacity Building
The NDTSP places great impetus on capacity building vis-à-vis encourages establishment of knowledge dissemination mechanisms in different segments of frontier technology, creation of accessibility to the educational resources and building inclusive framework for encouraging involvement of women and people from tier II and tier III cities in augmenting the deep tech ecosystem.
Promoting Procurement & Adoption
The NDTSP advocates for public procurement as a market for deep tech startups and aims to enhance the current programs and initiatives by implementing targeted interventions. The NDTSP urges the government to take a higher risk on such deep tech startups and enable public procurement to be the first market for such startups.
Enhancing Policy & Program Interlinkages
While many policies to encourage the deep tech segment are already established, the NDTSP encourages enhancing the policies and creating interlinkages in already existing initiatives in order to create a larger impact.
Sustenance of Deep Tech Startups
Lastly, considering the gestation period of deep tech startups, the policy aims to set mechanisms and provide a roadmap to the startups engaged in building frontier technology to ensure sustainable growth by implementation of funding sensitization programs, facilitation of meaningful partnerships, among many other initiatives.
While the initiative of formulating a policy for the deep tech ecosystem is meritorious, it would be interesting to witness how the policy shapes up. Considering the nascent stage of the deep tech ecosystem in India and the multitudes of benefits that the deep tech actually offers, it is pertinent to encourage experimentation and high-risk investments in this ecosystem.
The Draft National Deep Tech Startup Policy is open for public recommendation until September 15, 2023.
WhatsApp has become a ubiquitous messaging platform, with millions of users worldwide relying on it for personal and professional communication. With the legal system having already embraced technology and digital transformation to streamline their processes and enhance accessibility and electronic filing systems, digital signatures, and online platforms for case management, it has now also started accepting WhatsApp as a tool to enhance client communication and flow of information. Courts in India have also started accepting service of documents sent through WhatsApp to be valid service in certain situations.
Here is an analysis of accepting WhatsApp as a valid platform for service:
Proof of Delivery
One of the primary requirements for accepting WhatsApp documents as valid court service is the ability to prove delivery. Traditionally, a clear paper trail was created through registered mail or in-person delivery to demonstrate that the documents were received by the intended recipient. With WhatsApp, the challenge lies in establishing irrefutable evidence of delivery.
Acknowledgment and Read Receipts
WhatsApp offers features like read receipts and acknowledgment indicators, which can serve as evidence of delivery and receipt of documents. When a recipient opens and reads a message, the sender can receive a read receipt, providing a timestamp as proof of delivery. Additionally, if the recipient acknowledges receiving the message or responds to it, it further strengthens the case for the validity of WhatsApp documents as court service.
Authentication and Integrity
Courts place a high value on document authenticity and integrity. When considering WhatsApp documents as valid court service, it becomes crucial to establish the authenticity of the sender and the integrity of the document. Verification mechanisms, such as digital signatures or encryption, can help ensure that the documents have not been tampered with and that they originate from the identified sender. Confidentiality of documents and service is another concern faced by courts, however, WhatsApp claims to incorporate end-to-end encryption.
Legal Framework and Precedents
Courts in India have explicitly started recognizing WhatsApp as a valid platform of communication and service of documents related to court proceedings. However, burden of proof of service lies entirely on the party claiming service to have been completed through WhatsApp.
Cost-Effective Solution
Adopting WhatsApp as a communication tool can be a cost-effective solution for legal service providers and helps reduce wastage of paper.
Instances where courts have accepted service done via WhatsApp to be valid
The Delhi High Court set a precedent in 2017 in Tata Sons Limited & Ors Vs John Does, by allowing service of summons through WhatsApp after the Defendants evaded service though regular modes.
Thereafter, in SBI Cards and Payments Services Pvt Ltd Versus Rohidas Jadhav, the Bombay High Court accepted the service of notice in an execution application after finding that the PDF file containing the notice had not only been served but the attachment had also been opened by the opposite party. Justice G.S. Patel observed that “For the purposes of service of Notice under Order XXI Rule 22, I will accept this. I do so because the icon indicators clearly show that not only was the message and its attachment delivered to the Respondent’s number but that both were opened.
Justice G.S. Patel at Bombay High Court in Kross Television India Pvt Ltd & Anr Vs. Vikhyat Chitra Production & Ors. has also held that the purpose of service is to put the other party to notice. Where an alternative mode (email and WhatsApp) is used and service is shown to be effected and acknowledged, it cannot be suggested that there was ‘no notice’.
The Rohini Civil Court at Delhi in a case has also accepted the blue double-tick sign in a WhatsApp message as valid proof that the message’s recipients had seen a case-related notice.
Conclusion
As the Supreme Court is yet to lay down a precedent or ruling accepting Whatsapp as valid medium of service. The acceptance of WhatsApp documents as valid court service is a complex issue that requires careful consideration of factors such as proof of delivery, acknowledgment, authentication, and adherence to legal frameworks. As the Indian courts continue to navigate the digital landscape and embrace technology, it is essential for legal professionals, lawmakers, and technology providers to work together to establish clear guidelines and standards that safeguard the integrity of court proceedings while embracing the efficiencies offered by modern communication platforms like WhatsApp. The courts incorporating WhatsApp as part of the legal service workflow demonstrates the industry’s commitment to adapting to the evolving needs of clients in an increasingly digital world.
A fast-track merger is a streamlined process for combining two or more companies. It is typically designed to expedite the merger process, reduce administrative burdens, and facilitate efficient integration of the merging entities. It involves simplifying certain procedural steps and regulatory approvals, allowing the merger to be completed quickly.
Eligibility Criteria
A scheme of merger or amalgamation under section 233 of the Companies Act, 2013 may be entered into between any of the following classes of companies, namely:-
A holding company and its wholly-owned subsidiary company or such other class or classes of companies;
Two or more start-up companies; or
One or more start-up companies with one or more small companies*.
*Small Company means a company whose paid up capital is maximum Rs 4 crore and turnover is maximum Rs 40 crore
Highlights of Recent Amendment
The Ministry of Corporate Affairs (“MCA”) made amendments to Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, on 15th May, 2023 which states that the Central Government (CG) now has a specific timeframe to approve merger and amalgamation schemes, addressing the previous absence of a defined time frame for approval from the Registrar of Companies (“ROC”) or Official Liquidator (“OL”).
The purpose of these amendments is to streamline and expedite the merger and amalgamation process specifically for start-up companies and small companies under section 233 of the Companies Act, 2013.
Step Plan for a Fast-track Merger
Step 1: Authorization under Articles & Memorandum of Association
Step 2: Draft a scheme of merger (“Scheme”)
Step 3: Convene a Board Meeting approving the Scheme
Step 4: Declaration of solvency with the ROC
Step 5: Convening meetings of Shareholders & Creditors
Step 6: Filing a copy of Scheme with Regional Director (“RD”), ROC, OL for inviting objections
Step 7: No Objections from the authorities
Step 8: If found within public interest RD may approve the scheme
Step 9: File form INC 28 with ROC within 30 days of approval from RD
Amendments are as follows
Note: The Scheme in each of the aforementioned situations shall be approved or deemed to be approved only if the same is in the public interest or in the interest of the creditors
IF
THEN
No objection/ suggestion received by the CG from ROC/OL within 30 days of the receipt of copy of scheme.
CG shall confirm and approve the scheme within 15 days after the expiry of 30 days.
No confirmation from CG within 60 days from the receipt of the scheme.
The scheme shall be deemed to be approved.
On receipt of objections/ suggestions from ROC/ OL where such objection/ suggestion are not sustainable.
CG shall approve the scheme and issue confirmation order within 30 days after the expiry of 30 days.If no confirmation order is issued within the aforementioned period, it shall be deemed that it has no objection to the scheme and a confirmation order shall be issued accordingly.
On receipt of objections/ suggestions from ROC/ OL where CG is of opinion that the scheme is not in the public interest or in the interest of creditors.
CG shall file an application with the tribunal within 60 days of receipt of the scheme, requesting the tribunal to consider the scheme in the regular manner. If CG does not file the application within the aforesaid period, it shall be deemed that it has no objection to the scheme and a confirmation order shall be issued accordingly.
•Name to be available and unique. Should contain the nature of business •Minimum 2 names to be proposed
Share Capital
•Authorized and paid-up share capital to be determined •Sample capital structure: -10,000 equity shares of INR 10 per share -Total paid-up capital of INR 100,000 -Total authorized capital of INR 1,000,000
Directors
•Minimum 2 directors required •Minimum 1 director to mandatorily be Indian resident
Shareholders
•Minimum 2 shareholders required
Registered Office Address
•Commercial property/office location required as registered address •Services of co-working office spaces can also be availed for virtual office address
Incorporation process
Step 1 – Obtain DSC of directors & shareholders
Approx TAT: 2 Days Key documents/information required to be filed: Aadhar/PAN card, contact no. & email address and photo of individual
Step 2 – File for name application
Approx TAT: 3 Days Form: Spice+ Part-A Key documents/information required to be filed:
a. 2 proposed names of company b. NIC code along with 2-3 sentences about proposed business of company
Step 3 – File incorporation documents
Approx TAT: 1 Days Form: Spice+ Part-B Key documents/information required to be filed:
A. Shareholder and director details + KYC proofs
KYC documents of foreign director and shareholder need to beapostilled and notarized in home country
B. Company details – Share capital (authorized and paid up), registered office address, email address and contact no.
Certificate of incorporation, PAN, and TAN are issued to the company
Company can open bank account
Post – incorporation process
STEP 1 – Post incorporation filings
A. FORM ADT 1 Approx TAT: 2 Days Key documents and information required to be filed:
– Auditor details – Name of auditor/auditor’s firm along with partner’s name, PAN, Membership no., registered address, email address, written consent & certificate stating he/she is not disqualified for appointment
– Company’s board resolution appointing such auditor B. FORM INC 20AApprox TAT: 2 Days Key documents/information required to be file: Bank statement of company showing inward receipt of subscription money from subscribers
Company can issue share certificates to its shareholders
STEP 2 – RBI filing in case of foreign investor
Form: FC-GPR Approx TAT: 2 Days* (*2 days from receipt of FIRC and KYC from AD bank) Key documents/information required to be filed: FIRC and KYC for the fund transfer in foreign exchange entity master registration and business user registration to be obtained on FIRMS portal
The Constitution of India explicitly prohibits discrimination based on sex, race, religion, or on any other ground, but it has taken some time for this protection to be extended to LGBTQ+ individuals. The landmark judgment in NALSA v. Union of India case in 2014 marked a progressive interpretation by the Supreme Court, which recognized that discrimination based on sexual orientation and gender identity falls within the ambit of “discrimination on the grounds of sex.” The court emphasized that such discrimination violates the fundamental right to equality enshrined in the Constitution.
In a subsequent case, Navtej Singh Johar v. Union of India, the Supreme Court took one step forward by acknowledging that the freedom to choose one’s sexual orientation and express one’s gender identity, including through dress, speech, and mannerisms, is at the core of an individual’s identity.
Although there is an absence of standalone anti-discrimination legislations in India, certain laws such as the Rights of Persons with Disabilities Act, 2016, the Equal Remuneration Act, 1976 (along with the Code on Wages, 2019), the Human Immunodeficiency Virus and Acquired Immune Deficiency Syndrome (Prevention and Control) Act, 2017, and the Transgender Persons (Protection of Rights) Act, 2019, do contain provisions addressing discrimination against individuals falling under the ambit of the aforementioned laws.
A major drawback of the Equal Remuneration Act, 1976 is that while it encourages pay parity at workplaces, however its scope is restricted to merely two genders, i.e., men and women thereby alienating an individual with a different sexual orientation from obtaining the benefits under this legislation.
This piece highlights the various workplace policies in India and the need to make them more inclusive for the disabled persons and those belonging to LGBTQ+ communities.
Equal Opportunity Policy under Rights of Persons with Disabilities Act, 2016
The Rights of Persons with Disabilities Act (“Act”) requires all establishments to have an equal opportunity policy (EOP) specifically for individuals with disabilities. This policy must be made publicly available, preferably on the establishment’s website or in conspicuous locations within the premises. The EOP should outline the facilities and services that will be provided to enable individuals with disabilities to fulfill their responsibilities effectively in the establishment.
Furthermore, if the organization employs 20 or more individuals, the EOP must include the following details:
A comprehensive list of positions within the establishment that are deemed suitable for individuals with disabilities;
The procedure for selecting individuals with disabilities for different positions, as well as providing post-recruitment and pre-promotion training, prioritizing them in transfers and job assignments, granting special leave, allocating residential accommodation if available, and offering other necessary facilities.
Provisions for assistive devices, ensuring barrier-free accessibility, and implementing other necessary measures to accommodate individuals with disabilities.
Information about the designated liaison officer. It is mandatory for every establishment with 20 or more employees to appoint a liaison officer responsible for overseeing the recruitment of individuals with disabilities and ensuring the provision of necessary facilities and amenities.
A copy of the EOP must be registered with the relevant authority (whether a Chief Commissioner or State Commissioner, as the case may be) specified by the law.
Can POSH Policy be Gender Neutral?
The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“POSH Act”) is an Indian legislation designed to address workplace sexual harassment and ensure a safe working environment for women. Although the law primarily aims to protect women due to the widespread gender-based discrimination they face, it does not exclude or expressly/impliedly prohibit inclusion of men or individuals of other gender identities from receiving protection. It is important to recognize and address the experiences of all individuals who may encounter sexual harassment, regardless of their gender identity.
It is important to note that in the POSH Act, there is no bar on gender for the respondent, i.e., although the victim can only be a woman, but there is no specific gender mentioned for the respondent. Therefore, the term “respondent” encompasses all genders.
During the legislative process, the idea of enacting a gender-neutral law was discussed. However, this discussion primarily centered around men’s rights groups advocating for equal treatment and was framed as a debate between men and women. In response to this, the Parliamentary Standing Committee in 2011 proposed that the law should remain specific to one gender, citing the historical disadvantages, discrimination, abuse, and harassment faced by women. The committee based its recommendation on the belief that women are particularly vulnerable to workplace harassment, which hinders their ability to work. The primary objective of maintaining a gender-specific law was to increase female participation in the workforce and establish a robust mechanism to safeguard women’s employment rights.
In Anamika v Union of India, the Delhi High Court ruled that transgender individuals can utilize the protection under provisions related to sexual harassment, (which are commonly resorted to in cases of harassment by men against women), to file complaints. It is pertinent to note that in this case, although the aggrieved person was a transgender, however she identified herself as a woman and possessed a legally sanctioned identity document as evidence.
Provisions under Transgender Persons (Protection of Rights) Act, 2019
In 2014, the Supreme Court of India made a significant ruling in the case of National Legal Services Authority v. Union of India. This ruling played a crucial role in establishing the rights of transgender individuals in India. The court recognized the category of “transgender” as the “third gender” and introduced various measures to prevent discrimination against transgender individuals and protect their rights. The judgment also suggested that reservations should be made for transgender individuals in employment and educational institutions. Additionally, it affirmed the right of transgender individuals to identify their gender based on their self-perception, without the requirement of undergoing a sex reassignment surgery.
The Transgender Persons Act requires all establishments, including private employers, to adhere to certain regulations:
Prohibition of discrimination: Ensure a safe working environment and prevent any form of discrimination against transgender individuals in all aspects of employment, such as recruitment, promotions, infrastructure adjustments, employment benefits, and related matters.
Equal opportunity policy: Develop and publish an equal opportunity policy specifically for transgender persons. Display this policy on the company website, and if there is no website, post it at a conspicuous place within the premises.
Infrastructural facilities: Provide necessary infrastructure adjustments, including unisex toilets, to cater to the needs of transgender employees. Take measures to ensure their safety and security, such as transportation arrangements and security guards. Additionally, ensure the availability of amenities like hygiene products for transgender employees.
Confidentiality of identity of the transgender employees to be ensured at workplaces.
Appointment of Complaint Officers: Establishments are obligated to assign a complaint officer who will handle any grievances concerning the infringement of the regulations stated in the Transgender Persons Act. The designated complaint officer is entrusted with the responsibility of investigating the complaints, and it is mandatory for the head of the establishment to act upon the report produced by the complaint officer within the specified timeframes.
Got a question? Call us on 9930156000
References
Constitution of India, Article 14
Rights of Persons with Disabilities Act, 2016, Section 21
• The nature of the subject matter of the case at hand has been weighed and adjudicated upon around the world across various jurisdictions. In order to observe the case at hand more objectively and illuminate the grounds and discussions which have been placed before the Honourable Supreme Court thus far, we have laid out a summary of the facts of the case:
• The Petitioners identify themselves as gay men and are Indian citizens. Both petitioners, presently aged about 32 and 35 years respectively, have been in a committed relationship for almost a decade.
• On 17.08.2021, the Petitioners held a ceremony in the presence of their families, friends and colleagues.
• However, despite a decade long committed relationship, the Petitioners are unmarried in the eyes of law as the legal regime around recognition and solemnization of marriages excludes marriage between a same-sex couple.
• Despite the ceremony, the Petitioners realized that they are legally incapable of exercising the rights of married individuals and strangers in the eyes of the law, such as securing health insurance which would include their partner, nominating each other for life insurance, mutual funds, PPF, pension scheme, or any other financial instruments. Legally, they do not have the right to inheritance, property, to take medical or end-of-life decisions pertaining to each other.
• In light of the same, the Petitioners filed their PIL before the Hon’ble Supreme Court seeking recognition and solemnization of same-sex marriage.
Questions In Point
The Hon’ble Supreme Court is hearing the matter based involving the following issues:
• Recognition of Same-Sex Marriage: Whether same-sex marriage or non-heterosexual marriage can be recognized and solemnized under the Special Marriage Act, 1954?
• Constitutionality of the Special Marriage Act: Whether the Special Marriage Act, 1954 can be declared to be unconstitutional and violative of Articles 14, 15, 19 and 21 of the Constitution of India to the extent that it does not provide for solemnization of marriage between a same sex couple?
Recognition of same-sex marriage
Petitioners
UoI
• Broad interpretation to be made of the word “spouse” under Special Marriage Act, 1954 (“SMA”) and its meaning should not be confined merely to and be read as “a man and a woman”. Additionally, Section 4, SMA, which refers to a marriage in gender-neutral terms, between ‘any two persons’. However, it was clarified that merely amending the SMA isn’t enough and that a constitutional declaration of marriage, akin to that of the heterogeneous group, is needed. • It is important to remove the 30-day notice period under Section 5 of the SMA on the grounds that it invites unwarranted interference and such notice period violates an individual’s privacy along with their personal and decisional autonomy. • Advocate Abhishek Manu Singhvi, Counsel to the Petitioner stated that “But on the canvas there are two crucial words here. ‘Marriage’ and ‘persons’. ‘Same sex’ is a slight misnomer. The correct word is ‘person’, not ‘same sex’.”* • It was contended that the State could not deny marriage equality on grounds of “impracticality” as the discriminatory laws were created by it • Excluding the LGBTQIA+ community from their right to marry sends a message that it is legitimate to differentiate between the commitments of heterosexual and non-heterosexual couples, by indicating that the latter’s marriages are not as significant as “real” marriages.
• The Supreme Court could not hear this case as it fell under the powers of Parliament. The Respondent’s Counsel argued that there are certain issues which are better left to the discretion of the Parliament. There is no discrimination, no breach of privacy, right of choosing one’s sexual orientation. • It was argued that argued that 160 laws would be impacted in the process of bringing marriage equality. • It was argued that the subject of marriage is in the concurrent list and the possibility of one state agreeing to it and another against it cannot be ruled out. In this scenario, the maintainability of the petition would come into question. • Counsel to the Respondent stated that “Societal acceptance of any relationship in the society is never dependent either on legislation or on judgments. It comes only from within. Let us accept it whether we like to accept it or not.” • It was argued that the legislative intent of the legislature throughout has been a relationship between a biological male and a biological female including Special Marriage Act. • It was argued that the concept of biological man means a biological man and the question of notion does not arise.
Recognition of same-sex marriage
Constitutionality of the Special Marriage Act
Petitioners
UoI
• The Counsel argued that “The right to marry non-heterosexual unions is implicit in Articles 14, 15, 16, 19 and 21 of the Indian Constitution, especially after the Supreme Court rulings in “Navtej Singh Johar vs. Union of India” and “KS Puttaswamy and Anr. vs. Union of India”. • It was contended that the State could not deny marriage equality on grounds of “impracticality” as the discriminatory laws were created by it. • It is a civil union, as permitted in some countries, is not a solution to what same-sex couples are asking for. civil unions are not an equal alternative and do not address constitutional anomalies presented by excluding non-heterosexual couples from the institution of marriage • Excluding the LGBTQIA+ community from their right to marry sends a message that it is legitimate to differentiate between the commitments of heterosexual and non-heterosexual couples, by indicating that the latter’s marriages are not as significant as “real” marriages. • Adv. Mukul Rohatgi argued that “Gender identity is one of the most fundamental aspects of life and refers to a person’s intrinsic sense of being male, female or transgender or transsexual.” • Inalienable right to privacy must be granted in sanctity of a natural right to privacy in the Constitution as a fundamental right and the soulmate of dignity. Therefore, privacy, dignity go in hand in hand. Dignity is a part of life lived to its fullest under Article 21.
• The lawmakers had a conscious intent to include only heterosexual marriages under the SMA and the said Act’s character and intent cannot be altered. • It was argued that under the SMA, the court cannot give rights to non-heterosexual couples that heterosexual couples don’t have. • The State has a ‘legitimate’ interest in regulating marriages, while citing aspects such as the age of consent, prohibition of bigamy, prescription of prohibited degrees of marriage, judicial separation, and divorce. • While the rulings in Navtej or Shafeen Jahan were monocentric, the present dispute is a “polycentric”, one that will affect several legal provisions, possibly wreaking collateral damage or side effects in its wake. • The Respondent’s Counsel stated that “The question is not right of equality, right of dignity or right of privacy of persons who belong to LGBTQ community. That is first. The question is right of conferment of a socio-legal status and whether that can be done by judicial adjudication. There was no law governing the rights and other rights and other immunities to the LGBTQ community.” • It was argued that the concept of biological man means a biological man and the question of notion does not arise.
Constitutionality of the Special Marriage Act
Observations by the Hon’ble Supreme Court
Question
Observations
Inclusion ofLGBTQ+ in SMA
• Justice D.Y. Chandrachud observed that “Man is not a definition of what your genitals are. It’s far more complex. That’s the point. So even when the Special Marriage Act says man and woman, the very notion of a man and a notion of a woman is not an absolute based on what genitals you have.” • There should be a declaration of the right to marry, then there are two courses of action according to you. Either the court then finds a legislative void in that Parliament has not legislated explicitly to recognize the right of marry, and therefore finding a legislative void, you supplant that deficiency so long as Parliament enacts the law. The other option is, to locate the modalities for implementing that declaration in existing law. • The notice issue is even in a heterosexual marriage, because you are saying that even in a heterosexual marriage, the fact that you have to give a notice and have people object to whether there should be a marriage or not, is unconstitutional.
Violation of Fundamental Rights due to marriage inequality
• There are two corresponding rights and perhaps duties and obligations as well. On the one hand the LGBTQ community has or a same sex couple is entitled to say, I have a right to make my own choices. We have our right to make our own choices, to live as we wish together and therefore, that is a part of our dignity our privacy. But equally, society can’t say that. Well, all right. We will recognize that right and we leave you alone. And we will not recognize your relationship. • It’s not enough, in terms of privacy to leave them alone and to make their choices but it is equally important to assert a ride equally, to have the recognition of those social institutions. Because private is an individual concept which allows you to get to the core of your being and to live your life as you want. But equally, each of us are social individuals, social animals, so to speak. And therefore, for society to assert that all right, we’ll leave you alone, or the state will leave you alone.
Observations by the Hon’ble Supreme Court
Key Takeaways, pending the Supreme Court’s judgment
• Public opinion on various LGBTQ+ rights in India has evolved over the years and verdicts passed by the Judiciary. The progress of laws relating to LGBTQ+ marriage in India has been a complex and evolving journey. While the decriminalization of homosexuality and the recognition of civil partnerships have marked significant milestones, marriage equality remains unrealized. However, the recognition of same-sex marriages has seen progress in certain states.
• The LGBTQIA+ community has averred that it needs an anti-discrimination law that gives them the freedom to forge fulfilling relationships and lives regardless of their gender identity or sexual orientation and places the responsibility for change on the state and society rather than the person. The assertion is that when individuals belonging to the LGBTQ community are granted their complete set of constitutional rights, it is imperative to acknowledge their right to marry the person (and not only a man or a woman) of their choosing.
• However, while there is growing acceptance and support for equality, there is continued opposition to same-sex marriages.
• The arguments made against the petition were on both technical grounds (the jurisdiction of the Supreme Court qua the Parliament to confer rights of a socio-legal status, and the non-joinder of the States for an issue on the concurrent list of the Constitution), and on the grounds of maintainability (considering the provisions of the Transgender Act which already prohibit discrimination, and on the impact on personal laws and their amendment).
• After a hearing that ran for 10 days, the Honourable Supreme Court reserved its verdict on the batch of petitions seeking legal recognition of same-sex marriages.
With the increasing awareness and hype surrounding Cryptocurrency, NFTs, and other Digital Currencies, understanding the concept of Blockchain Technology has become crucial. Blockchain technology is a distributed digital ledger that records data, documents, and transactions securely and transparently.
Key Features of Blockchain Technology:
Decentralized: Blockchain allows for a decentralized network composed of multiple nodes or participants. This ensures the network is secure and minimizes the risk of malicious interference while providing financial sovereignty and democratic control to participants.
Peer-to-Peer (P2P): Blockchain technology leverages the power of P2P networks to provide a shared and reliable ledger of transactions. All nodes carry out the same tasks equitably without the presence of a central administrator.
Transparency: Blockchain makes transaction history more transparent, as all nodes on the network share a copy of the document, enabling all users to see updated records.
Security: Blockchain is superior to any other recording system, as it ensures all documents of transactions are updated or altered by consensus by the nodes in the network. This decentralized storage of information ensures that no individual holds the right to update records.
Efficiency: Blockchain streamlines transactional processes through traditional paperwork, minimizes the risk of error, eliminates the involvement of third-party beneficiaries, and makes transactions efficient and faster.
How Blockchain Technology Works:
Blockchain technology is the concept of digitally storing data in the most transparent, secure, and efficient way. The data is recorded on blocks and chained together cryptographically to create an unalterable digital ledger. Each participant on the Blockchain network has access to the entire database and its history, ensuring transparency, security, and efficiency. Let us now try to understand the working of the Blockchain technology from the flowchart below:
Types of Blockchains:
Public Blockchain: Also known as Permissionless Blockchains, Public blockchains are open networks that allow anyone to participate in the network. The data on a public blockchain is secure as it is not possible to modify the data or interfere with the same once it is validated on the blockchain.
Private Blockchain: Private blockchains, also known as authorized blockchains, are managed by the network administrator and only a single organization has authority over the network.
Potential Use Cases:
Cryptocurrency: The most well-known use of Blockchain Technology is for cryptocurrency exchanges. When people exchange or spend cryptocurrency, the transactions are recorded on a blockchain, with each block representing a separate transaction that is validated by the participants in the network.
Financial Exchanges: Blockchains can also be used for traditional exchanges to allow for faster and less expensive transactions. Decentralized exchanges provide better management and security because investors do not have to deposit their assets with a central authority.
Banking: Blockchain may be used to process transactions in fiat currency such as dollars and euros to make such transfers secure, quick, and more economical, especially for processing cross-border transactions.
Insurance: Using smart contracts on the blockchain can increase the transparency of customers and insurers. Recording all claims on the blockchain would prevent duplicate claims for the same event and speed up the process for applicants to receive payments.
Lending: Smart contracts built on the blockchain allow for secure lending, triggering the payment of services, margin calls, full repayment of loans, the release of collateral, etc. on the happening of certain events.
Real Estate: By recording real estate transactions using blockchain technology, a safer and more accessible way to identify and transfer real estate can be provided, speeding up transactions, reducing paperwork, and saving costs.
Healthcare: Blockchain can be used to protect medical records, health records, and other related electronic records, ensuring that medical professionals have accurate and up-to-date information about their patients and improve treatment.
Drawbacks of Blockchain Technology:
Power Consumption: The power consumption in the blockchain is high due to mining activities, maintaining a real-time ledger, and communicating with other nodes.
Scalability: The size of the block equals the data it stores, which poses serious difficulties for practical use, as each participant node needs to verify and approve a transaction.
Storage: Blockchain databases are stored indefinitely on all network nodes, causing storage space issues.
Privacy and Security: The public blockchain is not entirely secure as anyone on the network can legally access data, leading to privacy concerns.
Regulations: Regulatory regimes in the financial arena are a challenge for blockchain implementation, as blockchain applications need to establish a process to identify the culprit in the event of a scam.
In conclusion, Blockchain Technology is a powerful tool with numerous potential use cases and benefits, especially in the rapidly growing field of Cryptocurrency, NFTs, and digital currencies. However, there are also drawbacks to be considered, such as power consumption, scalability, storage, privacy and security, and regulatory challenges. Despite these challenges, the potential benefits of blockchain technology make it an important development to watch as it continues to evolve and adapt to new regulatory regimes. As the world becomes more technologically advanced, it is essential to stay informed about the latest developments in blockchain technology, as it has the potential to revolutionize how we store and exchange data in the future.
FAQs about Blockchain Technology
What are the main benefits of using blockchain technology?
Blockchain technology offers several benefits, including decentralization, transparency, security, and efficiency. By providing a decentralized network, blockchain ensures that the network is secure and minimizes the risk of malicious interference while giving participants control and financial sovereignty. Additionally, blockchain offers transparency by making transaction history more visible to all participants, and it provides security by ensuring that documents of transactions are updated or altered by consensus by the nodes in the network.
How is blockchain technology different from traditional database technology?
Blockchain technology differs from traditional database technology in several ways. First, blockchain is a distributed ledger that is shared among participants in a decentralized network, while traditional databases are often centralized, controlled by a single party or authority. Additionally, blockchain is more secure due to its decentralized nature, while traditional databases are more vulnerable to malicious interference. Lastly, while traditional databases require specific permissions to access and modify data, blockchain enables participants to access records while maintaining security and transparency.
How does blockchain technology and cryptocurrencies work together?
Blockchain technology and cryptocurrencies work together as blockchain is the underlying technology that allows cryptocurrencies to operate securely, transparently, and efficiently. Each cryptocurrency uses a specific blockchain to record transactions, where each transaction is verified and then added to a new block in the chain.
Can blockchain technology be used in industries beyond finance?
Yes, blockchain technology has a wide range of potential applications beyond finance, including industries like healthcare, insurance, supply chain management, and more. For example, blockchain technology can be used to protect medical records, ensuring that medical professionals have accurate and up-to-date information about their patients.
How do you ensure the security of blockchain technology?
Blockchain technology is inherently secure due to its decentralized nature, making it incredibly difficult for malicious actors to interfere with the network. Additionally, several other security measures can be taken to make sure blockchain technology is secure, such as encrypting data, using multi-factor authentication, and implementing measures to prevent unauthorized access to the network.
Registered office address (to be skipped if the Business is yet to be set up)
–
–
Brief Description of the Business
–
Note: This can be a 2-3 line description of the industry/sector where the Company currently operates and any differentiating factors.
Face Value of Equity Shares
–
–
Chairman of the Board
–
–
II. FOUNDERS
Particulars
Responses
Remarks / Examples
Name and Address of the Founders
Founder 1: –
Founder 2: –
PAN/ Tax Registration Number of the Founders
Founder 1: –
Founder 2: –
Founders who are a party to a pre-existing Shareholders Agreement (if any)
–
Monetary Contribution of each Founder (if any)
Founder 1: –
Founder 2: –
Shareholding Pattern of the Founders before the execution of the Co-Founders’ Agreement (to be skipped if the Business is yet to be set up)
Founder 1: –
Founder 2: –
Shareholding Pattern of the Founders as on the execution of the Co-Founders’ Agreement
Founder 1: –
Founder 2: –
Maximum amount of financial assistance that can be provided by the Business to each of the Founders during the course of Business
–
III. DECISION MAKING AND DISPUTE RESOLUTION
Particulars
Responses
Remarks / Examples
Founder whose opinion will hold more weight in case of any conflict with respect to the Business
–
Note: This can be an internal ‘veto’ right granted to one or more Founders, and is extremely customizable to the relationships between the Founders and their responsibilities. For example, one Founder may hold the deciding vote in general or have the final say on specific parts of the business such as design, costs, funding, or hires.
How will the day-to-day and major decisions of the Business be taken?
–
Note: Similar to the ‘veto’ mentioned above, this is customizable to match the working relationship between Founders. While one Founder may control day-to-day operations, another may be the decision-maker for the long-term direction. Alternatively, a voting mechanism can be set up for multiple Founders.
How will a sale of the Business be decided?
–
Example: To be decided by the Board/mutual agreement of the Founders. In case the parties have executed a SHA, this will ideally also be covered under reserved matters to be taken upon consent from the investor.
Dispute resolution in case one of the Founders is not performing his duties in accordance with the Co-Founders’ Agreement
–
Example: To be decided by the Board/such Founder may be terminated upon a simple majority of the other Founders. While this is difficult to account for at an early stage, it’s important to set checks and balances to avoid any disconnect in goals, ideals, and responsibilities.
IV. EXIT OPTIONS
Particulars
Responses
Remarks / Examples
Procedure to be followed by the Founders in case of resignation
–
Example: Prior written notice of 60 (sixty) days is to be provided to the Company. The Founder may not, in lieu of notice, pay the company his salary for the notice period, and may not also avail leave.
Can any of the Founder’s employment with the Business be terminated in the following situations? If yes, what will be the procedure followed by the Business to terminate such Founder’s employment?
–
Example: (a) For Cause (fraud, negligence, misconduct, crime of moral turpitude, material breach): Yes – the board may terminate the Founder’s employment with immediate effect by simple majority. (b) Without Cause (restructuring, cost cutting, underperformance): Yes – the board shall provide the Founder with an opportunity to present his case and may terminate his employment with 60 days’ notice or relieve him from duties or pay his salary.
Procedure to be followed by the Business in case any permanent disability is suffered by any Founder
–
Example: Agreement shall be terminated immediately in case the Founder is unable to perform his duties for a continuous period of 3 (three) months.
Would the Founder be obliged to leave his position as a Director on the Board in the following situations?
–
Example: (a) Termination of the Founder’s employment by the Business: Yes (b) Resignation by the Founder: Yes
Time period for which the exiting Founders shall be contractually obliged to not work with or as a competitor to the Business
–
Example: 1 year. This restriction, while falling into a grey area in terms of enforceability, is important to ensure that the Company’s confidential and proprietary information doesn’t become available to a competitor (whether directly or indirectly). Considering the goodwill carried by Founders, it is likely that courts will uphold such clauses.
V. TRANSFER OF SHARES
Particulars
Responses
Remarks / Examples
How will the Founder shares be dealt with in the following situations: (Please provide the details if any buyback options shall be given to the Business or remaining Founders)
–
Example: (a) Termination of the Founder’s employment by the Business: – For Cause: The company shall be entitled to purchase the unvested and vested shares at their face value or such other lower price as may be permissible under applicable law / as determined by the Board / in case of existing SHA, to be dealt with as described in the transaction document. – Without Cause: The company shall be entitled to purchase unvested shares at their face value or such other lower price as may be permissible under applicable law, and the vested shares at the fair market value / as determined by the Board / in case of existing SHA, to be dealt with as described in the transaction document. (b) Resignation by the Founder: The company shall be entitled to purchase unvested shares at their face value or such other lower price as may be permissible under applicable law, and the vested shares at the fair market value / as determined by the Board / in case of existing SHA, to be dealt with as described in the transaction document.
How will the market value of Shares be determined in case a Founder wants to sell his Shares?
–
Example: Fair market value / last valued round.
VI. DISSOLUTION OR SALE OF THE BUSINESS
Particulars
Responses
Remarks / Examples
What will happen to the Intellectual Property of the Business in case of the following:
–
Example: (a) Dissolution of the Business: If any compensation is received from the intellectual property owned by the company, the proceeds will be divided among the Founders in the ratio of their shareholding in the company. (b) Sale of the Business: Remains with the Business. (c) Termination of the Founder’s employment by the Business: Remains with the Business. (d) Resignation by the Founder: Remains with the Business.
Who will retain the original brand name of the Business?
–
Example: To be decided at the time of sale as part of negotiation / any Founder having the highest shareholding or who has single-handedly established the brand name.
Sample Responses
Particulars
Responses
Remarks / Examples
Name of the Business
–
–
Registered office address (to be skipped if the Business is yet to be set up)
–
–
Brief Description of the Business
–
Note: This can be a 2-3 line description of the industry/sector where the Company currently operates and any differentiating factors.
Face Value of Equity Shares
–
–
Chairman of the Board
–
–
Vesting conditions of each of the Founder’s shares (if any)
–
Example: Vesting conditions may be different for the Founders. This could include yearly, monthly, or quarterly vesting or vesting based on milestones achieved by the Business. For instance:Founder 1: Shares to be vested on an annual basis over a period of 4 years.Founder 2: 40% to be vested upon achieving 50,000 customers and 60% upon 1.5L customers.Founder 3: 25% to be vested on [date], and 75% monthly over 3 years.
Roles and Responsibilities of each Founder
–
Example:Founder 1: CEO, Head business development, investor relations, B2B sales, sourcing components, legal/compliance.Founder 2: CTO, OS/Apps/Cloud, overall product security.
Time and commitment to the Business expected of each Founder
–
Example: Founder 1: Full-time.Founder 2: Part-time (can also specify hours per day or days per week).
Which Founders hold a position of Director on the Board?
Founder 1: –
Founder 2: –
Remunerations including salary, bonus, commission, etc. (if any) of each Founder
Founder 1: –
Founder 2: –
Whether the Founders’ rights shall be inheritable? If yes, will the successors of the Founders have the same rights as such Founder or merely be Shareholders in the Business?
–
Note: While employment contracts are personal in nature, some Founders may choose to name successors to take over in their stead. Further, as shareholders, Founders are required to name nominees in case of death or disabilities.
External Commercial Borrowings (“ECB”) are commercial loans raised by eligible resident entities from recognized non- resident entities and should conform to parameters such as minimum maturity, permitted and non permitted end-uses, maximum all-in-cost ceiling, etc. Transactions on account of ECBs are governed by the provisions of Foreign Exchange Management Act, 1999 and the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations (2018-19) issued by the RBI and as amended from time to time (“ECB Master Directions”)
External Commercial Borrowings (“ECB”) are commercial loans raised by eligible resident entities from recognized non- resident entities and should conform to parameters such as minimum maturity, permitted and non permitted end-uses, maximum all-in-cost ceiling, etc. Transactions on account of ECBs are governed by the provisions of Foreign Exchange Management Act, 1999 and the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations (2018-19) issued by the RBI and as amended from time to time (“ECB Master Directions”)
RBI permitted Startups to raise ECB with the introduction of new guidelines vide its circular dated 16th January, 2019. Pursuant to the said guidelines, AD Category-I Banks are permitted to allow recognized Startups to raise ECB under the automatic route as per the prescribed framework
Recognized Lenders
•Lender/Investor, who is a resident of a Financial Action Task Force compliant country
•The recognized lenders do not include the following:
Indian banks’ foreign branches or their Indian subsidiaries; and
Overseas entity in which Indian entity has made overseas direct investment
Key Considerations
Term
Brief description
MAMP*
MAMP for ECB will be 3 years.
Forms
The borrowing can be in form of loans or non-convertible, optionally convertible or partially convertible preference shares
Currency
The borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination thereof
Amount
The borrowing per Startup will be limited to USD 3 million or equivalent per financial year (either in INR or any convertible foreign currency or a combination of both)
All-in-cost
As may be mutually agreed between the lender and borrower
End-uses
For any expenditure in connection with the business of the borrower
Choice of Security
At the discretion of the borrower. Security can be in the nature of: -movable assets; -Immovable assets; -intangible assets (including patents, intellectual property rights); -financial securities and shall comply with foreign direct investment or foreign portfolio investment/ or any other norms applicable to foreign lenders -Issuance of corporate and personal guarantee. Guarantee is only allowed if such parties qualify as lender under ECB for start-ups
Conversion Rate
In case of borrowing in INR, the foreign currency – INR conversion will be at the market rate as on the date of agreement
Notes : * MAMP: Minimum Average Maturity Period * All-in-cost: It includes rate of interest, other fees, expenses, charges, guarantee fees, Export Credit Agency charges, whether paid in foreign currency or INR but will not include commitment fees and withholding tax payable in INR.
Other Provisions
Term
Brief description
Parking of ECB Proceeds
ECB Proceeds can be parked abroad as well as domestically •If ECB Proceeds parked/repatriated to India, ECB borrowers are allowed to park ECB proceeds for a maximum period of 12 months cumulatively
Reporting arrangements
Submission of Form ECB and obtaining loan registration number (LRN) •Any change in terms and conditions of ECB should be reported to DSIM through revised form ECB •Monthly reporting through form ECB 2
Conversion of ECB into Equity
• Conversion is allowed subject to the conditions such as (without limitation): – activity should be covered under automatic route for FDI or government approval is received where required -conversion must not contravene eligibility or applicable sectoral cap on foreign equity holding -compliance with applicable pricing guidelines • The exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the ECB lender •Equity ratio of 7:1 not applicable
Non applicability ofEquity-liability ratio
The requirement of equity liability ratio of 7:1 as prescribed under the ECB Master Directions is not applicable for start-ups
Other provisions summarised in short
Process Flow
ECB FOR START-UPS
Notes : LRN: Any drawdown in respect of an ECB should happen only after obtaining the LRN from the RBI. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the bank Monthly Reporting of Actual Transactions: Form ECB 2 Return through the AD Bank on monthly basis.
The Startup India initiative was announced by Hon’ble Prime Minister of India on 15th August, 2015. The Department for Promotion of Industry and Internal Trade (DPIIT), previously known as the Department of Industrial Policy and Promotion (DIPP), is the nodal agency for dealing with matters related to startups in India. To obtain the benefits of “startups” under the Startup India initiative, as outlined above, recognition from DPIIT is necessary. DPIIT is the monitoring authority for registering all Startups under the scheme.
One of the key issues that an entity, being a startup, faces is not having adequate knowledge about what qualifies as a “Startup” under the Department for Promotion of Industry and Internal Trade (“DPIIT”). Due to lack of unawareness, many entities fail to avail the benefits applicable and attracted to them under the Startup India Action Plan prescribed vide notification No. G.S.R. 34 (E) dated January 16, 2019 issued by the Ministry of Commerce and Industry.
Under the DPIIT Scheme, an entity shall be considered as a startup:
● Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
● Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded INR 100 crore
● Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of “employment generation” or “wealth creation”.
Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’
The other major concern is lack of information about the registration process, the documents required for making registrations, collating the information and documents and uploading the same on the portal. The company will need the Charter documents of the Company i.e. MOA and AOA, Certificate of Incorporation, Pitch deck of the Company, Link of the company website(optional), Intellectual Property Registration Certificates (if applicable), Proof of any funding received by the company (MCA records, capital structure of the company, bank statements etc), Aadhar card of the authorized signatory making application on behalf of the Company, Director details (DIN, PAN, Address, contact details), Company details (CIN, Address, authorized signatory details for the Company).
In order to help ease the process, here are a few things one needs to bear in mind while initiating the registration process.
Preliminary process for registration:
● The Company needs to make a profile on the Startup India Portal. The registered email id will then receive an OTP and once that is confirmed the profile can be operated using the login credentials entered for registration.
● The User will have to complete the profile by adding the company specific details i.e. name of the company, CIN, the industry that the company operates, area of operation, stage of development the startup is currently at (ideation, validation early traction, scaling) etc
● The User will have to provide company specific responses to the questions basis which, at the discretion of the DPIIT, the application will be accepted/rejected or asked for clarification in case of any deficiency.
Questions on the portal:
a.Details of the innovation product/service or improvement in any existing product/service the Startup aims to create/provide
b. What is the problem that the startup aims to solve
c. How does your startup propose to solve this problem
d. What is the uniqueness of the solution provided by the startup.
e. How does startup generate revenue. Etc.
The authorized signatory signing and making application on behalf of the Company needs to be authorized by the other director/s of the Company and the same needs to be authenticated by signing a Letter of Authorisation (in the format provided on the startup India portal).
Once the application is submitted, the department will, at its discretion, approve the application of the Company.
Currently in India there are 29 labour laws which needs to be followed by all the entities. To make it more streamlined and hassle free the Ministry of Labour is under the process of consolidating all the labour laws under 4 new labour law codes (“Labour Codes”)
•Code on Wages
•Occupational Safety, Health and Working Conditions Code
•Social Security Code
•Industrial Relations Code
These Labour Codes are yet to be notified.
In India, the labour laws can be divided into compliance under central laws and the specific state laws.
We have compiled a list of central laws and examples of specific state laws herein.
Sr. No
Labour Laws
Applicability
Registration/Implementation
Penalty for non-compliance with the applicable laws
1
Employee’s State Insurance Act, (ESI Act 1948)
a) Working with the aid of power- 10 or more employees b) Without the aid of power- 20 or more employees
Section 2-A of the Act read with Regulation 10-B, registration within 15 days from the date of its applicability to them
Imprisonment for a period extending up to 2 years and a fine of up to INR 5,000.
2
Prevention of Sexual Harassment of Women at Workplace (Prevention Prohibition and Redressal Act, 2013) (“POSH Act”)
Applicable to all organizations, however the formation of an internal committee is applicable when there are 10 or more employees
The company has to elect an internal committee and pass a board resolution for adopting the internal committee as per the provisions of POSH Act
A fine of INR 50,000
3
Maternity Benefit Act, 1961
Any organization with 10 or more employees
No registration required. However, an organization needs to maintain a muster roll. An organization is required to provide for first and second-time mothers, a leave of 6 months, or 26 weeks, off, which is a paid leave wherein her employer needs to pay her in full.
Imprisonment which may extend to 3 months, or with fine which may extend to INR 500, or with both.
4
Payment of Gratuity Act, 1972
Any organization with 10 or more employees
Form A to be filed within 30 days of registration
punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees or with both
5
Rights of Persons with Disabilities Act, 2016
Any organization with 20 or more employees
a) Form E for registration under Rule 27(3). b) Organization needs to appoint a grievance officer as a compliance
Imprisonment up to 6 months and/ or a fine of INR 10,000, or both
6
Equal Remuneration Act, 1976
No minimum applicability
Form D- Register to be maintained by the employer
Penalty levied may be up to INR 10,000
7
Payment of Bonus Act, 1965
Any organization with 20 or more employees
In case of new establishments, for the first 5 years, bonus is payable only if the business is profitable.
Imprisonment for six months or may impose a fine of INR. 1000 or both
8
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
Any organization with 20 or more employees
Form 5 to be filled by employers for enrolling new employees for this scheme
For delay in payment of PF- a)For 0 — 2 months delay – @ 5 % p.a. b)For 2 — 4 months delay – @10 % p.a. c)For 4 — 6 months delay – @ 15 % p.a. d)For delay above 6 months – @ 25 % p.a. (subject to a maximum of 100%)
List of Central Labour Laws applicable to Start-ups
State Specific Labour Laws applicable to Start-ups
Types Of Applicable Legislations For Specific States:
•State-specific shops and establishment acts
•State-specific labour welfare acts
•State-specific professional tax acts
STATE OF MAHARASHTRA AND KARNATAKA COVERED HEREIN
State Specific Labour Laws applicable to Start-ups
A. For Maharashtra
Sr. No
Labour Laws
Applicability
Registration/Implementation
Penalty for non-compliance with the applicable laws
1
Maharashtra Shops and Establishment Act, 1948
Applicable to all organizations. Any organization with 10 or more employees needs to register.
Form A to be filed for registration
Fine which shall be not less than INR 1,000 but which may extend to INR 3,000 along with the prescribed registration or renewal Fee
2
Maharashtra Labour Welfare Fund Act, 1953
Any organization with 05 or more employees
Form A to be filed for registration
A fine of INR 500 and/or imprisonment up to 3 months
3
The Maharashtra State Tax on Profession, Trades, Callings and Employments Act, 1975
Applicable to all organizations/ establishments
Form I-I and I-II to be filled for enrollment
Employer will be liable to pay a simple interest @ 1.25% of the tax payable for each month for which the tax remains unpaid.
Maharashtra Labour Laws applicable to Start-ups
B. For Karnataka
Sr. No
Labour Laws
Applicability
Registration/Implementation
Penalty for non-compliance with the applicable laws
1
Karnataka Shops and Commercial Establishments Act, 1961
Applicable to all. Organizations with 10 or more employees have to register
Registration of establishment in Form B
punishable with fine up to INR 1,000 and in case of a continuing contravention, a further fine of up to INR 2,000 for every day during which such contravention continues
2
The Karnataka Tax on Professions, Trades, Callings And Employment Act, 1976
Applicable to all person working in Karnataka
Registration of establishment under Sec 5
Penalty not exceeding fifty per cent of the amount of tax due. This penalty shall be in addition to the interest payable under sub-section (2) or (3) of section 11.
The Ministry of Electronics and Information Technology (“MeiTY”), vide notification dated April 6, 2023 released the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2023 (“Amended Rules”), whereby the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Amendment Rules, 2021 were amended in order to provide for certain regulations with respect to online gaming industry. View complete Amended Rules
• The following new terms have been defined:
a) online game (Rule 2(1)(qa))
b) online gaming intermediary(Rule 2(1)(qb))
c) online gaming self-regulatory body(Rule 2(1)(qc))
d) online real money game (Rule 2(1)(qd))
e) permissible online game (Rule 2(1)(qe))
f) permissible online real money game (Rule 2(1)(qf))
• Online self-regulatory body (SRO) shall verify an online real money game as a permissible online real money game. Main criteria would be to satisfy that (Rule 4A (3)):
(a) the online game doesn’t involve wagering on any outcome
(b) the users are at least 18 years of age
• Obligations on online gaming intermediaries to ensure compliance under IT act and also to not show, distribute or host any data that can cause harm to the users.
• Obligations on permissible online real money game providers:
(a) displaying a visible mark verification by such online self-regulatory body on such games
(b) informing users about withdrawal or refund of deposit policies
(c) the manner in which the determination of distribution of winnings, fees and other charges is done
2. New Concepts Introduced
Online games (Rule 2(1)(qa)) – A game that is offered on the Internet and is accessible by a user through a computer resource or an intermediary.
Online real money game (Rule 2(1)(qb)) – Online games where users make deposits in cash or kind with the expectation of earning winnings on that deposit. Examples of online real money games shall be: Dream 11, My Premier League and My11Circle.
Permissible online real money game (Rule 2(1)(qc)) – Online real money game verified by an online gaming self-regulatory body.
Permissible online games (Rule 2(1)(qd)) – (a) Permissible online real money game; or (b) any other online game that is not an online real money game.
Online self governing Body (Rule 2(1)(qe)) – MeitY may designate as many online gaming self-regulatory bodies as it may consider necessary for the purposes of verifying an online real money game as a permissible online real money game.
Online gaming intermediary (Rule 2(1)(qf)) – Any intermediary that enables the users of its computer resource to access one or more online games.
3. Changes in the Gaming Ecosystem
Business of the gaming entity
Law before the Amendment
Effect of the amendment
Online Gaming Intermediaries
Not regulated earlier.
Will be covered under the IT Act, 2000 and shall have a plethora of obligations. List of obligations found in further slides
OnlineFantasySports
Online fantasy sports, though not heavily regulated, is permitted all over India except few states namely • Assam, Sikkim, Nagaland, Andhra Pradesh, Odisha, Telangana and Tamil Nadu.
Online games covered here shall be taken up for consideration by the online self-regulatory body to be classified as a permissible online real money game, provided that the same (Rule 4A (3)): (a) does not involve wagering on any outcome (b) the user is at least 18 years of age.
eSports
Not regulated. However, recognised as a part of multi-sports events in India and recognised by the Ministry of Youth Affairs and Sports.
With respect to eSports, the online self-regulatory body shall ensure that its rules and regulations, privacy policy or user agreement inform the users not to host, display, upload, modify, publish, transmit, store, update or share any information that is in relation to an online game which causes harm (Rule 4 and Rule 5 (11)).
Online Casino Games including Poker
• Sikkim allows casino games, such as Casino and Blackjack • Nagaland and West Bengal allow Poker • Gujarat bans Poker.
Online games covered here shall be taken up for consideration by the online self-regulatory body to be classified as a permissible online real money game, provided that the same (Rule 4A (3)) : (a) is permitted by the applicable state enactment within a particular state’s territory (b) does not involve wagering on any outcome (c) the user is at least 18 years of age.
Changes in the gaming ecosystem
4. Obligations of Online Gaming Intermediary
Reasonable security practices and procedures as prescribed in the Information Technology (SPDI) Rules, 2011 (Rule 3(1)(i)).
To retain information for a period of 180 days from cancellation or withdrawal of his registration in case information is collected from user for registration (Rule 3(1)(g)).
To not deploy / install / modify technical configuration of computer resource or become party to any act that may change operations such computer resource thereby, circumventing any law (Rule 3(1)(g)).
To publish the rules and regulations, privacy policy and user agreement on its website or mobile based application (Rule 3(1)(a)) :
a) To inform its users of its rules and regulations, privacy policy or user agreement (or any changes) at least once in a year (Rule 3(1)(f))
(Online real money game intermediary shall inform its users of such changes as soon as possible, not later than 24 hours after such change is effected)*
(b) To not display, upload, publish or share any information that (Rule 3 (1) (b) of Amended Rules)–
• related to online games that causes a user harm
• is not verified as a permissible online game
• is in the nature of advertisement of an online game that is not permissible
• violates any law
(c) To include provisions to inform the user not to host, display, upload or share any information that belongs to another person, is defamatory, obscene, pornographic, pedophiliac, invasive of another‘s privacy, including bodily privacy, racially or ethnically objectionable, relating or encouraging money laundering or gambling, is harmful to child, infringes any patent, trademark, copyright or other proprietary rights, violates any law for the time being in force; any deceiving or misleading information, impersonates another person; threatens the unity, integrity, defense, security or sovereignty of India, contains software virus or any other computer code (Rule 3(1)(b)).
5.Online Self Regulatory Body
Criteria to apply (Rule 4(A)) –
Should be a company
Membership is representative of gaming industry
Members are offering & promoting online games in a responsible manner
Board of directors –individuals with special knowledge or practical experience suitable for the performance of functions of self-regulatory body
the MOA and AOA of such entity includes provisions regarding grievance redressals, framework for disclosure and accountability of the members of such body, etc.
Responsibilities (Rule 4(A)) –
to designate an online real money game (ORMG) as permissible
to prominently publish a framework for verifying an ORMG on its portal
to publish and maintain an updated list of all permissible ORMG verified by it
to ensure that ORMG so verified by it shall display a demonstrable and visible mark of such verification stating that ORMG is verified by the body as permissible
publish framework for redressal of grievances and the contact details of the Grievance Officer on its portal. An applicant aggrieved by decision of such body with respect to verification may make a complaint which is acknowledged by the Grievance Officer within 24 hours and resolved within 15 days from the date of its receipt.
6. Conclusion
The new rules create an umbrella framework for the online gaming industry. While the distinction of game skill/ game of chance has not been dealt with in these rules, it lays down the basic stepping stone to crystallize the online gaming industry’s challenges and provides clarity on various concepts that were hitherto only industry parlance.
Startups face the challenge of determining their value since they often lack revenue figures or hard facts. Thus, estimation is required, and startup valuation methods frameworks have been invented to help startups accurately gauge their valuation. Startup founders aim for high valuation while investors want the value low enough to see big returns on their investment. This article will discuss the factors that determine startup valuation, negative and positive. Additionally, it will cover startup valuation methods such as the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), Discounted Cash Flow (DCF) Method, Venture Capital Method amongst others
FACTORS THAT DETERMINE STARTUP VALUATION
Positive Factors
Traction – One of the biggest factors of proving a valuation is to show that your company has customers. If you have 100,000 customers you have a good shot at raising $1 million.
Reputation – If a startup owner has a track record of coming up with good ideas or running successful businesses, or the product, procedure or service already has a good reputation a startup is more likely to get a higher valuation, even if there isn’t traction.
Prototype – Any prototype that a business may have that displays the product/service will help.
Revenues – More important to business to business startups rather than consumer startups but revenue streams like charging users will make a company easier to value.
Supply and Demand – If there are more business owners seeking money than investors willing to invest, this could affect your business valuation. This also includes a business owner’s desperation to secure an investment, and an investors willingness to pay a premium.
Distribution Channel – Where a startup sells its product is important, if you get a good distribution channel the value of a startup will be more likely to be higher.
Industry Trends – If a particular industry is booming or popular (like mobile gaming) investors are more likely to pay a premium, meaning your startup will be worth more if it falls in the right industry.
Negative Factors
Poor Industryor Market – If a startup is in an industry that has recently shown poor performance, or may be dying off.
Low Margins – Some startups will be in industries, or sell products that have low-margins, making an investment less desirable.
Competition – Some industry sectors have a lot of competition, or other business that have cornered the market. A startup that might be competing in a cluttered market is likely to put off investors.
Management Not Up To Scratch – If the management team of a startup has no track record or reputation, or key positions are missing.
Product – If the product doesn’t work, or has no traction and doesn’t seem to be popular or if there isn’t a product-market fit.
Desperation – If the business owner is seeking investment because they are close to running out of cash.
2. STARTUP VALUATION METHODS
Early-stage startups usually have little to no revenue or profits; therefore, valuing them can be challenging. Angel investors and venture capital firms use multiple formulas to find the pre-money value of a business. With mature businesses that receive steady revenue and earnings and make profits, it is easier to value the company using a multiple of their earnings before interest, taxes, depreciation, and amortization (EBITDA).
Concept of EBITDA
EBITDA is best shown with the following formula – EBITDA = Net Profit + Interest +Taxes + Depreciation + Amortization
For example, if a company earns INR 10,00,000 in revenue and production costs are INR 4,00,000 with INR 2,00,000 in operating expenses and depreciation and amortization expense of INR 100,000 that leaves an operating profit of INR 300,000. The interest expense is INR 50,000 leading to earnings before taxes of INR 250,000. With a 20 percent tax-rate the net income becomes INR 200,000.
For calculating EBITDA, add tax and interest to the net profit of INR 200,000 to get the operating income of INR 300,000 and also add on the depreciation and amortization expense of INR 100,000 giving you a Earning Before Interest Tax Depreciation and Amortisation of INR 400,000.
Venture Capital Method
The Venture Capital Method employs a forecasted terminal value for the startup and an expected return from the investor to determine pre-money and post-money valuations.
The formula used is:
Pre-Money Valuation = Post Money Valuation — Invested Capital
With the Post-Money Valuation being the terminal value divided between the expected return.
Let’s say an investor values your startup at a terminal value of $1,000,000 and he wants a 20X return on his $10,000 investment. In this case, your Post-Money valuation would be $50,000. And, according to the Venture Capital Method, the Pre-Money Valuation would be:
Pre-Money = $50,000 — $10,000 = $40,000
This is another popular method utilized by a lot of venture capital firms. To calculate the value of the firm, you will need to derive the terminal value or the value at which you will be selling the business and the Return On Investment. Plugging in these values to the formulas will help you arrive at the solution. The formulas for the same are as follows:
Berkus Method
The Berkus Method, created by American venture capitalist and angel investor Dave Berkus is a straightforward method that values startups based on detailed assessment of five key aspects called as success factors :
Basic Value, Technology, Execution, Strategic Relationships and Production and Consequent Sales
A detailed assessment is carried out to evaluate how much monetary value is assigned to each aspect. The startup value is the sum of all those monetary values. This method usually allocates $500,000 per success factor so theoretically the maximum pre-money valuation is $2,500,000. Nevertheless, depending on the degree in which each element is developed the investor could reduce the value of the item to say $400,000 or $250,000, to determine the final value.
Though the Berkus Method is seen as an important method utilized by many startups, it fails to take into consideration a lot of other aspects of startup life. However, for a startup that is in the early stage of its life or in development stage with no revenue generation, this might be an ideal way to arrive at the valuation.
Discounted Cash Flow Method
Startups and risk go hand in hand. When compared to a normal or running business, startups are riskier. That being said, for the amount of risk you take, you will expect the same level of reward. The same idea is behind this method.
Here, you will be required to calculate the future discounted cash flows which your business will be getting throughout the period or estimated period. To that, you will have to apply a discount rate or ROI to arrive at the right value.
Now, if you are getting a higher discount rate, that means your returns from the business should also be higher, and so, your valuation increases. There are three main scenarios under this method that will offer insights into your valuation. They are:
Your business performing exactly the way you expected.
Business performance being poor than what was expected.
Business performance is better than what was expected.
Here, the sum of discounted values will be your valuation. This method depends on both future and historical data to arrive at the solution.
Given the fact that this method relies heavily on assumptions that require some historical data to be performed, it is not the most widely employed to value startups.
Market Multiple Method
A Market Multiple is calculated using recent acquisitions or transactions that are similar in nature to the company or startup in case on hand. The startup is then valued using the calculated Market Multiple.
CONCLUSION
To conclude, Start-up valuation depends a lot on judgment and qualitative factors like Founders and Co-Founders background, experience and passion, Business Model, Scalability potential of business (with or without technology), Competitive landscape, Current Traction. Startup’s often operate in the valley of death which requires considering the probability of their success and failure. In a way, Start-up valuation also involves validation of the business model which makes it complicated vis-vis other valuations. As everything is future driven in start-up, the experience of valuer plays a significant role in how to evaluate and value a startup.
FAQs
How to calculate the valuation of a startup based on funding?
The valuation of a startup based on funding is typically determined by the negotiation between the startup and the investor(s) during a funding round. The valuation is influenced by factors such as the startup’s growth potential, market traction, team expertise, competition, and the terms of the investment. Generally, the valuation is based on the amount of funding raised and the percentage of equity or ownership stake given to the investors.
2. How to value a startup without revenue?
Startups without revenue can be challenging to value since traditional financial metrics like revenue or profit may not be applicable. In such cases, valuation often relies on other factors such as the startup’s market potential, intellectual property, growth prospects, team expertise, traction, user base, partnerships, and competitive advantage. Comparable valuations of similar startups in the industry or the use of valuation models like the discounted cash flow (DCF) method or the market approach can also be considered.
3. How to value a loss-making startup?
Valuing a loss-making startup can be challenging since traditional financial metrics may not accurately reflect its potential. In such cases, valuation often relies on factors like market potential, intellectual property, team expertise, growth prospects, user base, partnerships, and competitive advantage. Investors may also consider the startup’s ability to generate future revenue, cost management strategies, the market demand for the product or service, and the startup’s progress in reaching key milestones.
4. How to calculate post-money valuation?
Post-money valuation refers to the value of a startup after a new round of funding has been received. It can be calculated by adding the amount of funding raised in the latest round to the pre-money valuation. For example, if a startup has a pre-money valuation of $5 million and raises $2 million in a funding round, the post-money valuation would be $7 million ($5 million + $2 million).
In life people want shortcuts, that’s the reason rules of thumb find someplace in one life. There are rules of thumb for everything. In games, always start with a good serve; for boiling eggs there is a six-minute boiling rule. Why should investing be an exception?
In investing, there are certain rules that help us gauge how fast our money will grow or how fast it will lose its value. There are rules to make investment making easier. Such as asset allocation in mutual funds, how much to save for retirement and for emergencies etc.
In this blog, we will learn about the most popular thumb rules in the world of investing.
Rules to understand how fast your money can grow –
Rule of 72 –
We all want the money we invest to double and are always on the lookout for the ways it can be done in the shortest amount of time. Well, calculating the number of years in which your money doubles is very easy with the Rule of 72.
According to this rule, if you divide 72 by the expected rate of return, you can get a fairly accurate estimate of the number of years your money can take to double.
For example, let’s suppose you have invested Rs 1 lakh in a product that provides you a rate of return of 6 percent. Now, if you divide the number 72 with 6, you arrive at 12. That means, your Rs 1 lakh will become Rs 2 lakh in 12 years.
You can also use the Rule of 72 to calculate the interest rate required for the investment to double in a set time frame.
For example, if you want your investment to double within 6 years, Doubling Time = 72/Rate of Return
Rate of Return = 72/Doubling Time = 72/6 =12% p.a.
Rule of 114 –
For determining the number of years it will take for your investment to triple itself, use the Rule of 114. According to this rule, if you divide the expected rate of return from 114, you can get an estimate of the number of years your money can take to triple.
The answer is the number of years in which your investment will triple. So, if you invest Rs 1 lakh in a product that gives you an interest rate of 6 percent, then as per the Rule of 114, it will become Rs 3 lakh in 19 years.
Rule of 144 –
Rule of 144 helps you ascertain in how many years your money will quadruple if you know the rate of return. By dividing the expected rate of return with 144, the remainder shall be the number of years required to quadruple the money invested.
Quadrupling Time = 144/Rate of Return
If you invest Rs.1,00,000 with an expected rate of return of 10% per annum, then
Quadrupling Time = 144/10 =14.4 years
Hence, you can expect your investment to triple in 14.4 years. It is important to remember that this rule is applicable in the case of investments that offer compound interest.
Rules to understand how fast your money value can diminish –
Rule of 70 –
Even if you don’t spend a single penny from the wealth you own today, the value in 10 or 20 years shall be way less than it is today. The reason being inflation. This rule helps you understand the value of money in 10 or 20 years keeping inflation in mind.
To calculate this, divide 70 by the current inflation rate. The remainder is the number of years in which your wealth will be worth half of what it is today.
For example – you have Rs 50 lakh, and the current inflation rate is 5%. In 14 years, your Rs 50 lakh will be worth Rs 25 lakh, according to the Rule of 70.
This is especially useful for retirement planning, as it affects the way you set up your monthly withdrawals. However, do keep in mind that the inflation rate keeps varying.
Some other rules to keep in mind while investing –
Rule of 10,5,3 –
When we invest money or even consider investing money, we usually look for the rate of return on our investments. The 10,5,3 rule will assist you in determining your investment’s average rate of return.
Though mutual funds offer no guarantees, according to this law, long-term equity investments should yield 10% returns, whereas debt instruments should yield 5%. And the average rate of return on savings bank accounts is around 3%.
100 minus age Rule –
The 100 minus age rule is a great way to determine one’s asset allocation. That is, how much you should allocate in equities and how much in debt.
For this, subtract your age from 100, and the number that you arrive at is the percentage at which you should invest in equities. The rest should be invested in debt.
For example, if you are 25 years old and you want to invest Rs 10,000 every month. Here if you use the 100 minus age rule, the percentage of your equity allocation would be 100 – 25 = 75 percent. Then Rs 7,500 should go to equities and Rs 2,500 in debt. Similarly, if you are 35 years old and want to invest Rs 10,000, then according to the 100 minus age rule the equity allocation would be 100 – 35 = 65 percent. That means, Rs 6,500 should go in equities and Rs 3,500 in debt.
Finally, to know if you are wealthy, follow this rule –
The Net Worth Rule –
Thomas J. Stanley and William D. Danko in “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy” postulate that an average individual has a net worth equal to the product of their age and one-tenth of their pre-tax annual income. This should be the least net worth you should aim for. Remember that net worth includes not just your cash, investments and home equity but also tangible property like jewelry, furniture and other assets like books and paintings that you may own.
So if you’re 40 and make Rs 20 lakh a year, you should have a net worth equal to Rs 80 lakh, assuming you have no inheritance. If you want to secure your position as wealthy, your net worth should be double of that.
Conclusion
Sometimes Rules of thumb will give you a false sense of security or wrong guidance, they should always be taken with a pinch of salt. The thumb rules listed here are to be used as starting points – start here and tweak them based on your risk appetite, inherited wealth and personal goals.
FAQs
Q: What is the Rule of 72 in investing?
A: The Rule of 72 is a simple formula used to estimate the time it takes for an investment to double. To calculate the approximate doubling time, divide 72 by the expected rate of return.
Q: How can I use the Rule of 72 to calculate the required interest rate for doubling my investment?
A: If you want to determine the interest rate needed for your investment to double within a specific timeframe, use the formula: Rate of Return = 72 / Doubling Time.
Q: What is the Rule of 114 in investing?
A: The Rule of 114 is a guideline to estimate the time it takes for an investment to triple. Divide 114 by the expected rate of return to get an approximation of the number of years it may take for your investment to triple.
Q: How does the Rule of 144 help determine when an investment will quadruple?
A: The Rule of 144 assists in calculating the number of years required for an investment to quadruple. Divide 144 by the expected rate of return, and the remainder will indicate the approximate number of years it may take for the investment to quadruple.
Q: What is the Rule of 70 used for in investing?
A: The Rule of 70 helps understand the impact of inflation on the value of money over time. By dividing 70 by the current inflation rate, you can estimate the number of years it will take for your wealth to be worth half of its present value.
Q: What does the 10,5,3 rule signify in investing?
A: The 10,5,3 rule provides a guideline for expected average rates of return in different types of investments. It suggests that long-term equity investments may yield around 10% returns, debt instruments around 5%, and savings bank accounts approximately 3%.
Q: How does the 100 minus age rule determine asset allocation in investing?
A: The 100 minus age rule helps determine the percentage of investments to allocate in equities and debt. Subtract your age from 100, and the resulting number represents the percentage you should invest in equities, while the remainder should be allocated to debt.
Q: How can I calculate my net worth using the Net Worth Rule?
A: The Net Worth Rule suggests that your net worth should be equal to your age multiplied by one-tenth of your pre-tax annual income. This includes various assets like cash, investments, home equity, and other tangible properties you own.
Q: How can I assess if I am considered wealthy based on the Net Worth Rule?
A: According to the Net Worth Rule, to be considered wealthy, your net worth should be double the value determined by your age multiplied by one-tenth of your pre-tax annual income.
Q: Are these thumb rules definitive guidelines for investing?
A: Thumb rules are starting points and should be used with caution. Consider your risk appetite, personal goals, and inherited wealth while using these rules as a foundation for your investment decisions.
The regulatory landscape for startups in India is a constantly evolving space due to the dynamic and volatile nature of the country’s startup ecosystem. Cost-effective and innovative fundraising opportunities are a necessity for startups to succeed.
The Indian government, being aware of the above fact, regularly updates regulatory norms in accordance with the economic conditions and market dynamics. One of the fairly recent introductions by the government is the concept of ‘convertible notes’.
Convertible notes act as an instrument that evidences receipt of money initially as a debt, which is repayable at the option of the holder, or which can be convertible into equity shares of the startup company. Convertible notes are a hybrid of equity and debt instruments.
Convertible notes are primarily targeted towards startups as valuing companies during the initial phase of operations is often difficult. Since there’s no actual valuation for the startup’s shares, convertible notes become an attractive investment option for investors.
Under the Companies Act, 2013, a ‘convertible note’ was introduced as an exempted deposit (with respect to startup companies) under Rule 2(1)(c)(xvii) of Companies (Acceptance of Deposit) Rules, 2014.
To issue convertible notes, the startup company must be recognized as a “Startup” by the Department for Promotion of Industry and Internal Trade. Further, the investment amount per investor should not be less than Rs. 25 lakh in a single tranche, otherwise the same shall be considered to be a deposit under the relevant provisions of the Companies Act, 2013 and shall attract the necessary compliances relating to ‘deposits’. As convertible notes are debt instruments, startup companies can issue the same under the provisions of Section 62(3) of the Companies Act, 2013, with the shareholders’ approval at a general meeting, and by notifying the Registrar of Companies by filing eForm MGT-14 within 30 days of having held the said general meeting.
Convertible notes offer extensive flexibility compared to other instruments like compulsorily convertible preference shares, compulsorily convertible debentures, or equity shares. They involve minimal regulatory reporting while issuing and valuation hassles, thus promising substantial traction in the Indian ecosystem.
FAQs about Convertible Notes under Companies Act, 2013
1. What exactly are convertible notes? Convertible notes are a financial instrument that acts as a hybrid of debt and equity. They allow startups to raise money by issuing a promise to: (a) either repay the debt; or (b) convert it into equity shares in the company at a later stage.
2. Are there any pre-conditions to issue convertible notes in India? Yes, there are two pre-conditions for issuing convertible notes in India: (a) the company issuing the convertible note must be recognized as a “Startup” by the DPIIT; and (b) the investment amount per investor should not be less than Rs. 25 lakh in a single tranche.
3. How can startups comply with regulations while issuing convertible notes in India? Startups must obtain shareholders’ approval by way of a special resolution at a general meeting and shall notify the Registrar of Companies of the same by filing eForm MGT-14 within 30 days of having held the meeting.
4. How is a convertible note different from a traditional loan? Unlike most traditional loans, convertible notes are convertible into equity shares of the startup company upon the occurrence of specified events. The investor also gets a right to receive equity shares of the startup company at a future date in lieu of repayment.
5. What advantages do convertible notes offer startups? Convertible notes are an attractive investment option because of their hybrid structure. They allow flexible fundraising, and bypass the initial valuation hassles that startups usually face, thus making them a promising investment option.
Liquidation is the process of closing a business and distributing its assets among stakeholders, creditors, and rightful claimants. In the event of a corporate liquidation, preferred shareholders recover their investments first, prior to all other shareholders, in the process known as Liquidation Preference. Liquidation preference is a form of protection for investors as it guarantees them a certain minimum payment, regardless of the company’s valuation at exit. Investors can choose between non-participating and participating liquidation preference.
Non-participating liquidation preference allows investors to receive predetermined returns without any share in the surplus. In contrast, participating liquidation preference allows investors to receive predetermined returns as well as a share of the surplus proceeds based on their shareholding.
Standard Seniority Liquidation Preference is followed by most early-stage companies, where liquidation preferences are honored in reverse order from the latest investment round to the earliest. Pari-Passu Seniority gives all preferred investors equal seniority status, meaning that all investors would share in at least some part of the proceeds. Tiered Seniority is a hybrid between standard and pari-passu seniority, with investors grouped into distinct seniority levels.
Investors ask for liquidation preference to protect themselves, particularly if a company fails to meet expectations and sells or liquidates at a lower valuation than anticipated. Liquidation preferences are expressed as a multiple of the initial investment and are most commonly set at 1X. In the event of liquidation, investors receive the full amount of their investment before any other equity holders or their share in the liquidation proceeds on a pro-rata basis, whichever is more. Understanding liquidation preference is important for founders to negotiate well with potential investors.
A BO is a suitable business model for foreign companies looking to establish a temporary presence in India. The BO serves as an extension of the head office business and carries on the same business and activity as that of its parent company. The foreign company can have any revenue from the Indian BO only from the activity allowed by the Reserve Bank of India (“RBI”). It has to meet all its expenses of Indian office through remittances from the head office or through the revenue generated from the Indian operation permitted by the RBI.
BO is suitable for a foreign company to test and understand the Indian market with a very strict control by the RBI, as it does allow the companies to do business but just to do the activity which are mentioned in the application of BO. The Master Direction on Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any other place of business in India by foreign entities shall be relevant for setting up of the BO.
Permitted Activities
Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up BO in India and undertake the following activities in India;
i. Export/import of goods.
ii. Rendering professional or consultancy services (other than practice of legal profession in any matter).
iii. Carrying out research work in which the parent company is engaged.
iv. Promoting technical or financial collaborations between Indian companies and parent or any overseas group company.
v. Representing the parent company in India and acting as buying/ selling agent in India.
vi. Rendering services in information technology and development of software in India.
vii. Rendering technical support to the products supplied by parent/group companies.
viii. Representing a foreign airline/shipping company.
General Criteria
Applications from foreign companies (a body corporate incorporated outside India, including a firm or other association of individuals) for establishing BO in India shall be considered by the AD Category-I (“AD”) bank as per the guidelines given by RBI.
An application from a person resident outside India for opening of a BO in India shall require prior approval of Reserve Bank of India and shall be forwarded by the AD Category-I bank to the General Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi – 110 001 who shall process the applications in consultation with the Government of India, in the following cases:
a. The applicant is a citizen of or is registered/incorporated in Pakistan;
b. The applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a BO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
c. The principal business of the applicant falls in the four sectors namely Defence, Telecom, Private Security and Information and Broadcasting. However, prior approval of RBI shall not be required in cases where Government approval or license/permission by the concerned Ministry/Regulator has already been granted.
d. The applicant is a Non-Government Organisation (NGO), Non-Profit Organisation, Body/ Agency/ Department of a foreign government. However, if such entity is engaged, partly or wholly, in any of the activities covered under Foreign Contribution (Regulation) Act, 2010 (FCRA), they shall obtain a certificate of registration under the said Act and shall not seek permission under FEMA 22.
The non-resident entity applying for a BO in India should have a financially sound track record of a profit making track record during the immediately preceding five financial years in the home country and net worth of not less than USD 100,000 or its equivalent.
Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name called].
An applicant that is not financially sound and is a subsidiary of another company may submit a Letter of Comfort (“LOC”) from its parent/ group company, subject to the condition that the parent/ group company satisfies the prescribed criteria for net worth and profit.
Procedure for setting up a BO
i. The application for establishing BO in India may be submitted by the non-resident entity in Form FNC to a designated AD Category – I bank (i.e. an AD Category – I bank identified by the applicant with whom they intend to pursue banking relations) along with the prescribed documents mentioned in the Form and the LOC, wherever applicable. The AD Category-I bank shall after exercising due diligence in respect of the applicant’s background, and satisfying itself as regards adherence to the eligibility criteria for establishing BO, antecedents of the promoter, nature and location of activity of the applicant, sources of funds, etc., and compliance with the extant KYC norms grant approval to the foreign entity for establishing BO in India.
ii. However, before issuing the approval letter to the applicant, the AD Category-I bank shall forward a copy of the Form FNC along with the details of the approval proposed to be granted by it to the General Manager, Reserve Bank of India, CO Cell, New Delhi, for allotment of Unique Identification Number (UIN) to each BO. After receipt of the UIN from RBI, the AD Category-I bank shall issue the approval letter to the non-resident entity for establishing BO in India.
iii. An applicant that has received a permission for setting up of a BO shall inform the designated AD Category I bank as to the date on which the BO has been set up. The AD Category I bank in turn shall inform RBI accordingly. The approval granted by the AD Category I bank should include a proviso to the effect that in case the BO for which approval has been granted is not opened within six months from the date of the approval letter, the approval shall lapse.
iv. All applications for establishing a BO in India by foreign banks and insurance companies will be directly received and examined by the Department of Banking Regulation (DBR), Reserve Bank of India, Central Office and the Insurance Regulatory and Development Authority (IRDA),
v. There is a general permission to non-resident companies for establishing BO in the Special Economic Zones (SEZs) to undertake manufacturing and service activities subject to the conditions that:
o such BOs are functioning in those sectors where 100% FDI is permitted;
o such BOs comply with Chapter XXII of the Companies Act, 2013; and
o such BOs function on a stand-alone basis.
vi. A BO may approach any AD Category-I bank in India to open an account for its operations in India. Credits to the account should represent the funds received from Head Office through normal banking channels for meeting the expenses of the office and any legitimate receivables arising in the process of its business operations. Debits to this account shall be for the expenses incurred by the BO and towards remittance of profit/winding up proceeds. Any foreign entity except an entity from Pakistan who has been awarded a contract for a project by the Government authority/Public Sector Undertakings or are permitted by the AD to operate in India may open a bank account without any prior approval of the Reserve Bank.
Annual Activity Certificate by BO
The Annual Activity Certificate (“AAC”) as at the end of March 31 each year along with the required documents needs to be submitted by the following:
a. In case of a sole BO, by the BO concerned;
b. In case of multiple BOs, a combined AAC in respect of all the offices in India by the nodal office of the BOs.
The BO needs to submit the AAC to the designated AD Category -I bank as well as Director General of Income Tax (International Taxation), New Delhi.
The designated AD Category – I bank shall scrutinize the AACs and ensure that the activities undertaken by the BO are being carried out in accordance with the terms and conditions of the approval given. In the event of any adverse findings reported by the auditor or noticed by the designated AD Category -I bank, the same should immediately be reported to the General Manager, Reserve Bank of India, CO Cell, New Delhi, along with the copy of the AAC and their comments thereon.
Registration with police authorities
Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of opening BO in India shall have to register with the state police authorities. Copy of approval letter for ‘persons’ from these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi for necessary action and record.
Remittance of profit/surplus
BOs are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of the following documents to the satisfaction of the AD Category-I bank through whom the remittance is effected:
a. A certified copy of the audited balance sheet and profit and loss account for the relevant year.
b. A Chartered Accountant’s certificate certifying –
i. the manner of arriving at the remittable profit;
ii. that the entire remittable profit has been earned by undertaking the permitted activities; and
iii. that the profit does not include any profit on revaluation of the assets of the branch.
General Conditions
· BO is allowed to open non-interest-bearing current accounts in India. Such Offices are required to approach their AD for opening the accounts.
· A BO is required to register with the Registrar of Companies (ROCs) once it establishes a place of business in India under the Companies Act, 2013.
· The BOs shall obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up of their office in India and report the same in the AACs.
· Each BO is required to transact through one designated AD Category-I bank only who shall be responsible for the due diligence and KYC norms of the BO. BO, present in multiple locations, are required to transact through their designated AD.
· Acquisition of property by BO shall be governed by the guidelines issued under Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations.
· AD Category-I bank can allow term deposit account for a period not exceeding 6 months in favour of a BO provided the bank is satisfied that the term deposit is out of temporary surplus funds and the BO furnishes an undertaking that the maturity proceeds of the term deposit will be utilised for their business in India within 3 months of maturity.
Steps in brief There are two routes available under the FEMA 1999 for setting up the BO in India:
Reserve Bank Approval Route
Automatic Route
i. Designate a Bank and branch where the account will be opened (post approval of RBI) who will be an Authorized Dealer Bank (AD Bank) for BO in India.
ii. File an application for BO, with all necessary documents to the RBI through the AD Bank.
iii. Obtain approval of RBI.
iv. Apply to ROC to obtain a “Certificate of Establishment of Place of Business in India” within 30 days of approval by RBI.
v. Apply for Permanent Account Number with Income Tax Authority.
vi. Apply for TAN with Income Tax Authority.
vii. Open account with Bank and to obtain bank account number.
viii. Registration with police authorities if required.
FAQ’s
Q: Who can open a branch office in India?
A: Any foreign company can open a branch office in India provided it complies with Reserve Bank of India (RBI) guidelines.
Q: What is a branch office in India?
A: A branch office is an extension of a foreign company that carries out similar business activities as the parent company.
Q: What is branch office and examples?
A: The branch office is the extension of a parent company located outside India operating in India with similar business activities as that of the parent company. Examples of foreign companies having branch offices in India include Google India Private Limited, Microsoft India Private Limited, etc.
Q: How do you start a branch office?
A: To start a branch office, foreign companies need to apply to the RBI through an Authorized Dealer bank in Form FNC along with the required documents as mentioned in the RBI guidelines.
Q: What is the legal status of branch office?
A: The branch office does not have a separate legal status and is an extension of the foreign entity headquartered outside India.
Q: What is a branch office under Companies Act 2013?
A: Under Companies Act 2013, a branch office is considered as an establishment of a foreign company in India, and it requires registration with the Registrar of Companies (ROC).
Q: Is branch office a separate legal entity?
A: No, a branch office does not have a separate legal entity.
Q: How to open a branch office in another state?
A: The procedure for opening a branch in another state in India is the same as opening a branch office in India, and foreign companies must comply with RBI guidelines.
Q: Can a foreign company open a branch office in India?
A: Yes, foreign companies can open a branch office in India after getting permission from the RBI.
Q: What is the difference between head office and branch office?
A: The head office is the main administrative center and the place where major decisions are made, while a branch office is an extension of a head office located in another location, carrying out similar business activities as the parent company.
Q: What to consider when opening a new branch?
A: Before opening a new branch, companies should consider factors such as market demand, the location of the branch, competition, availability of talent, legal and regulatory compliance, and financial feasibility, among other things.
Software as a Service or SaaS is a cloud-based software delivery model that licenses applications on a subscription basis through the internet. It’s one of the three main types of cloud computing, along with platform as a service (PaaS) and infrastructure as a service (IaaS). Unlike traditional software, SaaS products do not require upfront purchases or underlying infrastructure maintenance.A software as a service agreement, or SaaS agreement, specifies the parameters of a software delivery framework. Under this kind of arrangement, users will access software and data via the internet from a central location. A software as a service (SaaS) agreement may have extensive service components, or it may only provide end customers with access to items that are already available for traditional licensing. With the SaaS approach, data is uploaded into a system and then saved on the cloud, negating the need for extra hardware or software.
In today’s technology industry, SaaS products have become widely prominent. Its features, including cost-effectiveness, greater flexibility, low risk, an increasing mobile workforce, and customers, have led to its widespread adoption across industries such as hospitality, education, healthcare, and wellness. The demand for SaaS products has led to a massive rise in startups dealing in SaaS products.
How is SAAS different from a License Agreement?
A licensing arrangement is not the same as a SaaS deal. A business would normally provide the actual software for usage via a licensing arrangement, usually in exchange for a one-time or ongoing charge. Hardware and software must be installed physically.
Contrarily, with a SaaS deal, clients receive cloud-based access to software and other technologies without exchanging any tangible commodities. End customers will get online access to the relevant items through a SaaS arrangement. Consequently, rather than authorizing product usage as a service, which would allow the licensee to install and execute the software on their own servers, the form of a SaaS agreement concentrates on allowing the use of a product, i.e., offering access to software housed remotely.
Components of a SAAS Contract
SaaS agreements serve a purpose when a business decides to license software rather than purchase it. In contrast to the conventional method, which sold software as a whole to an organization and installed it on servers on their premises, SaaS suppliers grant access to software and other technologies through public, private, or hybrid clouds. Although the nature, structure, and requirements of SaaS contracts are generally similar, the particular services, service level agreements, and obligations might differ depending on the technology or service being provided.
Difference between a SaaS company and a Software company
The main difference between a SaaS company and a software company is that a SaaS product is hosted on a cloud server, while the software is sold in a pre-packaged form. This technology eliminates the need for an end-user license to activate the software and any infrastructure to host the software. Instead, the SaaS company hosts its membership in the form of a subscription. The customer only needs to log into their account and get complete access. Any software company that leases its software through a central, cloud-based system is said to be a SaaS company. The basic distinguishing factor between a mainstream software company and a SaaS based company is the method of delivery.
SaaS Business Model and its Benefits
The SaaS business model is basically a delivery model and is not just about selling software but also being a full-fledged service provider. This involves not just selling the product but also customer retention for the foreseeable future.
SaaS companies can follow a Business to Business (B2B) approach or a Business to Customer (B2C) approach. In the B2B approach, the SaaS company sells its products and services to other companies, helping businesses operate more efficiently and effectively with highly automated technology. The B2C model focuses on individual customers, providing them ease of access to the software and products online, taking into account the exact user requirements.The SaaS business model offers several benefits, including cost-effectiveness, recurring revenue, and ease of maintenance. It also allows companies to optimize their sales, marketing, and customer care services to enhance performance and generate more revenue.For startups and small businesses, the SaaS business model is a cost-effective solution that eliminates the need for prompt customer support and various operating systems and devices. Instead, the product should only support different web browsers.
SAAS Terms and Conditions
A Terms and Conditions document for your SaaS application will help you better manage it while also reducing the reasons why users may file lawsuits against you. It is a legally significant document that every SaaS application should own. Having a Software as a Service (SaaS) Terms and Conditions agreement is crucial, regardless of how long your business has been in operation or if you’re a startup offering your first product.Legal conflicts may have been averted by those who do not have a Terms and Conditions agreement or who do not include the necessary terms.In addition to all the provisions found in regular Terms and Conditions agreements, SaaS terms and conditions agreements may contain additional sections or clauses specific to SaaS agreements.For instance, the majority of terms and conditions agreements include a section on acceptable behaviour on the website or app, copyright laws regarding content usage, and guidelines for suspending or cancelling a user’s account. Information about a SaaS’s licence agreement, reseller agreement, and subscription agreement may also be included in the Terms and Conditions document. A Service Level Agreement (SLA), which outlines the service level a customer may anticipate, the metrics used to assess it, and the potential remedies in the event that the firm falls short of these expectations, may also be included in some.
Negotiating a SAAS Contract
The topic of SaaS negotiation is seldom explored due to the fact that SaaS providers do not publicly promote their willingness to negotiate SaaS contracts. Instead, they utilise sales techniques to convince SaaS consumers that they’re receiving a fantastic deal, or they brag about pricing transparency on their websites. Negotiations are not limited to multi-year contracts at the corporate level. Small and medium-sized business SaaS purchasers have the option to bargain for specific conditions in their master services agreements, software licence agreements, and service level agreements (SLAs). Software negotiation strategies can be used to get improved support services, warranties, liability restrictions, and other pertinent contractual provisions.
White Label SAAS Agreement
The terms and conditions under which the provider offers the customer Software as a Service (SaaS) are outlined in a white label software agreement. It must to contain the supplier’s liability limitations and disclaimers about the SaaS solution. It also lays out the service level agreement that the supplier has promised to adhere to.
SAAS products and the Indian market
The Indian market is a great avenue for entrepreneurs to create a lucrative source of revenue by developing SaaS products. Indian entrepreneurs have competitive advantages over their global peers as they have access to a wide pool of skilled talent at a relatively lower cost. By 2025, the Indian SaaS market is projected to capture 8-9% of the global market and generate revenue of $30 billion.
The pandemic has also enhanced the need for software and tools that empower businesses by connecting and servicing customers, amidst physical limitations and being located in different parts of the world. SaaS is actively replacing other extraneous software segments like enterprise resource planning (ERP), customer relationship management (CRM), and point-of-sale (POS) systems.
A few examples of Indian SaaS companies include CleverTap, PingSafe, AppSecure, Zoho, WebEngage, Freshworks, Dukaan, and Talview.
Conclusion onDemystifying SaaS Agreements: A Concise Guide
A SaaS agreement is a roadmap for your journey with a cloud-based software service. It outlines the rights and responsibilities of both you (the customer) and the SaaS provider. Covering everything from payment terms and data security to service availability and user access, it ensures a smooth and mutually beneficial relationship.
SaaS Agreement/Contract/Software as a Service Agreement: These terms are interchangeable, representing the legal document governing your SaaS usage.
SaaS Agreement Template/Sample/Standard Agreement: These provide a starting point for drafting your agreement, often tailored to specific service types.
SaaS Terms and Conditions/License Agreement: These define the permitted uses and limitations of the software, often part of the broader agreement.
Negotiating SaaS Contracts: Don’t be afraid to discuss and adjust terms like pricing, support levels, and termination clauses to fit your needs.
SaaS Reseller Agreement: This enables you to resell the SaaS service to your own customers under specific conditions.
SaaS Service Level Agreement (SLA): This sets expectations for service uptime, performance, and support response times.
SaaS User Agreement/EULA: This outlines the acceptable use of the software for individual users within your organization.
Types of SaaS Contracts: Different terms might apply depending on your industry, service type, and business model (e.g., B2B, white-label).
SaaS License Types: These define the scope of your access and usage, such as per user, per feature, or by volume.
Templates and samples are helpful starting points, but customization is crucial.
Negotiating terms is often possible, so don’t hesitate to advocate for your interests.
By understanding these key terms and approaching agreements with clarity and awareness, you can navigate the world of SaaS with confidence and secure a contract that benefits both you and your chosen provider.
FAQs on Understanding SaaS Agreements:
What’s a SaaS Agreement?
A contract outlining service terms, responsibilities, and rights between you and a SaaS provider.
What do I need in a SaaS Agreement Template?
Essentials like payment terms, data privacy, service levels, warranties, and termination clauses.
Can I use a Free SaaS Agreement Template?
Use with caution! Consult a lawyer for complex needs or sensitive data.
Should I negotiate a SaaS Contract?
Yes! Discuss pricing, service levels, and specific needs to get a fair deal.
What are SaaS Reseller Agreements?
For reselling another company’s SaaS product under your brand.
What’s a SaaS Service Agreement Template?
Outlines specific service level guarantees and uptime commitments.
What are B2B SaaS Contract Templates?
Tailored for businesses, addressing data security, compliance, and liability.
What are SaaS Subscription Agreements?
Focus on payment terms, subscription tiers, and automatic renewals.
What are Standard SaaS Agreements?
Generic templates, often not suitable for complex situations.
What are SaaS License Types?
Per user, per feature, or concurrent user models, impacting pricing and access
A tax is a compulsory fee or financial charge levied by the government on the income, profits, occupation, property, transaction, etc. of the taxpayer. It is everyone’s contribution to the fund for making common public expenditures. Basically, taxes are a source of revenue to run the country for economic growth and development. Some also consider it as a transfer of wealth/ contribution from the rich to the poor betterment via the government.
TAXPAYER
Everyone who earns or gets an income in India is subject to income tax. But taxes are collected from those whose income is more than the basic exemption limits prescribed by the government. A taxpayer may be an individual, a partnership firm, a company, the government itself, and any other legal entity. He may or may not be a citizen of India and he may or may not be a resident of India.
TAXCOLLECTOR
The Ministry of Finance heads the Department of Revenue, which functions under the direction and control of the Revenue Secretary. He exercises control through two statutory bodies – the Central Board of Direct Taxes (“CBDT”) and the Central Board of Indirect Taxes and Customs (“CBIC”). There are many taxes levied by the state governments and local bodies also.
TYPES OF TAX
There are two groups of tax systems – progressive and regressive. Progressive is the one where the tax rate increases with the taxpayer’s income. While regressive is the one where the tax rate decreases with an increase in income. The former is beneficial for rich people. India follows the progressive tax system.
Direct Taxes
Direct taxes are collected from the person directly. Parliament passes the finance bill every year to give effect to any amendments proposed in the income tax law and to specify the rates of income tax for the purpose of self-assessment tax, advance tax, and tax deducted at source. Eg income tax, equalization levy, etc.
Indirect Taxes
Indirect taxes are the taxes that are imposed on goods and services. They are collected by the source that sells the product/ services thereby increasing the cost of the product/ services. eg. goods and services tax, excise and customs duty, securities transaction tax, commodities transaction tax, entertainment tax, etc.
As per the income tax act, the “total income” of the year of a person is charged to income tax. Certain deductions are allowed to be deducted from the total income, eg. investments to provident fund, the premium for life insurance and medical insurance, interest income from the savings bank, principle/ interest paid for a home loan and the education loan, etc. (all these are subject to provisions of the income tax laws).
“Total income” includes the income earned or received or accrued or arose in India or outside India depending on the residential status of the person and other provisions of the law to bring the taxability. The income tax act has not exhaustively defined the term income but extensively covered many types and sources of income.
Direct tax is divided into 5 main categories of income – salary income, income from house property, income from business/profession, capital gains, and income from other sources.
Exempt Income
Certain incomes are treated as exempt, which will not be included in the calculation of total income, eg. agriculture income, house rent allowance, the share of profit derived from partnership firm, gratuity, pension, the amount received under life insurance policy, etc. (all these are subject to provisions of the income tax laws). It is worth noting that exempt income has to be disclosed separately in the return though not under the income statement.
Don’t get confused between deductions and exempt income – deduction reduces total taxable income while exempt income is excluded from total taxable income.
RETURN OF INCOME
To ensure each person that there is a financial record of all the incomes, expenditures, losses, gains, losses, and taxes for each year, a return has to be filed by all those coming under the threshold limits. The return has to be filed annually for the period ranging between April to March i.e. Financial year.
Type of person
When to file*
Due Date*
Form*
Company
Always
31st October
ITR 6
Firm
Always
Non audit – 31 July Audit : Audit report – 30 September Return – 31 Oct
ITR 4 – having presumptive income ITR 5 – others
LLP
Always
Non audit – 31 July Audit : Audit report – 30 September Return – 31 Oct
ITR 5
Individual
If the total income exceeds the basic exemption limits
Non audit – 31 July Audit : Audit report – 30 September Return – 31 Oct
ITR 1 – not having business income and total income should be up to 50 Lakhs ITR 2 – not having business income ITR 3 – having business income TR 4 – having presumptive income
HUF
If the total income exceeds the basic exemption limits
Non audit – 31 July Audit : Audit report – 30 September Return – 31 Oct
ITR 2 – not having business income ITR 3 – having business income ITR 4 – having presumptive income
*unless amended/ otherwise notified by CBDT
Please note that the above table has been prepared based on generic detail and may subject to the addition/ deletion of any forms as prescribed by CBDT.
TAX AUDIT
Concept
Audit refers to the official inspection of an organization’s accounts and production of reports. Tax audit is an examination or review of accounts of business or profession carried out by taxpayers from an income tax point of view.
Audit is applicable to any person who:
Carries on business & sales, having turnover or gross receipts exceeds INR 1 Cr for the financial year. Subsequently, the limit has been increased to 5 Cr and recently in budget’21 to 10 Cr subject to certain conditions.
Simply put – If your turnover exceeds 1 Cr/ 10 Cr as the case may be, have a look at the applicability.
Carries on profession, having gross receipts exceeds INR 50 Lakhs for the financial year.
Taxpayer carrying on business or profession & income declared is less than 8% or 6% (i.e. not following presumptive taxation).
Accounts have to be audited by a prescribed accountant within the due dates specified above in form 3CA/3CB and Form 3CD.
PRESUMPTIVE TAXATION
Concept
Presumptive taxation scheme was introduced to give relief to small taxpayers from the tedious work of maintenance of books of accounts. They can compute income on an estimated basis at the rates prescribed.
Income
Applicable to
Threshold limit
Prescribed rate
Business income
Individuals, HUF, partnership firm
Less than 2 Cr of sale or turnover or gross receipts
6% for digital transactions. For others receipts – 8%
Professional income
Professionals
Less than 50 Lakhs of gross receipts
50% of gross receipts
Once the rates are applied, no other expense can be claimed. The income so generated shall be treated as final income from that business/profession.
Tax Deducted at Source (“TDS”)
Concept
We all love EMIs and so does our government. TDS is one such system that enables us to pay tax on the income as and when we earn it. It is not feasible to pay a large amount in one go and hence it is convenient for the taxpayers as the tax gets deducted automatically. It is one of the steadiest forms of revenue for the government. Tax is withheld at the source (called the deductor) and whose tax is withheld (the deductee) can claim such taxes paid in his return of income.
Example
Nisha works for an organization named TLC. TLC will collect all the income and investment declarations and will accordingly compute and deduct tax as per slab rates while paying the monthly salary. Nisha can claim this deducted tax at the time of preparing her return of income.
Kunal has given one of his commercial properties on rent to M/s. Sharma Enterprises. The firm shall deduct tax from the rent which is to be paid to Kunal and pay the net rent.
Rates of TDS are :
Individuals and HUF shall deduct TDS only if a tax audit is applicable to them. Others shall always deduct TDS if the threshold is crossed.
Threshold limit – INR 2.4 Lakhs Plant & machinery – 2% Land and building or furniture – 10%
Professional services
Threshold limit – INR 30,000 – 10%
#unless amended/ notified by CBDT.
TDS Return
The deductor is responsible to pay the taxes deducted to the government on a monthly basis and also file a compulsory quarterly return. A Tax deduction and collection number (TAN) has to be obtained by the deductor for itself and has to be quoted in the TDS return. The payee (deductee) has to provide his PAN, if the PAN is not provided then the deductor shall deduct tax at the higher rate of 20% (reduced to 5%).
Know Your Taxes (Basics)
TDS Return
Form
TDS for salaries
Form 24Q
TDS for payments other than salaries
Form 26Q
Tax collected at source
Form 27EQ
TDS Certificate
Every person deducting tax at source is required to furnish a certificate to the payee to the effect that tax has been deducted along with certain other particulars. This certificate is usually called the TDS certificate. Individuals are advised to request for a TDS certificate wherever applicable.
To view how much of your TDS is deducted for a year, a Form 26AS can be downloaded from the e-filing website. The TDS reflected here can be claimed in the return.
Lower deduction of TDS
If the assessee (other than company or firm) is sure that there is no taxable income for the year, he can submit a self-declaration form (Form 15G or 15H) to the deductor stating that his taxable income is less than the basic exemption limit and so not to deduct TDS on the payment.
If the assessee (everyone) is of the opinion that he would not be paying any tax for the year owing to losses or exemptions or that his yearly tax is going to be less than the total TDS deducted, then he shall make an application for lower or no TDS before the assessing officer (AO) in Form 13. The AO shall assess the application and if satisfied shall grant the permission. This permission letter has to be given to the vendor and shall remain valid for a period as specified by the AO.
These forms also reduce the hassle for claiming refunds every year.
ADVANCE TAX
Concept
It is the “pay-as-you-earn” scheme of the government. The assessee has to pay part of their taxes before the end of the year. The difference between advance tax and TDS is that advance tax is collected from the taxpayer itself whereas TDS is collected from the payee itself.
Monetary limit & Payment
Once the tax amount exceeds INR 10,000, the assessee has to pay advance tax. It applies to all taxpayers excluding those above 60 years of age who have no business income. It is calculated as per normal total income and tax calculations but on an estimated basis and divided as per the following schedule:
Advance Tax
Due Date
15% of advance tax
15th June
45% of advance tax minus already paid
15th September
75% of advance tax minus already paid
15th December
100% of advance tax minus already paid
15th March
However, all taxes paid before 31st March are considered as advance tax. Those having incomes as per presumptive taxation have to deposit the whole advance tax on 15th March. Non-payment or short payment leads to interest charges.
SELF ASSESSMENT TAX
What all tax is left to be paid after TDS and advance tax is self-assessment tax. This is before filing the return of income and after considering all the actual incomes, gains, and deductions of the year on a self computation basis.
Like advance tax, this tax is also directly paid by the assessee but there is no specific due date for the same. Just that it should be on or before filing the return.
BELATED RETURN
If you miss filing your return on the original due date, it can be filed anytime before 31st December of next FY (unless notified by CBDT). But the losses cannot be carried forward to next year (except house property loss). The maximum fine to file a belated return is INR 10,000.
REVISED RETURN
If you have made any mistake in the original return, it can be revised, provided the original one was filed at the right time. Revised return can be filed before 31st December or before your assessment of income is completed (if conducted), whichever occurs earlier (unless notified by CBDT).
ASSESSMENT OF INCOME
Concept
After filing an income tax return, a tax officer may be assigned by the Income Tax department randomly based on certain criteria to undertake an examination. If a taxpayer is selected for scrutiny assessment, the Assessment Officer would issue an income tax notice to the taxpayer for the same.
Notice
Further, the tax officer would request certain information, documents and book of accounts for undertaking the scrutiny assessment. On producing the information and documents requested, the income tax officer would complete an assessment and compute the amount of income and tax payable by the taxpayer.
Appeal
If there is any mismatch in the amount of taxable income or taxes to be paid, the taxpayer could agree with the order passed by the Officer and pay the demand or accept any amount of refund, or loss as determined by the tax officer. Or if not acceptable then file an appeal before the Commissioner (Appeals), further to Tribunal, High Court, and Supreme Court.
EQUALISATION LEVY
Concept
“Whole world is a market place”. It is the era of growing digitalization where everything happens without any physical presence and hence it becomes important for businesses to expand globally. Governments have tax laws to bring under its ambit even the advertisements and marketing income from the overseas market.
equalisation levy is the Indian version to tax the non-residents receiving such online advertising income from resident Indian businesses.
Further, budget’20 has introduced a new equalisation levy to tax the non-resident e-commerce operators.
Example
M/s Infotainment Pvt Ltd paid USD 7,000 to Facebook. The company need to deduct an equalisation levy @ 6% while making payments to Facebook.
Monetary Limits & Return
Old equalisation levy –
The aggregate amount of services rendered by the non-resident to one party should exceed INR 1 Lakh to trigger the levy. It is an indirect tax whereby the payer (Indian) has to deduct tax @ 6% while paying to the service provider (non-Indian).
New equalisation levy –
The aggregate amount of gross receipts/ turnover of such non-resident e-commerce operators from online sales of goods or services should be INR 2 crores in a year to trigger the levy. It is a tax whereby the e-commerce operator (non-Indian) has to collect tax @ 2% on consideration received from the service provider (Indian).
The above practice of tax deduction is followed by paying the tax to the central government and return filing (Form 1) on or before 30 June of the relevant year.
Saving tax money is a crucial aspect of running a profitable business. However, not all entrepreneurs are familiar with the tax provisions and available tax-saving strategies. By introducing tax efficiencies in their financial planning, startups and other businesses can save money and resources that can be used for growth.
Here are some tax efficiency strategies for businesses, including startups, to reduce their overall tax liability and maximize earnings:
1. Proper Book Keeping
Keeping accurate financial records is paramount to managing business expenses properly. Many business expenses are tax-deductible, so keeping detailed financial statements and receipts will help you to claim all eligible tax deductions and credits.
2. Registration Under Start-Up India Initiative
Start-ups that are registered under the Start-Up India program are eligible for various tax benefits such as tax holidays, angel tax exemption, and more. By taking advantage of this initiative, startups can save money on taxes and allocate those resources to other areas of their business.
3. Donations and Charity
Donations made to registered charities and funds are tax-deductible. Giving back to the community not only earns goodwill but can also attract tax benefits. So, consider donating to a registered charity or fund to help your community while also saving money on taxes.
4. Plan Your Investments
Consider investing in tax saving schemes or SIPs. These investment accounts offer tax benefits that can help you save money and also prepare for your retirement.
5. Correct Deduction of Taxes at Source
Non-deduction of taxes could lead to the disallowance of the entire expense or part thereof for tax purposes. Hence, ensure you’re deducting taxes, where applicable, and at the correct rates in force to avoid any tax disallowance or tax penalty.
6. Depreciation
Manufacturing companies can avail of additional tax benefits by claiming depreciation on the purchase of new plants & machinery. Make sure to keep accurate records of all capital expenditures to claim these deductions.
By adopting these tax efficiency strategies, businesses, including startups, can save a considerable amount of money on taxes each year, which can be used to reinvest and grow their business. With proper financial planning, businesses can avoid unnecessary expenses and maximize their earnings potential.
FAQs
Q: What is the importance of proper bookkeeping for tax efficiency in businesses?
A: Proper bookkeeping is crucial for tax efficiency as it allows businesses to keep accurate financial records, enabling them to claim all eligible tax deductions and credits. This helps reduce their overall tax liability and maximize earnings.
Q: How can startups benefit from registering under the Start-Up India initiative?
A: Start-ups registered under the Start-Up India program are eligible for various tax benefits, including tax holidays and angel tax exemption. By taking advantage of these incentives, startups can save money on taxes and allocate those resources to other areas of their business.
Q: Can donations and charity contribute to tax savings for businesses?
A: Yes, donations made to registered charities and funds are tax-deductible. By donating to a registered charity or fund, businesses can both support their community and save money on taxes.
Q: How can planning investments help in tax savings for businesses?
A: Planning investments in tax-saving schemes or Systematic Investment Plans (SIPs) can provide businesses with tax benefits. These schemes not only help save money on taxes but also assist in preparing for retirement.
Q: Why is correct deduction of taxes at source important for businesses?
A: Correctly deducting taxes at source is crucial to avoid disallowance of expenses or tax penalties. Non-deduction of taxes could lead to the disallowance of the entire expense or part thereof for tax purposes.
Q: How can manufacturing companies benefit from claiming depreciation on new plants and machinery?
A: Manufacturing companies can avail additional tax benefits by claiming depreciation on the purchase of new plants and machinery. Keeping accurate records of capital expenditures is essential to claim these deductions.
Regulators position – primary breach of S 42 (Issue of Shares on Private Placement basis) of CA, 2013
Extract of S 42(7) of the CA, 2013: “(7) No company issuing securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue.”
“S 42 of the Act clearly provides that the private placement shall be made to a select group of persons who have been identified by the Board. The number of such persons cannot exceed 200 (prescribed in the rules). The Explanation I. to S 42(3) makes it very clear that the process of “private placement” covers: • the offer or • invitation to subscribe or • issue of
securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in the section.
”In summary – the concept of the term ‘private placement’ stands for the fact that the company is identifying a certain set of parties to whom it wants to offer its securities rather than making any kind of public offer which generally happens in the case of listed companies. Private is construed as 200 people.
TYKE + Company’s position
“Tyke provides value added services in the form of facilitation of connecting like-minded people. Community with start-ups. Tyke also provides the verification of KYC, identification of KYC of people who have shown interest to invest in the company.”
“The Companies have only availed the value added services (VAS) which is provided by the Tyke platform.”
In summary – Tyke calls itself like a ‘community of like minded people and startups’ where the startup is leveraging on the community to raise investments and TYKE acts as a facilitator for the investment once the proposed investor and startup agree.
Our thoughts!
In the era of Shark Tank, every individual aspires to be a ‘shark’ and wants to participate in the startup ecosystem and ride the wave. TYKE serves as a great platform to provide access to both startups and retail investors for raising money and to invest money in startups respectively. In the USA, for example, this is considered as a high risk asset class and hence there are restrictions on the annual investment amount for regular investors other than ‘accredited investor’. Keeping this in mind, in the current scenario, despite all the explanations given by Tyke and the Company, the regulator primarily points out to the intent of the law where private placement (fundraise) cannot be published in open markets to solicit any investments through communities, etc