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shutting down a startup

Shutting Down a Startup – A Step by Step Guide

When and Why to Shut Down a Startup?

While the startup journey can be exhilarating, as with any business venture, there may come a time when the path forward is a dead-end. Causes such as unsustainable business models, unforeseen market shifts, funding challenges, or a change in vision can impact the lifespan of a startup, leading to the difficult decision to shut down the business.  

Similar to setting up an enterprise, closing a business requires careful planning and execution, taking into account the applicable laws. This article aims to provide a quick reference guide to navigate the shutting down of an enterprise in compliance with the legal and regulatory framework in India. 

Shutting Down a Startup -Step by Step Process

The shutting down of an enterprise is a complex and layered process that not only requires strict compliance with the applicable legal framework but also requires structuring such that personal assets are protected and losses during the closure process are minimized.

1. Stakeholder Management

Making the decision to shut down an enterprise requires a thorough evaluation of the company’s financial health and obligations, and consultation with key stakeholders (including shareholders and investors). Investors brought into the company as part of the funding process will typically have exit requirements that are contractually negotiated and recorded in the relevant transaction documents. The closure of the company will accordingly have to take into account any contractually agreed liquidation distribution preference.

2. Labour Law Compliance

Labour disputes in India are largely governed by the Industrial Disputes Act, 1947 (“IDA”). Subject to the applicability of the IDA to the concerned employee, the company will be required to adhere with strict conditions stipulated by IDA in the event of closure[1] of business. Accordingly, the company will be required to apportion for severance pay and settlement of any outstanding salary or social security contributions that are due and payable by the company. Compliance with the applicable labor laws may also impact the timelines set out for closure of the enterprise. For example, subject to the conditions set out in the IDA, the company may be required to obtain approval for the closure from the competent governmental authority and send prior notice of 60 days intimating employees of the intent of closure. Further, the amount of compensation payable to the employee is also impacted by the circumstances leading to closure.  

3.Financial Management

In the event of closure, it is mandatory that the creditors of the company (both contractual and statutory) are apportioned for. In this regard it is critical to note that the Indian courts have previously held that funds raised through a share subscription agreement bore the nature of a commercial borrowing, making a claim for unachieved exit/buyback admissible under the Insolvency and Bankruptcy Code, 2016[2]. As such, a clear resolution plan that settles all statutory (including taxation and social security contributions) and contractual liabilities of the company will be required.

4. Closure Option under Company Law – Winding Up

The Registrar of Companies (“ROC”) maintains records of incorporation and closing of companies (considered “juristic persons” in law). As such, closure of an enterprise attracts certain statutory processes dependent on the circumstances leading up to the closure. For companies that are yet to settle all liabilities, and further to the introduction of the Insolvency and Bankruptcy Act, 2016 (“IBC”), the companies can close their businesses under the Companies Act, 2013 (“CA”), through a  winding up petition submitted to the National Company Law Tribunal (“NCLT”). This process requires a special resolution of the shareholders approving the winding up of the company. 
The company (and such other persons as expressly permitted by the CA) will need to file a petition before the NCLT under Section 272 along with specified supporting documentation such as a ‘statement of affairs’ (format prescribed in the law). The petition will be heard by the NCLT, during the process of which the company will be required to advertise the winding up[3]. Once the winding up is satisfied, the NCLT will pass a dissolution order, which dissolves the existence of the company and strikes off its name from the register of companies. This process is largely left up to the discretion of the NCLT, and the tribunal is empowered to appoint a liquidator for the company (through the IBC) or reject a petition on justifiable grounds. The company would be bound by the order of NCLT to complete the winding up and consequent dissolution.

5. Closure Option under Company Law – Strike Off

For companies that are not carrying on any business for the two preceding financial years or are dormant, an application can be made directly to the ROC for strike off, thereby skipping the winding up process. However, this is subject to the conditions that the company has extinguished all liabilities and obtained approval of 75% of its shareholders for the strike-off. A public notice is required to be issued in this regard, and unless any contrary reason is found, the ROC will thereafter publish the dissolution notice in the Official Gazette and the company will stand dissolved. Startups are able to avail of a fast-track model implemented by the Ministry of Corporate Affairs, which would allow these companies to close their business within 90 days of applying for the strike-off process. This allows companies to achieve closure quickly, save on unnecessary paperwork and filings and avoid prolonged expenses. 

6. Closing Action

While the disposal of assets is often built into the resolution of creditor and statutory dues, it is crucial that the company also take steps to close all bank accounts maintained in its name, ensure that applicable registrations under tax and labor laws be canceled, and complete all closing filings with the ROC and competent tax authorities to record the closure and dissolution of the company. This will ensure that the company’s closure is sanctioned and appropriately recorded by the competent governmental authorities.

Retaining for Future Legal Compliance

Mere closure of the business does not alleviate data security obligations under the law. All sensitive data must be properly backed up, archived, or securely destroyed following data privacy regulations. Essential business records must be maintained for a specific period as required by law and in compliance with the NCLT orders.

Conclusion

Closure of an entity or startup has far-reaching implications, most critically of all, over its employees and its creditors (both contractual and statutory). As such, the legal framework mandates that the employees and creditors are taken care of in the closure process. Typically, where a plan has not been realized for settlement of these obligations, the company enters into the winding up stage, where such liabilities are settled. The final stage of this closure process is the dissolution of the entity itself, – akin to a “death” for the company as a juristic person. However, the framework is designed to ensure that the closure of the enterprise does not absolve the obligations of the company and its officers in charge to settle the outstanding liabilities. 

As more and more entrepreneurs go on to build billion dollar companies, the Indian startup ecosystem has evolved to embrace failure. As PrivateCircle Research claims, “this isn’t just about success, it’s about resilience, learning from failure, and leveraging those experiences to scale greater heights. Serial entrepreneurs come into their second or third ventures with insights, experience and often better access to networks or capital.” This rings true in the trend of venture capitalists and investors looking for founders who have experienced failure and come back stronger, associating the difficult decision to declare a venture a failure as a mark of grit, adaptability and flexibility.

FAQs on Shutting Down a Startup

1. What does it mean to shut down a startup?

Shutting down a startup involves formally closing the business, which includes settling debts, complying with legal requirements, and ensuring proper stakeholder management.

2. What are the primary reasons startups may need to shut down?

Common reasons include unsustainable business models, market shifts, funding challenges, and changes in the founders’ vision or strategy.

3. What are the first steps to take when deciding to shut down a startup?

The first steps include evaluating the company’s financial health, consulting with stakeholders (like investors and employees), and developing a clear plan for the closure process.

4. How should a startup handle its employees during the shutdown?

Compliance with labor laws is crucial. This may include notifying employees, providing severance pay, and settling any outstanding salaries or benefits as per the Industrial Disputes Act, 1947.

5. What legal requirements must be fulfilled to shut down a startup in India?

Legal requirements include filing for winding up or strike-off with the Registrar of Companies (ROC), ensuring compliance with the Companies Act, and settling all statutory and contractual liabilities.

6. What is the difference between winding up and strike-off?

Winding up is a formal process for companies with outstanding liabilities, requiring a petition to the National Company Law Tribunal (NCLT). Strike-off is a quicker process available for dormant companies without liabilities, allowing them to be dissolved directly through the ROC.

7. What financial obligations must a startup fulfill before shutting down?

A startup must settle all outstanding debts, including those owed to creditors, employees, and statutory obligations (such as taxes and social security contributions).

8. What data security measures should be taken during a shutdown?

Companies must ensure sensitive data is backed up, archived, or securely destroyed in compliance with data privacy regulations. Essential business records should be maintained as required by law.

References

[1]  “Closure” defined under Section 2(cc) of the Industrial Disputes Act, 1947 as the “permanent closing down of a place of employment or part thereof”.
[2] https://nclt.gov.in/gen_pdf.php?filepath=/Efile_Document/ncltdoc/casedoc/2709138051512024/04/Order-Challenge/04_order-Challange_004_172804362182744265066ffda65dd44f.pdf
[3] The NCLT winding up process under the earlier provisions required:
Three copies of the winding up petition will be submitted to NCLT in either Form WIN-1 or WIN-2, accompanied by a verifying affidavit in Form WIN-3. Two copies of the statement of affairs (less than 30 days prior to filing petition) will be submitted in Form WIN-4 along with an affidavit of concurrence of statement of affairs in Form WIN-5. NCLT will take the matter up for hearing and issue directions for advertisement. Accordingly, copy of petition is to be served on every contributory of the company and newspaper advertisement to be published in Form WIN-6 (within 15 days).

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SpaceTech-in-India-Legal-and-Regulatory-Overview

Spacetech in India: A Legal and Regulatory Overview

What is Spacetech and What does it comprise? 

Space technology, often shortened to spacetech, refers to the application of engineering and technological advancements for the exploration and utilization of space. It encompasses a vast array of disciplines, from designing and launching satellites to developing advanced propulsion systems for efficient space travel. Ground infrastructure, robotics, space situational awareness, and even life sciences for human spaceflight all fall under the umbrella of space-tech.[1]

Spacetech comprises:

  • Upstream Segment: activities involving design, development and production processes necessary for creating space infrastructure and technology. This additionally encompasses material supply to the integration and launch of space vehicles, ensuring successful deployment and operation of spacecraft and satellites.
  • Downstream Segment: activities involving utilization and application of space-based data and services, focusing on the development and deployment of satellite-based products for various sectors.
  • Auxiliary Segment: activities related to space insurance services, space education, training and outreach programs, collaborations and technology transfers, and commercialization of spin-off products. 

The space technology sector in India operates under a comprehensive legal and regulatory framework designed to promote innovation, facilitate private sector participation, and protect national interests. This framework is governed by several key regulatory bodies and policies that ensure the sector’s growth and compliance with both national and international standards. This handy overview aims to provide a quick reference guide to understand the complex legal and regulatory framework governing India’s space sector. 

Indian Space Ecosystem- ISRO, IN-SPACe
Spacetech in India: A Legal and Regulatory Overview

Key Regulatory Bodies of Spacetech in India

S. No.Regulatory Body Role
1.Department of Space (DoS)1. The apex body for space activities in India, DoS oversees policy formulation and implementation.

2. DoS coordinates between ISRO, other government agencies, and private entities to ensure policies are in line with national objectives. It also represents India in international space forums.
2. Indian Space Research Organisation (ISRO)1. As India’s premier space agency, ISRO is responsible for the planning and execution of space missions, satellite launches, and space research.

2. ISRO governs the operational aspects of space missions, including satellite deployment, mission planning, and research initiatives. It ensures adherence to safety protocols and technical standards.
3. Indian National Space Promotion and Authorization Center (IN-SPACe)1. IN-SPACe acts as a regulatory body to promote and authorize space activities by non-governmental entities.

2. Provides a single-window clearance for private sector space projects, ensuring they meet safety and compliance standards. IN-SPACe facilitates private sector participation by streamlining regulatory processes.
4. NewSpace India Limited (NSIL)1. The commercial arm of ISRO, NSIL is responsible for promoting Indian space capabilities globally.

2. Facilitates commercial satellite launches and space-related services, ensuring compliance with international trade laws. NSIL manages the commercialization of space products, technical consultancy services, and technology transfer.
5. Antrix Corporation Limited (ACL)1. The marketing arm of ISRO, Antrix Corporation Limited is responsible for promoting and commercially exploiting space products, technical consultancy services, and transfer of technologies developed by ISRO.

2. ACL deals with the commercialization of space products and services, including satellite transponder leasing, satellite launches through PSLV and GSLV, marketing of data from Indian remote sensing satellites, and the establishment of ground systems and networks. ACL ensures compliance with international trade and export control regulations.

Key Legislations and Policies

S. No.StatuePurposeProvision
1. ISRO Act (1969)The ISRO Act was enacted to establish the Indian Space Research Organisation (ISRO) as the primary body responsible for India’s space program.The Act defines ISRO’s mandate to conduct space research and exploration. It empowers ISRO to develop space technology, launch vehicles, and satellites, and to carry out research in space science. The Act also outlines the organizational structure and governance of ISRO, ensuring it operates under the guidance of the Department of Space.
2.Satellite Communication Policy (1997)This policy aims to foster the growth of a robust domestic satellite communication industry.The policy provides guidelines for satellite communication services, including licensing procedures, spectrum allocation, and operational standards. It promotes the use of satellite technology for telecommunications, broadcasting, and internet services. The policy encourages private sector participation and aims to enhance India’s capabilities in satellite communication.
3.Revised Remote Sensing Data Policy (RSDP) (2011)The RSDP regulates the collection, dissemination, and use of satellite remote sensing data.The policy mandates that remote sensing data with a ground resolution of 1 meter or less be acquired only through government channels. It sets guidelines for data acquisition, processing, and distribution to ensure national security and strategic interests. The policy aims to balance data accessibility with security concerns, promoting the use of remote sensing data for sustainable development and disaster management.
4. NRSC Guidelines (2011)Issued by: ISRO’s National Remote Sensing Centre (NRSC)
These guidelines focus on regulating the acquisition and dissemination of remote sensing data.
The guidelines set standards for data handling, including data quality, accuracy, and security. They outline the procedures for data licensing, usage, and dissemination, ensuring that remote sensing data is used responsibly and in compliance with national policies.
5.ISRO Technology Transfer Policy and Guidelines (2020)To establish a framework for transferring technologies developed by ISRO and the Department of Space (DoS) to industry partners.The policy facilitates the commercialization of ISRO’s technologies, promoting their wider application in various industries. It includes guidelines for licensing, royalty agreements, and intellectual property rights. The policy aims to foster innovation and support the growth of the Indian space technology ecosystem by enabling industry access to advanced space technologies.
6. Geospatial Guidelines, 2021The Geospatial Guidelines aim to liberalize the geospatial data sector in India, promoting ease of access and utilization of geospatial data and private sector participation. The Geospatial Guidelines, 2021, largely permit foreign investments up to 100% under the automatic route with limited foreign investment restrictions. These guidelines are relevant to satellite-generated data, a key component of the space-tech sector. Additionally, the guidelines remove specific restrictions on satellite-generated data, promoting the wider use of satellite imagery. The provisions also ensure alignment with national privacy laws and international treaties.
7.Foreign Direct Investment (FDI) PolicyAllow for higher FDI limits (up to 74% for satellites, 49% for launch vehicles, and 100% for components).The policy sets guidelines for foreign investments in space-related activities, encouraging international partnerships and collaboration. It aims to enhance the competitiveness of the Indian space industry by facilitating access to global markets and advanced technologies. However, clarification is needed on the definitions of “satellite data products” and the categorization of launch vehicle sub-components to ensure smooth implementation.
8.Constitution of India (Articles 51 & 73)Upholds India’s obligations under the Vienna Convention on the Law of Treaties.These articles ensure that India complies with established legal principles for peaceful space exploration. Article 51 promotes international peace and security, while Article 73 extends the executive power of the Union to the exercise of rights under international treaties and agreements.
9.Telecommunications Act (Upcoming)To clarify regulations for satellite communication.The Act will streamline processes for obtaining licenses and spectrum allocation for satellite communication services. It aims to enhance regulatory clarity, reduce bureaucratic hurdles, and promote the efficient use of satellite communication technology in India.
10.Indian Space Policy (2023)A transformative policy allowing private companies to offer satellite communication services using their own satellites or leased capacity.The policy permits private entities to operate in both Geostationary (GSO) and Non-Geostationary (NGSO) orbits. It simplifies the approval process by designating IN-SPACe as the single nodal agency for all approvals, promoting ease of doing business and fostering innovation in the private space sector.
11.Department of Telecommunications (DoT) – Satcom Reforms (2022)To complement the 2023 Space Policy by expediting application processing times and simplifying procedures.The reforms lower compliance requirements for private companies, establish a clear roadmap for obtaining necessary clearances, and streamline regulatory processes. They aim to create a more conducive environment for the growth of the satellite communication industry.
12.Foreign Exchange Management (Non-Debt Instruments) Rules (2019; amended 2024)To complement the 2023 Space Policy by recognising the Space sector and liberalizing the foreign direct investment thresholds.The reform liberalizes the thresholds for automatic entry of foreign direct investment through the space sector, reducing the burden of obtaining governmental approval for such investments.

International Treaties

India is a signatory to several key space treaties, ensuring compliance with international norms for peaceful space exploration:

S. No.Treaty Provision 
1.Outer Space Treaty (1967)The treaty includes guidelines on the non-appropriation of outer space, liability for space activities, and the prohibition of nuclear weapons in space. It promotes the peaceful use of outer space and international cooperation.
2.Agreement on the Rescue of Astronauts (1968)This agreement obligates countries to assist astronauts in distress and return them to their country of origin. It establishes protocols for the rescue and safe return of astronauts.
3.Convention on International Liability for Damage Caused by Space Objects (1972)The convention establishes a legal framework for liability and compensation for damages caused by space objects. It outlines procedures for resolving liability claims and determining compensation amounts.
4.Agreement Governing the Activities of States on the Moon and Other Celestial Bodies (1979)The agreement regulates activities on the Moon and other celestial bodies, emphasizing their use for peaceful purposes. It promotes international cooperation and prohibits the establishment of military bases on celestial bodies.
5.Convention on Registration of Objects Launched into Outer Space (1975)The convention mandates the registration of space objects launched by countries, ensuring transparency and accountability. It requires countries to provide details of their space objects, including orbit parameters and launch information.

Contractual Agreements for a Space Company in India

Establishing and operating a space company in India involves various contractual agreements [2] to protect intellectual property, and manage commercial relationships effectively.

S. No.Name of the Legal Agreement Description
Regulatory Compliance
1.Licensing AgreementsThese agreements ensure compliance for satellite launches and operations. They must include clauses for adherence to regulatory guidelines, renewal terms, and compliance with any changes in regulations.
2.Launch Service AgreementsThese contracts outline terms for satellite launches using Indian vehicles, covering payload specifications, launch schedules, costs, risk allocation, insurance, and liability for launch failures or delays.
Intellectual Property (IP) Protection
3.Technology Transfer AgreementsThese agreements govern technology transfers from ISRO or other entities, defining the technology, IP ownership, usage rights, confidentiality, sublicensing, and further development.
4.Non-Disclosure Agreements (NDAs)NDAs protect trade secrets and confidential information, defining confidential information, duration of obligations, and permitted disclosures.
5.IP Licensing AgreementsThese agreements allow the use of patented technologies, trademarks, or copyrighted materials, specifying the license scope, usage rights, territorial limitations, royalty payments, and mechanisms for addressing infringement.
Commercial Contracts
6.Satellite Lease AgreementsThese contracts specify terms for leasing satellite transponders or entire satellites, including lease periods, payment terms, service levels, maintenance, upgrades, and liability for interruptions.
7.Service Level Agreements (SLAs)SLAs establish performance metrics and service quality standards for satellite communication services, defining KPIs, penalties, service monitoring, reporting, and dispute resolution mechanisms.
8.Joint Venture (JV) AgreementsJV agreements define roles, responsibilities, and contributions in joint projects, including profit sharing, management structure, exit strategies, IP ownership, confidentiality, and dispute resolution.
Risk Management 
9.Insurance ContractsThese contracts cover risks associated with satellite launches and operations, providing comprehensive coverage for pre-launch, launch, and in-orbit phases, including claim procedures.
10.Indemnity ClausesIndemnity clauses allocate risk and liability, defining the scope of indemnity, covered events, third-party claims, defense obligations, and mutual indemnity arrangements.
Operational Agreements 
11.Ground Station AgreementsThese contracts govern the use and operation of ground stations, defining access rights, maintenance, operational support, payment terms, service levels, and liability for interruptions.
12.Data Sharing and Usage AgreementsThese agreements outline terms for sharing and using satellite data, defining data access rights, usage limitations, data security, privacy, compliance, ownership, licensing, and monetization.

Intellectual Property (IP) for Space Tech Companies in India

The legal framework for Intellectual Property Rights (IPR) in India provides robust protection for space tech companies by protecting innovations, fostering creativity, and encouraging investment. The Indian government has established a legal framework to safeguard IPR in the space industry, ensuring that companies can secure and monetize their innovations.

S. No.Types of IPDescriptionExample
1TrademarkFunction: Companies can register trademarks for their brands, logos, and other identifiers. This helps in building brand recognition and protecting against unauthorized use or infringement.
Registration: Trademarks registration is optional but advisable, and once granted will be valid for 10 years, renewable every decade.
Spacetech in India: A Legal and Regulatory OverviewNames, word-marks, logos, symbols, tag-lines, short sound marks, and more.
2Copyright Function: Space tech companies can protect their software, technical manuals, and marketing materials under copyright law. Prevents unauthorized reproduction and distribution of proprietary content.
Registration: The creator owns the copyright 60 years from creation before the work becomes public.
Software code, satellite imagery, technical documentation, mission designs, manuals, and more. Example – Satellite mission documentation, control software
3Patent Function: Space tech companies can file patents for new inventions related to space technology, including satellite components, launch vehicles, and software algorithms. 
Registration: The Act provides protection for 20 years from the date of filing, allowing companies to exclusively exploit their inventions.
Rocket designs, propulsion systems, satellite components, drastically unique or different technology, and more. Example – ISRO’s cryogenic engine patents
4Design Function: Companies can register designs for components and products used in space technology, such as satellite bodies and ground station equipment.
Registration: The Designs Act offers protection for registered designs enumerated as follows: 
Initial validity: A registered design certificate is valid for 10 years from the date of registration.
Extension: The protection can be extended for an additional 5 years by filing an application and paying the prescribed fee.
Satellite structures, rocket exterior designs, space module configurations, and more. Example – Exterior design of the GSLV Mk III rocket
Spacetech in India: A Legal and Regulatory Overview

5Trade SecretFunction: 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.
Provisions: Although there is no specific legislation for trade secrets in India, they are protected under common law principles of confidentiality and contract law. Companies can use non-disclosure agreements (NDAs), confidentiality clauses, and other contractual arrangements to protect their trade secrets.
Manufacturing processes, proprietary algorithms, satellite data processing techniques, and more.
Example- Proprietary algorithms for satellite data compression and transmission

India’s Foreign Direct Investment (FDI) Policy in the Space Sector

In line with the vision of the Indian Space Policy 2023 and further to the Union Budget 2024-25, the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 (“NDI Rules”) were amended by way of Gazette notification dated 16 April 2024[3] to prescribe liberalized FDI thresholds for various sub-sectors/activities in India’s spacetech ecosystem. This is seen as a welcome change as the erstwhile policy was restrictive, requiring significant government oversight and limiting avenues for private sector participation. 

FDI Policy and amendment to NDI Rules, 2024

Existing foreign investment limits in the space sector are provided under Chapter 5 of the Consolidated FDI Policy Circular of 2020[4], which are yet to be updated to reflect the amendment to the NDI Rules. The NDI Rules recognize “space” as a sector in itself in Schedule I, and the crux of the policy lies in the categorization of space-related activities and the corresponding FDI thresholds. Here’s a breakdown of the key categories and their investment limits:

ActivityFDI Threshold and Route
Satellites – manufacturing & operation; satellite data products, ground segment & user segmentUp to 74% automatic, beyond 74% up to 100% under government route
Launch vehicles and associated systems or subsystems, creation of spaceports for launching and receiving spacecraftUp to 49% automatic, beyond 49% up to 100% under government route
Manufacturing of components and systems or sub-systems for satellites, ground segment and user segmentUp to 100% automatic

The investee entity is required to adhere to sectoral guidelines issued by the Department of Space from time to time. The amended NDI Rules also incorporate definitions for the purpose of identifying the applicable FDI threshold and route:

(i) “Satellites – Manufacturing and Operation”: end-to-end manufacturing and supply of satellite or payload, establishing the satellite systems including control of in-orbit operations of the satellite and payloads;

(ii) “Satellite Data Products”: reception, generation or dissemination of earth observation or remote sensing satellite data and data products including Application Interfaces (API);

(iii) “Ground Segment”: supply of satellite transmit or receive earth stations including earth observation data receive station, gateway, teleports, satellite Telemetry, Tracking and Command (TTC) station and Satellite Control Centre (SCC), etc.;

(iv) “User Segment”: supply of user ground terminals for communicating with the satellite, which are not covered in Ground Segment;

(v) “Launch Vehicles and Associated Systems or Sub-systems”: vehicle and its stages or components that is designed to operate in or place spacecraft with payloads or persons, in a sub-orbital trajectory, or earth orbit or outer space;

(vi) “Manufacturing of components and systems or sub-systems for satellites Ground Segment and User Segment”: comprises the manufacture and supply of the electrical, electronic and mechanical components systems or sub-systems for satellites, Ground Segment and User Segment.

Gaps in the FDI Policy 2024 for Space-Tech

The amendments to the NDI Rules proposed to also be carried out to the existing FDI Policy 2020 aim to liberalize the spacetech sector, but certain gaps and ambiguities still exist that need to be addressed for it to be fully effective.

  1. Requirement to Comply with Sectoral Guidelines: The policy mandates that investee entities must comply with sectoral guidelines issued by the Department of Space, which counteracts the intended liberalization.
  2. Clarity on “Satellites – Manufacturing & Operation”: The term “satellites – manufacturing & operation” does not explicitly cover spacecrafts that may not be categorized as satellites, creating potential ambiguity.
  3. Definition of “Satellite Data Products”: The term “satellite data products” conflicts with the Geospatial Guidelines, which allow up to 100% foreign investment under the automatic route for similar data products, which might lead to regulatory overlaps and conflicts.
  4. Overlapping Activities: Companies engaged in activities spanning multiple categories (e.g., manufacturing components for both satellites and launch vehicles) must restrict foreign investments to the stricter category thresholds. This may necessitate business restructuring to comply with the new regulations.
  5. Grandfathering Existing Investments: The policy does not clearly address how existing investments, made under previous interpretations of the FDI rules, will be treated. Companies that received investments without explicit government approval may  require post-facto government approval.

Concluding Thoughts

Given the national contribution advancements in space tech bring about, it is natural that a degree of government oversight is still built into the legal and regulatory framework. While the amendments to the NDI Rules signify an exciting turn of events for the space tech sector in India, the significant nature of it is still required to be captured across applicable legislations. Further, the proposed 2024 FDI policy does not completely do away with the requirement to comply with sectoral guidelines, or provide complete clarity on critical terms commonly used in the industry. Further, the nature of overlapping business activities could trigger restructuring of businesses, with no clarity provided on grandfathering existing investments. These are likely to be the subject of any clarificatory orders from the Ministry of Finance (Department of Economic Affairs).

References:

[1] https://it.telangana.gov.in/initiatives/spacetech

[2] In addition to the above agreements, space companies may also need to enter into other agreements, such as marketing agreements, sponsorship agreements, and international collaboration agreements. The specific agreements that a space company needs to enter into will depend on its specific business model and operations.

[3] https://egazette.gov.in/WriteReadData/2024/253724.pdf

[4] https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf

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SME IPO Listing in India

SME IPO Listing in India – Platforms, Eligibility, Process

In recent years, the SME IPO listing in India has emerged as a vital avenue for small and medium enterprises (SMEs) to access capital and enhance their market presence. With a growing number of platforms facilitating these listings, SMEs can now tap into public funding more easily than ever. This blog will explore the various platforms available for SME IPOs, the eligibility criteria that businesses must meet, and the step-by-step process involved in listing on the stock exchange. Understanding these elements is crucial for entrepreneurs looking to leverage the benefits of going public and drive their growth in a competitive landscape.

What are Small and Medium Enterprises (SME)?

Small and Medium enterprises (SMEs) are classified as such through the Micro, Small and Medium Enterprises Development Act, 2006, wherein eligibility thresholds are prescribed for enterprises engaged in manufacture or production of goods in specified industries; or enterprises providing or rendering of services, as captured below:

CategorySmall EnterpriseMedium Enterprise
Engaged in manufacture or production of goods in specified industriesInvestment in plant and machinery is more than INR 25,00,000 but does not exceed INR 5,00,00,000. Investment in plant and machinery is more than INR 5,00,00,000 but does not exceed INR 10,00,00,000.
Engaged in providing or rendering of servicesInvestment in equipment is more than INR 10,00,000 but does not exceed INR 2,00,00,000.Investment in equipment is more than INR 2,00,00,000 but does not exceed INR 5,00,00,000.

Note: When calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.

What is an IPO?

Initial Public Offering (IPO) is the first invitation by a company to have their equity securities purchased by the general public. This allows the company to raise capital by inviting public investment into the company. Given that the general public is involved in the fund raising process, the IPO is subject to strict scrutiny and exhaustive regulatory compliances. This is typically undertaken by companies that have a large and established presence, and with a paid up share capital of at least INR 10,00,00,000. Such companies would be traded directly on the platforms hosted by the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), and are required to strictly comply with regulations prescribed by the Securities and Exchange Board of India (SEBI) from time to time.

Why should SMEs explore IPO?

SMEs are the backbone of the Indian economy and play a crucial role in job creation, innovation, and overall economic growth. These companies often face challenges when it comes to raising capital for growth as they have limited access to capital. In this context, an IPO is extremely beneficial to an SME:

  • Capital Injection: Public offerings attract a broader pool of investors, enabling SMEs to raise significant funds for growth initiatives like expanding operations, investing in research and development, or acquiring new technologies.
  • Enhanced Credibility: A successful listing serves as a public validation of a company’s financial health and governance practices. This newfound credibility can attract valuable partnerships, potential acquisitions, and a wider customer base.
  • Increased Liquidity: Listing on an exchange creates a secondary market for the company’s shares. This allows existing investors to easily exit their positions and attracts new investors seeking participation in the company’s future. Improved liquidity benefits both the company and its shareholders.

What are IPO Listing Platforms?

Traditional listing platforms India as hosted on the BSE and NSE are subject to exhaustive regulatory compliances, including multiple layers of approval by SEBI,  BSE and/or NSE (as chosen by the company). This can contribute to the inaccessibility of capital leading to the emergence of SME IPO Listing Platforms as a game-changer. 

As on date, two IPO Listing Platforms are hosted in India exclusively for SMEs: 

  • BSE SME Platform: Established by the Bombay Stock Exchange (BSE), this platform offers a dedicated marketplace for SMEs to list their shares. It provides a comprehensive support system, including guidance on regulatory requirements and listing procedures.
  • NSE Emerge: This platform, operated by the National Stock Exchange of India (NSE), caters specifically to the needs of growing companies. It offers a transparent and efficient listing process, along with educational resources and investor outreach programs.

Operating in accordance with relaxations on IPO processes prescribed for SMEs by SEBI, these platforms create an opportunity for SMEs to take advantage of the expedited process and increase their access to capital. 

Why IPO Listing Platforms?

To avail the core advantages of going for an IPO, SME IPO Listing Platforms offer a more streamlined and cost-effective path to going public compared to the traditional IPO route. Reduced regulatory requirements and simplified processes make it easier for promising SMEs to access the capital markets.

In the following sections, we’ll delve deeper into the specifics of these platforms, exploring the eligibility criteria for listing and also address potential challenges and considerations for SMEs contemplating this exciting funding option.

These platforms operate on leading stock exchanges and provide a streamlined process for SMEs to go public.  By listing their shares on these platforms, SMEs can:

  • Raise capital: Public investors can purchase shares in the company, injecting much-needed funds for expansion and development.
  • Enhanced credibility: A public listing demonstrates a company’s financial transparency and stability, potentially attracting more business opportunities and partnerships.
  • Increased liquidity: Shareholders can easily buy and sell shares, providing greater liquidity for the company’s stock.

Eligibility Criteria for Listing

To be eligible for listing on an SME IPO Platform, companies must meet specific criteria established by the Securities and Exchange Board of India (SEBI) and the respective stock exchange.  Here’s a general overview:

  • Company Type: The company must be a Public Limited Company incorporated under the Companies Act, 1956 or 2013.
  • Track Record: A minimum track record of operations, typically 3-5 years, is often required.
  • Financial Performance: The company must demonstrate consistent profitability and a healthy financial position. Specific requirements for minimum net worth and positive cash flow may apply.
  • Post-Issue Capital: The paid-up capital of the company after the IPO should typically fall within a specific range, often between Rs. 1 crore and Rs. 25 crore.

Choosing the Right SME IPO Listing Platform

While both BSE SME and NSE Emerge offer avenues for SME growth, selecting the optimal platform requires careful consideration of several factors:

  • Industry Focus: A platform with a strong presence in the target sector can provide access to more targeted investors, potentially leading to a more successful IPO.
  • Investor Base: Analyze the existing investor base of each platform. If the company caters to a niche market, choose the platform that attracts investors interested in similar sectors. This increases the likelihood of finding investors who understand your business model and are more likely to invest.
  • Listing Fees: Compare the listing fees and ongoing maintenance charges associated with each platform. While cost shouldn’t be the sole deciding factor, understanding the financial implications is crucial. Choose the platform that offers a competitive fee structure while aligning with the budget.
  • Support Services: Evaluate the level of support and guidance offered by each platform. Some platforms provide comprehensive assistance with the listing process, regulatory compliance, and investor outreach. Choose the platform that offers the level of support that best suits the needs of the company and internal resources.

By carefully considering these factors, SMEs can make an informed decision about which platform best positions them for a successful IPO and sustainable growth.

The SME Listing Process: A Step-by-Step Breakdown

The process of listing on an SME IPO Platform involves several crucial steps:

1. Appointment of Advisors:

  • Merchant Banker: This financial institution acts as the lead manager, handling the entire IPO process, from pre-IPO planning to investor outreach and post-listing activities.
  • Legal Counsel: An experienced lawyer ensures compliance with all legal and regulatory requirements throughout the listing process.
  • Statutory Auditor: An independent auditor conducts a thorough audit of the company’s financial statements to provide an impartial assessment of its financial health.

2. Preparation of Documents:

  • Draft Red Herring Prospectus (DRHP): This comprehensive document outlines the company’s financial position, business plan, future prospects, and details of the proposed IPO. It serves as a crucial information source for potential investors.

3. Regulatory Approvals:

  • SEBI: The Securities and Exchange Board of India is the primary regulator for the Indian stock market. Seeking approval from SEBI ensures compliance with all relevant regulations and protects investor interests.
  • Stock Exchange: After receiving SEBI approval, the company must obtain approval from the chosen SME IPO Platform (BSE SME or NSE Emerge) for listing.

4. Pre-IPO Due Diligence:

  • An appointed intermediary, typically the merchant banker, conducts a thorough due diligence process to verify the information provided in the DRHP and assess the company’s financial health and future prospects. This protects investors and ensures accurate information dissemination.

5. IPO Launch and Marketing:

  • Once all approvals are obtained, the IPO is officially launched. This involves intensive marketing efforts to attract potential investors. Roadshows, presentations, and targeted marketing campaigns are all essential during this stage.

6. Listing and Trading:

  • Upon successful completion of the IPO, the company’s shares begin trading on the chosen SME platform. This marks a significant milestone, providing the company with access to public capital and increased visibility.

Challenges and Considerations for SME IPOs

While SME Listing Platforms offer a promising route for growth, navigating the process and maintaining success requires careful consideration of potential hurdles:

  • Market Volatility: The stock market is inherently volatile. Fluctuations in market sentiment can significantly impact the success of an IPO. Careful timing and a well-defined marketing strategy can help mitigate these risks.
  • Regulatory Compliance: Maintaining ongoing compliance with SEBI regulations requires expertise and dedicated effort. Partnering with experienced legal counsel ensures adherence to all regulations and protects the company from potential penalties.
  • Investor Relations: Building and nurturing strong relationships with investors is crucial for long-term success. Regular communication, transparent reporting, and addressing investor concerns are key to fostering trust and confidence. Strong investor relations can lead to continued support and enhanced share value.

NSE Emerge – Criteria For Listing

ParameterCriteria for listing – SMEsCriteria for listing – Technology Startups*
1.IncorporationIncorporated under Companies Act 1956/2013Incorporated under Companies Act 1956/2013
2.Post Issue Paid-up CapitalPost issue paid up capital (face value)<= INR 25 cr.Post issue paid up capital (face value)<= INR 25 cr.
3.Track Record•Positive EBITDA in at least 2 out of the last 3 financial years preceding the application •Positive Net Worth• Annual Revenue >= INR 10 cr. • Annual growth (users/revenue/customer base) >= 20%• Positive Net Worth
4.Shareholding conditionsNo specific shareholding condition• At least 10% of its pre-issue capital to be held by qualified institutional buyer(s) (QIB) as on the date of filing of draft offer document. • At least 10% of its pre-issue capital should be held by a member of the angel investor network or Private Equity Firms and Such angel investor network or Private Equity should have had an Investment in the start-up ecosystem in 25 or more start-ups their aggregate investment is more than 50 crores as on the date of filing of draft offer document
5.Other Conditions• The applicant company has not been referred to erstwhile Board for Industrial and Financial Reconstruction (BIFR) • No proceedings have been admitted under Insolvency and Bankruptcy Code against the issuer and Promoting companies • The company has not received any winding up petition admitted by a NCLT / Court. • No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company.
The applicant Company has not been referred to erstwhile Board for Industrial and Financial Reconstruction (BIFR) • No petition for winding up is admitted by a Court of competent jurisdiction against the applicant Company. • No material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company.
6.Disclosure Requirements• Any material regulatory or disciplinary action  by any authority in past one year • Any defaults in respect of payments • Litigation against the promoters • Track record of directors with respect to any cases filed or ongoing investigations , etc.• Any material regulatory or disciplinary action  by any authority in past one year • Any defaults in respect of payments • Litigation against the promoters • Track record of directors with respect to any cases filed or ongoing investigations , etc.

BSE SME – Criteria For Listing

ParameterCriteria For Listing – SMEs
1.IncorporationIncorporated under Companies Act 1956/2013
2.Post Issue Paid-up CapitalPost issue paid up capital (face value)<= INR 25 cr.
3.Track Record•Positive Net Worth •Net Tangible Assets should be INR 1.5 crores •Company must have distributable profits for at least two out of the last three financial years, excluding extraordinary income. •The company or the partnership/proprietorship/LLP Firm or the rm which have been converted into the company should have a combined track record of at least 3 years. OR •In case it has not completed its operation for three years then the company/ partnership/ proprietorship/ LLP Firm should have been funded by Banks or financial institutions or Central or state government or the group company should be listed for at least two years either on the main board or SME board of the Exchange.
4.Other Conditions•It is mandatory for a company to have a website. •It is mandatory for the company to facilitate trading in demat securities and enter into an agreement with both the depositories. •There should not be any change in the promoters of the company in preceding one year from date of filing the application to BSE for listing under SME segment
5.Disclosure Requirements• A certificate from the Applicant Company / Promoting Company stating that the Company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).•There is no winding up petition against the company, which has been admitted by the court or a liquidator has not been appointed.

Conclusion

In India, SME IPO listing platforms have become a game-changer for small and medium enterprises (SMEs) seeking to scale new heights. These platforms act as launchpads, providing SMEs with much-needed capital to fuel innovation, expand operations, and achieve their full potential. This, in turn, injects fresh dynamism into the Indian economy. Investors also benefit immensely, gaining access to a pool of promising young companies with the potential for explosive growth. The Indian government’s active support for SME IPOs, coupled with the continuous refinement of these listing platforms, paints a very optimistic picture for the future. However, navigating this exciting space isn’t without its challenges. SME IPOs often come with stricter listing requirements and lower liquidity compared to established main boards. Additionally, for investors, careful due diligence is paramount before venturing into these potentially volatile, yet highly rewarding, investment opportunities. By fostering a responsible investment culture and addressing existing challenges, India can ensure that its SME IPO market continues to thrive, propelling the nation’s economic growth for years to come.

FAQs on SME IPO Listing

1. What is an SME IPO?
An SME IPO is an Initial Public Offering specifically for Small and Medium Enterprises. It allows SMEs to raise capital by inviting public investment, helping them expand, improve liquidity, and enhance credibility.

2. What are SME IPO listing platforms?
SME IPO listing platforms are specialized stock exchange segments in India—like the BSE SME Platform and NSE Emerge—that cater specifically to SMEs. These platforms offer a more streamlined and cost-effective way for smaller companies to go public.

3. Why should an SME consider going public?
Going public through an IPO allows SMEs to:

  • Access a broader pool of capital
  • Increase brand visibility and credibility
  • Provide liquidity for existing investors
  • Open up new avenues for partnerships and growth

4. How do SMEs benefit from listing?
SMEs gain easier access to capital, increased visibility, and potentially higher valuations.

5. What benefits do investors gain from SME IPOs?
Investors in SME IPO benefit by:

  • Accessing early-stage investment opportunities in high-growth companies
  • Potentially realizing higher returns if the SME succeeds post-listing
  • Diversifying their portfolios with promising companies in various sectors

6. Are there any challenges in SME IPO Listing?
SME IPOs often have stricter listing requirements, lower liquidity, and involve higher risk due to the young companies.

7. Are there any specific requirements for technology startups listing on NSE Emerge?
Yes, technology startups on NSE Emerge must:

  • Have positive annual revenue of at least INR 10 crore
  • Show annual growth in users, revenue, or customer base of at least 20%
  • Ensure that 10% of pre-issue capital is held by qualified institutional buyers or a recognized angel investor network

8. How does the government support SME IPOs?
The government establishes regulations, offers tax benefits, and promotes awareness for both SMEs and investors.

9. What should investors consider before investing?
Conduct thorough due diligence on the company, understand the inherent risks, and invest within their risk tolerance and long-term goals.

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Navigating the CERT-IN Directions: Implications and Challenges for Indian Businesses

Navigating the CERT-IN Directions: Implications and Challenges for Indian Businesses

Introduction

Reason for these Cyber Security Directions

In an increasingly digital world, the threats posed by cyberattacks have become a significant concern for organizations worldwide. Recognizing the urgency of the situation, on April 28, 2022, the Indian Computer Emergency Response Team (“CERT-IN”) introduced new directives that mandate all cybersecurity incidents be reported within a stringent timeframe. This move marks a significant shift in India’s approach to cybersecurity, underscoring the need for rapid response and heightened vigilance.

Scenario before these Directions

Prior to these directives, many organizations struggled with limited visibility into cybersecurity threats, leading to incidents that were either inadequately reported or overlooked altogether. The lack of comprehensive analysis and investigation of these incidents often left critical gaps in understanding and mitigating cyber risks. With the implementation of this directive, organizations are now compelled to reassess their internal cybersecurity protocols, ensuring that robust measures are in place to meet these new reporting requirements.

Highlights of the CERT-IN Directions

Applicability

These directions cover all organisations that come within the purview of the Information Technology Act, 2000. 

Individuals, Enterprises, and VPN Service Providers are excluded from following these directions. 

Navigating the CERT-IN Directions: Implications and Challenges for Indian Businesses
Navigating the CERT-IN Directions: Implications and Challenges for Indian Businesses

Types of Incidents to be Reported

The directions provide an exhaustive list of incidents that need to be reported within the timeframe mentioned (refer Annexure I). In addition to these directions, the entities to whom these directions are applicable also need to continue following Rule 12 of the Information Technology (The Indian Computer Emergency Response Team and Manner of Performing Functions and Duties) Rules, 2013, and report the incidents as elaborated therein. 

Timelines and How to Report

Timeline. All incidents need to be reported to CERT-IN within 6 (Six) hours from the occurrence of the incident or of the incident being brought to the respective Point of Contact’s (“POC”) notice. 

Reporting. Incidents can be reported to CERT-IN via Email at ‘[email protected]’, over Phone at ‘1800-11-4949’ or via Fax at ‘1800-11-6969’. Further details regarding reporting and the format to be followed are uploaded at ‘www.cert-in.org.in’.

Designated Point of Contact (POC)

The reporting entities are mandated to designate a POC to interface with CERT-IN. All communications from CERT-IN seeking information and providing directions for compliance shall be sent to the said POC.

Maintenance of Logs

The directions mandate the reporting entities to enable logs of all their information and communications technology systems (“ICT”) and maintain them securely for a period of 180 days. The ambit of this direction is broad and has potential of bringing in such entities who do not have physical presence in India but deal with any computer source present in India. 

ICT Clock Synchronization

Organizations are required to synchronize the clocks of all their ICT systems by connecting to the Network Time Protocol (“NTP”) Server provided by the National Informatics Centre (“NIC”) or the National Physical Laboratory (“NPL”), or by using NTP servers that can be traced back to these sources.

The details of the NTP Servers of NIC and NPL are currently as follows:

NIC – ‘samay1.nic.in’, ‘samay2.nic.in’

NPL – ‘time.nplindia.org’

However, the government has provided some relief, that not all companies are required to synchronize their system clocks with the time provided by the NIC or the NPL. Organizations with infrastructure across multiple regions, such as cloud service providers, are permitted to use their own time sources, provided there is no significant deviation from the time set by NPL and NIC.

Challenges Faced and Recommendations

Challenges

  • Limited Infrastructure and Resources: Many companies, especially tech startups may struggle to develop the necessary capabilities for large-scale data collection, storage, and management needed to report incidents within a six-hour timeframe.
  • Stringent Guidelines compared to International Standards: For example, Singapore’s data protection laws require cyber breaches to be reported within three days, which aligns with the General Data Protection Regulation (GDPR).
  • Increasing complexity of Cybercrime Detection: Identifying cybersecurity breaches can take days or even months. Additionally, the new guidelines have expanded the list of reportable incidents from 10 to 20, now including attacks on IoT devices. Currently, many organizations do not have an integrated framework that can monitor breaches across different platforms and devices, making it even more challenging to detect and report incidents.

Recommendations to comply with the 6 hours Timeframe

  • Reassess Practices and Procedures: Organisations, especially tech startups should review and update their breach reporting protocols to align with CERT-IN directions. This includes evaluating breach severity, clarifying reporting responsibilities among involved parties, and planning for non-compliance risks. 
  • Enhance Organizational Capabilities: Startups need to strengthen their ability to quickly identify and report cyber breaches. This includes training staff, conducting regular security audits, and managing personal device use. Given their limited resources, robust cybersecurity practices are vital for startups to protect against attacks and ensure their growth.
  • Enable and Maintain Logs: CERT-IN requires organizations to enable and maintain logs. Startups should carefully select which logs to maintain based on their industry to ensure they can promptly identify and report cyber incidents, staying compliant with the reporting timeframe.

Consequences for Non-compliance

  • Failure to comply with the directions can result in imprisonment for up to 1 year and/ or a fine of up to INR 1 Crore (approximately USD 1,20,000).  
  • Other penalties under the IT Act may also apply, such as the confiscation of the involved computer or computer system.  
  • If a company commits the offence, anyone responsible for the company’s operations at the time will also be liable. Furthermore, if the contravention occurred with the consent, involvement, or neglect of a director, manager, secretary, or other officer, that individual will also be considered guilty and subject to legal action.

Conclusion

The CERT-IN Directions issued on 28th April 2022 mark a significant step towards strengthening India’s cybersecurity framework. These directions introduce stringent reporting timelines, enhanced data retention requirements, and new compliance obligations for service providers, intermediaries, and other key entities. By mandating swift reporting of cyber incidents within 6 hours and enforcing strict penalties for non-compliance, CERT-IN aims to bolster the security and trustworthiness of India’s digital infrastructure. The intention behind the introduction of these measures is laudable but from a compliance point of view, the direction can be overreaching and may not be the most efficient manner of dealing with cybersecurity threats. 

Annexure

Types of Incidents to be reported include:

  • Attacks or malicious/suspicious activities affecting systems/servers/software/applications related to Artificial Intelligence and Machine Learning.
  • Targeted scanning/probing of critical networks/systems.  
  • Compromise of critical systems/information.  
  • Unauthorised access of IT systems/data. 
  • Defacement of website or intrusion into a website and unauthorised changes such as inserting malicious code, links to external websites etc.  
  • Malicious code attacks such as spreading of virus/worm/Trojan/Bots/Spyware/Ransomware/ Cryptominers.
  • Attack on servers such as Database, Mail and DNS and network devices such as Routers.
  • Identity Theft, spoofing and phishing attacks.
  • Denial of Service (DoS) and Distributed Denial of Service (DDoS) attacks.  
  • Attacks on Critical infrastructure, SCADA and operational technology systems and Wireless networks.
  • Attacks on Application such as E-Governance, E-Commerce etc.  
  • Data Breach.  
  • Data Leak.
  • Attacks on Internet of Things (IoT) devices and associated systems, networks, software, servers.  
  • Attacks or incident affecting Digital Payment systems.  
  • Attacks through Malicious mobile Apps.  
  • Fake mobile Apps.
  • Unauthorised access to social media accounts.
  • Attacks or malicious/suspicious activities affecting Cloud computing systems/servers/software/applications.  
  • Attacks or malicious/suspicious activities affecting systems/servers/networks/software/applications related to Big Data, Blockchain, virtual assets, virtual asset exchanges, custodian wallets, Robotics, 3D and 4D Printing, additive manufacturing, Drones.
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Board Observers: Navigating Influence and Corporate Governance without Voting Power

Board Observers: Navigating the Influence Without the Vote

In the complex world of corporate governance, the role of board observers has emerged as a key component, especially in the wake of increased investor scrutiny, particularly in the private equity (PE) and venture capital (VC) sectors. With growing financial uncertainty, investors are looking for ways to maintain a closer watch on companies without assuming directorial risks. One such method is by appointing a board observer, a role that, although devoid of statutory voting power, can wield significant influence.

A board observer’s position in the intricate realm of corporate governance is crucial and varied. With increased distress particularly in the private equity sector, we may see investors deploying various tools to keep a closer eye on the company’s financial performance. Appointing a board observer is one such tool.

Despite not having statutory authority or the ability to vote, board observers have a special position of influence and can provide productive insights.

Board observers quite literally are individuals who are fundamentally appointed with the task to ‘observe’. They act as representatives typically from major investors, strategic partners, or key stakeholders, and are granted access to board meetings.

Understanding the Role of Board Observers

Board observers are not formal members of the board, nor do they hold the power to vote on corporate decisions. However, their presence in board meetings is a tool used primarily by major investors, strategic partners, and other key stakeholders to monitor the company’s strategic direction and financial health. These individuals are entrusted with providing valuable insights without the direct legal responsibilities that directors typically face.

Although board observers do not have a formal vote, their influence can shape company strategies. This unique role enables them to represent the interests of investors or stakeholders while remaining free from the direct obligations of fiduciary duties.

Board Observer Rights – How does it work?

Investors involved in the venture capital (VC) and private equity (PE) spaces often negotiate for a board seat with the intent to contribute to the decision-making process and protect their interests by having representation on the board. A recent trend, however, indicates that these investors are reluctant to formally exercise their nomination rights owing to the possible risks/liabilities associated with directorships, such as fiduciary duties and vicarious liability that is often intertwined in the acts and omissions of the company, which can lead to such directors being identified as “officers in default”.

The rights and responsibilities of a board observer are distinct from those of a nominee director, primarily due to the lack of formal voting authority. Accordingly, board observers are relieved from the direct fiduciary duties that are normally connected with board membership since their position is specified contractually rather than by statutory board responsibilities.

Is a Board Observer an officer in default?

The Act provides a definition for the term “Officer” which inter alia includes any person in accordance with whose directions or instructions the board of directors of the company or any one or more of the directors are accustomed to act. Additionally, the term “Officer in Default” states that an Officer of the company who is in default will incur liability in terms of imprisonment, penalties, fines or otherwise, regardless of their lack of an official position in the company.

Accordingly, any person who exercises substantial decision-making authority on the board of the company may be covered as an Officer in Default.

While board observers may not be equivalent to formal directors, the litmus test lies in determining where the decision-making power truly resides, leading to potential liabilities that may surpass the protections sought by investors. 

Observers are not subject to a company’s breach of any statutory provisions because their appointment is based on a contractual obligation rather than a statutory one, unlike nominee directors who are permitted to participate in board meetings.

Even though board observers are not designated as directors, they run the risk of being seen as “Shadow Directors” if they have a significant amount of authority or influence over the decisions made by the company.

The Legal Perspective on Board Observers

Unlike nominee directors, who are formally appointed and legally bound to fulfill statutory responsibilities, board observers are appointed through contractual obligations. This shields them from liabilities tied to breaches of statutory provisions. However, as their influence grows, so does the risk of being classified as shadow directors, particularly if they are perceived as playing a significant role in decision-making.

Conclusion

Corporate Governance is an evolving concept, especially in the context of active investor participation. In order to foster a corporate environment that is legally robust, it will be imperative to strike a balance between active investor participation and legal prudence. That being said, as businesses continue to navigate complex and evolving landscapes, the value of a well-integrated board observer cannot be overstated. A board observer can bring clarity to the business and operations of an investee company without attaching the risk of incurring statutory liability for acts/omissions by the company. This is a significant factor that makes the option of a board observer nomination more attractive to PE and VC investors, vis-a-vis the appointment of a nominee director.

FAQs on Board Observers

  1. What is a board observer in corporate governance?
    A board observer is an individual appointed by investors or key stakeholders to attend board meetings without having formal voting power. They offer insights and monitor the company’s performance, primarily to protect the interests of those they represent.
  2. How do board observers differ from directors?
    Unlike board directors, board observers do not have the authority to vote on decisions or take on fiduciary duties. Their role is more about observation and providing feedback rather than participating in the decision-making process.
  3. What are the rights of a board observer?
    A board observer has the right to attend board meetings and access key company information, but they do not hold any voting rights. Their responsibilities and rights are typically outlined in a contractual agreement between the company and the observer’s appointing party.
  4. Can board observers influence corporate decisions?
    Yes, board observers can provide valuable insights and advice that may influence corporate decisions, but they do not have direct decision-making power. Their influence comes from their ability to offer expert advice and represent investors’ interests.
  5. Are board observers liable for company decisions?
    Generally, board observers are not legally liable for company decisions as they are not formal board members. However, if their influence over board decisions becomes significant, they could be viewed as shadow directors, which might expose them to certain legal liabilities.
  6. Why do investors appoint board observers instead of directors?
    Investors often prefer appointing board observers because it allows them to monitor company performance and offer guidance without taking on the fiduciary duties and potential liabilities associated with being a formal board member.
  7. What is the risk of being considered a shadow director as a board observer?
    If a board observer has significant influence over board decisions, they could be classified as a shadow director. Shadow directors can be held liable for the company’s actions, similar to formally appointed directors, especially in cases of misconduct or financial mismanagement.
  8. How does a board observer benefit private equity and venture capital investors?
    Board observers allow PE and VC investors to maintain oversight of their portfolio companies, ensuring the company’s strategic direction aligns with their interests. This role provides investors with valuable insights without the risk of statutory liabilities that come with directorship.
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IFSCA releases consultation paper seeking comments on draft circular on “𝑷𝒓𝒊𝒏𝒄𝒊𝒑𝒍𝒆𝒔 𝒕𝒐 𝒎𝒊𝒕𝒊𝒈𝒂𝒕𝒆 𝒕𝒉𝒆 𝑹𝒊𝒔𝒌 𝒐𝒇 𝑮𝒓𝒆𝒆𝒏𝒘𝒂𝒔𝒉𝒊𝒏𝒈 𝒊𝒏 𝑬𝑺𝑮 𝒍𝒂𝒃𝒆𝒍𝒍𝒆𝒅 𝒅𝒆𝒃𝒕 𝒔𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔 𝒊𝒏 𝒕𝒉𝒆 𝑰𝑭𝑺𝑪”

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

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

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

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

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

𝐖𝐡𝐚𝐭 𝐢𝐬 “𝐆𝐫𝐞𝐞𝐧𝐰𝐚𝐬𝐡𝐢𝐧𝐠”?

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

IFSCA’s Consultation Paper: Mitigating Greenwashing

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

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

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

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

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

What are Global Capability Centres (GCCs)?

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

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

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

Why is Karnataka a Major Hub for GCCs?

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

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

Key Highlights of Karnataka’s GCC Policy 2024-2029

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

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

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

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Major Boost for Reverse Flipping: Indian Startups Coming Home

Major Boost for Reverse Flipping: Indian Startups Coming Home

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

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

MCA Streamlines Cross-border Mergers for Reverse Flipping

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

Key Takeaways of the Amended Rules

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

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

The Road Ahead

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

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IFSCA's Single Window IT System (SWIT): A Game Changer for Businesses in GIFT City

IFSCA’s Single Window IT System (SWIT): A Game Changer for Businesses in GIFT City

 Prime Minister Narendra Modi’s recent launch of the IFSCA’s Single Window IT System (SWIT) marks a significant milestone for businesses looking to set up operations in India’s International Financial Services Centre (IFSC) at GIFT City. This unified digital platform promises to revolutionize the ease of doing business in this burgeoning financial hub.

What is the IFSC and Why is SWIT Important?

The International Financial Services Centres Authority (IFSCA) was established to develop a world-class financial center in India. Located in Gujarat’s GIFT City, the IFSC aims to attract international financial institutions and businesses by offering a global standard regulatory environment. However, setting up operations in the IFSC previously involved navigating a complex web of approvals from various regulatory bodies, including IFSCA itself, the SEZ authorities, the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority of India (IRDAI). This process could be time-consuming and cumbersome for businesses.  

SWIT: Streamlining the Application Process

The SWIT platform addresses this challenge by creating a one-stop solution for all approvals required for setting up a business in GIFT IFSC. Here’s how SWIT simplifies the process:

  • Single Application Form: Businesses no longer need to submit separate applications to various authorities. SWIT provides a unified form that captures all the necessary information.
  • Integrated Approvals: SWIT integrates with relevant regulatory bodies – RBI, SEBI, and IRDAI – for obtaining No Objection Certificates (NOCs) seamlessly.
  • SEZ Approval Integration: The platform connects with the SEZ Online System for obtaining approvals from the SEZ authorities managing GIFT City.
  • GST Registration: SWIT facilitates easy registration with the Goods and Services Tax (GST) authorities.
  • Real-time Validation: The system verifies PAN, Director Identification Number (DIN), and Company Identification Number (CIN) in real-time, ensuring data accuracy.
  • Integrated Payment Gateway: Applicants can make payments for various fees and charges directly through the platform.
  • Digital Signature Certificate (DSC) Module: The platform enables users to obtain and manage DSCs, a crucial requirement for online submissions.

Benefits of SWIT for Businesses

The introduction of SWIT offers several advantages for businesses considering the IFSC:

  • Reduced Time and Cost: By consolidating the application process into a single platform, SWIT significantly reduces the time and cost involved in obtaining approvals. 
  • Enhanced Transparency: SWIT provides a transparent and user-friendly interface that allows businesses to track the progress of their applications in real-time. 
  • Improved Ease of Doing Business: This makes GIFT City a more attractive proposition for global investors and businesses.

Looking Ahead: The Future of GIFT City

The launch of SWIT is a significant step forward in positioning GIFT City as a leading international financial center. By streamlining the application process and promoting ease of doing business, SWIT paves the way for increased investment and growth in the IFSC. This, in turn, will contribute to India’s ambition of becoming a global financial hub.

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Sovereign Green Bonds in the IFSC

Sovereign Green Bonds in the IFSC

In recent years, the global investment landscape has shifted dramatically, with sustainability becoming a central theme in financial markets. As nations and corporations commit to net-zero emissions, innovative financial instruments are emerging to facilitate this transition. One of the most promising of these instruments is Sovereign Green Bonds (SGrBs). Recently, the International Financial Services Centres Authority (IFSCA) in India introduced a scheme for trading and settlement of SGrBs in the Gujarat International Finance Tec-City International Financial Services Centre  (GIFT IFSC), marking a significant step towards attracting foreign investment into the country’s green infrastructure projects.

Understanding Sovereign Green Bonds

SGrBs are debt instruments issued by a government to raise funds specifically for projects that have positive environmental or climate benefits. The proceeds from these bonds are earmarked for green initiatives, such as renewable energy projects, energy efficiency improvements, and sustainable infrastructure development. As global awareness of climate change grows, SGrBs are gaining traction as a viable investment option for those seeking to align their portfolios with sustainable development goals.

The Role of IFSCA

The IFSCA’s initiative to facilitate SGrBs in the GIFT IFSC is a strategic move that aligns with India’s commitment to achieving net-zero emissions by 2070. The GIFT IFSC has been designed as a global financial hub, offering a regulatory environment that supports international business and financial services. By introducing SGrBs, the IFSCA aims to create a robust platform for sustainable finance in India.

Key Features of the IFSCA’s SGrB Scheme

1. Eligible Investors

The IFSCA’s scheme allows a diverse range of investors to participate in the SGrB market. Eligible investors include:

  • Non-residents investors from jurisdictions deemed low-risk can invest in these bonds.
  • Foreign Banks’ International Banking Units (IBUs): These entities, which do not have a physical presence or business operations in India, can also invest in SGrBs. 

2. Trading and Settlement Platforms: The IFSCA has established electronic platforms through IFSC Exchanges for the trading of SGrBs in primary markets. Moreover, secondary market trading will be facilitated through Over-the-Counter (OTC) markets. 

3. Enhancing Global Capital Inflows: One of the primary objectives of introducing SGrBs in the GIFT IFSC is to enhance global capital inflows into India. With the global community increasingly prioritizing sustainable investment opportunities, India stands to benefit significantly from the influx of foreign capital. The availability of SGrBs provides a unique opportunity for investors looking to contribute to environmental sustainability while achieving financial returns.

The IFSCA’s introduction of SGrBs in the GIFT IFSC is a forward-thinking initiative that aligns with global sustainability goals. By facilitating access for non-resident investors and creating robust trading platforms, India is positioning itself as a leader in sustainable finance. As the world moves toward a greener future, the role of SGrBs will become increasingly important. For investors, these bonds not only represent a chance to achieve financial returns but also to make a meaningful impact on the environment. 

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