The Department for Promotion of Industry and Internal Trade (“DPIIT”) of the Ministry of Commerce and Industry vide Office Memorandum dated July 26, 2022 (“Office Memorandum”) have suggested certain ministries/departments to amend the definition of ‘Startup’ in consonance with its Notification G.S.R. 127(E) dated February 19, 2019 (“Notification”) under relevant rules/regulations/guidelines/notifications/directions.
what is the definition of a startup
The definition that has been in use by the DPIIT places emphasis on the criteria which a startup has to qualify in order to fall within the ambit of ‘Startup’. For instance, the turnover of a legal entity has to be less than INR 100 crores, and the legal entity should not have been in existence for more than 10 years from the date of incorporation.
It is important to take a step back and acknowledge that over the years and especially in recent times the categorization of ‘Startups’ have become key to their ability to access government support/assistance. This support/assistance can come by taxation related exemption that a ‘Startup’ can avail or the ability to access different and more time sensitive funding options such as convertible notes. The department of for promotion of industry and internal trade has also contributed by creating schemes and programmes such as ‘Startup India Seed Fund Scheme’. Such schemes have helped various founders move from the ideation stage to market entry.
The abovementioned support that has been provided by the Government showcases clear intent on the government’s end regarding their enthusiasm to get behind the startup ecosystem. This has also been made clear by the Government through their liberal definition of the term ‘Startup’ so as to be as inclusive as possible. The ecosystem shall soon become the backbone of future growth and development of several sectors across the country and has already been responsible for the creation of new industry sectors such as e-commerce and fintech among others.
Further, from a legislative standpoint, consistency is key. Different legislations carrying different definitions of the term ‘Startup’ will make holistically reading such legislations a task for founders (they are more often than not, their own legal support) at the seed stage. We shall take a deep dive into the Office Memorandum below along with an analysis of its impact.
The Office Memorandum suggests harmonization of the definition of ‘Startup’ under the following regulations in consonance with the Notification:
DST Guidelines for Seed Support System for Start-ups in Incubators (Ministry of Science and Technology);
Foreign Exchange Management (Non-Debt Instruments) Rules, 2019;
Master Directions-External Commercial Borrowings, Trade Credits and Structured Obligations;
Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015; and
Notification S.O. 1911(E) dated June 14, 2017 by the Ministry of Corporate Affairs.
In creating uniformity to the definition of ‘Startup’ across rules/regulations/guidelines/notifications/directions, the Notification promotes inter-regulatory consistency. Additionally, incorporating the updated definition of ‘Startup’ across the abovementioned rules/regulations/guidelines/notifications/directions will reduce ambiguity in interpretation across different rules/regulations/guidelines/notifications/directions. In conclusion, the suggested amendments are a step in the right direction to regularizing the latest definition of ‘Startup’.