Recent Company and LLP Law Amendments Impacting Startups

The legal and regulatory framework in India plays a pivotal role in shaping the growth trajectory of startups. Private limited companies are governed by the Companies Act of 2013, while the Limited Liability Partnership (LLP) Act, 2008, offers an alternative structure combining limited liability and partnership benefits. In recognition of startup challenges, the Indian Government has made significant changes to the Companies Act and the LLP Act.  These modifications seek to create a more business-friendly climate by streamlining compliance, lowering fines, and promoting innovation.

The Indian government has introduced several amendments to specific Acts over time, and these amendments are in line with a variety of other policies, which include Startup India and Digital India and are intended to promote innovation and business development. In addition to these reforms, the government’s Budget 2025 proposals are expected to further bolster the startup ecosystem by offering incentives for innovation, reducing tax burdens, and simplifying regulatory processes. These initiatives align with the government’s broader goals of fostering entrepreneurship, making India a hub for startup activity. This article examines the recent key amendments to company law and LLP law, focusing on their impact on Indian startups.

Key Amendments and their Impact on Startups

  • LLP (Third Amendment) Rules, 2023: Enhancing Transparency and Compliance

To improve accountability and transparency in LLPs, the Ministry of Corporate Affairs (MCA) unveiled the LLP (Third Amendment) Rules, 2023, in October 2023 (Click here to read our article on the Amendment Rules).[1] A notable modification requires each LLP to maintain Form 4A partner register at its registered office. Following the publishing of the Gazette notification, the existing LLPs had 30 days to comply with the amendment, which fosters investor confidence and aids in regulatory adherence.

Declaration of Beneficial Interest in LLPs

The 2023 amendment introduced provisions for partners to declare beneficial interests in contributions of the LLP. Partners holding such interests must submit declarations in Form 4B or Form 4C, as applicable. Upon receiving these declarations, the LLP is obligated to record them in the register of partners and file a return in Form 4D with the Registrar of Companies within 30 days. This measure aligns LLP regulations with those of companies, promoting greater transparency in ownership structures. 

LLP (Significant Beneficial Owners) Rules, 2023

In order to further improve transparency in LLP ownership structures, the MCA introduced the LLP (Significant Beneficial Owners) Rules, 2023. These rules closely mirror the provisions applicable to companies under the Companies (Significant Beneficial Owners) Rules, 2018, ensuring that LLPs disclose the details of individuals or entities holding directly or indirectly, 10% or more of the LLP’s contribution, voting rights, or exercising significant influence or control over decision-making, by filing a return in Form LLP BEN-2 and maintaining register of partners.

These provisions bring LLPs in line with corporate governance standards applicable to companies, thereby increasing transparency and helping prevent fraudulent ownership practices.

Recently, recognising the compliance burden on businesses, particularly startups and small LLPs, the MCA provided a relaxation in filing deadlines for:

    1. Form LLP BEN-2 (Declaration of Significant Beneficial Ownership) wherein the deadline for initial filings has been extended, giving LLPs additional time to report SBO details and no late fees were levied until May 15, 2024.
    2. Form LLP 4D (Filing of Beneficial Interest Declarations) wherein the MCA has granted LLPs an extension for submitting Form 4D, allowing them to comply with the new disclosure requirements without facing any penalties until May 15, 2024.

These relaxations are aimed at ensuring a smooth transition to the new compliance framework while reducing the regulatory burden on LLPs, particularly those in the startup ecosystem.

Appointment of Designated Partner for Disclosures

 To streamline the process of sharing information regarding beneficial interests, the amendment rules mandate that LLPs appoint a designated partner responsible for furnishing such information to the Registrar or any authorised officer. Accordingly, the LLP must specify one of the existing designated partners already in charge of compliance activities to furnish information regarding beneficial interest. Details of this designated partner must be provided in Form 4.  This requirement ensures accountability and facilitates efficient communication with regulatory authorities.

  • Extension of E-Filing Deadlines

The MCA extended the deadline for electronically completing the filing of LLP Form 3, Form 4 and Form 11[2] to November 30, 2023, without additional charges for delay, in recognition of the difficulties experienced by LLPs, particularly startups. This extension lessened the immediate compliance load and improved resource allocation. 

  • Amendments to the Definition of “Related Party”

Effective from April 1, 2023, the definition of “related party” was expanded under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations 2021. Prior to the LODR Amendment Regulations, the definition primarily included promoters, directors, and entities under common control. However, the amendment broadened the scope to include:

    1. Any person or entity holding 10% or more of the equity shares in a listed entity, either directly or indirectly through beneficial interest, during the preceding financial year (reduced from the earlier threshold of 20%).
    2. Any entity that is part of the promoter group, thereby ensuring that transactions with such entities are subject to disclosure and approval norms.

This expansion aimed to enhance corporate governance, improve transparency, and prevent conflicts of interest in related party transactions (RPTs). Additionally, startups seeking to procure public funds through an SME IPO should consider compliance with SEBI LODR obligations, especially for any reorganization and emergence of a new promoter and/or shareholder base, then they would need to consider these compliance disclosures under the related party transactions. This amendment necessitates that startups identify and disclose such relationships, ensuring greater transparency in financial dealings and adherence to corporate governance norms. 

  • Fast-Tracking Mergers of Startups Incorporated Outside India

In September 2024, a pivotal amendment was made to Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, introducing Sub-rule (5).[3] This provision expedites the approval process for a startup incorporated outside India to merge with its wholly-owned Indian subsidiary by eliminating the need to obtain approval from the National Company Law Tribunal (NCLT). Further, based on the amendment of Rule 25A, compliance rules have been streamlined by the Central Government for enabling reverse flipping as well.

By simplifying this procedure, the government offers companies greater flexibility and opportunities to enter the Indian market, which is particularly advantageous for foreign startups aiming to establish a presence in India efficiently. 

This regulatory reform is said to have reduced the time for reverse flip mergers from 12-18 months to approximately 3-4 months.[4]

  • Companies (Prospectus and Allotment of Securities) Amendment Rules, 2025

In February 2025, the MCA amended Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014[5], granting a compliance extension for certain private companies. Specifically, private companies (excluding producer companies) that were not classified as small companies as of March 31, 2023, now have until June 30, 2025, to comply with the provisions of sub-rule (2). The Companies Act, 2013 defines a “small company” based on the thresholds of INR 4 crore paid-up capital and INR 40 Crore turnover, respectively, as of 2024. However, many early-stage start-ups, while still qualifying as start-ups under relevant criteria, often surpass these small company limits due to increased revenues or the infusion of venture capital and as a result, they lose their small company status and become subject to Rule 9B(2), which mandates the dematerialisation of their securities. However, with the recent extension, startups now have time until June 30, 2025, to comply, providing them more time to align with regulatory requirements and easing their compliance journey.

While concluding with these amendments, it is also notable that the Union Budget for 2025-26 extended the timeline for tax benefits available to startups under Section 80-IAC of the Income-tax Act, 1961. This allows eligible startups to claim a 100% deduction on profits for three consecutive assessment years out of ten, beginning from the year of incorporation.

The amendment extends the tax deduction benefit under Section 80-IAC for eligible startups by five years, allowing newly incorporated start-ups to avail of the deduction until April 1, 2030, instead of the previous cut-off of April 1, 2025. This extension provides businesses with additional time to operate while benefiting from tax breaks during their crucial early years when cash flow is typically limited, as every rupee saved can be reinvested into the business, and could be used to hire more staff, or dedicate towards launching new ideas in the market. This shows the government’s deliberate approach to empower the startup space rather than just offer support to relieve the financial constraints during a critical growth phase.  There is an ongoing commitment to help fulfil new businesses’ dreams by making sure that future businesses have the financial capacity to thrive and compete in the global market.

Opportunities for Startups

These amendments encourage startups to adopt a proactive compliance culture, which can reduce future risks and uphold confidence among domestic and international investors. The streamlined processes, reduced penalties, and emphasis on digital transformation empower startups to focus on innovation and growth.

Moreover, the expanded definitions, simplified compliance processes, and cost savings enhance the ease of doing business, enabling startups to scale operations seamlessly. Startups in tech-driven sectors can particularly leverage these amendments to attract investments and navigate the regulatory landscape more effectively.

Way Forward

The amendments to company law and LLP Law mark a significant step toward building a friendly regulatory environment for entrepreneurs in India. These changes help to resolve compliance issues and promote digital transformation, indicating the government’s commitment to boosting entrepreneurship.

To effectively benefit from these improvements, companies must invest in legal awareness, professional counsel, and compliance technologies. With ongoing efforts to raise awareness and additional reforms in the works, the Indian Startup Ecosystem is poised to achieve extraordinary success in the coming years.

References:

[1] https://www.mca.gov.in/bin/ebook/dms/getdocument?doc=Mzc2OTA4ODA4&docCategory=Notifications&type=open

[2] https://www.mca.gov.in/bin/dms/getdocument?mds=Zt6foWsl%252BABAbU7Pid9NGg%253D%253D&type=open

[3] https://www.mca.gov.in/bin/dms/getdocument?mds=qTyAFp6vBFvAIie1mgFTbg%253D%253D&type=open

[4] https://www.reuters.com/world/india/india-regulatory-reform-could-hasten-homecoming-ipo-bound-startups-2024-10-10/

[5] https://www.mca.gov.in/bin/dms/getdocument?mds=uB9cbvrHAgY40CP98CDaNQ%253D%253D&type=open

Image Credits:

Photo by Monster Ztudio on Canva

The amendments to company law and LLP Law mark a significant step toward building a friendly regulatory environment for entrepreneurs in India. These changes help to resolve compliance issues and promote digital transformation, indicating the government’s commitment to boosting entrepreneurship. To effectively benefit from these improvements, companies must invest in legal awareness, professional counsel, and compliance technologies. With ongoing efforts to raise awareness and additional reforms in the works, the Indian Startup Ecosystem is poised to achieve extraordinary success in the coming years.

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What the Union Budget Unveiled for the Infrastructure Sector?

The Finance Minister, Smt. Nirmala Sitharaman, presented the union budget for the fiscal year 2025-26 before the Parliament on February 1, 2025 (the “Budget”). The budget was crafted with the intent of aligning with the government’s mission of achieving ‘Viksit Bharat’ by the year 2047. It placed a strong emphasis on achieving multifaceted economic growth, which included enhancing the infrastructure sector, fostering public-private partnerships, ensuring inclusive development, boosting private sector investments, improving household sentiments, and enhancing the spending power of India’s growing middle class.

The next five years are seen as a unique opportunity to achieve ‘Sabka Vikas’, fostering balanced growth across all regions. Emphasizing reforms as a means to achieve effective governance of both people and the economy, the budget introduces transformative changes in six key sectors, including the infrastructure, power, urban development, and financial sector. Highlights for the infrastructure sector include:

Sustainable Development: The Budget supports the continued commitment of the government to sustainable development. In line with this commitment, the manufacturing mission is set to support clean technology manufacturing, which aims to enhance domestic value addition and strengthen the ecosystem for key technologies such as solar photovoltaic (PV) cells, electric vehicle (EV) infrastructure, wind turbines, high voltage transmission equipment, and grid-scale batteries.

Micro, Small, and Medium Enterprises (MSMEs) and Start-ups: The Budget has introduced several measures to improve access to credit, particularly for MSMEs and start-ups. For Micro and Small Enterprises, the credit cover has been doubled, unlocking significant additional funding over the next five years. Start-ups will also benefit from a higher credit limit, along with a reduced guarantee fee for loans in key sectors vital to the Atmanirbhar Bharat initiative. Furthermore, well-managed exporter MSMEs will have access to increased coverage for term loans, while micro enterprises registered on the Udyam portal will be able to access customized credit cards with a generous limit, with millions of such cards to be issued in the coming year. These steps aim to provide better access to credit and foster growth among MSMEs and start-ups.

Fund of Funds: Furthermore, Alternate Investment Funds (AIFs) for start-ups that have already secured commitments exceeding ₹91,000 crore are supported by a Fund of Funds with an initial government contribution of ₹10,000 crore. To further promote this initiative, a new Fund of Funds has been established with an expanded scope and an additional contribution of ₹10,000 crore.

Credit Enhancement: As part of its focus on financial reforms, the National Bank for Financing Infrastructure and Development (NaBFID) will establish a ‘Partial Credit Enhancement Facility’ for corporate bonds related to infrastructure.

PM Gati Shakti: The government has introduced key developments to enhance India’s infrastructure landscape through the PM Gati Shakti initiative. As part of these efforts, PM Gati Shakti data will be made accessible to the private sector, fostering improved collaboration and efficiency in infrastructure projects. Launched by Prime Minister Narendra Modi on October 13, 2021, PM Gati Shakti aims to streamline and accelerate infrastructure development in the country. By integrating 16 ministries and several national schemes including Bharatmala, Sagarmala, UDAN, and various industrial corridors into a unified framework, the initiative seeks to enhance coordination across transportation, energy, logistics, and other sectors.

Asset Monetization Plan: Building on the success of the first Asset Monetization Plan, the Budget launches the second plan for 2025-30, aiming to generate ₹10 lakh crore for new projects through capital recycling. Regulatory and fiscal measures will be adjusted to support this plan.

Jal Jeevan Mission: The mission has been focused on improving the quality of infrastructure and the Operation and Maintenance (O&M) of rural piped water supply schemes through community participation (“Jan Bhagidhari“). Additionally, urban sector reforms in governance, municipal services, urban land, and planning are set to be incentivized.

Urban Challenge Fund: The government has introduced the fund with a corpus of ₹1 lakh crore to finance up to 25% of the cost of bankable projects. The fund stipulates that at least 50% of the cost of the project must be covered through bonds, bank loans, or PPPs. An allocation of ₹10,000 crore is proposed for the 2025–26 fiscal year.

Nuclear Energy Mission: In a significant move towards clean energy transition, the government has announced the launch of this mission aimed at developing 100 gigawatts (GW) of nuclear energy by 2047, in line with India’s ‘Viksit Bharat; vision. To support this, the government has planned to amend key laws, including the Atomic Energy Act, 1962, and the Civil Liability for Nuclear Damage Act, 2010, to facilitate greater private sector participation. An allocation of ₹20,000 crore has been earmarked for research and development in Small Modular Reactors (SMRs), a promising technology to meet India’s growing energy demands with safety and efficiency. At least five indigenously developed SMRs are expected to be operational by the year 2033.

Incentivize Electricity Distribution: The Budget proposes to incentivize electricity distribution reforms and the augmentation of intra-state transmission capacity by states. These measures aim to improve the financial health and capacity of electricity companies. States implementing these reforms will be allowed additional borrowing of 0.5% of their Gross State Domestic Product (GSDP), contingent on the successful implementation of the reforms.

Ude Desh Ka Aam Nagarik (UDAN): The UDAN scheme has enabled 1.5 crore middle-class people to fulfill their aspirations for faster travel, connecting 88 airports and operationalizing 619 routes. Building on this success, a modified UDAN scheme has been launched to enhance regional connectivity to 120 new destinations and serve 4 crore passengers over the next 10 years. The scheme will also support the development of helipads and smaller airports in hilly, aspirational, and northeastern districts of the country. To meet future needs, Greenfield airports are set to be developed in the state of Bihar, alongside the expansion of Patna airport and the construction of a brownfield airport at Bihta, Bihar.

Tourism Infrastructure: The top fifty tourist destinations in the country will be developed in collaboration with states through a challenge-based approach or open competitive bidding, with states required to provide land for key infrastructure. Hotels at these destinations would be included in the Harmonized Master List (HML) of Infrastructure, issued by the Ministry of Finance.

Shipping Infrastructure: The Budget has announced that large ships above a specified size will be included in the Infrastructure Harmonized Master List. By being included in the aforementioned list, lenders will have more favourable access to infrastructure loans, External Commercial Borrowings (ECB) limits, access to funds with longer repayment periods from insurance and pension funds, and the eligibility to avail loans from the India Infrastructure Financing Company Limited (IIFCL). Shipbuilding clusters will also be supported to expand the variety, types, and capacity of ships. This will involve enhancing infrastructure, providing skill development, and integrating advanced technology to strengthen the entire ecosystem.

Additionally, each infrastructure-related ministry will create a 3-year pipeline of projects for implementation in Public-Private Partnership (PPP) mode, seeking support from the India Infrastructure Project Development Fund (IIPDF) to prepare PPP proposals. An outlay of ₹1.5 lakh crore has been proposed for 50-year interest-free loans to states for capital expenditure and reforms.

The Union Budget 2025-2026 reinforces the government’s commitment to accelerating India’s infrastructure development, aligning with the government’s vision of ‘Viksit Bharat’ by 2047. Through strategic reforms, enhanced financing mechanisms, and a strong focus on clean energy, the budget aims to foster inclusive and sustainable growth. Key initiatives such as the PM Gati Shakti, the revamped UDAN scheme, interest-free loans for a period of 50 years, inclusion of ships and major tourist hotels to the Infrastructure Master Harmonized list, and encouragement of increased PPP collaboration reflect the government’s commitment to strengthening India’s infrastructure across sectors. Although there was an expectation for an increase in the overall capital expenditure outlay for the infrastructure sector, similar to the previous budget, the continued allocation of funds towards key infrastructure sectors such as roads and railways remains a positive and encouraging aspect of the budget.

Additionally, the focus on MSMEs, start-ups, and asset monetization demonstrates a balanced approach to fostering innovation, private sector participation, and fiscal sustainability. By prioritizing green technology, streamlining approvals, and incentivizing capital inflows, the budget aims to position India as a global leader in infrastructure and clean energy. The significant investments and reforms in the Budget 2025-2026 outline a clear path towards building a modern, resilient, and globally competitive economy.

Click here to read what the budget unveiled for other sectors.

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Photo by Zeynep Erten on Pexels 

 

The Union Budget 2025-2026 reinforces the government’s commitment to accelerating India’s infrastructure development, aligning with the government’s vision of ‘Viksit Bharat’ by 2047. Through strategic reforms, enhanced financing mechanisms, and a strong focus on clean energy, the Budget aims to foster inclusive and sustainable growth. Key initiatives such as the PM Gati Shakti, the revamped UDAN scheme, interest free loans for a period of 50 years, inclusion of ships and major tourist hotels to the Infrastructure Master Harmonized list and encouragement of increased PPP collaboration reflect the government’s commitment to strengthening India’s infrastructure across sectors.

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The Venture Debt Edge: Financing India’s Startup Evolution

Venture debt funding is steadily gaining traction in India, with the market reaching a milestone of $1.2 billion in 2023 – an impressive 50% increase from the previous year.[1] This growth showcases the accelerating pace of venture debt in India, growing at a compound annual growth rate (CAGR) of about 34% since 2017, according to a report by Stride Ventures.[2] The milestone is noteworthy against a backdrop of declining funding activity due to high interest rates, uncertain macroeconomic conditions, and geopolitical concerns impacting global investor sentiment.

Venture debt offers an alternative capital source alongside traditional equity investments, enabling startups to secure additional funding for growth without further diluting equity. It is particularly favoured by companies between equity financing rounds, as it allows founders to retain control of their businesses while offering investors steady fixed returns. Unlike traditional loans from banks or financial institutions, venture debt is underwritten based on the venture capital raised and the growth potential of the borrower, rather than on asset value or cash flow.

For the purpose of this article, we assume that the venture debt investor is organised in the form of an alternative investment fund, typically structuring venture debt funding through subscription of non-convertible debentures issued by the borrower company.

A venture debt transaction is structured in the form of a mix of (a) loan component which is a substantial part of the total amounts to be provided to the borrower company and is usually undertaken via the issuance of non-convertible debentures with a fixed tenor, agreed interest or coupon payments and is secured by a charge on the fixed and current assets of the borrower company (including any IP, receivables etc.); and (b) equity component which is a small percentage of total debt amounts and is typically in form of convertible instrument, like partly paid up compulsorily convertible preference shares (CCPS), which converts into equity at a pre-agreed ratio in future or at a discount to the price of next qualifying round. The proceeds of the debentures are to be repaid in agreed equal monthly instalments payable by the borrower company in terms of the redemption schedule agreed between the parties.

As to the documentation process, it follows a similar transaction process when compared to equity investments: (i) execution of a term sheet; (ii) conducting legal, financial and any commercial due diligence; and (ii) execution of transaction documents i.e. investment/subscription agreement, debenture trust deed, debenture trustee appointment agreement, deed of hypothecation and other ancillary documents like demand promissory note, NACH mandate forms up to the investment amount, undated cheques, etc.

The composite investment agreement contains terms, rights, and processes involved in relation to both the loan and the equity component. Following are the broad typical terms that are covered in the relevant investment agreement:

  • Objects, tenor coupon and covenants under the issue

The agreement should mention the purpose for which the amounts infused will be utilised i.e. capital expenditure or working capital purposes or for any general corporate purposes of the borrower company. Additionally, the period of the debt facility and repayment thereof and the applicable coupon rate are to be specified upfront within the terms of issue of the debentures. With respect to the equity component, the terms of issue of CCPS are specified which, inter alia, include terms like anti-dilution, liquidation preference, conversion terms, etc. Certain affirmative covenants such as obtaining insurance, maintaining books of accounts, paying taxes when due, providing end-use certificates, etc. are also enshrined till the time debenture proceeds are fully repaid.

  • Creation of charge and minimum security and financial covenants

The nature of the charge created on the hypothecated assets (whether a first charge or a first pari passu charge) and the assets over which such charges are created should be set out. In case the borrower company has subsidiaries, the agreement should describe whether the charge is to be created on assets of such subsidiaries and contain other covenants for investor protection in this regard, e.g. maintenance of a debt servicing reserve account, maintenance of agreed amounts of cash burn equivalents in the form of cash or bank balances, etc.

  • Representations and warranties

These are required from the borrower company on its business, contracts, compliance with laws, financial statements or accounts, issuance of securities, legal proceedings, hypothecated properties, etc. From the company and the founders’ perspective, relevant carve-outs such as knowledge qualifiers, the construct of ordinary course of business, the requisite look-back period of the warranties, and monetary thresholds shall be factored in depending on the nature of the warranties.

  • Negative covenants

Until the time debenture proceeds are repaid, the investment agreement includes a broad list of negative covenants (i.e. actions which the borrower company cannot undertake during the term of the debt without the consent of the investor, e.g. obtaining further borrowings, creation of charge in hypothecation assets, change in shareholding of the founders or change in founders; change in business or legal status of the borrower company, enter into transactions relating to sale of assets, provide guarantees, undertake changes in board, etc.). From the founders’ perspective, it is relevant to have carve-outs to the negative covenants in the form of monetary thresholds, ability to conduct business in the ordinary course, etc.

  • Event of default

A wide range of default events are applicable till the time debenture proceeds are repaid (i.e. scenarios wherein early redemption of debentures and the invocation of hypothecated property can be triggered). This construct includes, in addition to the standard payment default events, events such as a material adverse change occurring in relation to the borrower company, material breach of identified covenants of the transaction documents, utilisation of the proceeds other than for agreed purposes, criminal conviction of the founders, and cross defaults in other lending documents. From the founders’ perspective, it is relevant to have materiality thresholds, carve-outs in the form of monetary thresholds, material adverse effects vis-à-vis these applicable events, and an adequate cure period to cure the default involved.

  • Indemnification

Indemnity obligations arising out of the material breach of the warranties and material covenants have to be specified. The indemnity points to be considered include – (i) whether only the borrower company has to provide indemnity, (ii) losses being limited to actual and direct losses, (iii) other limitations of liability constructs, inter-alia, de-minimis, tipping basket, aggregate cap, sunset periods or time limitations, no double recovery, and due process of establishment of losses.

  • Standstill covenants

These operate between the execution date and the closing date and include matters that cannot be passed without the consent of the investor. If the standstill duration is higher, from the founders’ perspective it is relevant to have monetary thresholds and carve-outs of the ordinary course of business and consent shall not be unreasonably withheld by the investor.

  • Right to invest or subscribe

Usually, investors negotiate for a right to further invest a specific amount (which is either specified upfront or extends up to the principal amount of debenture subscribed by the investor) in favour of the investor in any future round of capital raise on the same pricing, rights and terms as the equity securities being issued to the new investor at a specific future round. From the founders’ perspective, it is pertinent to note that in many instances this right to further invest goes beyond the pro-rata participation right of the investors (based on a fully diluted capital structure) and amounts to a superior pre-emptive right protection which may not be viewed favourably by an incoming new investor. The company can instead consider providing this right subject to best efforts by the company based on the discussions with the new incoming investor(s) at that point in time.

  • Others

The other covenants include – debenture holders having a right to appoint an observer to the board, penal interest applicable on the prepayment, information rights of the investor (timing of providing relevant information to be agreed), default interest on amounts due (over and above the coupon rate), bearing of costs and expenses by the parties, break fee (in case the issuer does not avail facility), liquidation preference on the equity portion (priority in case of liquidity events), tag along rights in relation to the equity instruments, assignment by debenture holders, transfer by the investor (competitors are excluded other than in cases of an event of default), etc.

The other transaction documents usually contain standard provisions as to the security created and its invocation, rights of the debenture trustee (along with the scope of powers and obligations of the debenture trustee specified in Section 71 of the Companies Act, 2013 and the rules made thereunder) including in case of a breach, the fee payable to the debenture trustee, etc.

Usually in India, the venture debt deal is structured as a domestic transaction given that in the event the debt is an external commercial borrowing, there will be certain restrictions or compliances in terms of extant foreign exchange laws, for instance, the conditions as to the recognised lender, eligible borrower, limitations on the end-use of funds by the borrowing company such as meeting working capital requirements and general corporate purposes (other than in certain cases), all-in-cost ceiling and minimum maturity constructs also become applicable. Further, if any partly paid instruments are subscribed to by non-resident investors, such instruments need to be fully paid up within 12 months, along with the requirement of compliance with the pricing guidelines for the issuance of securities to the non-resident.

References:

[1] https://startupstorymedia.com/insights-indian-start-ups-secure-1-2-billion-in-venture-debt-in-2023-fueled-by-fintech-and-consumer-sectors/#:~:text=The%20report%20highlights%20a%20remarkable,cent%20from%202017%20to%202023.

[2] https://docsend.com/view/6c4s54uhd4p73bvr

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Photo by Gajus on Canva

A venture debt transaction is structured in the form of a mix of (a) loan component which is a substantial part of the total amounts to be provided to the borrower company and is usually undertaken via the issuance of non-convertible debentures with a fixed tenor, agreed interest or coupon payments and is secured by a charge on the fixed and current assets of the borrower company (including any IP, receivables etc.); and (b) equity component which is a small percentage of total debt amounts and is typically in form of convertible instrument, like partly paid up compulsorily convertible preference shares (CCPS), which converts into equity at a pre-agreed ratio in future or at a discount to the price of next qualifying round. The proceeds of the debentures are to be repaid in agreed equal monthly instalments payable by the borrower company in terms of the redemption schedule agreed between the parties.

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Direct Listing of Securities in GIFT City: Exploring the Nuances

The Ministry of Finance recently allowed for the direct listing of securities by Indian companies on international exchanges. It follows that Indian companies can now offer equity shares directly to non-resident Indians as well. This is in line with the Government’s vision to make India an international hub for businesses. This will open new and better avenues for investments for Indian companies by giving them access to an alternate source of capital, a broader investment base, better valuation, facilitation of their international employee compensation, brand awareness and visibility, etc. Additionally, it will be an attractive proposition for foreign investors as they would have the option of participating in the value creation of one of the fastest-growing economies.

This article will briefly give an overview of the roadmap to the direct listing of securities on international exchanges via Stock Exchanges in the Gujarat International Finance Tec-City, popularly called the GIFT City, discuss the two recent rules and amendments passed for this purpose, and explore the gaps that need to be fixed.  

Roadmap to direct listing of securities on international exchanges

The Government’s move is facilitated by the setting up of the International Financial Services Centre Authority (IFSCA), which was established on April 27, 2020, under the IFSCA Act, 2019. This authority now assumes the responsibility of regulating industries in the International Financial Services Centres (IFSCs). The country’s first IFSC was set up in GIFT City. IFSCA now regulates the industries in the GIFT City, which was previously regulated by the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Pension Fund Regulatory and Development Authority (PFRDA), and the Insurance Regulatory and Development Authority of India (IRDAI). The main intention of establishing these IFSCs in India is to allow for a strong global connect and create opportunities to compete on a global level.

A roadmap to listing of securities on international exchanges was made as early as 2021 through the passing of the IFSCA (Issuance and Listing of Securities) Regulations, 2021 (ILS Regulations). Through the ILS Regulations, a thorough outline was created for the listing of different kinds of securities. It allowed for security instruments such as equity instruments through Initial Public Offer (IPO), Follow-on Public Offer (FPO); listing of specified securities by a start-up company or an SME company, secondary listing of specified securities, IPO of specified securities by a special purpose acquisition company; depository receipts; debt securities; and ESG debt securities. It further lays down the requirements for listing, such as the eligibility criteria, application, issue size, minimum subscription, type of allotment, lock-in, pricing, disclosure requirement, etc. Prior to this, Indian companies raised foreign funds through the issue of depository receipts listed outside or non-residents subscribed to issuances made in India or by way of borrowing overseas.

Regulatory changes

Although the ILS Regulations were in place, there were no enabling provisions to facilitate the listing of securities on international exchanges. In 2020, Section 23(3) was incorporated in the Companies Act, 2013 to enable companies to issue securities in permissible foreign jurisdictions or such other jurisdictions. This Section was notified on October 30, 2023. The Ministry of Corporate Affairs, on January 24, 2024, issued the Companies (Listing of equity shares in permissible jurisdiction) Rules, 2024, and certain amendments were made to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) on the same day. In the new NDI Rules, along with other additions and amendments, Schedule XI is added with the heading, “Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme”, which acts as the main scheme for direct listing of securities.

Through a series of amendments and new rules, public companies in India are now allowed to list and issue securities in IFSC in India on two stock exchanges namely – India International Exchange and NSE International Exchange.

Eligibility conditions

The aforementioned rules permit both listed and unlisted public companies to list their securities on international exchanges. This may be in the form of an IPO by the company or through an Offer for Sale (OFS) by the existing shareholders. There is a prohibition on certain categories of companies from offering shares on international exchanges, such as Nidhi companies, Section 8 companies, companies limited by guarantee and also having share capital, companies having a negative net worth, companies which have defaulted in payment of dues to any bank or public financial institution or non-convertible holder or any other secured creditor, companies which have made any application for winding up, and has defaulted in filing of an annual return or financial statements within the specified period.

Companies which engage in activities such as lottery business, gambling, chit funds, trading in transferable development rights, real estate business or construction of farmhouses, manufacturing of cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutes, and activities which are not open to private sector investment will not be allowed to issue securities. In addition to this, the companies are also restricted to the sectoral caps as per Schedule I of the NDI Rules.

Further, companies or their existing shareholders are not allowed to issue or offer shares where the director or promoter of the concerned company is debarred from accessing the capital market, is or are wilful defaulter(s) or fugitive economic offender(s). The companies which are under inspection or investigation under the provisions of the Companies Act, 2013, are also not permitted to list their securities.

Permissible holders under the 2024 amendment

The Scheme restrict persons resident in India from applying for the securities offered through direct listing on the international stock exchanges. There are no special restrictions for NRIs, and they are free to trade in such securities. Although all of these transactions are under the automatic route, some approvals by the Central Government are needed for citizens of neighbouring countries, who intend to buy shares from the companies listed on and through international stock exchanges.

The burden is on the issuing company to disclose these restrictions to the subscriber through the offer document. A permissible holder can hold or invest only up to 10% of the total paid-up equity capital on a fully diluted basis.

Price of issue or transfer of equity shares

For a company that is already listed in India, the issue price in the international stock exchange should not be less than the price applicable to the corresponding mode of issuance of such equity shares to domestic investors.

For an unlisted public company, the issue price should be determined by the book-building process as permitted by the international foreign exchange, and it should not be less than the fair market value as applicable under the Foreign Exchange Management Act, 1999.

Obligations of public Indian companies

The new amendments collectively impose certain obligations on the company which have to be followed before and after the listing of securities on the stock market. Accordingly, companies should ensure that the aggregate of equity shares which are, or which may be offered along with equity shares already held in India by persons resident outside India, do not exceed the sectoral caps under Schedule I to these NDI Rules.

In addition to that, the Direct Listing Scheme also stipulates that public Indian companies listing their securities on the international stock exchange should ensure compliance with all laws and regulations pertaining to issuance of equity shares such as the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Foreign Exchange Management Act,1999, the Prevention of Money-laundering Act, 2002, or the Companies Act, 2013.

Gaps to be addressed

The status of the public unlisted Indian companies which have listed their securities on international stock exchanges does not change despite the listing. As per Section 2(54) of the Companies Act, 2013, a listed company “means a company which has any of its securities listed on any recognised stock exchange”. The recognition of stock exchanges is as per Section 4 of the SCRA. Both the international stock exchanges are not recognised stock exchanges for this purpose. Despite listing their securities on a stock exchange, the unlisted companies are excluded from all the other obligations and compliances for listed companies as laid down in the Companies Act, 2013. A few of these obligations are in place to provide investor protection. Whether such a measure was taken to reduce the compliance requirements to encourage smaller and medium-sized companies to list their securities or whether there would be an amendment to the Companies Act, 2013, in the future, is unclear. However, it is essential to lay down some compliances to ensure investor protection.

Conclusion

Foreign investments, along with domestic investments also bring in other perks such as brand recognition, brand visibility, knowledge about global best practices, technological advances, etc. The direct listing of securities in international stock exchanges will not only aid big companies in raising foreign funds but will also encourage start-ups and MSMEs to look for foreign investment opportunities by allowing even unlisted companies to list their securities on international stock exchanges.  

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Photo by energepic.com on Pexels

The status of the public unlisted Indian companies which have listed their securities on international stock exchanges does not change despite the listing. As per Section 2(54) of the Companies Act, 2013, a listed company “means a company which has any of its securities listed on any recognised stock exchange”. The recognition of stock exchanges is as per Section 4 of the SCRA. Both the international stock exchanges are not recognised stock exchanges for this purpose. Despite listing their securities on a stock exchange, the unlisted companies are excluded from all the other obligations and compliances for listed companies as laid down in the Companies Act, 2013. A few of these obligations are in place to provide investor protection. Whether such a measure was taken to reduce the compliance requirements to encourage smaller and medium-sized companies to list their securities or whether there would be an amendment to the Companies Act, 2013, in the future, is unclear. However, it is essential to lay down some compliances to ensure investor protection.

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Streamlining the Patent Process in Startups: A Pressing Priority

India has leveraged the startup ecosystem by offering a conducive environment to make them powerhouses of innovation. According to the Economic Survey 2021-22, the number of new recognised start-ups increased to over 14,000 in 2021-22 up from 733 in 2016-17. The survey further emphasized that intellectual property (IP), notably patents, was the key to a robust knowledge-based economy.

Similar to any other business undertaking, startups interact with various stakeholders, including employees, who regularly exchange ideas and develop key IP. Hence, business operations that significantly rely on IP exchange need an optimized and watertight structure of intellectual property rights protection, especially when they aspire to cater to international markets. In line with the growing importance of startups and IP, the government of India has launched the “Start-up India, Stand-up India Scheme” to support early-stage startups.

 

Recognition as a ‘Startup’

 

Entities to qualify as a ‘startup’ need to be recognized by the competent authority under the START-UP INDIA initiative and fulfil all the criteria for the same. For the sake of more clarity, the Department of Promotion of Industry and Internal Trade issued a notification in 2019[1] according to which an entity incorporated as a private limited company, a partnership firm, or a limited liability partnership in India can be considered a startup for up to ten years if its turnover since its incorporation has not exceeded one hundred crore rupees.

Further, such an entity should be actively working towards “innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential for employment generation or wealth creation.” Notably, an entity formed due to restructuring or splitting up an existing business cannot be deemed a startup.

A foreign entity can also be considered a start-up if it fulfils the criteria of turnover and specified period of incorporation/registration and submits a valid declaration to substantiate the requisites as per the provisions of the START-UP INDIA initiative.

 

Minding the IP of Business

 

An important criterion for getting startup registration is that the entity should be working to innovate, develop or improve products, processes or services. To protect technical innovation, patent registration is crucial, especially for startups, where the start-up’s success is tied to the novelty of their product and process. The DPIIT has recognised a total of 69,492 startups to date. In addition, startups have filed a total of 6000+ patent applications.7

A product or process with patent protection helps create a solid business model, enabling them to earn a good market reputation, a return on investment (ROI), and access new opportunities for expansion and generate funds.

To this effect, businesses can undertake the following best practices to optimise their inventions and ideas:

  1. Build an IP culture that drives innovation in the organization. For instance, implementing rewarding ownership strategies, implementing IP incentive schemes, encouraging teams to research and identify areas where valuable IP protection can be secured, etc.
  2. Foster IP awareness within the organization.
  3. Build an IP protection system that is driven by strong policy and practice. Organisations should focus on structuring agile protection strategies that prevent knowledge leaks. Undertaking regular IP audits and compressive risk analysis should be the focus.
  4. Once the IP is protected, its commercialization should be the focus. Additionally, organisations should be aware of their IP infringement and take proactive measures to enforce their rights effectively.

 

Gaining Traction with DPIIT Recognition

 

Benefits from Intellectual Property Rights (IPR)

 

A startup recognised by the DPIIT is eligible for tax breaks on:

  • Prior Turnover
  • Prior Experience
  • Earnest Money Deposit

DPIIT recognised startups can now get listed as sellers on the government e-Marketplace.

Self-certification Under Labour & Environment Laws

  • Startups are allowed to self-certify their compliance with nine labour and three environmental laws for 3 to 5 years from the date of incorporation.
  • In respect of three environmental laws, units operating under 36 white category industries (as published on the website of the Central Pollution Control Board) do not require clearance under three Environment-related Acts for three years. Hence, startups can focus on their core business and keep compliance costs low.

Fund of Funds for Startups (FFS)

  • The government has set up a corpus fund of INR 10,000 Cr. INR 5409.45 cr has been committed to 71 VC firms. In total, INR 5811.29 Cr was invested in 443 startups. 

Faster Exit for Startups

  • As per the Govt Notification, startups are now notified as “fast track firms”, enabling them to wind up the operations of their startups in 90 days.

Seed Fund Scheme

  • Grant up to INR 20 lakh to validate proof of concept, prototype development, or product trials.
  • Grant up to INR 50 lakh for market entry, commercialisation, or scaling up.

Tax Relief

  • Recognised startups are exempted from Income Tax for 3 consecutive years out of the 10 years since incorporation.
  • Startups incorporated on or after April 1 2016, but before April 1 2022, can apply for an income tax exemption under Section 80-IAC of the Income Tax Act.

 

Patent Incentives for Start-ups in India

 

Patent Facilitators

 

The government has identified over 226 local patent facilitators[2] to extend their expertise to DPIIT-recognised startups. The government would reimburse these facilitators for their services.

Patent facilitators are responsible for:

  • Providing general advisory services on a pro bono basis
  • Providing pro bono assistance with IPR filings
  • Assisting with the filing and disposal of IP applications at the National IP offices under CGPDTM
  • Drafting specifications (provisional and final)
  • Preparing and filing responses to examination reports and other queries, notices or letters by the IP offices
  • Appearing at hearings as may be scheduled
  • Contesting opposition, if any, by other parties
  • Final disposal of the IP application. 

 

Fee

 

The government has provided 80% rebate on the patent filing fee to make the process more attractive.

 

Expedited patent registration process:

 

Expedited Examination can be made by filing Form 18A accompanied by Form 9 (Publication). A request filed under a Regular Examination request via Form 18 (rule 24B) can be converted to an Expedited Examination by submitting Form 18A and Form 9.

The IPO has significantly reduced the duration of the patent timeline.

  • Publication: Within 1 month from the date of filing of Form 9.
  • Issuance of the First Examination Report (FER) to the Applicant: Within one month, but no more than two months, from the date the patent application is assigned to the Examiner; and within 45 days from the date, the Examiner submits the FER to the Patent Controller.
  • Response to the First Examination Report by Applicant: Within 6 months of receiving the FER from the IPO.
  • Disposal of the First Examination Report (FER) by the Controller: Within 3 months from the receipt of the last reply from the Applicant.

 

Conclusion

 

The objective of innovation and promoting patent filing by startups is simple, i.e., a patent is directly related to innovation and contributes to significant economic growth for a startup. The upsurge of startups has also led to massive employment generation, with over 5,60,000 jobs in 2016-2020. Hence, it is imperative to have an enabling ecosystem where entrepreneurs are encouraged to file more IPs seamlessly. While launching incentivized schemes and actively working towards reducing the compliance burden for new businesses when filing IP applications is a step in the right direction, there is still a pressing need to address the issues of procedural delays and complex patent processes to tap into the intellectual prowess of the country.

References: 

[1] https://dpiit.gov.in/sites/default/files/notification_Definition_StartupIndia_06July2021.pdf

[2] https://www.startupindia.gov.in/content/sih/en/facilitator.html 

 

Image Credits: Photo by Med Badr Chemmaoui on Unsplash

The objective of innovation and promoting patent filing by startups is simple, i.e., a patent is directly related to innovation and contributes to significant economic growth for a startup. The upsurge of startups has also led to massive employment generation, with over 5,60,000 jobs in 2016-2020. Hence, it is imperative to have an enabling ecosystem where entrepreneurs are encouraged to file more IPs seamlessly.

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India is Innovating Faster than Before - and That’s Good News

India needs to radically rethink and modernize delivery of various public services to improve reach, scale, and quality. I believe this process, which began a decade ago, has gathered momentum in recent days. This, I believe, is the direct result of our innovation ecosystem maturing and scaling rapidly. Two news reports I recently read have reinforced my belief that not only has the pace of technology-led innovation has picked up across sectors in India, it has also become more broad-based.

The first report was on how Narayana Healthcare (founded by renowned cardiac surgeon Dr. Devi Shetty) has fitted 700 beds at its cardiac hospital in Bangalore with sensors. When connected to patients using these beds, these sensors can monitor vital parameters. Data such as each patient’s temperature, blood pressure, SPO2/oxygen levels, pulse rate, ECG, breathing etc. are regularly measured and transmitted to dedicated computers and smartphones. Nurses and doctors can monitor each patient’s health and take quick action as and when necessary.

The idea is not new, as many factories in India (and elsewhere) that have embraced “Industry 4.0” have already gone down a similar path. Real-time data from an array of sensors fitted to various machines on shop floors are securely streamed to devices so that supervisors and managers are instantly alerted to breakdowns, abnormal variations in energy consumption or sub-optimal performance in terms of productivity or quality.

What is perhaps new- or at least becoming more visible across India- is the ability to cross-pollinate ideas and best practices across industries and evolve innovative solutions that are powered by technology so that reliability is improved. Dr. Shetty has often spoken about the impending shortage of healthcare professionals in India, and the need to train youth for jobs as medical technicians, so that the load on doctors is reduced and more patients can get their attention for treatment instead of performing tasks such as conducting tests etc. Dr. Shetty also pointed out that with this new system, nurses will no longer need to awaken sleeping patients just to measure and record vital signs. When innovations like this are replicated across hospitals in India, the quality of care will improve- even in government hospitals. The initial investment too will come down as more companies offer such automated, real-time health monitoring solutions.

A second report that provides evidence in support of my view was on drone startups. Thanks to an expanding vista of applications (e-commerce delivery, telecom, energy, disaster management, defence etc.) and various government policies (PLI, Drone Shakti etc.), this sector is attracting significant investments. Reports suggest that the twelve months ending 30 June 2022 saw twice the number of VC deals related to drones as in the preceding twelve-month period. At an estimated US$87 Million, the quantum of investment too in the 1 July 2021- 30 June 2022 period was more than 3.6X the US$24 Million invested in the preceding year. Trends indicate that India will soon be home to a rapidly-growing vibrant drone industry.

As our world grapples with multiple threats including climate change, a reduced emphasis on traditional models of globalization and new geopolitical fault lines, new technologies in critical areas emerging rapidly. These technologies will soon alter societies and security paradigms. In such a milieu, no country can afford to remain dependent on foreign technology. India must ensure that we build a large, robust and sustainable base of domestic capabilities in areas such as AI/ML, robotics, drones, healthcare, high-tech manufacturing etc.

To keep up with the changes (including in laws, business models/strategies, hybrid working arrangements, war for talent etc.), professional services firms too need to evolve to up their game. Siloed capabilities and solution approaches that worked even five years ago are no longer enough- but that’s perhaps a topic for a future write-up.

India must ensure that we build a large, robust and sustainable base of domestic capabilities in areas such as AI/ML, robotics, drones, healthcare, high-tech manufacturing etc.

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Layoffs, Contracts and Lawyers: Connecting the Dots

In recent weeks, there has been a lot of news about startups laying off employees. Edtech companies like UnAcademy and Vedantu, used car sales companies like Cars 24 and E-commerce players like Meesho have all reportedly laid off people. As many as 8000 people have been laid off in the first four months of 2022. The irony is that this is happening even as the startup ecosystem raised more than US$10 Billion in capital during the Jan-March 2022 quarter. IVCA-EY data indicates that in April 2022, the capital raised was around US$1.6 Billion- less than half the sum in the corresponding period in 2021. Last year saw a record number of Indian unicorns emerge.

It is not that there is a sudden scarcity of risk capital. What is happening is that VC funds and other investors are taking a long hard look at business models and valuations. Cash burn rates and unit economics, which were always important elements of valuation, have become front and centre again, after a prolonged period of time that saw some investors take their eyes off the ball as they frenetically looked for ventures to invest in. This long bull run for startups also encouraged many executives to throw their hats into the ring; they relied on their personal expertise and experience to attract investors.

There are also external factors whose unfortunate confluence in the last couple of months has contributed to this situation and exacerbated the stressors. The Ukraine invasion has undoubtedly impacted energy prices; the lockdown of large Chinese cities including Shanghai and Beijing has further disrupted global supply chains that were already affected due to the pandemic. These have thrown unit economics out of gear. Inflation rates around the world have soared- in some countries, the prevailing inflation is at the highest level in over a decade or even longer. In response, central banks around the world have raised interest rates; in India too, the RBI raised interest rates more than anticipated and ahead of when such action was expected. Further increases in interest rates are expected, as central banks seek to suck out the money supply to cool inflation. This means that in the short term, growth expectations will need to be moderated. This affects valuations (something that is also visible in how stock prices of listed companies are fluctuating).

Investors and company managements are therefore looking for ways to cut costs. Rationalizing the workforce is one way to achieve this goal. During a euphoric phase, businesses tend to hire more than they need, often at higher compensation levels than are sustainable. Many companies that have laid off their people continue to advertise extensively on national television. Logically, cutting down on TVCs and using lower-cost digital marketing will be another cost-cutting lever. As the market tightens, business plans will need to be revised. Growth will moderate, and high valuations will get harder to defend. The lack of clarity surrounding when various events will be resolved adds to the uncertainty around when an economic rebound will occur and what the new operating environment will look like. Indeed, Y Combinator, the highly successful Silicon Valley accelerator has advised founders of the companies in its portfolio to “plan for the worst” and focus all efforts in the next month on extending their runway. They are advising ventures to ensure survival even if fresh funds cannot be raised for 24 months.

Sometimes, there are contractual constraints on implementing cost-cutting actions. While some of these clauses may be legitimate and the result of deliberate negotiations between the parties, I have also seen “cut-paste” clauses in contracts; these are taken directly from other contracts downloaded from the internet or obtained in other ways. Many entrepreneurs succumb to taking this shortcut because it saves them the lawyer’s fees for drafting customized contracts. While some money can be saved, doing so creates risk because the business context in which a contract is drafted varies- and blindly lifting clauses can render the entire contract meaningless, hard to implement or leave entities open to expensive litigation.

Founders and leadership teams need to make better-informed decisions around every facet of their business strategy and operations. This includes the kind of capital to be raised, the timing, quantum and terms. Depending on the nature of business, expensive office space may not be needed; the savings on rentals/lease payments can be deployed elsewhere. Hiring frenzies must be avoided just because someone good is available. If the candidate is indeed likely to add value to the venture, maybe the compensation can be structured differently, so that risk of losing a good resource is reduced. Lawyers and Business Advisors who understand business- especially in the world of startups- can guide entrepreneurs so that they don’t pay a high price later, since a stitch in time saves nine!

Image Credits: Photo by aymane jdidi from Pixabay 

Founders and leadership teams need to make better-informed decisions around every facet of their business strategy and operations. This includes the kind of capital to be raised, the timing, quantum and terms. Depending on the nature of business, expensive office space may not be needed; the savings on rentals/lease payments can be deployed elsewhere. Hiring frenzies must be avoided just because someone good is available. If the candidate is indeed likely to add value to the venture, maybe the compensation can be structured differently, so that risk of losing a good resource is reduced. 

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Education in India: Time to Connect the Dots and Look at the Big Picture

In the last few days, I read news reports that are seemingly unrelated on the surface. However, I think there exists a deeper connection for those willing to think outside the box. I thought I would use this article to articulate my thoughts on the connections and their possible implications for India. 

India’s New Education Policy expected to gain traction

The first item was about various initiatives announced by the Union government on the first anniversary of India’s National Education Policy (NEP). While internationalization, multiple entry/exit options, and digital education will be key pillars, one other important component is to enable students to pursue first-year Engineering courses in Indian languages.

In the context of the broad-brush changes envisioned to India’s education system, it is time to rethink the role of the UGC as a body that enables the nation’s higher education system in ways beyond disbursing funds to be recognized universities. There also ought to be more harmony between the various Boards that govern school education. The roles of bodies responsible for governing professional education in India- e.g., AICTE, NMC (which replaced the MCI), ICAI, ICSI, ICWAI, Bar Council of India etc. should also be redefined to ensure that India’s professionals remain in tune with the needs of a fast-changing world.

English will play an important role in our continued growth

The second report that caught my attention was on two main points made by Mr. Narayana Murthy (the Founder of Infosys), in a recent media interaction. He stated that it is high time that English be formally acknowledged and designated as India’s official link language, and greater emphasis is given to its teaching and learning in Indian schools. He said that his opinion is based on his first-hand knowledge of many technically qualified students in Bangalore/Karnataka who lose out in the job market largely because they lack a certain expected level of proficiency in English.

In the same interview, Mr. Murthy went on to say that on a priority basis, India needs overseas universities and vocational educational institutions to set up facilities in India to train students and teachers in key areas like nursing. This too makes sense because our healthcare infrastructure needs massive upgrades- and human resources will be critical.

China’s tightening regulations threaten its US$100 Billion EdTechc industry

The third report was on China’s recent decision to tightly regulate its online tutoring companies. The new rules bar online tutoring ventures from going public or raising foreign capital. There are also restrictions on the number of hours for which tutors can teach during weekends and vacations. In fact, the rules go so far as to make online tutorial businesses “not for profit”.

Different views have been expressed on why Chinese authorities have taken this step. Some see it as a means to reduce the cost of children’s education- and thus encourage couples to have more children. They point to this as a logical enabler of the recent relaxations in China’s two-child policy. Others view it as a step designed to clip the wings of Chinese tech companies that are deeply entrenched in many consumer segments, and have, over the past decade, acquired significant financial muscle.

To put into perspective the size of Chinese EdTech companies, consider this data point: Byju’s, arguably India’s largest EdTech company, was valued at over US$16.5 Billion as of mid-June 2021. Despite this high valuation, Byju’s would have been smaller than the top 5 Chinese EdTech players (on the basis of valuations that existed before the recent draconian rules came into effect).

Implications for India

The majority of China’s EdTech ventures are financed through significant venture capital investments from the west. Analysts expect that China’s sudden actions will, at least in the short run, divert capital to other locations. India could be a potential beneficiary because it already fosters a large EdTech ecosystem.

Given our demographics, we have a significant domestic market for education across all levels- primary, secondary, and college. Since digital education will likely become the norm, this space is ripe for newfangled innovations in the days ahead. If online education can bridge the gaps that employers currently perceive in our fresh graduates, unemployability rates shall notably decline. . This will not only contribute directly to our GDP but also indirectly stimulate innovation and entrepreneurship.

India has a large technical skill base. Some of these resources can easily be harnessed to develop next-gen education solutions using cutting-edge technologies such as AI, ML, Language Processing, Augmented Reality, etc. To begin with, Indian start-ups can build, test, and scale EdTech platforms and solutions for our domestic market. Over time, these can be refined and repurposed for global markets. Similarly, features built for the global market can be adapted to Indian markets, thus creating a virtual cycle. Such a trend will not only proffer legs to implementing India’s NEP but will also enable us as a society to improve access to education to underprivileged sections of the society. This is critical to sustaining our growth on the path of socio-economic development.

By taking the right decisions now, we can attract capital, talent, and world-famous institutional brands to this critical sector. EdTech in India has the potential to become a powerful engine of growth for our services sector. Done right, I have no doubt that in a few years, India can become a “Vishwaguru” not just in the spiritual sense, but also literally.

PS: As with many other sectors in India, the legal framework that governs education too needs to be made more contemporary and relevant, but that’s for another time.

Image Credits: Photo by Nikhita S on Unsplash

By taking the right decisions now, we can attract capital, talent and world-famous institutional brands to this critical sector. EdTech in India has the potential to become a powerful engine of growth for our services sector. Done right, I have no doubt that in a few years, India can become a “Vishwaguru” not just in the spiritual sense, but also literally.

 

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Sports and Business: Long Term Thinking is Vital for Success in Both

India’s sportspersons have returned to India after a fantastic performance at the Tokyo Olympic Games. Neeraj Chopra’s javelin throw gave India its first ever gold medal in athletics (and second in an individual event). Weightlifter Mirabai Chanu and wrestler Ravi Dahiya won us two silver medals, while boxer Lovlina Borgohain, badminton player P V Sindhu, wrestler Bajrang Punia and the men’s hockey team won bronze medals. Our overall tally of 7 medals is the highest at any Olympics. Overall, a very creditable performance the nation should be proud of.

As a proud Indian, I too am hopeful that the exposure and “big stage” experience gained by our sportspersons in Tokyo, combined with better training, practice infrastructure and facilities will help India better its 2021 performance. However, I worry about the flurry of speculative discussions in the media about how many medals India will win at the 2024 Paris Olympic Games.

The media is full of expert analysis and recommendations on what the government and sports federations need to do to ensure a higher medal tally in 2024. Sportsperson I am not; nor am I a seer. Therefore, I do not know what individuals and teams need to sustainably enhance their performance and win medals for India in the future. But I do know that ad hoc actions will not suffice.

A structured, long-term approach is essential for sustaining success in sports and business

I see a clear parallel between the world of sports and the corporate world, with which I am more familiar. No matter how talented and skilled an individual athlete or player is, skills alone are not enough to win him/her a medal. They need the right coaching, top quality training facilities, regular opportunities to compete with the world’s best, the right nutrition, inputs on biomechanics, mental conditioning etc. Having all this also does not guarantee a medal-winning performance, because, on the day, anything can happen.

Similarly, individual brilliance or an innovative new idea or product alone will not guarantee success in business. India needs to strengthen its ecosystem for business, with a particular emphasis on startups and young ventures. Coaching and mentoring to give better shape to business ideas, access to risk capital, support during the early stages of the business, tax breaks, the right kinds of sector-specific laws and regulations that will help businesses become viable sooner are all elements of what our business ecosystem requires.

Just as world-class sports infrastructure cannot come up in every state or city in the next year or two, incubators cannot come up everywhere. Junior talent identification and nurturing programs too can take 8-10 years to produce top-class sportspeople who are ready to compete on the global stage. Even if physical infrastructure comes up, finding equally qualified coaches for all locations will not be easy.

Although we know that Artificial Intelligence, Cybersecurity, Clean Energy, Electric Vehicles etc. are all critical emerging areas, it is naïve to expect that overnight India will become a leader in these sectors. The same is true of our performance in sports as well. Countries prioritize participation in those sporting events that afford them their best chances of winning medals; India is no exception. This same thinking needs to be applied to business as well. The first step is to mindfully identify sectors that are critical to our future- for example, clean energy, healthcare, space, drones, defence equipment (aircraft carriers, submarines, 6th generation fighter aircraft, anti-missile systems), electronic chips etc.

Then, just as countries identify individuals with promise in the “priority sports”, the government of India (and the private sector) must identify/agree on ventures with the potential to become world-class and nurture them. Within the national business ecosystem, smaller regional ecosystems need to be created across the country, based on resource availability and other strategic considerations. Individual states must compete with each other to build such ecosystems and attract the best entrepreneurial talent. Doing all this will definitely give India a stronger and more vibrant domestic industry, besides acting as prime movers for overall socio-economic development, employment generation and GDP growth.

Spotting and nurturing young talent in various sports must be part of our education system

Also, our education system has focused on academics, with sports and other activities labeled as “extra-curricular”. This needs to change in two ways. First, right from the primary school level, children must be encouraged to participate in different sporting activities. Trained teachers and specialist staff must spot talent and at the right ages, enable specialized training. This obviously must be done with the parents’ active cooperation. Second, for super talented children who wish to pursue sports as a possible career option, specialized institutions must be set up (either by state/central governments or in PPP mode). Children in these institutions must be given extra coaching and training, while also being allowed to pursue a basic level of academics that will help them once their sporting careers end. Seasoned athletes must be invited to train at these facilities so that young aspirants can learn and benchmark against the country’s best. The National Education Policy 2020 seeks to make sports and physical fitness more central to school education, but the proof of the pudding lies in the eating. Only time will tell how seriously this is taken in a country that values grades and marks over excellence in a chosen field.

Concerted action is essential not just for a US$5 Trillion economy but also a richer medal haul in the future

Winning in sports is not easy- and neither is succeeding in business. If we are not quick to act, flight of entrepreneurial talent to other countries is a distinct possibility, and in time, our businesses (and athletes) may end up competing with rivals who also had their origins in India- and could perhaps have been part of our sports contingents and GDP. What is worse, we may be ranked as poorly on innovation in critical areas as we have been in world sports.

Image Credits: https://www.pexels.com/photo/city-dawn-dusk-night-236937/

Just as countries identify individuals with promise in the “priority sports”, the government of India (and the private sector) must identify/agree on ventures with the potential to become world-class and nurture them. 

 

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India Needs New Regulations - But Simplification of Compliance is Just as Critical

In earlier posts, I have touched upon the need for Indian laws to be updated to better reflect the current environment and foreseeable changes to it brought about by various forces, primarily technology-led innovation. This is not just because of the need to plug legal loopholes that are exploited to the nation’s detriment but also with the objectives of streamlining compliance and better enforcement.

 

Recently, the union government did exactly this when it announced a new set of rules to govern the operations of drones in India. A new draft of the Drone Rules, 2021, now out for public consultation, will, when approved and notified, replace the UAS Rules, 2021, which were announced in March 2021. The fact that the government has come out with a new set of rules within 4 months of issuing the earlier version is a welcome sign of change, as it signals recognition of a rapidly-changing environment as well as the importance of timely and appropriate responses.

Changes are aimed at simplification and less regulatory control

The new rules are remarkable for other reasons as well. At about 15 pages in length, the new rules are only a tenth of the earlier rules. The changes are not limited to the form; there are substantive changes too. The new rules seek to do away with a large number of approvals (e.g., Unique Authorization Number, Unique Prototype Identification Number etc.).  Licensing for micro drones for non-commercial use has been done away with. Recognizing the immense potential for drones to revolutionize our society and economy, the government proposes to develop “drone corridors” for cargo delivery. Prior authorization of drone-related R&D organizations is being removed. A drone promotion council is to be set up, in order to create a business-friendly regulatory regime that spurs innovation and use of drones. All this augurs well for the development of a robust drone ecosystem in India.

Implementing the “spirit” of underlying regulations is vital

The change to the drone rules is a welcome step- just as the consolidation of 29 of the country’s labour laws into four Codes during 2019 and 2020 was. But rationalization becomes futile if there is no element of reform- e.g., doing away with requirements that have outlived their utility or need significant changes to remain relevant in the current environment? There were many expectations around the Labour Codes, but in the months that followed, it is fair to say that there was also much disillusionment amongst industry stakeholders because sticky issues, such as the distinction between “employees” and “workers”, payment of overtime, role of facilitator-cum-inspector etc., remained.

Simplifying compliance is necessary to improve “ease of doing business” further

The World Bank’s 2020 “ease of doing business” report ranks India 63rd; we were ranked 130 in 2016. The 2020 report considered three areas: business regulatory reforms (starting a business, paying taxes, resolving insolvency etc.); contracting with the government, and employing workers. 

But there are miles to go before we sleep. To ensure that India’s entrepreneurial energies and creative intelligence are directed to areas that will be critical in the years to come- e.g., space, AI, robotics, electric vehicles, clean energy etc. all need new regulations or revamp of existing legislations and rules. But this alone will not suffice. Implementing the spirit, and not just the letter of the law and rules and the simplification of regulatory compliance are important angles that government must pay attention to. These are going to be key determinants in improving our “ease of doing business”.

 

Technology is a necessary enabler but it is not sufficient

All regulatory filings- whether for approvals or compliance- should ideally be enabled in digital format. Digital dashboards in the government and other regulatory bodies should facilitate real-time monitoring. Only exceptions or violations should need further actions. To be sure, the government has initiated some steps in this direction- e,g., “faceless” interactions between business and the Income Tax authorities with the intention to reduce human interventions and thus, the possibility of corruption. But if the underlying income tax portal itself is not working properly, as was widely reported soon after it was launched, the desired outcomes will not be achieved.

Moreover, it is not just about having the right technology platforms in place. It is equally critical to bring about a mindset change in the administrative machinery that helps political leadership formulate policy and thereafter, enable implementation and performance monitoring.

Given India’s large domestic market and attractiveness as a base for exports, we as a nation stand on the threshold of a phase of significant economic growth. Many Indian entrepreneurs are establishing businesses overseas; this means that the benefits of jobs, tax revenues and IPR creation all move to other jurisdictions. The longer anachronistic and irrelevant laws remain on our books, and the harder regulatory compliance remains, the more we stand to lose. In a world where global investment flows, trade and supply chains are facing significant change under the influence of numerous forces, it would truly be unfortunate if India loses out largely because of continued difficulties in regulatory compliance.

Image Credits: Photo by Medienstürmer on Unsplash

The longer anachronistic and irrelevant laws remain on our books, and the harder regulatory compliance remains, the more we stand to lose. In a world where global investment flows, trade and supply chains are facing significant change under the influence of numerous forces, it would truly be unfortunate if India loses out largely because of continued difficulties in regulatory compliance.

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