Start-ups in A Muddle

How Simple Restructuring May Lead To Withdrawal Of Exemption

Written By ————

Karnik Gulati and Loveena Manaktala

Start-ups, nowadays, are preferring a dual-company structure that involve a holding company that owns 100% of the shares in a subsidiary operating company. An operating company is the entity that enters into contractual arrangements with clients, suppliers and employees.The holding company generally houses the start-up’s intellectual property (IP), common resources like management, employees, assets, etc.

Revised guidelines that were issued in June 2021 (‘revised guidelines’), that many are still unaware of, mainly discourage the dual-company structures and joint ventures. This article talks about the potential implications and grey areas that have come into picture pursuant to such revised guidelines.

As per the guidelines dated 19 February 2019 issued by Department for Promotion of Industry and Internal Trade (‘DPIIT’), an entity is considered as a ‘start-up’ if it fulfils the following conditions:

It is provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Start-up’. An entity shall cease to be a start-up on achieving either of the following:

Revised Guidelines For (De)Recognition Of Start-Up Dated 21 June 2021 (‘Revised Guidelines’)

The revised guidelines were discreetly uploaded on the Start Up India website without any notification or circular. Further to our surprise, no one is actually talking about these, even when the potential implications pursuant to these guidelines are going to cause trouble for many existing start-ups.

Revised guidelines discourage holding-subsidiary relationship and joint ventures (JVs). An extract from the revised guidelines relating to holding-subsidiary relation, JV entities incorporated outside Indian Territory is given below:

Impact Of Revised Guidelines

Things To Ponder Upon For Existing DPIIT-Recognised Start-Ups

Our Comments

Even though the derecognition condition of barring the holding-subsidiary structure or forming a JV is a bit too harsh, even if it were to stay as it is, it will be helpful to grandfather the startups recognised until the notification date to ensure that the existing startups do not face any unnecessary hurdles in expanding their business. Furthermore, to give effect to the derecognition, other relevant laws including companies law, foreign exchange regulations should also be synced in line with the revised guidelines.

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