KEY COMPLIANCES FOR

STARTUPS IN INDIA

Rajat Malhotra
Legal Risk, Ethics and
Compliance Consultant

Compliances are legal obligations that any

company or a startup must meet to operate in the
country. Through this article we will look at some
of the key compliances Indian startups must keep
in mind!
 Background of Indian Startup

As per the Ministry of Commerce and Industry, India has the 3rd
largest startup ecosystem in the world; expected to witness Year
over Year growth of consistent annual growth of 12-15%

India has about 50,000 startups in India in 2018; around 8,900 –

9,300 of these are technology-led startups 1300 new tech startups
were born in 2019 alone implying there are 2-3 tech startups born
every day.

Since the launch of the Make in India Scheme, ease of doing

business has been on the government's mind, and there are certain
legal requirements every startup in the country must comply with.

These compliances play an essential role to function legally, and

startups need to beware of such legal requirements to be compliant
with the laws.

Importance of Business Compliance and

Implications of Non-compliance

In layman's language, Business compliance means the company

adhering to the legal requirements (such as record keeping,
reporting, and registration) of all the applicable laws.

The implication of non-compliance with the laws can be extreme.

Therefore it is advisable to be compliant with the requirement to

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avoid criminal charges such as penalties, closure of business, or even
the possibility of imprisonment for the persons responsible for
business activities (such as Directors, occupiers, entrepreneurs, etc.).

Besides getting into trouble with criminal charges, facing non-

compliance can also damage the company's public image and
reputation. It can also lead your core customer base to start
believing your product and startup as being deceptive and
fraudulent. An example of loss of reputation is Maggie (a product
of Nestle) when it was found in non-compliance with FSSAI laws in
2015.

Complying with requirements such as timely payment of wages,

minimum wages, maternity leave, com off, etc., also impacts the
employees' satisfaction and well-being, thus improving the
company's overall productivity and growth.

Key Compliances in India

Laws can be divided into different categories such as corporate and

secretarial, taxation, labour, EHS, and sector-specific. In this article,
we will take look over some of the key compliances that startups in
India need to adhere with across different categories of laws.

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 Obtain Sector Specific Licenses
If you have established a business in such a sector that requires a
license or registration to operate the business then you will need to
identify the applicable laws on such business activities and obtain
the required licenses. For example, to operate a telecommunication
business you must obtain licenses as stipulated under the
telecommunication laws, or for running a food business you must
obtain a license from the FSSAI, or if it is a general business may be
registration under The Shops and Establishment Act of the state is
sufficient. Operating without obtaining the relevant license can
attract heavy penalties, sanctions, and criminal charges.

Identify the Structure of the Company

There are various structures you can choose to register as such as a

partnership firm or a company. Depending on the structure you wish
for your startup, different rules and regulations will be applicable.

Following are the different types of businesses you can establish.

the corresponding set of rules you need to follow:
One Person Company - Governed by the Companies Act, 2013.
Private Limited Company or a Public Limited Company -
Governed by the Companies Act, 2013.
Partnership Firm - Governed by the Partnership Act, 1932.
Limited Liability Partnership - Governed by the Limited
Liability Partnership Act, 2008.

There are some other types of structures that are not very common in
India.

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 Register your Startup with the Authority

Once you have decided on the type of business structure you wish to
establish, then you will need to register yourself as a legitimate
business. Registration of business with the authority can be a tedious
task and may require professional assistance to ease the process.

Corporate and Secretarial Compliances

If you registered the business as a company so basis on the structure

and applicable laws you must follow compliances such as meetings
with board members, filling out important forms to the authority,
displaying auditing information on the website, and creating reports.
Let's discuss the key compliances under corporate secretarial:

(i) Annual General Meeting (AGM)

The company must conduct Its first AGM within 9 months from the
closing of the first financial year and thereafter once a year, within 6
months of the financial year’s closing. The gap between two AGMs
shall not exceed 15 months.

(ii) Board meetings

The first board meeting must be conducted within 30 days of the
establishment of the company. Thereafter, the company must
conduct 4 board meetings every financial year and there should
not be a gap of more than 120 days between the board meetings.

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(iii) Appointment of Auditor and Filing of Form ADT-1
The company must appoint its first statutory auditor within 30 days
of the incorporation of a company in the first board meeting.

The statutory auditors would be established in an AGM and could be

appointed for up to a maximum of 5 years upon approval `by
stakeholders in every AGM. The company shall file the appointment
of auditor in Form ADT-1 for a 5-year appointment.

(iv) Directors’ Report

The company must prepare a board report containing the details of
net profit, dividend declaration, and CSR activities for the financial
year.

(v) Other Mandatory Forms and Filing Requirements

INC-20A (Declaration for commencement of business)

AOC-4 (Financial statements)
MGT 14 (Filing of resolution with MCA)
DIR-12 (Appointment/Resignation of Directors)
DIR – 3 KYC (Director KYC submission)
MGT-7A (Annual Returns for Small Company/OPC)
DPT-3 (Return of Deposits)
MGT 14 (Filing of resolution with MCA)

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(vi) Maintenance of Statutory Registers and Books of Accounts
The Companies Act provides various record-keeping requirements
and the companies must prepare and keep them up to date at all
times. Following are a few mandatory registers required to be
maintained by the companies:

Register of Members
Register of the Company
Register of Directors and KMPs
Register of Charges
Register of Related Party Transactions

(vii) Circulation of Financial Statements with the Stakeholders

The Financial Statement must be circulated along with the Director's
report and Auditor's report at least 21 days before the AGM. It is to
inform the stakeholders about the company's financial situation.

Taxation Compliances
The company must adhere to the following tax-related compliances:
Payment of periodic dues (GST Liability, TCS, TDS payment,
Advance tax, and PTax)
Filing of periodic returns
Monthly/Quarterly/Annual GST Returns
Quarterly TDS Returns
Assessment of advance tax liability
Filing of Income Tax Returns
Filing of Tax Audit Report

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 Filing of Tax Audit Report
Filing of PF returns
Filing of Profession tax (PTax) returns

The Government of India has provided tax benefits for Indian

startups, such as:

Capital Gain Tax

The majority of companies raise capital through sharing stocks and
the profits earned, known as capital gains and these gains are
taxed. However, startups get an exemption of 20% of their capital
gains resulting in them having to pay less tax on profits earned
through the sales of stocks, bonds, and shares.

Angel Investment Tax

The amendment of Section 56(2) (vii) (b) of the Income Tax Act has
also given entrepreneurs the right to issue shares at a higher rate
than the value noted in the books, helping them raise funds with
more ease.

Intellectual Property Rights (IPR) Compliances

Innovation and creativity play a significant role in the success of a

startup. Most startups come with a new solution to a problem that
requires the protection of their Intellectual Property Rights for
growth.

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The company can take below mentioned actions to protect these
assets, such as:
Non-disclosure agreements
Copyrights
Trademarks
Patents, etc

Indian Government has provided a tool (Start-ups Intellectual

Property Protection (SIPP)), which facilitates the registration process
of Intellectual property through registered facilitators in IP offices by
only paying the statutory fees.

Labour-laws Compliances

Labour laws are wide and can be tricky to comply with therefore it is
advisable to take the assistance of a professional.

These are meant to protect employees and workers against the

abuse of their employers, with compliances under regulations such
as the Shops and Establishment Act, Factories Act, Minimum Wage,
Maternity Leave, or Protection Against Sexual Harassment in the
Workplace, Contract Labour (Regulation and Abolition) Act, etc.

Some important laws that must be followed are:

The Employee’s State Insurance Act, 1948
Employee Provident Fund Scheme, 1952
Maternity Benefit Act, 1961
The Sexual Harassment of Women at Workplace (Prevention,
Prohibition, and Redressal) Act, 2013

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 Payment of Wages 1936
Minimum Wages Act, 1948
Contract Labour (Regulation & Abolition) Act, 1970
Interstate Migrant Workmen Act, 1979

Environmental Health and Safety

Compliances

Depending upon the structure of the company (manufacturing or an

office setup) it must adhere to the record-keeping, reporting, and
authorization requirements under the following laws:

Environment Protection Act

Air Pollution Act
Water Pollution Act
E-waste Management Rules
Bio-medical Waste Management Rules
Hazardous Waste Management Rules
Batteries Waste Management Rules

Event-Based Compliances
Event-Based Compliances are usually requirements that happen as
a result of a specific change, such as:
Change of business structure
Change in location of the business
Change of director
Change the quantity of air or water emission
Installation of a new machine that requires registration like
Boilers, etc.

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 Conclusion
In conclusion, to comply with laws and regulations you must identify
the laws applicable to the business and obtain the required license,
and registration, maintain records and report to the authority as
required under the laws.

Often entrepreneurs get overwhelmed by the number of

compliances applicable to the business and in absence of
professional guidance end up paying interest and heavy penalties.

I hope this article has cleared many doubts, although I advise you to
look for professional legal help to assist you in this process and
avoid mistakes.

Rajat Malhotra
Legal Risk, Ethics and
Compliance Consultant

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