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Govt adds additional rider to qualify as a ‘startup’

23 February, 2016

The government has added an additional condition for ventures to be eligible for being covered as a ‘startup’ under its Startup India initiative, while sticking to the basic age criteria of five years and turnover being under Rs 25 crore.

Department of Industrial Policy & Promotion (DIPP), which is a part of the commerce ministry and has just notified how a startup is defined, has retained almost all of the points it had previously disclosed as part of the Startup India initiative (click here for more on that).

In particular, it had said last month that a startup shall be eligible for tax benefits only after it has obtained certification from an inter-ministerial board created for such a purpose. This body would have representatives of DIPP besides departments of biotechnology and science & technology.

Venture funded applicants need to have diluted at least 20 per cent stake to their investors if they are not simultaneously holding a patent or carry a recommendation from government recognised incubators

The government had also put a lot of weight on incubators that, in effect, becomes the first filter for chaffing out ineligible ventures. But the incubators that are associated with a post-graduate college in India and are funded or recognised by a government agency would be the first recommendation port-of-call.

Alternatively, such startups would need to be already funded by a SEBI-registered investor or carrying a patent application in India or already carrying a sanctioned funding by a government agency.

In the notification dated February 17, DIPP has added additional conditions while specifically naming the set of investors under this provision.

It has said that such startups that are not carrying a separate recommendation of a government recognised/funded incubator or have a patent would need to have diluted at least 20 per cent stake to such investor(s) and also stated that these investors can be incubation fund, angel fund or networks, private equity fund or an accelerator. Interestingly, it has not named venture funds in particular, who are the more common investors in startups.

Moreover, while it has named incubation funds too as an investor class under this provision, the threshold of over 20 per cent equity dilution could filter out many, as several early-stage investors pick small stake, especially at incubation/accelerator and angel funding stage.

The government had said last month that it would come out with a negative list of funds that won’t be eligible under this scheme. It has not specified categorically in its notification even as this is likely to exclude hedge funds, who form Category III under SEBI’s Alternative Investment Fund norms.


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Govt adds additional rider to qualify as a ‘startup’

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