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Legal Challenges Faced by Startups in India

6 min read
STARTUPS LEGAL PROBLEMS Law Insider

By Ayushi Budholia

Published on: 08 August 2022 at 21:38 IST

INTRODUCTION

A company or a project started by an entrepreneur which is at its initial stage with limited capital and experience is known as a startup.

Currently, the whole world is witnessing a rise in startups. They are of great importance as they make various contributions to the country’s economy. India is witnessing a boost in the number of startups. Till September 2018, a total of 1200 new tech startups were added which included eight unicorns. According to the Economic Survey 2021 – 2022, this number has increased to 14,000. The government launches several schemes and programs to promote the growth of startups. The Budget 2022-23 allocates Rs 283.5 crore for the Startup India Seed Fund Scheme.

Though these Startups are capable of attracting large investments, the majority of them face many problems during their operations. This article highlights the importance of startups, the legal challenges faced by them, and the schemes launched by the government to promote their growth.

BENEFITS OF STARTUPS

There are various benefits of promoting the growth of startups in the country. Some of those benefits are listed below :

  • Economic Growth

The promotion of startups in the country contributes to the economic growth of the country. Through these startups, it is possible to generate more revenue which will play a vital role in enhancing the economic growth of the country.

  • Source of FDI

In recent years, the startups in India have become a good source of Foreign Direct Investments (FDI). As investors establish new businesses in foreign countries, FDI creates new jobs opportunities. This can lead to an increase in income and purchasing power for locals, resulting in an overall boost for targeted economies.[1]

  • Technological Advancements

The Startups in India aim at innovations and providing products and services through new technologies. This not only helps in cost reduction but also creates efficiency.

  • Employment Generation

The Startups creates new companies which demands human resource. This helps in creating more job employment and thereby helps in reducing unemployment in the country.

ISSUES FACED BY STARTUPS

Startups are faced by the following legal issues

  • Issues with Licensing and Permits

To ensure the smooth functioning of their business, some licenses and permits must be obtained by the startups. The absence of such licenses and permits might result in the initiation of criminal proceedings against the business.

These requirements of license and permits differ with each business and according to the local laws in which such business is being operated. However, these licenses and permits are difficult to be obtained by the government and include a time-consuming process.

Registration certificates, GST registration, FSSAI license, import and export code, Udyog Aadhar registration, and other licenses are among the licenses required by businesses.[2] Certain goods and services such as alcohol, guns, drugs, electricity, and human organs require licenses and permits in their dealings. The absence of such licenses and permits may result in criminal charges against the businessman as well as the closing of the business.

  • Marketing and advertising

One of the most effective ways for businesses to increase their revenue and earn more profit is through marketing and advertising. But such advertisements must not include false claims and formation about their products and services.

Further, there are some categories of products the advertisements of which are banned. For example, The “Tobacco Prohibition Act” outlaws all tobacco and tobacco product advertising, whether direct or indirect, in all media.

The Food Safety and Standards Act of 2006 prohibits the advertising of infant formula in order to encourage breastfeeding of infants, physicians under the Indian Medical Council regulations of 2002, legal services under the Bar Council of India Rules, prenatal sex determination services under The Prenatal Diagnostic Techniques Act of 1994, alcohol or alcoholic beverages under the Cable Television Network Rules of 1994, and prenatal sex determination services under The Prenatal Diagnostic Techniques Act of 1994.[3]

  • Zonal Laws Concerning Infrastructure

Most businesses need allocation of land for the operation of their business. Such land is required for the purpose of constructing business offices, warehouses, service centers, etc. It is important for startups to be aware of the local laws before making any commercial use of the agricultural land or the property of schools and hospitals. Since land comes under the control of the State in India. The law regarding the allocation of land varies from state to state according to their own zonal laws.

  • Privacy and Data Protection Concerns

In the world of digitalization, all startups used to prefer a digital mode of operating their business. The problem which businesses face with digitalization is the storage and use of the personal information of the users. Such information is obtained by the business as soon as the user accesses it website or app. This results in the potential risk of violation of privacy of the users.

The businesses are required not to access any sensitive information of the users without their permission. Further, they should not seek rights that their website or application does not require. Most startups now enter into an agreement which is in the form of a privacy policy to which the user has to agree before accessing or signing in to any program.

  • Intellectual Property rights are protected

The issue with intellectual property rights is a two-faced problem. On one hand, many startups make their own innovation. They have a fear of their idea being stolen or copied by some other business. On the other hand, if the product or service that the startups are selling is already been protected then this could land the startups into the issues of intellectual property breaches. The intellectual properties which a startup needs to protect include trademarks, copyrights, patents, etc.

  • Tortious Liabilities in Contract Management

A startup in the operation of a business undergoes many contracts with its employees, suppliers, buyers, and co-founders. To avoid any future dispute, it is important for startups to formulate a well-written and accurate contract. However, if the startup fails to comply with the terms and conditions of the contract or does anything contrary to the contract, it will result in tortious liability on the part of the startup.

INITATIVES BY THE GOVERNMENT

In order to promote the growth of the startups in India, many schemes and programs were launched by the government. Some of those schemes are as follows:

  • Startup India initiative:

With the intent of cutting government regulations and red-tapism, a three-year tax and compliance is provided under this initiative.

  • MUDRA Yojana:

The Pradhan Mantri Mudra Yojana (PMMY) was launched in 2015 with the aim of granting loans to startups. The loan was provided of maximum 10 lakhs rupees.

  • SETU (Self Employment and Talent Utilization) Fund:

Government has allotted Rs 1,000 Cr in order to create opportunities for self-employment and new jobs mainly in technology-driven domains.[4]

  • E-Biz Portal:

In 2013, the ministry of Commerce and Industry launched e-biz portal.[5] It was India’s first government to business (G2B) portal that integrates 14 regulatory permissions and licenses at one source to enable faster clearances and improve the ease of doing business in India.

  • Royalty Tax:

Indian government has reduced the royalty tax paid by businesses and start-up firms from 25 per cent to 10 per cent.

  • Credit Guarantee Fund Trust:

The Government of India (GoI) has started a programme to provide collateral-free lending to the micro and small firm sector. Both current and new businesses are eligible for coverage under the scheme.

  • Fund of Funds for Start-ups (FFS):

Small Industries Development Bank of India (SIDBI) developed a 10,000 Rs corpus fund to support start-ups in accordance with the Start-up India action plan.

  • Self-certification compliance.

CONCLUSION

India is currently witnessing a wave of startups. The number of startups is increasing in the country. According to the Department for Promotion of Industry and Internal Trade, at present India have 61,400 recognized startups. The increased number of startups not only help in the economic growth of the country but also acts as a source of Foreign Direct Investment (FDI) and helps in creating more employment opportunities.

Though these startups provide various benefits to the country, they also face various legal challenges like Licensing, Advertising, Data Protection, Intellectual Property Rights, etc. The Government has started various initiatives to promote the growth of startups in the country. These reforms have improved India’s ranking in the Ease of Doing Business to 63rd which was 130 in 2016.

ABOUT THE AUTHOR

Ayushi Budholia is a third-year, B.A.LL.B Student of Lloyd Law College, Greater Noida.

REFERENCE:

  1. Benefits and Advantages of Foreign Direct Investments 
  2. Legal Issues Faced by Startups in India
  3. Legal Issues Faced by Startups in India 
  4. Startup: Unicorn Revolution in India
  5. E-Biz Mission Mode Project
  6. Challenges Faced by Start-up Ecosystem