In order to provide its growing startup industry a better ecosystem for working, the ministry of corporate affairs (MCA) recently notified a number of operational and compliance relaxations that put a smile on the face of many. Among them, the one relaxation that would make a real difference to startups is the ability to raise deposits from members, with exemption from procedural compliance for an extended period of half a decade.

Two years ago in June, the MCA had announced that it will allow all private companies in the country (which also included Indian startups) to obtain deposits from their shareholders to the extent of 100 per cent of their paid-up share capital and free reserves. It was also announced that such companies will be free from any procedural requirements such as creation of a deposit repayment reserve or issue of an offer circular. In the latest relaxations announced in a notification dated 13th June, MCA has now specifically included startups for exemption from such procedural requirements for an extended period of five years from the date that they were incorporated. Considering the fact that it in the initial years, debt financing is something which is difficult to get ones hands on, especially in the case of startups since most of them have a low collateral to offer. The new relaxations which provide procedural relaxation and allows shareholders to lend will prove to be extremely helpful to startups in the country.

Some of the other compliance relaxations announced by the MCA include exemption from preparing and including cash flow statements with annual accounts. The relaxation further makes way for the director of a startup to sign annual returns that need to be filed with the registrar of companies, in the absence of a company secretary. While relieving startups from the additional duty of preparing their cash flow statements, might be perceived by some as a step towards non-transparency. But, nothing prohibits potential investors to request that these statements be prepared for them before they invest their capital in the startup.

While companies in the country are required to organise and hold a board meeting every quarter of the year under the Companies Act, the startups in the country are given a relaxation of holding the meeting once in every six months. The only requirement is that the there should be a gap of at least three months or 90 days between two board meetings. In addition to this, there should be at least two members of the board present in the meeting for it to be considered as a board meeting. According to the MCA notification, from now, the quorum can also count interested directors provided they disclose their interest in the proposed transaction. According to experts, this was a much needed thing considering the fact that most of the startups have a small size board of directors, which could even be two in some cases.

For MCA, a startup is an entity recognised as such by the DIPP's notification. That means, it can be a private company, firm or LLP, which has not completed seven years from incorporation (10 for the biotech sector), is innovative or has a scaleable business model. Further, its turnover for any of the financial years since the day it was incorporated shouldn't have crossed the Rs 25 crore mark.

MCA has also taken into account the high number of startups bowing out from the startup ecosystem every year and notified sections 55 to 58 of the Insolvency and Bankruptcy Code, 2016, pertaining to the fast-track process of liquidation would now also be applicable for startups. This way, the entire tedious process from initiation of the insolvency resolution till approval of the resolution plan by the adjudicating authority shall be completed in just 90 days as against the regular 180 days norm.

According to experts, this particular move by the MCA would really help in shortening the time period for startups that have no defaults. In fact, the notification gives some kind of an incentive to startups to try to maintain a clean slate with their stakeholders so if ever they go bust, they can take advantage of the scheme.

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