The Ministry of Corporate Affairs (MCA) is reported to be considering easing certain capital raising regulations for companies registered as startups with the Department for Promotion of Industry and Internal Trade (DPIIT) (“Startups”) as per the notification dated February 19, 2019 (“Notification”). Do note that these are proposals which have not yet been notified.
Proposed changes
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Existing Provision |
Proposed Change(s) |
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Duration for Issue of Sweat Equity Shares As per Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014, Startups are allowed to issue up to 50% of their paid-up share capital in the form of sweat equity shares, up to 5 (Five) years from their date of incorporation. What are sweat equity shares? Sweat equity shares are issued by companies to their employees or directors as incentives for their services to the company. |
Startups will be allowed to issue up to 50% (Fifty per cent) of their paid-up share capital in the form of sweat equity shares to their directors or employees, up to 10 (Ten) years from their date of incorporation.
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Acceptance of deposits As per Rule 3 of the Companies (Acceptance of Deposits) Rules, 2014, a private company may accept from its members monies only upto a maximum of 100% of aggregate of the paid-up share capital, free reserves and securities premium account (“Restriction”). Exemption for Startups: Startups have been allowed an exemption from the Restriction for a period of 5 years from their date of incorporation. |
Startups will be allowed an exemption from the Restriction, for a period of 10 years from their date of incorporation. |
Quick View
The government has increasingly been on the lookout to promote its Startup India Scheme, which includes reducing the regulatory burden on startups with a view to provide them the operational and financial flexibility, along with a reduction in time and costs incurred in fulfilling statutory requirements. With this view in mind, the Government has introduced several initiatives, including the angel tax exemption available to Startups, to the creation of a dedicated income tax grievance cell with strict timelines by the Central Board of Direct Taxes (CBDT). The above changes appear to be in line with these intentions and will bring the corporate law provisions in line with the amended definition of “Startup” as recognized by the DPIIT in the Notification.
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Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.