Incorporation

For the sake of simplicity, this article divides Indian startups into two broad categories – those engaged in manufacturing activities and those engaged in providing services (including software/technology-driven products and services). Applicable compliances for these two categories can be then divided into two further categories – statutory compliances and non-statutory compliances.

Statutory compliances are those that emanate out of a specific enactment or rules framed thereunder—for example, the requirement to obtain registration certificates for opening shops or offices, arising out of the Shops and Establishments Acts of different states. Non-statutory compliances are not directly related to any specific legislation, but arise as a consequence of adhering to such legislations. But more on that later.

Once you have clarity on the business model/idea, the very first requirement should be that of choosing the type of corporate entity under which you want to establish your venture. You have the options to choose from – a company, typically a private limited company (governed by Companies Act) and a limited liability partnership (governed by the Limited Liability Partnership Act). Most startups choose the former, since private limited companies by virtue of their inherent legal nature, provide better security for both promoters as well as investors who are funding the venture.

Once you have decided upon establishing a private limited company as your vehicle of choice, you must have it registered with and incorporated at the Registrar of Companies (RoC). That entails that you along with your co-founders/co-promoters subscribe to a Memorandum of Association (MoA) and drafting Articles of Association (AoA).

You will also need to provide several documents and fill all the appropriate forms and affidavits. An important compliance to be noted here is that while registering the name of the company, the words “Private Limited” must be present.

 

Choosing a unique name for your company

Since we are on the topic of names, let’s look at your first non-statutory compliance. You want to register a company name. It has to be unique, yet relatable. How else are you going to create a niche space in the market for yourself? So, your first task is to do a name search with the RoC to check whether someone else has already registered the name, which you wish to put on record for your company. This is a non-statutory compliance – in that, it arises as a consequence of you adhering to the statute (in this case, the Companies Act).

 

Setting Up and Running Your Manufacturing Unit

So you’re done with incorporating the company; you’re now in business. Welcome to the world of compliances. If you’re in the manufacturing sector, your first instinct will be to set up a manufacturing unit – a factory. You’ll have to buy land for the factory. During and post purchase of that land, you need to apply for clearances and NOCs (No Objection Certificates) from the local and municipal authorities under the Panchayati Raj Act or the Municipal Act of the state where you wish to set up your operating unit.

Now that you own the land and have your clearances, you will want to start construction of your factory. You will be faced with compliances under the Factories Act. Depending on the state in which your factory is located, you will need to apply with the Chief Inspector of Factories and Boilers for a ‘stability certificate’. This document certifies that the design of your factory is safe for workers and the surrounding areas and that production can begin once construction according to this design is completed. The Factories Act is both an enabling as well as welfare legislation. It facilitates construction of factories and ensures health and safety of workers.

For example, if you plan on building a factory in Maharashtra, you’ll require :

  • NOCs from the local Gram Panchayat (under the Panchayati Raj Act) or Municipality (under the Municipal Act)
  • Consent to Establish (CTE) and/or Consent to Operate (CTO) under the Water (Prevention and Control of Pollution) Act and the Air (Prevention and Control of Pollution) Act, from the State Pollution Control Board (SPCB). The SPCB permissions are critical to the operation of the factory, since funding is often tied to the viability of the project. The SPCB permissions ensure smooth development of the factory and thus facilitate the inflow of funds secured through loans or equity.
  • A trade license (Certificate of Enlistment) from your local Panchayat/Municipality, which allows you to run a business/trade in the area of your choice.

Once your factory is up and running you will be required to adhere to numerous compliances under the Factories Act – related to operations, and health and safety of your workers.

 

Office Space

You will also need office space – for a sales office, or a registered office. You might wish to open branch offices in other cities/towns – now you will be required to obtain registration under the Shops and Establishments Act of the State where your operating units are based. You will start recruiting employees for which you will now face additional compliances under labour laws such as Payment of Wages Act, Minimum Wages Act, Payment of Bonus Act, Employees State Insurance Act (if your employees earn below a certain threshold), Contract Labour (Regulation and Abolition) Act (in case you employ a certain number of contract labourers. These labour law compliance are often applicable across both the manufacturing as well as the services sectors.

 

Compliances in the IT/ITeS Sector

The Information Technology Act provides an overarching policy framework; along with its attendant Rules, the Act gives rise to a number of critical compliances. For example, the Sensitive Personal Data or Information Rules under the Act mandate that – all sensitive personal data that is collected from clients/customers may only be gathered after clear, written consent has been obtained. The Rules also state that companies, which gather such data, must publish a clearly drafted privacy policy on their websites – a fundamental compliance, which many companies have not even heard of. The Act and attendant Rules mandate that you obtain ISO/IS/IEC 27001 or equivalent certification, especially while providing cloud services.

Compliance requirements vary not just by the nature of your business but also by its scale and size; the geographical location and your corporate structure. This article gives an indicative list of things that a startup needs to consider at the time of setting up by taking two examples – a manufacturing company in Maharashtra and an IT/ITeS company in Karnataka. These are given in the next part of this article.

Corporate Compliances (Common to Maharashtra and Karnataka)

  1. Obtain digital signatures – Obtain digital signature from authorized DSC issuing authority (as listed in the MCA 21 portal) for at least one director to sign E-forms.
  2. Obtain Director Identification Number (DIN) – Every individual to be appointed as a Director of your Company must apply to the Ministry of Corporate Affairs (MCA) for DIN in Form DIR 3.
  3. Name availability of proposed company – Application for reservation/availability of name of the company must be made to the MCA in Form INC 1. (Note: Name will be valid only for a period of 60 days from date on which application for reservation is made)
  4. Preparation of memorandum of association (MoA) and Articles of Association (AoA) – Draft MoA and AoA for your company. The main objects of the MoA and the AoA must match the objects written down in Form INC 1.
  5. Application for incorporation of a private company – Apply to RoC, within whose jurisdiction your registered office is located. Application must be made in Form INC 7 along with Form INC 22 and Form DIR 12. Requisite documents must be appended to these forms.
  6. Requirement for Company Secretary (CS) – In case the paid up share capital of your company exceeds Rs. 5 crore, you are mandated to appoint a whole-time Company Secretary.

 

Labour Compliances

Manufacturing (Maharashtra)

  1. Payment of Gratuity Act, 1972
    • Submit notice of opening of factory in Form A to controlling authority.
  2. Employees’ Provident Fund Act, 1957
    • Register your establishment with the EPFO.
    • File monthly PF returns with the EPFO.
  3. Employees’ State Insurance Act, 1948
    • Obtain registration of your factory by applying in Form 01.
  4. Contract Labour (Regulation and Abolition) Act, 1970
    • Register as a principal employer by filing an application in Form I (upon employing 20 or more contract labourers).
  5. Industrial Disputes Act, 1947
    • Form one or more Grievance Redressal Committee (upon employing more than 20 workmen).
    • Form a Works Committee (upon employing more than 100 workmen).
  6. Motor Transport Workers Act, 1961
    • Obtain registration for your establishment (if you employ more than 5 motor transport workers (includes drivers, cleaner, transport cash clerk, watchman or attendant) at least 30 days prior to start of operations, by applying in Form I.
  7. Child Labour (Prohibition and Regulation) Act, 1986
    • Display a notice in Marathi and English specifically mentioning the prohibition of employment of child labour in your factory.

 

Labour compliances

IT/ITeS  (Karnataka)

  1. Payment of Gratuity Act, 1972
    1. Submit notice of opening of factory in Form A to controlling authority.
  2. Employees’ Provident Fund Act, 1957
    1. Register your establishment with the EPFO.
    2. File monthly PF returns with the EPFO.
  3. Employees’ State Insurance Act, 1948
    1. Obtain registration of your factory by applying in Form 01.
  4. Contract Labour (Regulation and Abolition) Act, 1970
    1. Register as a principal employer by filing an application in Form I (upon employing 20 or more contract labourers).
  5. Industrial Disputes Act, 1947
    1. Form one or more Grievance Redressal Committee (upon employing more than 20 workmen).
    2. Form a Works Committee (upon employing more than 100 workmen).
  6. Motor Transport Workers Act, 1961
    1. Obtain registration for your establishment (if you employ more than 5 motor transport workers) at least 30 days prior to start of operations, by applying in Form I.
  7. Child Labour (Prohibition and Regulation) Act, 1986
    1. Display a notice in Kannada and English specifically mentioning the prohibition of employment of child labour in your factory.
  8. Karnataka Shops and Commercial Establishments Act, 1961
    1. Apply for Registration of the Establishment within 30 days from commencement of your establishment in Form A.
    2. Apply to Labour Commissioner in Form R if you intend to employ women employees during night shift.
    3. In case you employ women employees during night, you must comply with best practices to ensure security of women employees as enumerated by the Govt. of Karnataka.

 

Environment Health and Safety Compliances

Manufacturing (Maharashtra)

  1. Environmental Impact Notification, 2006

Obtain prior clearance from Central Govt., before construction of your factory by applying in Form 1.
  1. Air (Prevention and Control of Pollution) Act, 1981
    1. Obtain consent to establish and operate from Maharashtra Pollution Control Board (PCB) by applying in Common Application Form.
  2. Water (Prevention and Control of Pollution) Act, 1974
    1. Obtain consent to establish and operate from Maharashtra Pollution Control Board (PCB) by applying in Form XIII/Form OG.
  3. Bio-Medical Waste (Management and Handling) Rules, 1998
    1. Obtain authorization from Maharashtra PCB for generating bio-medical wastes (from your first aid unit) by applying in Form I.
  4. Environment (Protection) Act,1986 (from DG Set perspective)
    1. Keep the emission and noise level of the generators within prescribed limits after installing DG sets.
  5. Hazardous Wastes (Management, Handling and Transboundary Movement) Rules, 2008
    1. Obtain authorization from Maharashtra PCB for disposal of hazardous wastes by applying in Form 1.
  6. Public Liability Insurance Act, 1991
    1. Obtain insurance policy against liability to provide compensation before handling any hazardous substances.
  7. Maharashtra Fire Prevention and Life Safety Measures Act, 2006
    1. Install fire prevention and life safety measures and get a compliance certificate in Form A from Licensing Agency.

IT/ITeS – Karnataka

  1. Environment (Protection) Act, 1986 (from DG Set perspective)
    1. Keep the emission and noise level of the generators within prescribed limits after installing DG sets.
  2. E-Waste (Management and Handling) Rules, 2011
    1. Obtain authorization from the Karnataka State Pollution Control Board prior to handling and generating e-waste.

 

Operations Module

Manufacturing (Maharashtra)

  1. Factories Act, 1948
    1. Obtain certificate of stability from a competent person in respect of every work of engineering construction for your factory in Maharashtra.
    2. Obtain prior written approval from the Chief Inspector of Factories for site and construction/extension of your factory in Maharashtra under the Factories Act, 1948 (apply in Form 1).
    3. Obtain registration and license for your factory in Maharashtra under the Factories Act, 1948 (apply in Form 2).
    4. Obtain prior written approval from the Local Authority to connect your factory drainage system to the public sewerage system.
    5. Obtain prior written approval from the Maharashtra Pollution Control Board (PCB) with respect to arrangements made for disposal of trade-waste and effluents.
  2. Indian Boilers Act, 1923
    1. File an application to the appropriate Inspecting Authority for the registration of boiler in the State of Maharashtra.
    2. Engage an Inspecting Authority for carrying out inspection at the stage of erection of boiler.
  3. Petroleum Act, 1934
    1. Obtain approval for all the following containers having below mentioned capacities from the Chief controller:

i. Containers > 1 ltr (for class A petroleum);

ii. Containers > 5 ltrs (for class B petroleum); and

iii. Containers > 5 ltrs (for class C petroleum).

IT/ITeS (Karnataka)

  1. Information Technology Act, 2000 read with Sensitive Personal Data or Information Rules
    1. Draft and implement a privacy policy for handling of or dealing in personal information (PI) including sensitive personal data or information (SDPI); make sure this policy is available on your website.

 

Fiscal Module

Manufacturing (Maharashtra)

  1. Income Tax Act, 1961
    1. Application for Permanent Account Number (PAN) in Form 49-A.
    2. Application for obtaining Tax deduction and collection account number in Form 49-B.
  2. Chapter V of the Finance Act, 1994
    1. Obtaining service tax registration by applying in Form ST-1.
  3. Maharashtra Value Added Tax Act, 2005
    1. Application for registration in Form 101.
  4. Maharashtra Tax on the Entry of Goods into Local Areas Act, 2002
    1. Application for registration in Form 1.
  5. Central Sales Tax (Bombay) Rules, 1957
    1. Application for registration certificate in Form A.
  6. Central Excise Act, 1944 read with Central Excise Rules, 2002
    1. Register at www.aces.gov.in. Post registration, fill Form A-1 in the “Reg” tab. Print the filled form and submit it. Take a printout of the filled form as well as the acknowledgement of submission. Submit the aforementioned printouts to the relevant Excise authorities with requisite documents.
    2. Authorizing Factory Head (who should be a Director of the Company) through Board Resolution.

IT/ITeS (Karnataka)

  1. Income Tax Act, 1961
    1. Application for Permanent Account Number (PAN) in Form 49-A.
    2. Application for obtaining Tax deduction and collection account number in Form 49-B.
  2. Chapter V of the Finance Act, 1994
    1. Obtaining service tax registration by applying in Form ST-1.
  3. Karnataka Value Added Tax Act, 2003
    1. Application for obtaining VAT registration in Form VAT-1.
  4. Central Sales Tax (Karnataka) Rules, 1957
    1. Application for registration certificate in Form A.

 

  1. Non-Statutory Compliances (applicable to Maharashtra and Karnataka)

It is often found that during day-to-day operations of the company, you require various documents as a matter of necessity. Therefore it is often prudent as well as expedient for you to have well-drafted copies of the documents listed below.

  1. Collaboration Related Agreements
    1. Memorandum of Understanding (MoU)
    2. Franchise Agreement
    3. Profit/Revenue Sharing Agreement
    4. Strategic Alliance Agreement
  2. Confidentiality Related Documents
    1. Non-Disclosure Agreements (NDA)
    2. Confidentiality Agreement
  3. Website Related Documents
    1. Terms of Service Agreement
    2. Privacy Policy (has been mentioned under IT Act, 2000)
    3. Additional Disclaimers
    4. Terms of Use
    5. Shrink Wrap/Boiler-Plate Agreements