The year of Economic and Regulatory Impetus for Start-Ups in India
The inception of this article cannot be more defining than quoting the Finance Minister of India, Smt. Nirmala Sitharaman in her Budget Speech of 2022;
“Start-Ups have emerged as the drivers of growth for our economy. Over the past few years, the country has seen a manifold increase in the number of successful start-ups.”
What we will cover in this article?
Having given the prologue to the article, we will focus on the burgeoning digital economy in India and more importantly the start-ups. The article will list down the key observations impacting Start-ups in India evidenced from the Economic Survey Report of 2021-2022 (2022 Report) released by the Ministry of Finance, the key reforms and findings in the Budget of 2022 that are beneficial for technology sector and more importantly for the start-ups. Furthermore, being cognizant of the fact that technology and data has been an enabler and equalizer for the growth of consumer internet start-ups, we will also delve into the present and upcoming regulatory knots that start-ups have to be cautious about while dealing with data.
Who is a Start-Up?
The Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry defines “startup” as an entity incorporated as a private limited company, registered partnership firm or as a Limited Liability Partnership in India with period of existence and operations not exceeding 10 years from the date of incorporation. The entity should have an annual turnover not exceeding INR 100Crore for any of the financial years since its incorporation and it should work towards development or improvement of a product, process or service and/or have scalable business model with high potential for creation of wealth & employment.
II. THE TIME IS RIPE FOR BEING A START-UP
As we complete the header above, “the time is ripe for being a start-up, cooed the Economic Survey Report and 2022 Budget”, the clarion call of the Prime Minister, ‘Make in India’ has echoed amongst the young business houses, the formidable start-ups of the country. The finance minister said in her Budget speech of 2022 that Make in India can create 6 million new jobs. In the ensuing part we unpack the key aspects of the 2022 Report along with the Budget.
A. The growth of startups in the country
As the 2022 report points, startups in India have grown remarkably over the last six years. The number of new recognised startups have increased to over 14,000 in 2021-22 from only 733 in 2016-17. More than 61,400 startups have been recognised in India as of January 10, 2022. As a result, India has become the third largest startup ecosystem in the world after the US and China which added 487 and 301 unicorns respectively in 2021. Further, a record 44 Indian startups have achieved Unicorn status in 2021 taking the overall tally of unicorns in India to 83, and most of these are in the services sector. It is notable that as of January 14, 2022, India has 83 unicorns with a total valuation of US$ 277.77 billion.
B. Mapping the presence of startups
The 2022 Report has also observed a change in trend, where Bangalore being the Silicon Valley of India, has been taken over by Delhi for hosting the greatest number of start-ups. Over the recent years, Delhi has replaced Bangalore as the startup capital of India. Over 5,000 recognised startups were added in Delhi while 4,514 startups were added in Bangalore between April 2019 to December 2021. With a total of 11,308 startups, Maharashtra has the highest number of recognised startups. The numbers have also rallied from the presence of startups in just 121 districts to 555 districts as of 2021.
C. Improved market economics
India’s capital markets, have done exceptionally well and have allowed record mobilization of risk capital for Indian companies. The year 2021-22 so far has been an exceptional year for the primary markets with a boom in fundraising through IPOs by many new age companies, tech start-ups and unicorns. In April-November 2021, Rs. 89,066 crores were raised via 75 IPO issues, much higher than in any year in last decade. The exuberance associated with the listings manifested in huge oversubscriptions by retail, High Net worth Individuals and institutional investors and stellar listing gains have pushed more and more companies to tap the markets. The tremendous response by all categories of investors in IPOs of companies was reflective of not only the confidence in markets, but also that in corporate sector performance and prospects of the economy in the long run.
Recently, the Union minister of Commerce and Industry, Shri Piyush Goyal said while chairing the fourth roundtable with global VC funds that global venture capital funds should focus more on startups from tier-II and tier-III cities, for investing, promoting and protecting the intellectual property created by startups. They should also provide expertise to startups to scale up, and explore greater capital infusion, including risk capital.
D. Boosting innovation and focus on new-age technology
By virtue of Finance Act of 2022, in order to incentivize start-ups, the tax exemption has been extended for one additional year for start-ups incorporated till March 2023 from the last granted tax exemption under Finance Act, 2021.
The 2022 Report has stressed that the focus should be on use of new technology including drones and AI based decision support systems, reduction in use of chemical fertilizers and use of low-cost organic inputs and supporting start-ups for innovations for the agriculture sector.
There has also been growth in the number of start-ups engaged in the space technology sector. Just in the last three years number of startups in the space sector has increased from 11 in 2019 to 47 in 2021 with a total of 101 startups commanding their presence in the space technology sector. While opening the accessibility of space sector and to trigger innovation, the government has also setup an independent nodal agency under the Department of Space, Indian National Space Promotion and Authorization Centre (IN-SPACe), which shall act as the promotor and regulator of space activities in India by NGPEs (Non-government/private entities). In a little over a year since the agency was announced, the interim IN-SPACe board has received close to 40 proposals from large industries, MSMEs, start-ups and academia covering broad range of activities in space domain.
At the same time, by engaging in intensive stakeholder consultation the government has also liberalised the Drone Rules, 2021, which was notified on 25th August, 2021, doing with a lot of compliance, approvals and licensing requirements.
Additionally, the heavy regulation around the creation, acquisition and use of geospatial data, including maps have been drastically simplified by the release of new guidelines by Department of Science and Technology on 15th February 2021. The guidelines are more focussed to facilitate Indian companies and startups operating in this sector and make data available for them to innovate.
The Indian startups in the technology sector are also constructively utilising their innovation towards creation of intellectual property assets. There has been gradual increase in the filing and granting of patents in India. The number of patents filed in India has gone up from 39,400 in 2010-11 to 58,502 in 2020-21 and the patents granted in India has gone up from 7,509 to 28,391 during the same time period. Consequently, India’s ranking in Global Innovation Index has climbed 35 ranks, from 81st in 2015-16 to 46th in 2021.
Furthermore, in August 2021 the Ministry of Electronics & IT (MeitY) launched the SAMRIDH program. It is known that MeitY has various programs to facilitate start-ups, but with the SAMRIDH program the focus is to aid start-ups to enhance their software products by providing fiscal incentives and assisting in securing investments for scaling their business.
Additionally, the Budget 2022 gave boost to Gaming Industry, with the government deciding to promote AVGC (Animation, Visual Effects, Gaming, and Comics) by setting up task force to recommend steps for promotion of AVGC in meeting global demands. It is imperative to note that India presently commands around 10% of the global AVGC market and has the potential to reach 20-25% by 2027
III. REGULATORY ENVIRONMENT AROUND THE USE OF DATA BY STARTUPS
At the cost of reiteration, technology and data has been an enabler and equalizer for the growth of consumer internet start-ups, and thus is the need for start-ups to carefully deal with data withing the regulatory and legal vires. In India, a total of 86.63 million Indian users’ data was breached till November 2021, ranking India third in the world for data breaches.
The tech startups dealing with customer data have to be very cautious about how they utilize, process and preserve the personal data and more specifically the sensitive personal data. In India, data privacy as a concept is statutorily governed by Section 43A of the Information Technology Act, 2000 (IT Act) read with the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011 (SPDI Rules). Additionally, the Bureau of Indian Standards made available to the public its new standards for data privacy assurance i.e., the IS 17428 in 2021, which aids companies in their data privacy management system, and is a compliance norm under SPDI Rules. There is other proxy regulation around punishment for violation of privacy under section 66E, penalty for breach of confidentiality and privacy under section 72 and punishment for disclosure of information in breach of lawful contract under Section 72A.
There is also a nodal agency setup, i.e., Indian Computer Emergency Response Team (CERT-In) to function in the area of cyber security and collect, analyse and disseminate information on cyber incidents and issue directions to any service provider, intermediaries, data centres, body corporate or person to remedy a cyber-incident.
At present, the regulatory environment is not agnostic with the privacy principles being followed in mature jurisdiction like the European Union (reference to GDPR). However, as start-ups dealing with data in India, the need is to navigate carefully and adopt best privacy practices followed globally. This will not only aid the company in being at the forefront while dealing with near challenge and burden of complying with the proposed Data Protection Bill, 2021 (modelled on GDPR), when it takes the shape of law and setting up infrastructure and facility in place, but will also aid the start-up in being free from litigations that may ensue in the coming future on account of violation of data privacy practices. Furthermore, the start-ups based in India but aiming to have their presence globally and in EU region, dealing with data of EU citizens, have to comply with GDPR as a mandate under Article 3 relating to extra-territorially and applicability of GDPR.
Furthermore, if we focus in India, regulators are cognizant of the need of startups to use data and innovate on the analytics developed in a safe environment. This has also resulted in the introduction of regulatory sandbox by the financial sector regulator, RBI. The idea of regulatory sandbox is to facilitate a formal regulatory programme for market participants to test new products, services or business models with customers in a live environment, subject to certain safeguards and oversight.
Similarly, the 2021 Joint Parliamentary Committed Report has also taken positive steps for startups and reduced their burden when Data Protection Bill (DPA) is enforced as law, with an aim to keep innovation unhindered. Few suggestions include:
-- The adoption of deferred timeline for implementation of various obligations under DPA, with an approximate period of 24 months, to facilitate startups in putting the infrastructure in place and comply with the law.
-- To foster innovation by startups and also keeping data privacy angle in the frame, the JPC recommended that the formulation of data obligations should be weighed according to their impact on start-ups and adherence to the objectives of “Ease of Doing Business” as guiding factors.
-- JPC has also batted for regulatory sandboxes and while promoting the quotient of innovation by startups and privacy by design.
-- Data localisation has a matter of concern for the data driven industry due to the huge compliance cost associated with it and especially for startups. The JPC has recommended that the government should subsidize the development of compliance infrastructure for start-ups.
-- The penalties under the DPA haven’t been fixed (only with a maximum cap) and are kept proportionate to the resources of the violating party. This will be a relief for startups who are penalized in any event of non-compliance with the law.
-- Furthermore, the processing and use of children’s data and regulation around it has been a matter of concern. The internet consumption today is largely done by youth and in most case people under the age of 18 years with the pandemic at play. The JPC has recommended that data fiduciaries processing children’s data have to mandatorily register with the Data Protection Authority, irrespective of their overall size of operation. The startups while dealing with children’s data has to be caution about their obligations under law.
The startup ecosystem has been the engine of growth for the digital economy in India. The government has also endeavoured to facilitate a regulatory and policy environment which propels the growth of startups in India. The observations of the 2022 Report, Budget of 2022 and the interplay of technology, data and law evidence that the start-up ecosystem in the country is really on the rise, thus the legal & policy instruments must be to ensure that spirit of innovation and contestability is kept intact. The time is to unbundle and unlock the innovation quotient of India while harbouring a safe legal environment within the company.
Author: Abir Roy, Advocate and Co-Founder of Sarvada Legal; Aman Shankar, 5th year Student of law from Symbiosis Law School, NOIDA.