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INTEGRITY FIRST

“There is no such thing as business ethics. There is

only one kind – you have to adhere to the highest

standards.”

— Marvin Bower

S. No. Topic

1. Angel Tax

2. Director Identification Number (DIN) Allotment

3. Corporate Insolvency Resolution Process(CIRP) & MSMEs

Index

INDEX

This article aims to

Understanding Angel Tax & Angel Investor

Its impact on Startups

Benefits of Angel Tax

Recent Amendments

Angel Tax

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Angel Tax

What is Angel Tax?

Angel tax is a term used to refer to the income tax payable on capital raised by unlisted companies via

issue of shares where the share price is seen in excess of the fair market value of the shares sold.

The excess realisation is treated as income and taxed accordingly. The tax was introduced in the 2012

Union Budget by then finance minister Pranab Mukherjee to arrest laundering of funds. It has come to

be called angel tax since it largely impacts angel investments in startups.

What is Angel Investor?

Angel tax refers to the income tax payable on capital raised by Angel Investors which are basically

unlisted companies via the issue of shares where the share price is seen in excess of the fair market

value of the shares sold. One of the difficult tasks for startups is to obtain funding. Normally the

startups receive money only from friends and relatives. However, there is another class of Investors

who provide funding to these startup’s organization. They invest in companies which are in the early

stage of development. These investors act same as the Venture Capital function. Hence these

investors are named as “ANGEL INVESTORS”.

The Angel Investors take the risk of investing in Startups which in turn the government provides them

various tax breaks for investing in startups. The United States has provided the Angel Investors the

benefit of reinvesting the profits generated from one Startup to another startup. However, this facility is

not provided in India. Angel Investments has not received much importance in India, the reason is that

no special tax breaks are provided to the Angel Investors.

How it impacts startups

The share issued to an investor has to be valued to decide whether the price is in excess of fair value.

The industry has demanded that the discounted cash flow (DCF) method of valuation be used to

calculate angel tax instead of the net asset value (NAV) method, though even that may not capture the

true value of a startup. The valuation of a startup is usually based on a commercial negotiation

between the company and the investor, and is a function of the company’s projected earnings at that

point in time. However, since startups operate in a highly uncertain environment, many companies are

not always able to perform as per their financial projection. Equally, some companies exceed the

projection by a long mile if they are doing well.

Motive of Angel Tax

Black Money is the biggest problem that India is facing. Also, out of the large population, only a few people are doing the tax compliance. Presently around 2% of the population pay

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income tax and do their compliances properly. Thus, the Tax Department is worried if they support Angel Investment which will, in turn, increase money laundering.

Mostly the startups have their assets which are off the books of the company which the investors are aware of as such they provide them with high valuations. In this situation, the startups defend themselves by saying that by obtaining higher valuations they do not become an offender and it is not a crime. Also, they believe that they are not involved in any kind of money laundering nor they are involved in any case of tax evasion.

Due to these flaws, the tax department is of the view that the valuation of the startup’s companies has to be done by the specialist which is to be based on the predefined formula. This is will enable to calculate the valuation of the assets of the startups on the fair value basis. However, if the value exceeds the fair value then it will be subject to the highest level of taxation.

What are the benefits of Angel Investment to Certified Innovative Startups?

The government of India has introduced this concept of Certified Innovative Startup which basically is a startup which has received certification as per which they are not subject to draconian angel tax which is torturing the startups and killing genuine innovation.

Thus, getting a certification is not an easy task. The Startups have to follow certain stringent parameters to get the certification:

For Example, A Company willing to apply for Certification must:

Not have a turnover exceeding 25 million rupees and The startup should not be old than 5 years and The startup should be engaged in the production of innovative product or services.

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Problems due to the Certification parameters are:

That the Parameters set are very subjective Also, various departments in India are also known for corrupt officers who manipulate

the startups as such startups are reluctant to apply for the certification

As a result, approximately only 5% or fewer startups apply for certification and are able to get it. Now we understood the crux of the Angel Tax let me take you through the effects of Angel tax on startups.

Recent Amendment:

The Government of India is continuously engaged in addressing the issues which are faced by the Indian Startup Ecosystem.

As per the notification issued by the Department of Promotion of Industry and Internal Trade (DPI) in April 2018 for easing the norms for providing tax exemptions to startups which were further amended on 4th February 2019.

As per the amended notification, an entity will be considered as Startup:

1. Up till 7 years from its date of Incorporation on to off chance that it is fused as a restricted organization or enlisted as an association firm or a constrained obligation

2. Turnover of the companies any of the Financial year or from the date of its incorporation or registration has not exceeded Rs.25 Crores.

3. The main of the startup is to work for innovation, development, enhancement of items or procedures or administrations. Provided the element stated above it is pertinent to note that recreation of current business will not be treated as “Startup”

4. If the Startup wills to apply for the endorsement for the offers issued to proposed to be issued are required to fulfill the following conditions:

o The total amount of paid-up offer capital and offer a premium of the startup after the proposed issue offer shall not exceed Rs. 10 crores.

o The Investor od proposed Investor shall have: Returned Income of Rs.50 lakhs or more for the financial year proceeding

the year of investment or the proposed investment and\ Total Assets exceeds Rs. 2 crores or more which is proposed to be made

in the startup

Provided that in case the approval is asked for offers as of now issued by startups no application will be made whether appraisal request has been passed by surveying officer for the important money-related year.

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The application, accompanied by the documents specified therein, shall be transmitted by the Department of Promotion of Industry and Internal Trade to CBDT along with the necessary documents. CBDT within 45 days from the date of receipt of application from DPI may grant approval to the Startup or decline to grant such approval.

However, the Government has not conducted any survey to assess the adverse effects of

angel tax on the Indian startup ecosystem.

Prepared by:

Adiba Bano

This article aims to:

• What is DIN?

• Where is DIN used?

• How to apply for DIN and relevant Forms?

Director Identification

Number(DIN)

I. What is DIN?

DIN is a unique Director identification number allotted by the Central Government

to any person intending to be a Director or an existing director of a company.

It is an 8-digit unique identification number which has a lifetime validity. Through

DIN, details of the directors are maintained in a database.

DIN is specific to a person, which means even if he is a director in 2 or more

companies, he has to obtain only 1 DIN. And if he leaves a company and joins some

other, the same DIN would work in the other company as well.

II. Where is DIN used?

Whenever a return, an application or any information related to a company will be

submitted under any law, the director signing such return, application or

information will mention his DIN underneath his signature.

III. How to apply for DIN and relevant forms?

E-Form DIR-3 is required to be filed pursuant to Section 153 of the Companies Act,

2014 & Rule 9(1) of the Companies (Appointment and Qualification of

Directors) Rules.

Section 153:

Every individual intending to be appointed as director of a company shall make an

application for allotment of Director Identification Number to the Central

Government in such form and manner and along with such fees as may be

prescribed.

Rule 9(1):

Every applicant, who intends to be appointed as director of an existing company shall

make an application electronically in Form DIR-3, to the Central Government for

allotment of a Director Identification Number (DIN) along with such fees as provided

under the Companies (Registration Offices and Fees) Rules, 2014.

Rule 9(3) (b)

Form DIR-3 shall be signed and submitted electronically by the applicant using his

or her own Digital Signature Certificate and shall be verified by a company secretary

in full time employment of the company or by the managing director or director or

CEO or CFO of the company in which the applicant is intended to be appointed as

director in an existing company.

Specific Instructions to fill the e-Form DIR-3:

• Every individual intending to be appointed as director of an existing Indian company

or the existing director who has not taken a DIN is advised to make an application for

allotment of Director Identification Number (DIN).

• DIN is a unique number, and is mandatory requirement for a company/ limited

liability partnership (LLP) for filing certain e-Forms.

• Government Fees Rs. 500/-

• E-Form DIR-3 is required to be signed by the applicant and by

director/manager/CEO/CFO/Company secretary of an existing company. (Now

Signature of Practicing Professional Like PCS, PCA and PCMS’s DSC is not

required)

• If the e-Form DIR-3 is signed by company secretary /director/manager /CEO/CFO

and is not identified as potential duplicate, then the same shall be auto approved by

the system (STP) and sent for verification to the DIN cell. The status of DIN shall be

Approved’.

• If the e-Form is signed by company secretary /director/manager /CEO/CFO of the

existing company, and identified as a potential duplicate, then provisional DIN is

allotted and same is sent for processing to the DIN cell. If the e-Form is not

approved, then status of provisional DIN allotted is ‘Lapsed’ on rejection or

invalidation of the e-Form as the case may be.

• If verification is not passed, an email is sent to the director for filing DIR-6 for

making the desired changes.

Documents for the DIR-3 Application:

The following are the mandatory attachments to be filed in all cases:

1. Proof of Identity of applicant

• In case of Indian nationals, Income-tax PAN is a mandatory requirement for proof

of identity.

• In case of foreign nationals, passport is a mandatory requirement for proof of

identity.

2. Proof of residence of applicant

• Address proofs like passport, election (voter identity) card, and ration card, driving

license, electricity bill, telephone bill or Aadhaar shall be attached and should be in

the name of applicant only.

• In case of Indian applicant, documents should not be older than 2 months from the

date of filing of the e-Form.

• In case of foreign applicant, address proof should not be older than 1 year from the

date of filing of the e-Form.

3. Picture of the Applicant– attach on Photograph Box

Other Information:

• Mobile No and email address of the applicant

• Qualification of Applicant

• Occupation of the Applicant

Punishment for Contravention (Section-159):

If any individual or director of a company, contravenes any of the provisions of

section 152, section 155 and section 156, such individual or director of the company

shall be punishable with imprisonment for a term which may extend to six

months or with fine which may extend to fifty thousand rupees and where

the contravention is a continuing one, with a further fine which may extend to

five hundred rupees for every day after the first during which the contravention

continues.

Prepared by:

Mr. JK Budhiraja

This article aims to:

• Background & Introduction

• What is MSME?

• NPA in MSME Sector

• Steps taken by RBI to solve NPAs in MSME

Sector

MSMEs & Corporate

Insolvency Resolution

Process (CIRP)

MSME & Corporate Insolvency Resolution Process (CIRP)

Background

Micro, Small and Medium Enterprises (MSMEs) are the backbone of the Indian economy, being key drivers of employment, production, economic growth, entrepreneurship and financial inclusion. As per the 2017-18 annual report of the Ministry of MSME, there are 63.39 million MSMEs in India, employ around 111 million people and contribute 30% to GDP in the country. The MSME sector accounts for about 45 per cent of manufacturing output and around 40 per cent of total exports of the country. Therefore, the MSME occupies importance space in India to foster broad based inclusive growth by creating enterprises and jobs at the local level, notably 51% of MSMEs in India are in rural areas.

MSMEs access to finance from banks are relatively limited when compared to large corporate in India and is a major operating constraint for the MSMEs. Banks are always hesitant to lend to MSMEs due to their small pocket size of loans, cost of processing the loans, recovery of loans and lack of proper accounting systems, updated financials, and proper documentation among many of these MSMEs.

While there are no reliable estimates of the credit gap by faced by MSMEs, however as per estimates nearly 90% of Indian MSMEs are dependent on self-funding.

The MSME sector has witnessed two major recent shocks, viz., demonetisation and introduction of goods and services tax (GST). Due to demonetization, employees suffered as payments from employers became constrained after demonetization. Similarly, the introduction of GST led to increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net.

Challenges/Problems faced by MSMEs in India

1. Despite the importance of the MSMEs in Indian economic growth, the sector is facing challenges and does not get the required support from the concerned Government Departments, Banks, Financial Institutions and Corporates which is proving to be a hurdle in the growth path of the MSMEs. There are many problems being faced by

existing/new companies in SME sector are as under: Non-availability of adequate and timely credit;

2. High cost of credit; 3. Collateral requirements; 4. Limited access to equity capital; 5. Process related issues which increase the cost of production due to old methods

deployed by MSMEs. 6. Lack of requisite upgradation of technology which optimizes the cost and the

process impacting the quality of the product. 7. Problems in supply to government departments and agencies; 8. Cost efficient procurement of raw materials due to non-availability of funds and

the scale required. 9. Problems of storage, designing, packaging and product display.

10. Scale of operations & technological obsolescence; 11. Lack of access to modern technologies and in-house Technological innovation; 12. Non-availability of skilled Labour at affordable cost 13. Follow up with various government agencies to resolve problems due to lack of

man power and knowledge etc. 14. Ineffective marketing strategy.

Reasons for Non-Performing Assets (NPAs) in MSME Sectors

The problems faced by MSMEs lead to NPA in MSMEs and particularly the following factors contribute to the NPAs in the MSME Sector:

1. Lack of demand of their products; 2. High Cost of Production due to old methods of production; 3. Shortage of working capital; 4. Non-availability of raw materials; 5. Power shortage; 6. Technological obsolescence; 7. Marketing problems; 8. Labour and Management problems; 9. Equipment problems etc.

Steps Taken by Government/RBI and other Agencies to solve problems/ NPAs in MSME Sector

In recent past, the Government, RBI and SIDBI have taken critical steps to address the issues. Some of the measures are: setting up of MUDRA and the launch of Pradhan Mantri Mudra Yojana (PMMY), Stand-up India scheme in 2015 to promote entrepreneurship at grass root level for economic development and job creation, RBI earmarking a sub-limit of 7.5% under priority sector exclusively for “micro” enterprises, launch of a new portal (www.udyamimitra.in) by SIDBI to act as a match making platform for MSME loans up to Rs. 2 crore and enhancement in coverage amount under credit guarantee scheme.

Shri Narendra Modi, the Hon'ble Prime Minister of India launched "Support and Outreach Programme" for MSME Sector on 02.11.2018 and unveiled the 12 key initiatives which will help the growth, expansion and facilitation of MSMEs across the Country. The Prime Minister said that there are five key aspects for facilitating the MSME sector. These include access to credit, access to market, technology upgradation, ease of doing business, and a sense of security for employees. 12 key initiatives which he announced are as follows:

(i) The GST-registered micro, small and medium enterprises (MSMEs) will be sanctioned a loan of Rs 1 crore in just 59 minutes through a new portal: www.psbloansin59minutes.com. MSMEs will be able to apply for loans from SIDBI and 5 PSU Banks — State Bank of India, Bank of Baroda, Punjab National Bank, Vijaya Bank and Indian Bank.

(ii) The GST-registered MSMEs will get 2% subvention or rebate on incremental new loans of up to Rs 1 crore. Interest subvention on pre- and post-shipment credit for exports by MSMEs has also been increased from 3% to 5%.

(iii) MSMEs will be allowed to file just one annual return on eight labour laws and 10 central rules.

(iv) Public Procurement Policy for MSEs Order, 2012 has been amended and mandates increase from 20% to 25% annual procurement from MSEs by Central Ministries/Departments/ Central PSUs.

(v) Out of the 25% procurement mandated from MSMEs, 3% must now be reserved for women entrepreneurs. Accordingly, the necessary changes have been made by the Central Government in the MSME SAMBANDH Portal.

(vi) All companies with a turnover of more than Rs. 500 crore and all CPSEs to mandatorily get on board on the Trade Receivables Discounting System Platform (TReDs).

(vii) All companies who get supplies of goods or services from MSEs and whose payments to MSE suppliers exceed 45 days from the date of acceptance of goods or services to mandatorily submit a half yearly return to the Ministry of Corporate Affairs.

In view of above, the Ministry of Corporate Affairs has vide order number S.O. 368(E) dated 22nd January, 2019 notified Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019. As per the said order every specified company shall file in MSME Form I details of all outstanding dues to Micro or small enterprises suppliers.

(viii) All central public sector enterprises (CPSEs) will have to take membership of the Government e-Marketplace (GeM) to facilitate online procurement of common use goods and services by various government departments and organisations.

(ix) A package of Rs 6,000 crore announced by Government to facilitate better technological support and tools to small industries. This money will be used for 20 hubs and 100 tool rooms for technology upgradation.

(x) The government will form MSME pharma clusters. 70% cost of establishing these clusters will be borne by the government.

(xi) Inspections of factories in the MSME sector will be sanctioned only through a computerised random allotment and inspectors will have to upload reports on the portal within 48 hours.

(xii) MSMEs will now need single air and water clearance and just one consent to establish a factory.

(xiii) An ordinance has been promulgated to simplify the levy of penalties for minor offences under the Companies Act.

Initiative of Reserve Bank of India (RBI)

The Insolvency and Bankruptcy Code (Amendment) Ordinance 2017 which was converted into the Insolvency and Bankruptcy Code (Amendment) Act, 2018, introduced Section 29A to restrict certain categories of Promoters of Corporate Debtor to bid for their own companies by submitting resolution plans under the Code.

The Ministry of Corporate Affairs constituted the Insolvency Law Committee under the chairmanship of the Sh. Injeti Srinivas, Secretary, Ministry of Corporate Affairs on 16th November 2017 to study the IBC 2016 and come out with its recommendation for change in the Code. The Insolvency Law Committee (“Committee”) was apprised by several stakeholders that due to large businesses being taken into insolvency under the Code, MSMEs which are usually operational creditors to such large businesses are suffering in two ways: first, the temporary credit disruption created by the large businesses being in CIRP is leading the affected MSMEs to be dragged into insolvency, which may potentially lead to liquidation and second, in a CIRP where MSMEs are operational creditors, the liquidation value guaranteed to them is negligible.

The Committee that MSMEs are the bedrock of the Indian economy, and the intent is not to push them into liquidation and affect the livelihood of employees and workers of MSMEs, and thought it fit to explicitly grant exemptions to corporate debtors which are MSMEs by permitting a promoter who is not a wilful defaulter, to bid for the MSME in insolvency. In view of this, the Government amended IBC 2016 and inserted new Section 240A by the Insolvency and Bankruptcy Code (2nd Amendment) Act 2018, exempting the promoters of MSMEs from the provisions of clauses (c) and (h) of section 29A of the IBC 2016.

According to above exemption, following clause (c) and (h), the text of which is given below, will not be applicable to promoters of MSMEs to submit the Resolution Plans for their own companies, being MSMEs:

(c) at the time of submission of the resolution plan has an account,] or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) or the guidelines of a financial sector regulator issued under any other law for the time being in force, and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:

Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non performing asset accounts before submission of resolution plan:

Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.

(h) has executed a guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code and such guarantee has been invoked by the creditor and remains unpaid in full or part;