Can a Startup India Certificate Transfer with New Ownership?

The Startup India Initiative, launched by the Government of India in 2016, has played a significant role in fostering entrepreneurship and innovation across the country. By offering numerous benefits like tax exemptions, funding support, and simplified compliance processes, Startup India Registration has become an essential milestone for budding entrepreneurs. However, one common question that arises in the startup ecosystem is: Can a Startup India Certificate be transferred if a startup changes ownership?

This article explores into this query, exploring the nuances of ownership transfer, the legal and regulatory frameworks surrounding DPIIT Registration and DPIIT Recognition, and how changes in ownership impact a startup’s eligibility under the Startup India scheme.

Startup India Registration and Certification

Before diving into the question of certificate transfer, it's important to understand what Startup India Registration entails.

Startup India Registration is a process through which a startup obtains official recognition from the Department for Promotion of Industry and Internal Trade (DPIIT). This recognition, often referred to as DPIIT Registration or DIPP Registration, provides startups with access to various incentives, including tax exemptions, funding opportunities, and easier compliance with government regulations.

Upon successful registration, startups receive a Startup India Certificate. This certificate signifies that the startup meets the criteria set by the government and is eligible to avail of the benefits under the Startup India scheme.

Criteria for DPIIT Recognition

For a startup to obtain DPIIT Recognition, it must fulfill the following conditions:

1. Age of the Startup: The startup should be less than 10 years old from the date of incorporation.

2. Type of Entity: The business should be registered as a Private Limited Company, LLP (Limited Liability Partnership), or Partnership Firm.

3. Annual Turnover: The startup’s turnover should not exceed ₹100 crores in any of the previous financial years.

4. Originality: The entity must be working on innovation, development, or improvement of products or services or have a scalable business model with high potential for employment generation or wealth creation.

5. Non-Splitting Rule: The startup should not have been formed by splitting up or reconstructing an existing business.

What Happens When Ownership Changes?

When discussing whether a Startup India Certificate can be transferred, it is crucial to differentiate between the types of ownership changes:

• Partial Ownership Change: This involves changes in the shareholding pattern, where new investors or partners join, but the original founders retain significant control.

• Complete Ownership Transfer: This occurs when the entire ownership is transferred to new individuals or entities, often through acquisition or sale.

Partial Ownership Changes

In the case of partial ownership changes, the Startup India Certificate typically remains valid, provided the startup continues to meet the criteria set by DPIIT. For instance, if new investors acquire shares in the company but the startup's core activities, management, and innovation focus remain unchanged, the DPIIT recognition remains intact.

However, it is important to inform DPIIT about significant changes in shareholding or management structure. This ensures that the records are up-to-date, and there are no compliance issues in the future.

Complete Ownership Transfer

When there is a complete transfer of ownership, the situation becomes more complex. DPIIT Recognition is granted based on specific criteria related to the founders, business model, and innovation. If the original founders exit entirely, and the new owners alter the business model or operations significantly, the startup may no longer meet the eligibility criteria.

In such cases, the Startup India Certificate may not be transferable. The new owners may need to apply for fresh DPIIT Registration, provided they continue to meet the eligibility requirements.

Legal Implications of Ownership Change

The Companies Act, 2013 and Limited Liability Partnership Act, 2008 govern ownership changes in companies and LLPs, respectively. When ownership changes occur, the following legal steps are necessary:

1. Amendment in Incorporation Documents: Update the company’s Memorandum of Association (MoA), Articles of Association (AoA), or LLP Agreement to reflect the new ownership.

2. Registrar of Companies (ROC) Filings: File necessary forms with the Ministry of Corporate Affairs (MCA) to record changes in ownership.

3. Intimation to DPIIT: Notify DPIIT about the change in ownership and seek clarification on the continued validity of the Startup India Certificate.

4. Tax and Compliance Updates: Update PAN, TAN, and other statutory registrations to reflect the new ownership.

Impact on Other Registrations and Certifications

Ownership changes can also affect other registrations and certifications associated with the startup. Here’s how they may be impacted:

1. IEC Registration (Import Export Code)

If the startup engages in international trade, it likely holds an IEC Code. Ownership changes require updating the IEC registration details with the Directorate General of Foreign Trade (DGFT). However, IEC codes are tied to the business entity rather than individual owners, so the code remains valid with updated information.

2. LLP Registration

For startups registered as LLPs under LLP Registration, ownership changes involve updating the LLP Agreement and notifying the Registrar of LLPs. The LLP’s legal status remains unchanged as long as the entity continues to exist.

3. CSR-1 Registration and CSR Funds

If the startup is involved in Corporate Social Responsibility (CSR) activities and holds CSR-1 Registration, ownership changes must be reported to the relevant authorities. The eligibility to receive CSR Funds may remain intact, provided the startup continues its CSR activities as per legal requirements.

4. NITI Aayog Registration

Startups working with government bodies may have NITI Aayog Registration. Changes in ownership should be reported to ensure compliance, but the registration remains valid if the business model and operations are consistent with the original registration criteria.

5. Government e-Marketplace (GeM)

For startups registered on the Government e-Marketplace (GeM), ownership changes must be updated on the platform. The registration remains valid if the startup continues to meet the platform's eligibility criteria.

Case Studies: Ownership Change and Startup India Certification

Let’s explore a few hypothetical scenarios to understand how ownership changes can affect Startup India Certificates:

Scenario 1: Partial Sale to Investors

A tech startup, registered under Startup India, sells 30% of its shares to a venture capital firm. The original founders retain 70% ownership and continue to manage the company.

Outcome: The Startup India Certificate remains valid as the core team, innovation, and business model remain unchanged. The startup must, however, update its shareholding structure with DPIIT and other regulatory bodies.

Scenario 2: Full Acquisition by Another Company

A healthcare startup recognized under Startup India is fully acquired by a large healthcare corporation. The original founders exit, and the acquiring company integrates the startup's operations into its existing business model.

Outcome: The Startup India Certificate is likely to become invalid, as the startup no longer operates independently, and the original innovation criteria may no longer be applicable. The acquiring company may need to apply for fresh recognition if it meets the eligibility criteria.

Scenario 3: Change in Partnership in an LLP

An LLP startup in the consulting sector undergoes a change in partners, with one original partner exiting and a new partner joining.

Outcome: The Startup India Certificate remains valid, provided the LLP continues to meet the eligibility criteria. The change must be updated in the LLP Agreement and reported to DPIIT and the Registrar of LLPs.

Steps to Ensure Compliance During Ownership Change

To ensure smooth transitions and maintain eligibility for Startup India benefits, follow these steps during an ownership change:

1. Review Eligibility Criteria: Ensure that the startup continues to meet DPIIT eligibility criteria after the ownership change.

2. Legal Documentation: Update all legal documents, including MoA, AoA, LLP Agreement, and shareholding patterns.

3. Regulatory Filings: File necessary forms with the MCA, ROC, and other regulatory authorities.

4. Inform DPIIT: Notify DPIIT about ownership changes and seek clarification on the certificate’s validity.

5. Update Other Registrations: Ensure that other registrations like IEC Registration, CSR-1 Registration, NITI Aayog Registration, and GeM Registration are updated accordingly.

Conclusion

While partial ownership changes usually do not affect the validity of a Startup India Certificate, complete ownership transfers can lead to complications, especially if the startup no longer meets the eligibility criteria set by DPIIT. It’s crucial for startups to understand these implications and ensure compliance with all legal and regulatory requirements.

Ownership transitions are a natural part of the business lifecycle. By staying informed and proactive, startups can direct these changes without losing access to the valuable benefits provided under the Startup India scheme.