india corporate playbook for m&a - a guide to m&a in india
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India Corporate Playbook
A Guide to M&A in India
Dec 2016
DisclaimerThis Playbook is focused on highlighting the key differences and common pitfalls in acquiring a
company in the technology industry in India and sharing key learnings and best practices in engaging in
transactions in India
This Playbook is not intended to be a comprehensive guide on M&A or meant to constitute legal advice.
Please consult a legal professional.
Executive Summary | Huge potential in India
M & A Process
Similar to other cross-border M&A,
except longer time to close, lower
deal value
Regulation
Regulatory framework aligned w/ common law; however, local
advisory support recommended
Landscape
2nd largest internet
economy ($150B 2018F), growing rapidly
3rd in global tech investment
destination list (E&Y)
Visible benefits when target is US / Singapore entity
Constant trade-off between time &
legal conservatism
2ndLARGEST INTERNET
MARKET
$13.5BVC/PE INVESTMENT
SINCE 2014
309M&A DEALS SINCE 2014
Funding, M&A numbers as of 2016Q3
Indian Startup Landscape| Strong ecosystem in India to support bustling startup activity
Robust VC/PE Investments
Unicorns in multiple sectors including e-commerce, consumer
internet, digital marketing & enterprise SW
6K2015 est
20K(2020F)
Active product startups in India
Supported by 2.5K+ VCs/angels120+ incubators
$801M
$1.02B
$4.88B
$6.25B
2012 2013 2014 2015
$2.42B
2016
Source: Signal Hill - iSPIRT Product Monitor Report (Nov 2016)Note: Funding, M&A numbers are Q1-Q3 2016 only
$13.5B invested across 729 deals since 2014
Uptick in M&A Deals However, valuations lag US
10.5x 2.0x
Avg. M&A Deal Size
M&A Landscape in India| Strong uptick in activity but valuations lag
$8.4M$80.7M
$205M$308M
$792M
$1.35B
2012
2013
2014
2015
$1.34B
2016
M&A : VC/PE Ratio
309 deals worth $3.48B since 2014
Tech & Talent deals very popular; process for team to move to the US on a visa is well understoodMarket entry less commonHigh user base but low financial traction
TYPE OF DEALS
TIME TO CLOSE40-50% longer than US acquisitionsVisible benefits when the target is a US/Singapore entity (vs. Indian entity)
VALUE OF ACQUISITIONCan expect a 30-40% discount on India-based acquisitions vs equivalent US acquisitions
Indian M&A Process | Similar to other cross-border M&As, with some key differences
Regulatory Framework | Aligned with common law, but local advisory support recommended
Common law country, like most states in the US, but far more aligned to the English legal system
Important to engage a well-versed lawyer early on in the process to manage nuances
Foreign Investment being liberalized, but continues to be regulatedLitigation in India runs in yearsClosing down companies takes time, so prefer full stock purchase
Constant tradeoff between TIME and LEVEL OF LEGAL CONSERVATISM that needs to be managed
1. Indian Technology Landscape Overview
20K product startups (2020F)
India is a hotbed for tech product startups
India-for-India Startups
B2C Consumer & Internet
Often domiciled in India/Singapore
India-for-Global startups
B2B startups with global customers
Often domiciled in US
Bangalore
Mumbai
NCR
HyderabadPune
Kolkata
Chennai
5%
40%
10%
5%13%
12%
25%
Source: Lit search, iSPIRT Product Industry Monitor
Healthy funding ecosystem in India $13.5B funds invested in Indian startups since 2014
Crunch in VC/PE Investments after strong 2014-15
Costs are lower in India, so startups raise a lower absolute amount vs equivalent rounds
in the USIncu
bators
Angel & Seed
Series A
Series B+
Investments upto $100KInvest in ideas / biz plans
Investments $100k - $1MBeta version of productMentorship, guidance
Investments $2-10M with follow-on participation
Investments $15M+ with follow-on participation
$801M
$1.02B
$4.88B
$6.25B
2012 2013 2014 2015
$2.42B
2016
147 123 176 330 223Deal Vol.
$13.5B invested across 729 deals since 2014
Strong uptick in deal value & volume since 2014 However, long-tail distribution of deals,
driven by acqui-hires and restructuring
$205M$308M
$792M
$1.35B
2012
2013
2014
2015
$1.34B
2016
309 deals since 2014 worth $3.48B
M&A Deal Value and Volume Trends
43 39 59 137 113Deal Vol.
70%volume
Small deals
(<$5M)
Large deals
(>100M)
71.5%value 2.2%
vol
2.7% vol
Beginning of M&A/IPO uptick
2-5 years to see the fruits of the 2014 & 2015 funding boom play out in M&A and
IPO activity
Early signs are positive with both 2015 & 2016 being record years for
India Technology Product M&A
Startups back-to-basics
Mature management and great execution is
required at companies which have taken in
substantial amounts of capital during the 2014 &
2015 funding boom
Current private funding environment is likely to
persist with focus on unit economics, cash burn and
path to profitability
VC/PE boom has provided strong impetus
Indian Tech Product future is bright
Recent VC/PE funding boom has filled up the
tanks of many companies and created
several unicorns
India on the map of global tech product
investors
Continued innovation and strong macro
tailwinds will further enhance India’s
attraction
2. Mechanics of an M&A: Key differences
Tech Due Diligence
Valuation/ Termsheet
Legal / Financial
DDSPA
1-8 Weeks
Tech & Talent deals popular; process for team integration well understood
Market-Entry opportunities require detailed analysis – high user, but low financial, traction
1-2 Weeks
Valuations at 30-40% discount
Common to have 45-60 days of exclusivity/ no-show in the termsheet
~2 months
Visible time benefits when target is US (Delaware C Corp) or Singapore entity
Increasingly common
1-2 months
Indian law requires ALL owners on the cap-table to physically sign the SPA agreement
1-2 Months
Team pedigree important factor
Key differences in M&A by StagesTimelines for transactions can be ~50% longer (3-5 mos)
Discovery
Discovery Deals for TECH and TALENT very popular; process well understood
Talent (Acqui-hire)
Strong mobile, back-end, systems expertise among Indian engineers
Acquired team is first integrated into Indian arm of US company, and moves to the US (if necessary) at a later stage
High number of ex-Google/Yahoo engineers as founders/CXOs
Hot areas: iOS, Android, Machine learning & Data Science
Market/Customer
Companies with sizeable India market penetration
Require detailed analysis; common to see high users but lower financial traction
India market success can be rapidly replicated in other emerging markets (Indonesia, Brazil, Africa etc)
Technology
High quality Tech & IP across multiple domains including:
● Mobile & Consumer Internet
● Big Data/Analytics● SaaS & Cloud SW● SW Infrastructure● Digital Marketing
Process for team to move to the US on a visa is well understood
iSPIRT M&A Connect Program is a good resource to help in discovery.
Pedigree important, pre-screened for by VCs
Top Engg. Colleges: IITs (all cities), BITS (Pilani), IIIT (Hyderabad), Institute of Tech (Varanasi), Vellore Institute of Tech (Vellore)
Top MBA programs: IIMs, ISB
Consider non-CS majors from T1 schoolsBe cautious of undocumented colleges
Team PedigreeIndian education strong in
back-end/systems; limited focus on UI/UX & product
management
Look out for heavy use of open-source code
Product Technology
Star engineers quickly become managers / team
leads
Common to see large teams with good engineers but
few product designers
Technical Skills OtherInterview all employees; Leadership team not always representative of 2nd tier employees
Candidates’ geographical exposure is a good indicator of cultural fit, adaptability
Tech Due DiligenceCriteria to evaluate Indian teams & product should range from source code to team pedigree
Valuation & TermsheetValuations commonly at 30-40% discount vs. US counterparts, all else equal
CashInvestor payout + Founder Payout + Employee bonus
[Paid out on Day 0]
Retention Pkg (Cash+ Stock)
Usually vested over 3-4 years, same as regular options/RSUs
Not based on Cap Table
Salary
StockUsually mirrors vesting schedule in Silicon Valley companies
Industry
Startup
Entry level $10K $6-8K
Experienced
$20-30K
$12-15K
I. Acquisition II. Employee Salary & Stock
NOTE: Strong preference in India for cash over equity: Cultural preference of stable income over uncertain future
Indian job market
High attrition in talent because of large and aggressively hiring Indian Unicorns and
global MNCs
Structure deals with emphasis on the
retention/earnout package to retain
employees
Group decision-making
Indians make decisions
communally, ‘by committee’.
Investors, BoD, etc often play a very
active role in valuations
Actively manage CEO-Investor
relationship; should be more of an
‘informing rather than advising relationship
Salary Conversations
Salary is openly discussed; expect
everyone knows what everyone else makes
in India
Have clear conversations about
job titles and hierarchy/ relevance in
the new company.
Indians are title conscious and it’s
much easier to talk salary when new hires
understand their title/level at the new
company
Valuation & TermsheetOther important comments
Other
Lower value placed on stock if acquiring
company is not public
Common to have 45-60 days of exclusivity/
no-show in the termsheet
In case of an acquihire, important
to have team member names in the
Termsheet
Lead Counsels Family-owned businessesIndemnification
Common for Investors to seek indemnification from the target co. and promoters for breach of
the SPA
Effective enforcement of indemnity remains a
challenge given the restriction on deferred
consideration
Cross-border M&A can have 2 counsels on
each side (i.e. Indian/US counsel each
for buyer/seller)
Language differences, legal nuances etc can
result in a lot of miscommunication
Identify lead counsel for the entire process
early on
Match the lead counsel with the buyer i.e. if it’s
a US buyer, the lead counsel should be US
for both buyer and seller
Inter-company or related party
transactions are common in family-owned businesses.
Although not a common structure for product startups, worth being
aware that these require additional
scrutiny
Tax Clearance CertificateFinancial Diligence
Startup companies often are not most organized in record
keeping; expect delay in financial diligence
Takes away risk of ownership of shares.
Usually done for property deals in India,
not share deals, but becoming increasingly
common to avoid liability on the shares
Takes 2-3 weeks
Legal & Financial DD
Specific assets of company (eg. Tech/IP, team etc)Acquihire: common to acquire team, license IP perpetually, & shut down product
Share Purchase AgreementShare Purchase Asset Purchase
All shares of startup
Shell company remains which owns non-acquired assetsEventually shuts down
Ceases to exist
Need to analyze the tax efficiency of transferring assets piecemeal v. slump sale
Min. 2 members/ stockholders
required
WATCHOUT: Shutting down a company in India is time consuming and slow; hence, most startups prefer a full stock purchase
IT - Income Tax; CA - Chartered Accountants; HNWI - High Net Worth Individuals
Acquirer buys
Differences from US
Startups of Startup
Transfer of Funds● Shares transferred to the acquirer only post
the receipt of funds in the Indian bank● Funds will come in tranches but in India can’t
pay partial shares – have to buy in one shot shareholder’s bank to RBI; only then transfer shares
Relocation of team● L1 visas are commonly used to ‘move’ a
team to the US post acquisition● Employees need to meet the “One year in
last 3 years” rule for eligibility● Asset purchases reset the L1 visa clock: ie
employee will need to be at the acquirer for 1 year post-acquisition for L1 eligibility. hence, share purchase is strongly recommended
SPA Key Terms
Share Purchase Agreements
Contract forms are similar to UK style documents
Holdbacks and Escrows
Once money has been transferred into India, it cannot be repatriated back without lots of paperwork. This is an issue with Escrow
Representations and Warranties
Usual for Investors to seek extensive representations and warranties from the target co. and promotersBreach of representations and warranties can be treated as a ground for rescission of contract
General Covenants
List of covenants are relatively shorter than those found in US form contractsEnforceability of certain covenants (e.g. – non-compete restrictions on Promoters) is uncertain though but it is commonplace to include them for deterrent effect.
Conditions Precedent (CO)
List of CPs are similar to those found in US form contracts
ESOPs Employee stock option scheme of a company must be approved by shareholders by passing a special resolution (i.e. <75% consent)ESOPs are not transferable and must have a min. vesting period of 1 year. Unvested ESOPs must compulsorily vest upon death or permanent incapacitation of employee.Prohibited Recipients: (i) promoters (ii) independent directors (iii) directors with more than 10% shareholdingAn Indian company may provide ESOPs to its own employees and to employees or its JV or WOS abroad*. Pricing of shares issued under such ESOPs is separately regulated by the exchange control laws.
Liquidation preferences
Separate ‘liquidation preference’ into 2 strands: one what happens in case of winding up under Indian Company Law (‘liquidation’) and the other in case of an exit event (‘liquidity’)
WATCHOUT: Multiple documents at various stages will need to be physically signed by potentially geographically-dispersed investors
RECOMMENDATION: Allow for time to get signatures. Ensure shares are dematerialized (not in physical format) or ask to have them converted
3. Indian Statutory and Regulatory Framework
Cultural differencesCommunal decision-making (with family members, investors etc.).
Non-punctual culture often can result in delays; be explicit and open about timelines, disclosures etc
Grooming, personal appearances low priority
Cultural sensitivitiesFamily (immediate, extended, in-laws) is important, decisions made given their consent
Religion/spirituality is very important to the older generation
Men and women tend to socialize independently
Large English speaking marketEnglish commonly spoken,
almost everyone is multilingual
Technical talent is abundant, relatively inexpensive;
Large middle class huge internal
market for Indian startups
Unreliable infrastructureWeak, unreliable infrastructure
(electricity, roads) cause delays; budget extra time
Internet connectivity can be poorTest bandwidth before day of
conversation, schedule calls around times of reduced bandwidth demands
(early am, late pm)
India landscape| Huge opportunity but must account for key differences
WEF’s Global Competitiveness Index - 39th position out of 138 nations
Biggest leap in ranking for any country in 2015
Developing market – regulators playing ‘catch up’ like in most countries, especially with disruptive business models
Government and regulators committed to facilitating innovation and disruption - Startup India Action Plan, Niti Ayog, RBI’s Payment Bank LicencesCommon law country with rule of law like the US – Contract law principles same as in the US– Nationality blind enforcement by Judiciary
Like in most countries, must know ‘how to do business’ in India for India strategy to be effective
Doing Business in India|Huge opportunity but must account for key differences
Key Legal Frameworks & Differences vs. US
Companies Act, 2013
Regulates the way a company is structured and sets out the rules regarding ownership
Uniform law across all statesProhibition on issuing convertible notes
Foreign Exchange Regulations
Regulates the rules regarding payments in, and repatriation of, foreign currencies, which is very regulatedForeign investment into India is primarily regulated by (i) industrial policy (ii) regulations issued by RBI (iii) FEMA (iv) FDI Policy
In & out-flow of foreign exchange not as heavily regulated
Competitions Act, 2002
Provisions relating to anticompetitive agreements and abuse of dominant position
Similar to US- prohibition on horizontal, vertical combinations, dominant use of position
Income Tax Act, 1961
Tax compliance requirements for an Indian company Similar to US - Indian companies taxable in India on their worldwide income
Employment Laws
Legal framework that governs and Indian employer’s relationship with it’s employees
The construct of employment at will is not recognized
IP Laws Legal protection available to IP created in India, incl. copyright, patent, trademark, design, trade secret
Software programs are not patentable in India’ protection is available by way of copyright
Other Stamp Duty - all agreements must be stampedDispute Resolution - In-court litigation can run into several yearsClosing down a Pvt. Ltd. Co. - Time consuming and expensive
No equivalent duty in USDisputes resolved more easilyNot difficult at all
Key call outs vs . US
India Companies Act, 2013
Ownership & Mgmt
Ownership represented by shares:Equity share: ~common stockPreference shares: preferential right for dividend and redemption but reduced voting rights
Board of DirectorsManage day to day affairs; one resident director in India mandatory (182 days/year)
Directors fall under the purview of “officer in default” - liable for contravention of the provisions of law even if did not even participate in the concerned meetings of the Board
Access to capital
Access to capital is regulated
Convertible notes cannot be used as a mode of investment under the extant RBI regulations.
Companies are not allowed to secure loans or collect deposits from any person other than an institutional lender, who is not a director or a shareholder
Venture debt in India is currently regulated under the stringent regime applicable to non-banking financial companies.
Structure
Typically organized as “Private Limited Companies” due to ease of operation and fewer disclosure requirements
Other business entity structures:Sole Proprietorship: No business registration requiredPartnerships: Regulated under Partnership ActLtd. Liability Partnership: Hybrid between a LLCo. and Partnership
Step-down Subsidiary: A company cannot have more than two layers of subsidiary entities that engage solely in investment activities
New Companies Act to tighten regulatory framework post certain corporate scandals (Satyam etc) – is work in progress
List of Company DocumentsAmendments:Alteration to the Memorandum requires a prior approval from either the Govt. or Company Law Board depending upon which clause requires alteration
Articles may be altered by a special resolution passed by the members of the company
Watchouts: Stringent compliance requirements particularly in relation to registers, record keeping and filings including penal sanctions for some non-compliances
Memorandum of AssociationProvides the characteristics (name, division of shares etc) and objects (activities) of the Company; the company cannot engage in business that falls outside the scope of these objectsMust be filed with the Registrar of Companies
Articles of AssociationProvides for the manner in which the Company is managed
Register of Members (CapTable)Lists the current shareholders of the Company
Register of loans, guarantee, securityShows the debt owed by a Company
Register of related parties contractsList the contracts with related parties and entities in which directors are interested
Register of directors & key managerial personnelProvides a list of the persons in charge of the overall operation of the company
Foreign Exchange Regulations: FEMA
Investment RoutesA non-resident entity (NR) can acquire shares of an Indian company through (a) a primary issue (b) a secondary sale of shares by a resident, NR or NRI shareholder. NR can also acquire ownership interests in LLPs for which separate guidelines are set out.Non-cash consideration such as share swap are also permitted.
ApprovalsGenerally, transfer of shares from R to NR and NR to NR, is permitted without prior approval from RBI for all sectors where automatic FDI is allowed.Compulsory RBI approval for (i) transfer of shares by way of gift; (ii) transfer of shares from NRI to NR.In some sectors such as multi-brand retail and defence, specific foreign investment restrictions and pre-approvals apply; FDI in e-commerce is prohibited [See slide on FDI for further details]
PricingShare transfer to NR is subject to pricing guidelines, that must be complied with.
ReportingThe primary obligation of reporting transfer of shares to NR is on the investee company or the transferee resident in India. The investor is required to submit its KYC details.Indian entities have to file FCTRS/other documents during an M&A process for foreign exchange compliance
SELECT DOCUMENTSKYC: Know-Your-Customer information to be sent from banks
FIRC: For foreign funds to Indian accounts – each person needs a certificate from bank with purpose specified - eg. purchase of equity
FC-TRS: Declaration regarding transfer of shares; to be filed by banks after original FIRC filed by each
FEMA: Foreign Exchange Management Act 199, NR: Non-resident entity, NRI: Non-resident Indian, R: Resident entity, RBI: Reserve Bank of India, KYC: Know Your Customer; FIRC: Foreign Inward Remittance Certificate, a document that acts as a testimonial for all the inward remittances entering India
Foreign Exchange Regulations: FEMA
INDEMNITY PAYMENTSSimilar to deferred consideration, payment of indemnity amounts in relation to M&A transactions between residents and non-residents is not permitted without the prior approval of the RBI
REPATRIATIONRemittance of sale proceeds of securities by a NR seller is permitted (i) when securities are held on repatriation basis (ii) sale is made in accordance with prescribed guidelines and (iii) NOC is obtained from Income Tax dept.However, repatriation of foreign exchange from India requires a lot of paperwork!
EscrowCreation of non-interest-bearing escrow accounts for the purposes of keeping shares or purchase or subscription money/consideration in an escrow is allowed for a maximum period of 6 months (vs. 3 years in global M&A escrow arrangements)Additionally, the funds in the escrow account may not be used by the bank-escrow agent for providing any form of financing to a third party, nor for providing any non-fund based facilities such as letters of credits or guarantees against the balances in the escrow account
Deferred ConsiderationFEMA does not permit payment of ‘deferred consideration’ by foreign investors/acquirers (staggered payments structured usually as ‘earn-outs’ based on milestones achieved) unless RBI approval is obtainedForeign acquirers are forced to stagger their acquisition over a period of a few years
Price of each tranche to be determined in accordance with the existing pricing guidelines at the time of completion of the relevant trancheIn cases of a staggered acquisition by a foreign investor / acquirer, seller promoters have, typically, insisted on a floor price or a base valuation for the next tranche of the acquisition to shield them from factors that could affect the valuation of their shares
Foreign Exchange Regulations: FDIIndian Commerce Ministry’s directives about foreign ownership of Indian companyAUTOMATIC ROUTE
The “software product” sector falls under the automatic route for purpose of FDI.
Foreign investment is prohibited in e-commerce but permitted in marketplace-models that facilitate e-commerce
KEY INDIAN STAKEHOLDERS
● Dept. of Industrial Policy & Promotion (DIPP)
● Foreign Investment Promotion Board (FIPB)
Entry Routes and Sectoral caps for FDI
Automatic Route - Government approval is not required for certain sectors for FDI upto 100%. Foreign investors in such activities only need to adhere to certain post-FDI reporting requirements to RBI.
● 100% FDI allowed in ‘marketplace’ models – B2C or B2B● FDI not permitted in inventory-based e-commerce models
Approval Route - Approval of Government is required and proposals are considered by FIPB
Sectoral Caps - FDI in a company is permitted up till the sector-specific percentage of the total capital
● Extent of FDI depend on activity engaged● In most activities, FDI permitted upto 100% - includes most tech
startups● Prohibited Sectors – Lottery, Gambling, Chit funds, Trading in
Transferable Development Rights, Real Estate Business etc
Competition Act, 2002 regulates:
● Anti-competitive Agreements
○ Horizontal Agreements(eg. cartels)
○ Vertical Agreements (eg. tie-in/bundling agreements)
● Abuse of Dominant Position
○ Eg. predatory pricing, denying market access, limiting or restricting production of goods
● Combinations○ Mergers & Acquisitions○ Amalgamations
Competitions Act, 2002
* Ref: Section 5 & 6 of the Competition Act, 2002
Combination Regulations, 2011
All ‘Combinations’ falling within certain thresholds*, require prior approval of the Competition Commission of India (CCI)
Acquisition of Control / Merger and Amalgamation Competition Commission is required to be notified within 30 days of (a) the execution of any agreement or other binding document for acquiring control, shares, voting rights or assets; or (b) in the case of a merger and amalgamation, the board of directors’ approval of the proposed merger or amalgamation
Public Financial Institution, Foreign Institutional Investor, Bank or Venture Capital Fund Whilst merger control provisions under the Competition Act do not apply to investments, financing facilities or any acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund, the Competition Commission is, nevertheless, required to be notified of details of the transaction within 7 days from the date of the investment, financing or acquisition
Transactions found to have an “appreciable adverse effect” on competition in India will be rendered void in accordance with the Combination Regulations
Income Tax Act, 1961
Income Tax● Indian companies are taxable in India on their worldwide
income, irrespective of source and origin● Before any share transaction, must get IT clearance,
without which, govt can ‘void’ the transaction; HNWIs also need clearance
● Recently, the Government has mandated that barring a few exceptions, private limited companies must now include premium they receive from resident investors who subscribe to their shares as ‘Income from Other Sources,’ and pay tax on such investment at the applicable rates.
Tax Treaties: Agreements for Avoidance of Double Taxation signed by India with various countries provide a favourable alternative mode for determining taxable business profits; the treaties also provide specifically the mode of taxability of incomes in the nature of dividends, interest, royalty and fees for technical services
WATCHOUT!
Situation: US Acquirer X buys Indian Startup Y and begins to use Y’s IP as it’s own
Watchout: Acquirer will have to pay Indian taxes on the Indian IP being used
Recommendation: Value the IP from a merchant banker (eg. Morgan Stanley, EY, PWC), sell the IP to the US Acquirer X, pay taxes on the sale to the Indian govt. and then use the IP wherever
Excise Duty
Customs
Duty
Sales Tax
Central Excise Rules, 1944
Requires all manufacturers of
excisable goods to register
themselves. Registration valid
for as long as production activity
continues; no renewals needed.
Customs Act, 1962 & Customs Tariff Act, 1975
Tax levied on all goods which are
freely importable.
Central or the State Sales Tax
Acts
Tax levied on sale of a commodity (not services or
exports) which is manufactured or
imported, and sold for the first
time.
Service Tax
GST
Finance Act
Tax levied by Central
Government of India on certain
“covered services” that is collected from the service
recipient
Proposed
Comprehensive single national-
level tax on goods and services
Other Taxes
Employment Laws Indian Contracts ActLays down the general principles relating to the formation and enforceability of contracts.
Agreements in restraint of trade are void Agreements restraining an employee from carrying on the activities similar to that of his/her employer upon the termination of such employment would be void and unenforceable, as opposed to agreements that impose a restraint during the course of employment
Concessions for tech focusSpecial concessions offered by various state governments to IT-enabled enterprises and employers situated in special economic zones (SEZs), tech parks etc
Employers have to follow certain
procedures / restrictions before separating
employees
Separate terms for female workers
No non-discrimination / diversity laws
No “Employment at will”
E.g. prohibition of work during night hours, protection against
sexual harassment etc.
No specific laws that enforce diversity, non-harassment and non-
discrimination.
OverviewCentral legislations govern employer-employee relationships. However each state has the power to make changes to the same in so far as it concerns employees in their state.
Broadly, key labour legislations in India can be grouped under select Acts including Indian Contracts Act, Factories Act, Industrial Disputes Act, Payment of Gratuities Act, Indian Contracts Act, State laws
Primary employment benefits are Provident Fund (PF) (payable after 20 employees threshold) and gratuity (applicable after 10+ employees). These are structured as defined contribution schemes.
Other key points:
Act Description Duration Registration
The Copyright Act, 1957
Protects specific creative expression of an idea (eg: articles, sketches, code).Recognizes and protects computer programs, tables and compilations including computer databases as ‘literary works’ under the Copyright Act. Employer is first owner of copyright of the work created by an employee or contractor during course of employment or term of service unless decided otherwise by the parties. (S.17 of the Copyright Act, 1957)
Term of protection extends to 60 years
OPTIONAL (to prove time and identity of author) – copyright vests in the author automatically upon creation
The Trademarks Act, 1999
Protects any symbol, word or slogan indicating origin of goods/ services or distinguishing it from another good/service
Distinctive marks/ slogans have 10 years trademark protection subject to renewal, which may go on indefinitely.
REQUIRED by filing trademark application in order to obtain trademark rights
The Patents Act, 1970
Protects functional expression of an idea (eg: machine, method/process, business strategy)Provides protection for computer- implemented inventions; however, prohibits patentability of “computer programs per se”
Novel, nonobvious and useful ideas have patent protection for 20 years in India, if they are patentable under Indian law
REQUIRED
Trade Secrets
No legislation – Agreements under Section 27, Indian Contract Act, 1956Protects any information (usually technical), that is secret and is of economic value and advantageous to the business because of its secrecy (eg: business strategy, algorithm)
No registration for trade secrets in India; Protection through confidentiality agreements
Intellectual Property Laws|Indian IP laws are largely TRIPS compliant
Other
Dispute Resolution
● Federal court system similar to US that allows multiple appeals
● In-court litigation is time consuming and can run into several years
● Arbitration and Mediation are effective alternate resolution mechanisms that afford secrecy and provide greater procedural control to the disputing parties
● Arbitral/Mediation awards are open to review by the courts in certain circumstances
Closing Down a Private Co.
● Time consuming, expensive and difficult process
● By shareholders’ consent
● Involves seeking approval from various government departments
Stamp Duty[No equivalent In US]
● A government levy that is charged on instruments executed in India or that are brought to India for enforcement
● Determined by a central law (Indian Stamp Act) but most states have specific rules which override the central law
● Charged on all written instruments (including electronic records), contracts etc.
● Non-payment makes a document unenforceable
● Non-payment or underpayment may be a rectifiable defect, subject to discretionary approval of the relevant regulator and payment of penalties
● Note: SPAs, SHAs, Employment and IP assignment agreements must be stamped
This document has been prepared by iSPIRT in consultation with several partners including Mani Chengappa and Mathur (‘MCM’), Nishith Desai Associates for discussion purposes only. The information contained in this document is intended for information purposes only. They are derived from public and private sources which we believe to be reliable and accurate but which, without further investigation cannot be warranted as to their accuracy, completeness or correctness. This information does not in any manner constitute, and should not be construed to be, legal advice or a legal opinion. Note that any information you provide during the course of this presentation will not be subject to legal privilege. This information is supplied on the condition that iSPIRT, MCM and any partner, employee or affiliate are not liable for any error or inaccuracy contained herein, whether negligently caused or otherwise, or for loss or damage suffered by any person due to such error, omission or inaccuracy as a result of such a supply. iSPIRT, MCM and its affiliates are also not liable for any loss or damage howsoever caused by relying on the information provided in this document.
For any legal advice you require, please seek advice from a qualified lawyer in the relevant jurisdiction.
M. Thiyagarajan (Rajan)Fellow, M&A Connect, iSPIRTrajan@ispirt.in
For Questions Please Contact
Thank You
iSPIRT Foundation is an industry think-tank founded by key participants and proponents of the Indian software product industry. iSPIRT enables a strong ecosystem, connects and guides software product entrepreneurs and helps catalyse business growth. It encourages buyers to improve performance by leveraging software products effectively. iSPIRT advises policymakers on interventions that can set the industry on a higher growth trajectory.
Mani Chengappa & Mathur is a Bangalore-based boutique law firm that is driven by the belief that information technology is the profoundest change agent of our times. Our lawyers specialize in advising domestic and international businesses of all sizes on technology and outsourcing transactions, early stage capital, corporate, privacy and data protection, employment law, intellectual property protection and commercialisation, and dispute resolution. With years of experience advising stakeholders ranging from the board of directors and executive management through corporate development, sales, human resources, research and development to the CIO organisation, we make legal advice accessible and useable.
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