Starting a business isn’t just about having a great product or service — it’s also about navigating the legal and regulatory framework that keeps companies accountable. In India, the Companies Act, 2013 sets out a range of compliance requirements for businesses. While these are essential for transparency and governance, they can feel overwhelming for early-stage companies working with lean teams and limited resources.
To encourage entrepreneurship and support new ventures, the Government has introduced several relaxations for startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). These benefits are designed to cut down on compliance burdens, lower costs, and free up time for founders to focus on building their business.
From simplified reporting requirements and exemptions in deposit rules to relaxed conditions for employee stock options, sweat equity, mergers, and board meetings, the Companies Act now offers a friendlier environment for startups. Let’s go through each of these benefits in detail.
Cash Flow Statement and Annual Return
In most companies, the annual financial statement is a comprehensive package that includes:
- A balance sheet at the end of the financial year
- A profit and loss account or an income and expenditure account
- A cash flow statement
- A statement of changes in equity (if relevant)
- Explanatory notes to accompany these documents
For a startup company, there’s one big difference — the cash flow statement can be left out. This is more than just a skipped page in a report. Preparing a cash flow statement often requires detailed tracking of every inflow and outflow, projections, and reconciliations. For a young business still stabilising revenue streams, removing this step saves valuable time and resources.
The annual return also comes with a simpler requirement. Normally, it must be signed by both a director and a company secretary. If a startup doesn’t have a company secretary, the director’s signature alone is enough. It’s a small change in paperwork but removes the need to engage extra personnel purely for compliance.
Acceptance of Deposits
Section 73 of the Companies Act sets strict conditions for accepting deposits from members. These typically include:
- Issuing a circular detailing the company’s financial position, credit rating, and number of depositors
- Filing this circular with the Registrar
- Setting aside at least 20% of the deposits maturing in the next financial year into a special reserve account
- Certifying that no default has been made in repayment or interest payment
- Providing security for repayment, or clearly stating if deposits are unsecured
Startups get a significant relief here. For the first five years from incorporation, these conditions do not apply. Instead, the only requirement is to file details of any money accepted with the Registrar in the prescribed manner.
This change means that, during those early years when flexibility matters most, a startup can raise funds from members without the heavy procedural overhead that established companies must follow.
The law also spells out what counts as a deposit and what doesn’t. One major exemption for startups is money received through a convertible note.
If a startup receives ₹25 lakh or more in a single tranche from one person in the form of a convertible note, it’s not treated as a deposit. A convertible note starts as a loan but can either be repaid or converted into equity shares when certain agreed conditions are met.
For founders, this opens up a flexible funding route without triggering deposit compliance rules. It also gives investors a clear path to become shareholders if the business performs well, creating a win–win arrangement.
Issue of Employee Stock Options
Employee Stock Option Plans (ESOPs) are a popular way to reward and retain talent. In most private companies, ESOPs can be granted to:
- Permanent employees in India or abroad
- Directors (except independent directors)
- Employees of subsidiaries or holding companies
However, under normal rules, ESOPs cannot be offered to promoters, members of the promoter group, or directors holding more than 10% equity.
For startups, this restriction is lifted for the first ten years from incorporation. Promoters and significant shareholders can also be granted ESOPs. This is particularly relevant for startups where the founders themselves are deeply involved in operations and strategy — it allows flexible compensation structures that align everyone’s incentives with the long-term growth of the business.
Issue of Sweat Equity Shares
Sweat equity shares are issued in recognition of contributions other than cash, such as intellectual property rights, technical expertise, or other forms of value addition. For most companies:
- Sweat equity shares cannot exceed 25% of paid-up equity capital
- They must be locked in for three years from allotment
- A special resolution is required to authorise their issue
Startups enjoy a bigger allowance — up to 50% of paid-up capital for the first ten years after incorporation. This is a significant benefit for ventures that rely heavily on specialised skills or innovation contributed by their founders, employees, or close collaborators. It allows them to reward such contributions without immediate cash outflow.
Fast Track Merger
Mergers can be lengthy and costly because they usually require approval from the National Company Law Tribunal (NCLT) and public notifications. A fast-track merger process removes these steps, making the process quicker and simpler.
Startups can take advantage of fast-track mergers when:
- Two or more startups merge
- A startup merges with one or more small companies
In such cases, approval comes from the Regional Director instead of the NCLT, reducing both cost and turnaround time.
A small company, for the purpose of this rule, is one with:
- Paid-up share capital not exceeding ₹50 lakh (or a higher amount prescribed, up to ₹10 crore)
- Turnover not exceeding ₹2 crore (or a higher amount prescribed, up to ₹100 crore)
Certain entities, such as holding companies, subsidiaries, Section 8 companies, and companies governed by special Acts, are excluded from this definition. This ensures that the fast-track option is limited to genuinely small-scale entities that can benefit most from the reduced process.
Other Benefits
Two other noteworthy relaxations make compliance easier for startups:
- Meetings of the Board — Normally, companies must hold at least four board meetings each year, with no more than 120 days between meetings. For startups, it’s enough to hold two meetings annually, one in each half of the calendar year, with at least 90 days between them. This reflects the reality that in small, tightly run teams, formal board meetings are less frequent because discussions happen more informally.
- Lesser Penalties — If a startup or its officers fail to comply with certain provisions of the Act, penalties are halved. The maximum penalty is ₹2 lakh for the company and ₹1 lakh for the officer in default. For early-stage businesses operating under tight budgets, this reduction can be meaningful.
Final Thoughts
The benefits provided under the Companies Act, 2013 for startups are more than just procedural shortcuts. They represent a deliberate effort by the government to give young companies the flexibility they need in their early years. By easing financial reporting, simplifying fundraising rules, expanding stock option eligibility, increasing allowances for sweat equity, streamlining mergers, and reducing both meeting requirements and penalties, these provisions create a business environment that encourages innovation and growth.
For founders, understanding and using these benefits is not just about compliance — it’s about strategically managing time and resources so the focus remains where it matters most: building a successful, sustainable business.
