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India Corporate Playbook for M&A - A guide to M&A in India

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India Corporate Playbook for M&A - A guide to M&A in India, Startup Bridge India initiative.

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India Corporate Playbook for M&A - A guide to M&A in India

  1. 1. 1 India Corporate Playbook A Guide to M&A in India Dec 2016
  2. 2. Disclaimer This 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.
  3. 3. 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 2nd LARGEST INTERNET MARKET $13.5 B VC/PE INVESTMENT SINCE 2014 309 M&A DEALS SINCE 2014 Funding, M&A numbers as of 2016Q3
  4. 4. 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 6K 2015 est 20K (2020F) Active product startups in India Supported by 2.5K+ VCs/angels 120+ 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
  5. 5. 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
  6. 6. Tech & Talent deals very popular; process for team to move to the US on a visa is well understood Market entry less common High user base but low financial traction TYPE OF DEALS TIME TO CLOSE 40-50% longer than US acquisitions Visible benefits when the target is a US/Singapore entity (vs. Indian entity) VALUE OF ACQUISITION Can 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
  7. 7. 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 regulated Litigation in India runs in years Closing down companies takes time, so prefer full stock purchase Constant tradeoff between TIME and LEVEL OF LEGAL CONSERVATISM that needs to be managed
  8. 8. 1. Indian Technology Landscape Overview
  9. 9. 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
  10. 10. 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 US Incu bators Angel & Seed Series A Series B+ Investments upto $100K Invest in ideas / biz plans Investments $100k - $1M Beta version of product Mentorship, 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
  11. 11. 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
  12. 12. 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
  13. 13. 2. Mechanics of an M&A: Key differences
  14. 14. Tech Due Diligence Valuation/ Termsheet Legal / Financial DD SPA 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 Stages Timelines for transactions can be ~50% longer (3-5 mos) Discovery
  15. 15. 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.
  16. 16. 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 schools Be cautious of undocumented colleges Team Pedigree Indian 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 Other Interview all employees; Leadership team not always representative of 2nd tier employees Candidates’ geographical exposure is a good indicator of cultural fit, adaptability Tech Due Diligence Criteria to evaluate Indian teams & product should range from source code to team pedigree
  17. 17. Valuation & Termsheet Valuations commonly at 30-40% discount vs. US counterparts, all else equal Cash Investor 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 Stock Usually 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
  18. 18. 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 & Termsheet Other 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
  19. 19. Lead Counsels Family-owned businesses Indemnification 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 Certificate Financial 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
  20. 20. Specific assets of company (eg. Tech/IP, team etc) Acquihire: common to acquire team, license IP perpetually, & shut down product Share Purchase Agreement Share Purchase Asset Purchase All shares of startup Shell company remains which owns non-acquired assets Eventually 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
  21. 21. 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 promoters Breach 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 contracts Enforceability 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% shareholding An 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
  22. 22. 3. Indian Statutory and Regulatory Framework
  23. 23. Cultural differences Communal 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 sensitivities Family (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 market English commonly spoken, almost everyone is multilingual Technical talent is abundant, relatively inexpensive; Large middle class huge internal market for Indian startups Unreliable infrastructure Weak, unreliable infrastructure (electricity, roads) cause delays; budget extra time Internet connectivity can be poor Test 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
  24. 24. 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 Licences Common 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
  25. 25. 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 states Prohibition on issuing convertible notes Foreign Exchange Regulations Regulates the rules regarding payments in, and repatriation of, foreign currencies, which is very regulated Foreign 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 stamped Dispute Resolution - In-court litigation can run into several years Closing down a Pvt. Ltd. Co. - Time consuming and expensive No equivalent duty in US Disputes resolved more easily Not difficult at all Key call outs vs . US
  26. 26. India Companies Act, 2013 Ownership & Mgmt Ownership represented by shares: Equity share: ~common stock Preference shares: preferential right for dividend and redemption but reduced voting rights Board of Directors Manage 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 required Partnerships: Regulated under Partnership Act Ltd. 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
  27. 27. List of Company Documents Amendments: 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 Association Provides 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 objects Must be filed with the Registrar of Companies Articles of Association Provides for the manner in which the Company is managed Register of Members (CapTable) Lists the current shareholders of the Company Register of loans, guarantee, security Shows the debt owed by a Company Register of related parties contracts List the contracts with related parties and entities in which directors are interested Register of directors & key managerial personnel Provides a list of the persons in charge of the overall operation of the company
  28. 28. Foreign Exchange Regulations: FEMA Investment Routes A 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. Approvals Generally, 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] Pricing Share transfer to NR is subject to pricing guidelines, that must be complied with. Reporting The 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 DOCUMENTS KYC: 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
  29. 29. Foreign Exchange Regulations: FEMA INDEMNITY PAYMENTS Similar 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 REPATRIATION Remittance 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! Escrow Creation 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 Consideration FEMA 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 obtained Foreign 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 tranche In 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
  30. 30. Foreign Exchange Regulations: FDI Indian Commerce Ministry’s directives about foreign ownership of Indian company AUTOMATIC 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
  31. 31. 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
  32. 32. 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
  33. 33. 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
  34. 34. Employment Laws Indian Contracts Act Lays 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 focus Special 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. Overview Central 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:
  35. 35. 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, 1956 Protects 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
  36. 36. 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
  37. 37. 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, iSPIRT rajan@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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