MCA fast-tracks insolvency process of start-ups

The Corporate Affairs Ministry (MCA) has now widened the pool of start-ups that can avail themselves of the fast track corporate insolvency process, thereby enabling faster exits for such businesses.

It has now said that the facility of fast track corporate insolvency resolution process — being eligible for faster winding down within 90 days — would be available to the expanded definition of ‘Startups’ as specified in February 2019 by the  Department for Promotion of Industry and Internal Trade (DPIIT) under the Commerce and Industry Ministry. 

Hitherto, only those start-ups that were in conformity with the ‘Startup’ definition specified in May 2017 were eligible for applying for the fast track corporate insolvency resolution process, sources said.

It maybe recalled that the Centre had in February 2019 widened the definition of Startups and increased the period for which an entity would be considered as a start-up from seven to ten years, besides increasing the ceiling turnover limit in any financial year to ₹100 crore from ₹25 crore earlier. 

Rising number of start-ups

This change in definition of ‘Startups’ was made to allow the benefits to be available to a larger pool of start-ups. 

While encouraging more start-ups in the system, the government is also keen that the laws of exit should be simpler so that young entrepreneurs are not punished for any business failures. 

As of June 30, 2022, a total of 72,993 start-ups have been recognised by DPIIT. India registered a whopping 15,400 per cent increase in the number of start-ups from 471 in 2016 to 72,993 as of June 30, 2022. India currently has more than 100 unicorns with each of them having a valuation of more than $ 1 billion. About 44 unicorns were minted in India in 2021 alone.

Aseem Chawla, Managing Partner, ASC Legal, said the government’s regulatory and business policy aims all along in providing an enabling business environment to the start-up Industry. “This latest move is again a step in the said direction by ensuring fast tracked insolvency proceedings. Also the same incentivises startups to be registered with Ministry of Commerce and Industry so as to be eligible for the said inclusion apart from other fiscal concessions which are available to such registered entities. All in all a welcome move”.

Under the insolvency law, a fast track corporate insolvency resolution process should be completed within a period of 90 days from insolvency commencement date. It can be extended  by Adjudicating Authority by further 45 days, if a resolution is passed at a meeting of the committee of creditors and supported by a vote of seventy five percent of the voting shares. 

The Startup India initiative was launched in 2016 with the objective of building a strong ecosystem for nurturing innovation and entrepreneurship in the country. The Government, as part of Startup India initiative, is implementing Fund of Funds for Startups (FFS) scheme and Startup India Seed Fund Scheme (SISFS) to provide financial assistance to Startups through Alternative Investment Funds and incubators respectively. FFS was established with a corpus of ₹ 10,000 crore.

An Action Plan for Startup India was unveiled on January 16, 2016. The Action Plan laid the foundation of Government support, schemes and incentives envisaged to create a vibrant startup ecosystem in the country.

The Action Plan comprised of 19 action items spanning across areas such as “Simplification and handholding”, “Funding support and incentives” and “Industry-academia partnership and incubation”.

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