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In Libra News: How to Avoid Legal Problems When You are an Entrepreneur?

It is very important for all the entrepreneurs to be aware of the legal compliances and follow them to avoid legal problems in the future. So, in this article, we will be discussing how to avoid legal problems when you are an entrepreneur.

It is always suggested that entrepreneurs must choose the correct business entity suitable for their business such as LLP, Public Company, Private Company, Partnership etc. to avoid payment of higher taxes. All the records related to receipts and expenditures should be maintained and tracked all the time. By this, in future, it will become easy while filing tax returns. Along with this, meeting minutes, contracts, founder’s agreement, employment etc. should be maintained. It is very important for the founder to read all the agreements carefully and then sign them. Even a simple mistake can cost a lot!

Entrepreneurs should be careful regarding the IPR violations and comply with all the security laws. Most of the founders often issue stocks to family, friends and angel investors without proper caution which can cause severe legal problems in the future.

Socio-economic sector startups

Corporate Social Responsibility (CSR) has been mandatory by the Companies Act, 2013 under section 135 of the Companies  Act. If the net worth of the company is more than Rs.500crores or more, if the annual net profits of the company are at least Rs.5crores, if the annual turnover of the company is Rs.1000crores or more the business should form a committee for the CSR mandate and follow it.

Private equity

Private equity can be said as the first large investment considerations for any startup. Convertible instruments are used as the major investments as securities for private equity investment. There are two kinds of securities in general i.e. compulsory convertible preference shares and compulsory convertible debentures.

Documents such as a letter of intent or memorandum of understanding or term sheet should be provided for the basic commercial understanding between startups and investors. Share subscription agreement or debenture subscription agreement basically take care of the number of shares allotted in the share capital to the investors or the issuance of the number of debentures after duly having valued the business. Furthermore, these agreements are responsible for the conditions to be satisfied by the investee or investors after the completion date. Documents related to indemnification, representation and warranties resulting from the due-diligence exercise, shareholder’s agreement dealing with the redemption rights on preference or debentures shares, exit options to the investors after the lock-in-period etc. or otherwise are also necessary.

Angel investors are generally individual persons or industry professionals who fund or invest the venture in return of an equity stake. The investee company has to be within three years of its incorporation, not listed on a stock exchange and should have a turnover not exceeding Rs.25crore and not be promoted by or related to an industrial group. The deal size should be between Rs.5 lakhs and Rs.5crores. It is also necessary that an investment shall be held for a time period of at least 3 years.

Debt financing

  1. A)   Loan from NBFCs and Banks

When a loan is taken from the NBFCs and banks, the businesses should have a good track record and substantial collateral. Along with this, other terms and conditions should be fulfilled and a lot of documentation should be done. Such as-

i) application for the loan sanction by borrowers.

ii) issue of the sanction letter by the bank.

iii) agreement of loan.

iv) Security or collateral documentation, such as the deed of mortgage, deed of hypothecation, deed of guarantee, share pledge agreement, memorandum of entry.

B)   External Commercial Borrowings (ECB)

New ventures can also take advantage of availing the borrowings by the way of buyer’s credit, bank loans etc. to finance their business activities according to their requirements. However, these types of borrowings from the ECBs come with some end-use restrictions. For instance, these borrowings cannot be used for investment or lending in the capital market or for acquiring the company in India. The ECB guidelines are outlined by the reserve bank of India hence strict compliance of these conditions prescribed by the guidelines is warranted.

C)   CGTMSE loans

New ventures can also procure the loans under the credit guarantee trust for micro and small enterprises scheme launched by the ministry of micro, small and medium enterprises (MSME), Government of India. Through this scheme, one can get loans of up to Rs. One crore without collateral or surety. Any business can obtain loans from any of the scheduled commercial banks and specified regional rural banks such as NSIC, SIDBI etc.

So, if all the businesses follow these legal compliances before starting their business they can avoid all kinds of legal problems in the future.




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