9 Rules for Building a Tech Winner

Tony Seba gave a great talk at Google some time ago and lists these 9 rules for building a tech winner. This talk is still a must-hear for any entrepreneur in the high tech area. Here are the main points of his talk:

1. Design products and services that are easy to adopt.
2. Add value not features
3. Focus, win, grow. Repeat.
4. Have a story for your product.
5. Feel the pain, and then develop the products
6. It's a risky world. Sell confidence and not products.
7. Convert champions and not just deals.
8. Choose the right partners and Manage with Clarity.
9. Having succeeded, change or die.

I find #2 the most valuable since it is easy to get carried away by the allure of adding new features. This is especially true in any software product where it is really easy to add new features.

Education Market in India

According to Educomp Solutions Limited 2007-08 annual report, here are some key facts about the education market in India:

1. 361 million children, making India the largest school market in the world. However, only 219 million go to school and the remaining 142 million are deprived of education
   
2. There are 75,000 private schools and 950,000 public schools. 84% of the public schools are in villages.
3. Out of the 75,000 private schools: 15,000 unaided premium schools, 29,400 unaided regular schools, and 30,660 aided by government.
   
4. There are about 136 students per public school, on an average. And 1200 students per private school.
5. About 200,000 more schools need to be built
6. 5 million teachers in the country with 90-95% needing re-skilling
7. K-12 market is estimated to be $20 billion, comprising of $15 billion of unaided schools and $5billion for aided schools.
8. About 2o million students take private coaching after school due to the highly competitive nature of exams in the country. This market is about Rs 5.3 billion or $500 million.
   

According to New York times, the total education market in India (including schools, universities, tutoring etc) is around $80 billion, with $30 billion coming from the government spending, and $50 billion from individuals.

For futher reading:

1. WSJ: VCs give India Education Market High Marks
2. Venture Intelligence report: Private Equity Pulse on Education (free 52-page report on sign in)
   

All you need to know to start and run a company in India

If you are a budding entrepreneur and and want to start a company in india, it is hard to find comprehensive information on the overall process and the complexities involved. Based on my experience, I have created a Mashedge web book that will help entrepreneurs get a jump start:

All you need to know to start and run a company in India.

It is a dynamic web book, and so any reader who knows links to better websites can add that link into the web book. Thus, the web book will get better over time.

The web book also has recommendations to some excellent (real) books.

Documents and signs required at the place of business

Every physical place of the business should display these documents prominently:

1. A clear signboard with the name and address of the company in 2 languages: the local language and English.
2. In Karnataka, a copy of the certificate from the the Department of Labour. This will state that the office is a legal place to do business and authorized to employ x number of people.
   
3. In Karnataka, a copy of the certificate from the Commercial Taxes department stating that the company has registered under the Karnataka Tax on Professions, Traders, Calling and Employment Act, 1976. In plain english, this means that the business has paid professional tax.
4. In addition to 3, another certificate stating that who the employer is and the employer is authorized to collect professional tax from the employees and remit it to the government on a montly basis.

Statutory Register

Running a company in India involves a lot of paper, I mean, mountains of paper. I think I may have submitted more than 200 pages of documents (many of them, the same over and over again to different agencies to get approvals) just to get through the basic incorporation and other licenses.

One of the important books that the company has to maintain is the "Statutory Register". It is a relic of 1950s that still lives on. It has the following registers:

1. Applications for and Allotment of Shares
2. Register of Members and Share Ledger (Rule 7)
   
3. Register of Share Transfer
4. Register of Debunture Holders
5. Register of Directors, Managers, and Secretary and Companies/Firms in which Directors are interested (Rules 303, 301(3) of Companies Act, 1956)
   
6. Register of Directors' share and debenture holding (Rule 307 of Companies Act, 1956)
   
7. Register of Contracts (Section 297, 299, 301 of Companies Act, 1956)
   
8. Register of Charges (Section 143(1) of the Companies Act, 1956)
9. Register of Deposits (Under the Companies Acceptance of Deposits Rules, 1979)
10. Register of Investments (including register of investments not kept in Company's name and of investment in shares and debentures of bodies corporate in the same group) (Section 372(5))
11. Register of Loan and Guarantee
12. Register of Common Seal (i.e, list of documents on which the common seal has been placed).

This Statutory Register can be bought from a bookstore that specializes in corporate stationery. One such store in Bangalore is:

Industrial and Commerical Prints
No.11, 2nd cross Gandhinagar, Bangalore - 560009
Ph: +91-80-22266513

First Board Meeting

The first board meeting is necessary to pass certain minimum resolutions. It must occur within the first 30 days of incorporation.

Here's the list:

1. Certificate of Incorporation must be presented to the board.
2. Filing the consent of directors to act as Directors.
3. Appointment of the Chairman of the Board.
4. Appointment of the Secretary.
5. Appointment of Auditors.
6. Adoption of the Common Seal.
7. Situation of Registered Office.
8. Authorize opening the Bank account.
9. Allotment of shares to the Subscribers of Memorandum.
10. Approval of statement of preliminary expenses by promoters in connection with the incorporation of the company.
11. Authorize purchase of Books and Registers.

The minutes of the meeting must be captured and filed in the folder.

Things to do in the first 30 days after incorporation

There are rules and more rules for the things you need to do in the first 30 days of incorporating your private limited company. Here are a few things:

1. Open a bank account. The minimum share capital of Rs 1 lakh (1,00,000) has to be deposited in the company account within 30 days.
2. Appoint an auditor formally using a company letterhead. The auditor in turns needs to accept the appointment and inform the government.
3. A registered office must be up and running in 30 days. A signboard must be put up in a prominent location.
4. The initial shares have to be assigned according to the agreed upon investment and recorded in the register.

Difference between Assessment Year and Financial Year

In income tax parlance, there is an important difference between an "assessment year" and "financial year". 

In India, the financial year usually starts on April 1 of a calendar year and ends on March 31 the following calendar year. For example, April 1 2008 to March 31 2009 is a financial year. The taxes for the financial year 2008-2009 has to be reported in the assessment year 2009-2010! Did you get that?

In other words, you should use the tax forms that say "Assessment year 2009-2010" to report on taxes for the financial year 2008-2009.  While this makes no logical sense, that is the way it is in India. If you were to file taxes that say "Assessment year 2008-2009", then you are reporting wrong.

Statutory Audit

Two kinds of audit are required for private limited companies - statutory audit and income-tax audit. Statutory audit is required as per the Companies Act, and the income-tax audit is required as per the Income tax rules. The statutory auditor must be appointed within the first 30 days of forming the company. The income-tax audit is only required if the revenue exceeds a certain limit, e.g. Rs 40lakhs for an IT company and the income-tax auditor can be appointed after reaching the required revenue level.

Any practicing CA can do the statutory audit but must be different from the firm that does the accounting.

Bottom line - add the cost of statutory audit to your budget. It's not sufficient to just have one accountant. The additional audit costs could start anywhere from Rs 25000 per annum.

Tax compliance for India Company

At the very outset, it is best to understand the tax compliance issues and the burden it imposes on the founders. If the founder is a US citizen and starts a company in India, here are some tax compliance issues. (This is not an exhaustive list. I will update this as I discover more issues). (Disclaimer: This is not a legal advice. Please make sure you consult a tax attorney for your specific case).

India - Corporate filing: (see here)

1. The tax year is April 1 - March 31 following year. 
2. Quarterly advance tax payments: 15th June (pay 15%), 15th Sept (pay 45%), 15th Dec (pay 75%), and 15th march (pay 100%)
   
3. File tax return by Oct 31.
4. Bookkeeping: cash book, ledger, journal, copies of all bills issued, originals of all expenses.

India - Individual tax filing

1. You must file an individual tax return by July 31st.
2. Note that there is no joint filing as in US. You and spouse must file separately and all income, if via joint accounts, must be apportioned correctly.
3. If you are a resident in india, irrespective of your citizenship status, then your global income is taxed in India. With double taxation avoidance treaty between US and India, the net tax is the higher of the tax rates of US and India.
4. The tax year is April 1- March 31. 

US - Individual tax filing:

1. The tax year is Jan 1-Dec 31.
2. File a separate or joint tax return by April 15th. Note that foreign filers get an automatic extension but the tax owed must still be paid by April 15th.
3. Make sure you include your global income including income from your india company and from your India bank accounts and investments.
4. File IRS form 5471 if the founders are directors of the foreign company. This requires balance sheets and other information from the foreign corporation.
5. Unless you want to invite the wrath of the IRS, make sure you report all your foreign bank accounts by June 30th every year.

Since the tax year is different, you have the additional enjoyable task of selecting the correct subset of transactions.

Applying for DIN

DIN (director identification number) is a pre-requisite for any person who intends to hold a director position in any company in India.

The form is quite simple and straightforward. However, if you an OCI (overseas citizen of India), make sure you fill the nationality correctly. Although OCI grants the holder equal status with that of NRIs and Indian citizens, it is not dual citizenship. So mention the nationality correctly and attach the certified true copy of the passport and visa from your embassy.

If there are any mistakes in your DIN form, you can always submit the DIN-4 form to make corrections.

Overall process

I decided to start a private limited company. This is generally the option if you intend to seek venture funding and/or have shareholders at some point in time. The basic requirements, as set by the Govt. of India, is that the private limited company should have a minimum share capital of INR Rs. 1 lakh (100000.00) and at least 2 directors. 

The share capital will determine how you name the company. For example, the share capital should be at least INR 5 lakhs if you intend to have the word "India" in your company name. If you intend to use the word "corporation", then the share capital should be at least INR Rs. 1 crore. 

The overall process is the following:

1. The proposed directors should apply for a DIN (Director identification Number) and a DSC (Digital Signature Certificate). Note that the DIN application should contain no abbreviations. If you are not an indian citizen, you will need to get certified true copies of the passport and visa from your embassy.
2. Select at least 3 names for your company, and apply for name availability with the Registrar of Companies on form 1A.
3. Once the name has been approved, you will have 60-days to file incorporation documents. The incorporation documents include the all important Memorandum of Association (MoA) and the Articles of Association (AoA.  It also includes Form 18 (registered office of the company), Form 32 (list of directors), Form 1 (Compliance letter from the company).
4. If all goes well, you will get the incorporation certificate from the Registrar of Companies via registered post to the registered office of the company. Somebody better be there to collect it else it will go into a black hole.
5. Get a property lease agreement for the registered office. If you own the property, make sure property tax is paid fully and get a tax receipt.
6. Apply for a PAN and TAN account numbers from the Income Tax office.
7. Get a company "for" seal. This seal says "For Company XYZ...     Director".
8. Design a company letterhead.
9. Open a bank account. This is called a current account and there are a number of options based on the average quarterly balance (AQB) you can maintain. The minimum AQB is INR Rs 10000. This requires a whole host of documents including the incorporation certificate, MoA, AoA, board resolution for authorized signatories in the specific bank format on company letter head, list of directors on company letter head, PAN of the company, PAN cards of the director.  All documents must be stamped by the company seal at the "correct" places.
10. If you import/export, you need to get the Importer Exporter Code (IEC) from the Joint Director General of Foreign Trade. IEC code is useful if you want to preserve the foreign currency earned in a separate account in the bank. 
11. Register with the Karnataka Shops and Commercial Establishments office for  your registered office. This is a state authority and will depend on your local state.
12. Registration for professional tax (employer and employees).
13. If you expect service revenue of over INR Rs. 10 lakhs a year, you must register for service tax.
14. If you sell goods, you must register for VAT.

A lot depends on what your business does and there may be additional requirements. It is best to go through a professional. The professional fees vary widely.

 For a share capital of INR Rs. 5 lakhs, the cost breakdown is as follows:

1. Government fees and deposits: Rs. 38,800
2. Professional fees: Rs 25,000
3. Other costs (stationery, seal, reimbursements): Rs. 27,500

Welcome

I am writing this blog to enable future entrepreneurs to start their own companies in India. This is a first hand account of the complexities of starting and running a company in India.