As a service provider with worldwide activities in international cooperation for sustainable development, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH ('GIZ') works together with its partners to develop effective solutions that give people better prospects and sustainably improve their living conditions . In India, GIZ works with its partners in the areas of energy, environment and natural resources, sustainable urban development and sustainable economic development. With the Indian government's growing focus on promoting start-ups, the initiative intends to explore further ways in which companies can engage with start-ups and social enterprises.
According to the Startup India Action Plan, 20163, one of the biggest challenges is the failure of most startups during the first five years due to lack of money or management skills. This handbook is an attempt to provide insight into various models that could be explored to establish a fund to promote start-ups, the contributions of which would qualify as CSR expenditure under Section 135 of the Companies Act, 2013 .
Further, corporations fulfilling any of the above conditions are required to spend on permitted CSR activities at least 2 percent of the average net profits realized during the immediate three financial years. Contributions are made to a not-for-profit entity registered under Section 8 of the Act [Section 8 Society] or registered as a society or trust (collectively referred to as the "Start-up Supporting Entity"). Once the fund is established as a registered legal entity under one of the above options, corporates can contribute directly to these entities and these contributions will qualify as 2 percent expenditure under the CSR regulations.
Both of the above options are discussed in detail in the last section of the handbook. In addition, the CSR regulations do not limit the number of corporates that can contribute to a TBI or SSE.
What is an incubator?
- Process for engaging with an incubator – From corporate lens
- Process for engaging with an incubator – From incubatee lens
- Existing incubators in India - Technology and Social Enterprise
Social impact: Traditional stoves emit dangerous smoke (known as household air pollution), which is known as one of the biggest health risks for rural women. It nurtures early-stage social enterprise projects and start-ups with great potential to improve the lives of India's poor. Finding technologies and products that can help rural communities is one of India's overarching challenges.
Social impact: Infant mortality due to hypothermia is one of the major challenges in India (K Lunze, 2013; Indian Pediatrics, 2001; Singh, 1999). Social impact: Inadequate storage infrastructure in India is one of the biggest challenges in meeting the domestic demand for fruits and vegetables. An unlisted public company or a private company covered under section 135(1) of the Act which is not required to appoint an independent director in accordance with section 149(4) of the Act shall have its CSR Committee without directors such.
It should involve innovative technology-based products, ideas or services. The potential of the idea for the creation of Intellectual Property. Under this option, the proposed fund could be legally structured as a TBI, which would be housed within an academic institution and approved by central government. TBIs in India can be set up as either a for-profit legal entity or a non-profit legal entity, depending on the motive of incubation.
In case TBIs do not have any of the above components, they usually associate or connect with different academic/technical/R&D institutions and companies (called host institutions) dedicated to fostering innovation and entrepreneurship, and have the necessary expertise and infrastructure in situ. According to the CSR regulations13, only a contribution made to a TBI, established within an academic institution and approved by the national government14, is eligible for mandatory CSR expenditure. This means that the contribution to TBIs that are not located in academic institutions and are not approved by the National Government (DST) will not be regarded as a mandatory 2 percent spending.
Model 1 – Setting up a Technology Business Incubator (TBI)
- About the model
- Form of investments by TBI
- Reporting requirements for TBI
- Reporting requirements for corporates
- Corporates supporting incubators under CSR mandate
- Impact assessment
- Tax implications
- TBI accepting FCRA funds
These focus areas can be the same or different from the thematic areas specified in Schedule VII of the Companies Act. Reporting of the CSR policy on the companies' websites, including the intention to contribute to an incubator and/or the areas specified in Schedule VII that the company intends to address. Taxability of income in India is governed by the provisions of the Income Tax Act, 1961.
Under the provisions of the Act23, a TBI registered as a Section 8 company/society/public charitable trust can apply to the income tax authorities for tax exemption. Any contribution that a company makes to an entity registered with the income tax authorities25 must be eligible for 50 per cent. deduction from the company's taxable income, regardless of whether the contribution is made for CSR expenses or non-CSR expenses. Accordingly, 50 percent of a company's contribution to a TBI registered with the income tax authorities must be allowed as a deduction from the company's taxable income.
Under the provisions of the Foreign Contribution (Regulation) Act, 2010 (FCRA), a TBI registered as a Section 8 Company/Society/Public Charitable Trust must obtain the prior approval of the Ministry of Home Affairs (MHA) before accepting any contribution29 from foreign of a company having a branch in India30. Companies are increasingly aware of the potential that start-ups have and the contribution they can make both to the economy and to the development of the country. A contribution made by a company to a not-for-profit entity registered as a Section 8 company or as a company or trust (collectively known as a start-up support entity) qualifies under CSR regulations.
The CSR regulations require such companies to formulate CSR projects, in accordance with the thematic areas mentioned in the Schedule VII of the Companies Act, and to identify geographical areas where the project can be implemented. While the actual implementation of the project may be undertaken by the non-profit entity, companies will be responsible for its monitoring. The project will then be taken to the non-profit entity, which will act as an SCE and manage the project by providing support to start-ups working to create an impact in line with the chosen thematic area of the project.
Model 2 – Setting up a Start-up Supporting Entity (SSE)
- About the model
- Legal structure of an SSE
- Section 8 Company
- Entity options – Advantages and limitations
- Entity options - Comparative analysis
- Reporting requirements for an SSE
- Reporting requirements for corporates
- Impact assessment
- Tax implications
- SSE accepting FCRA funds
Therefore, it is important that CSR funds benefit a social or environmental cause and not the startups themselves. To ensure this aspect, the SSE should only support start-ups that do not have a profit-only objective, although for-profit entities can be supported. However, incubators that support startups with CSR funds typically limit their funding to exclude startups that are self-sustaining and scaling up their operations.
Incubators consulted during the study indicated that the financing of start-ups scaling up their operations did not come from the CSR funds provided to the incubator and could be done independently by the company directly in the start-up without inclusion of the incubator. Non-profit enforcement entity. project with support for start-up companies developing . products to help eradicate malaria. While the number of startups in India is on the rise, they often find it challenging to get off the ground.
The lack of support for social impact companies and start-ups can be addressed through the proposed use of CSR funds. The knowledge gained in these incubators is also invaluable in providing guidance to start-ups. Support for start-ups and incubators would contribute to the creation of a culture of innovation and the creation of new opportunities for companies in the provision of goods and services.
Furthermore, the support of start-ups with social impact can quickly scale up the developmental impact that the companies create, which has a multiplier effect. Intensive market research conducted by start-ups can help companies gain access to new potential markets and company-specific knowledge. Moreover, engaging with start-ups would inspire innovation in businesses, which is essential for business growth.
Partnering with startups can help bring insights into industry trends, which will help businesses increase their reach in the business ecosystem. Furthermore, cooperation with start-ups will further help companies to collaborate with other relevant companies and stakeholders.
Comparison of models
Practical insights on funding incubators
Companies in India can play a key role at this stage and support incubation platforms in the country. By providing CSR resources, companies can help TBI/SSE create a supportive ecosystem for startups to survive and address economic, social and environmental challenges. Using CSR funds would also help incubators secure early funding, build workspaces, recruit desired mentors, and establish research and development centers to foster start-ups.
It can also help businesses respond quickly to the changing demands of the potential market to remain competitive in an ever-changing economy. Many companies are realizing the need to engage with startups to get exposure to advanced technologies and methodologies, enabling them to solve problems, build minimum viable products, etc. Thus, the benefits of associating with startups are more than just generate financial returns since start-ups are considered to be more innovative than internal research and development carried out by leading companies.
Thus, the contribution of CSR funds by corporates would be beneficial to both the corporates and the start-up/incubator ecosystem, resulting in the development of the economic climate in the country.
CSR funds and incubation
Creates long-term sustainable impact and scales up the social impact created by CSR funds.