India might grant startups the ultimate power: non-accountability

Currently, all startups have to file annual returns and financial documents with Registrar of Companies.

In an unprecedented move, Indian startups may get an exemption from regulatory filings for the first 10 years of their existence.

Under the new guidelines that the Indian Ministry of Corporate Affairs (MCA) is mulling over, startups don’t have to file company documents with the ministry for a decade since their incorporation, local media Economic Times reported. Although it is not immediately clear which regulatory filings, the proposed relaxed norms would be applicable to.

Currently, India mandates all startups to file annual returns and financial documents such as balance sheets and profit and loss statements with Registrar of Companies (RoC), that makes it open to scrutiny as these documents are available in public domain.

“This is a positive move. When startups are small, they do not have much to comply with or report as far as RoC filings are concerned, because they are struggling with things like product development, first customers, and payments,” said Anil Joshi, managing partner at Unicorn Ventures, which backs early-stage startups.

“This will help startups from the compliance perspective. Because nowadays startups do take time to get bigger.”

Joshi sees the proposed norms, once enforced, would mostly benefit the larger segment of startups.

“There is always this 80:20 principal. There is only one Ola, one Oyo or one Snapdeal. But there are so many other smaller startups,” he said. “The growth companies that have raised millions and billions of Rupees, in any case they will have smart investors who will make them comply on a quarterly basis.”

According to Joshi, the larger objective of the government is to promote startups, have more entrepreneurs and generate jobs.

While the government’s intention seems to tick all the right boxes, the impact on the ground may vary from startup to startup.

Ankit Prasad, co-founder of seven-year-old Bobble AI Technologies, which offers popular Indic mobile keyboard Bobble, says preparing all the financial documents is basic hygiene for the startups because investors seek these documents as such.

“With every new round of funding, the discipline is enforced by the investors. So even if the government relaxes these regulatory filing norms, investors won’t,” Prasad told KrASIA.

“The only advantage would be that startups would be able to hide certain information from the public,” he added.

However, he said, the relaxed norms do send positive signals to foreign investors.

Tanuj Vohra, founder and managing partner at company secretaries firm TVA & Co., that works with Indian startups to help them ensure regulatory compliance said it may be risky to allow startup to not file regulatory documents for a decade.

“Balance Sheet filings should not be exempted for any company doing business, because then startups may become a tool to conduct financial frauds since they won’t disclose any information to the public,” Vohra told KrASIA. He believes it would do good to the ecosystem if MCA takes bolder steps to sensitize the startup ecosystem like “introducing an abridged version of reporting and exemption from few RoC filings.”

Gopal Sharma, head of operations (NCR Region) at FinAdvantage Consulting, an accounting firm with pan-India presence, said regulatory filing exemption may not add any significant value to startups. Ensuring compliance is always a measure of good corporate governance which is well appreciated by all relevant stakeholders.

“Reporting may be a little cumbersome, but it is not a show-stopper. Most of the startup founders hire consultants to do that and are not directly involved,” he told KrASIA. “Diluting reporting requirements are not going to add any significant value to businesses, since whether startups report it or not, it is not going to impact the transactions that they do.”

The media report quoted a government source who said Ministry of Corporate Affairs is also discussing whether it should let startups use 50% of their paid-up capital as sweat equity for the first 10 years as compared to five years right now.

Companies, many a times issue sweat equity or shares to employees and promoters in lieu of their non monetary investment such as time and effort.

FinAdvantage’s Sharma said that time-frame relaxations pertaining to sweat equity are going to be the real value-addition to the young startups to help them engage with better talent or business partners while leveraging liquidity in a better manner.

“The big problem with (smaller) startups is cash flow,” Joshi said. “Many a times, other than for business, startups do not have money to engage experts who can consult them on growth strategy. In such cases, they compensate by these experts by the way of equity. But it is very difficult. Issuing equity by structuring it as esops is quite cumbersome.”

According to him, having a proper sweat equity allocation might help them attract the right kind of people who may help them grow.

Earlier in February, the Department for Promotion of Industry and Internal Trade (DPIIT) changed the definition of startups, stating that a company would be considered as a startup for up to 10 years since the date of its incorporation.

Prasad fromBobble believes this was very much needed for the startups in the country. “When companies enjoy startup status, they can avail opportunities and offers under Startup India initiative. Typically, for pre-Series A startups, the gestation period to reach Series A or B is quite high. Although we hear only success stories, there are so many early-stage startups that struggle with product-market fit and are figuring their way out.”