Pursuant to our last edition on “Intellectual Property for Start ups”, in this edition we take a look at the world of compliances from a Start up perspective!
Compliances are the structural backbone of a Company. And this holds true for Start ups as well. Most Start up entrepreneurs, especially those coming from technical backgrounds, have little knowledge of the required compliances or their implications and tend to let it pass. It is later when they get hit at the time of fund raising, or due diligence or on receipt of notice from governing establishments, that they face severe repercussions.
This has to be especially viewed in light of the new Start up policy announced by the Government of India. The policy encourages self certification based compliance, including environment regulation. This should however not desist Start ups from adhering to the statutory requirements. In the event of any failure to follow compliances, Start ups will have to cough up heavy fines or penalties after the 3 year inspection holiday ends.
Why are compliances important?
- Strengthens internal process capabilities
- Prevents employee fraud, waste, loss of name or government fine
- Prevents any director penalties, including imprisonment of key office bearers
- Helps achieve high valuation, as better process controls & compliances indicate a better managed and risk free company
- Increased funding opportunities
- Healthy financial statement, as there will be no risk of retrospective fees or penalties.
Compliances for Start ups – A Bird’s View
As per the new Start up policy, Start ups will have to self certify their compliance with 9 Labor Laws and Environmental Laws. In case of Labour laws, no inspections will be conducted for a period of 3 years. The aim is to reduce regulatory burden on Start ups and allow them to focus on their core business. It does not absolve them from following compliances or prevent any penalty if discrepancy is found later.
Start ups may hire full-time employees, independent consultants, and contractors, whom the company should pay as per labor legislations. Some key registrations to note:
- Professional Tax (PT)
- Provident Fund (PF)
- Labour Welfare Fund
- Contract Labour compliances
Start ups will have to adhere to the licensing requirements as applicable to the industry in which they operate. For instance, a Start up into EXIM business will have to apply for IEC code (Import Export code). Similarly, a Start up into food business will have to apply for required Food Industry Licenses (FSSAI) and so on.
Shop & Establishment License/Factory License is a universal license that will be needed by all Start ups to run a place or establishment in India.
Financial & Tax Compliances
As per new Start¬up India Action Plan, newly established companies are exempted from tax for 3 years. But there are certain regulatory compliances and requirements that need to be followed, irrespective of the exemption granted.
- PAN/TAN/TIN if applicable
- DPIN/DIN & DSC
- Filing of Income Tax returns
- Filing Returns under TDS, VAT, Service Tax, Excise as applicable
- FEMA compliances, in case of foreign investments
Startups are by and large formed as private limited companies or LLPs. In the eyes of law, this makes them separate legal entities governed by various statutes of the place where they are registered. Key compliances to be followed:
- Incorporation Compliances
- Board Meeting/AGM compliances
- Issue of share certificates & payment of stamp duties
- Appointment of C.S. if paid up capital more than Rs.5 crores
- Appointment of first auditor
- Filing of Annual Returns & Financial Statements to ROC
- Maintaining Statutory Registers
- Maintaining Minutes Book
Most of the Start up entrepreneurs are between 25-35 years old, with a zeal to work on their idea, but with limited knowledge on the compliance ecosystem. There are many VC/PE investments happening, especially with foreign investors. Startups, therefore, have to stay cautious at every stage and ensure their compliances are in order. This would certainly result in better valuations, besides protecting the directors/promoters from any unguarded liabilities.
This article is authored by A. Loganathan, representing India Business Solutions (IBS) which is a boutique advisory firm helping a lot of Start ups in India and Singapore in fulfilling their aspirations. Loganathan is heading the Singapore operations of IBS and can be reached on email@example.com.