4 Jul 2017, 09:27 — 10 min read
India is the new startup nation with the third highest startups launched in the world after US and UK in the year 2015. To build the investors’ confidence and brand reputation, to drive the top line growth and protect the bottom line, it’s imperative for any startup to be responsive and ready. As startups our plan should focus on all three aspects of a business i.e. commercial, financial and compliance.
Startups are known for bringing in innovative business ideas, process, products etc. Hence it becomes more critical to analyse the regulatory impact on such ideas, process and products. E-commerce companies are the best example wherein since the past few months they have been under tremendous pressure by the Reserve Bank of India, DIPP, VAT departments for adhering to various compliances, including of those who are selling through their platform. Startups have contributed tremendously in improving consumer experience. But it is also essential that if you are introducing any new concept, then that should be within the four walls of Indian law. So it is pertinent to have regulatory validation along with commercial validation at the beginning, when stakes are low and plans are more flexible.
Compliance is all about the knowledge of rules that regulate your kind of business and complying with them. Owing to little knowledge and complexity of applicable statuettes, owners of startups shy away from it, thus missing on a very important management tool that ensures security, quality and the potential expansion of the business.
Indian Central and State government has lately been trying to simplify things for startups so that initiatives like ‘Make in India’ are a success. ‘Startup India’ initiative, One Person Company (OPC), Goods and Services Tax (GST), online registration platforms like ebiz.com are some steps to ease the effort of running a business in India. However looking at the diversity of startups, with the uniqueness of the environment to operate in and quaint inputs required, it’s necessary that focused measures are taken.
Benefits of compliance for startups
A compliant startup can enjoy the following benefits:
Absence of regulatory risk which can be operational, monetary and imprisonment
Better chances of attracting investors
High consumer confidence
Ordinarily, a company operating in the Indian regulatory environment needs to comply with Central, State and Local legislation depending on the following:
The compliances which are required to be executed under these acts can be broadly divided into the following categories:
i. Due date based compliances: Every business entity has to follow and report various statutory compliances i.e. monthly, quarterly, half-yearly, annually e.g. Income tax return, TDS return, deposit of TDS, VAT, Service tax etc. These types of compliances are referred to as 'due date based compliances'.
ii. Ongoing compliances: As the name itself suggests, apart from the due date based compliances, every act prescribes certain set of mandatory compliances which are to be ensured by a corporate at any and every given point of time e.g. maintenance of books of accounts, display of abstracts of HR rules and regulations etc
iii. Event based compliances: These are compliances which are triggered due to a corporate action e.g. if you are opening a new office or starting a new product then you need to get various registrations/modify registrations of Shop and Establishment, VAT, CST, Service Tax. Likewise a simple act of change in an Executive Director can impact more than 10 Acts in a startup and more than 30 Acts in a manufacturing company. These are 'event based compliances' which can impact various divisions within an organisation.
As per a research conducted by the LexComply.com team, if we consider the top thirty most commonly applicable laws then due date based compliances are less than 10%, ongoing are almost 50% and event based compliances, which are mostly ignored, are almost 40% of the total compliances. Further non compliances of such cases may result in imprisonment, operational closure or monetary penalty. As per the research there are provisions of imprisonment in almost of 60% cases.
Ignorance or lack of experience is also one of the reasons that the compliance culture is not nurtured but if you are running a business, ignorance can’t be your defence. Financial blockades, litigations and finally end of the enterprise are the aftermath of such callousness.
Realising the financial and legal implications of being non-compliant, compliance qualifies to be in the top to-do list of all start-up founders. The think tank of a startup should always consider establishing a compliance management system which facilitates the following features:
Identification of applicable laws
Allocation of responsibilities to various team members
Educate and train the team about the same
Review regulatory impact of a business decision
Ensure that requirements are incorporated into business processes
Integration of departments, consultants and management
Enable adoption to regulatory changes
Act as repository of statutes, forms, challans and compliance support documents
Facilitates review operations to ensure responsibilities are carried out and requirements are met
How can startups become compliant?
Startups can create a community of practicing professionals who can mentor the startup teams in-house. These practicing professionals are no third parties but the Chartered Accounts, Company Secretaries, Labour Law experts, fire and safety experts etc already working with the startups. These mentors can help startups to identify the applicable statutes that they have to abide as per the nature of their business and sensitise them about the compliances relating to licenses, approvals, returns records/registers, statutory dues and other compliances. Additionally also lay down strong internal controls and processes that ensure that startups meet not only the national standards but also comply to the International standards of quality and security, thus, opening various new avenues of growth and expansion.
Adoption of technology
Compliance is a crucial function where startups should integrate technology. Visualise an automated compliance management system that identifies the applicable and relevant compliances, assigns the due tasks, tracks and monitors the progress of the pending tasks and reports the status of all due compliance tasks. Compliance Management tools take the ease of compliance to another level by building comprehensive library of acts and laws and complete repository of the required documents that compliance becomes simple and efficient.
Compliance Management tools with the mentoring of existing practicing professionals attached with the enterprises can help in providing a platform to integrate the community of practicing professionals and startups by way of:
These tools are cost effective as it does not require any capex on the server or creating library. These tools can be accessed 24x7 from anywhere.
So if startups use such tools and make an effective integration of external professionals and in-house team, then it will certainly help in improving compliance environment with minor changes in budgets. If an enterprise is adhering to product related regulations like Food Safety, BIS, Legal Metrology etc then their products are more acceptable not only in domestic but also in the international market segment. If an enterprise is diligent on labour laws, it will have improved HR relations and reduced cost of strikes, lockouts or high staff turnover. Startups also have the opportunity to act as job workers to big brands or are deemed exporters, provided they not only maintain high product quality standards but also are sensitive towards regulatory compliances. A compliant enterprise if in the right market segment will have numerous alternative means of increasing business and having access to funds.
Presently, compliance is complex for startups. But this disadvantage can be turned around and changed into an opportunity by having a bird’s eye view of the whole tangle of regulations and adopting focused measures. Tech-savvy startups can make compliance a key differentiator in improving their efficiencies, reducing costs, gaining insights to strengthen their credentials and more importantly positioning themselves strategically in new geographic markets.
Compliance management enables growth.
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By Varun Bhagat