Start-ups: don’t slip on the compliance banana peel!

01 Dec 2016


Founders of start-ups – passionate as they are for making their venture a success – tend to concentrate on fine-tuning their product and focus on the marketing and sales aspects, while the regulatory factor is often put on the back-burner.

But it is important not to overlook the rules and regulations laid down by the government for their segment of business. It is crucial to take care of all the three aspects of a business - commercial, financial and compliance. Yet the tasks of getting licenses and meeting the rules and regulations laid down by the state or central government are too often passed on to less trained personnel.

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 blockages, litigations and finally the end of the enterprise are the aftermath of such an attitude.

Understanding Compliance
Simple words put together – Complete alliance of all three aspects of a transaction to ensure that we follow the rules!

These rules come from two sources – external and internal. External are the regulatory compliances that are enforceable by law to make sure that the business is adhering to the legal parameters defined by the state. Internal are the standards and policies designed by you to deliver a product or service par excellence.

Regulatory laws are broadly the standards, laws and regulations laid down by the government, Central and State, covering four broad parameters, ie (a) What is the enterprise doing? (b) How is the enterprise doing that? (c) Where is the enterprise doing what it does? and (d) Who is doing it?

Compliances to be adhered to may be due-date based, corporate action based or ongoing, and non-compliance with same has detrimental effects on the future of a start-up. The cost associated with non-compliance is not only a fine and penalties but much more. Some non-compliances have an irreversible impact.

Cost Of Non-compliance
The most catastrophic cost is a penalty or the fine imposed by the regulator. Income Tax, VAT, CST, Service Tax, Companies Act and other non-statutory regulations provide for penalties ranging from a few hundred rupees to crores. For example, if an enterprise fails to deduct TDS then such amount is disallowed as expense, hence enterprise ends up paying 30 per cent (approx) plus interest and penalty equivalent to the amount of TDS.

Failure to pay VAT or Service Tax may result in penalty, interest and imprisonment up to 6 months. Under the Companies Act, 2013 penalty for non-compliance with provisions of allotment of shares may result in penalty up to the amount of funding. Similar provisions exist in Labour Laws and other relevant trade regulations.

Non-Compliance Rectification Cost
Apart from the fines and penalties, non-compliance rectification cost is the most evil residual effect of being non-compliant in the first place. Hiring additional compliance specialist staff at higher prices, devising and implementing compensation plan if the customers are involved, to get the licenses reinstated and managing the paperwork – the cost of all of this is usually 10 times higher than if the compliance plan had been in its place right from the inception of the start-up.

Every business depending on its activity and nature of business has to obtain various licenses and approvals subject to numerous terms and conditions. Failure to comply may result in termination of approval/license. Hence closure of business.

Any erring start-up can't go unnoticed. Everyone is watching with an eagle eye, speculations are ripe and the start-up is at the receiving end. Lots of face-saving explanations, query resolutions and future accountabilities are to be worked upon. The customers are unhappy and the investors lose. And that is when the slip downhill is inevitable. Most start-ups fail to raise funds due to their failure in legal Due Diligence. Hence the impacts of non-compliance are sometimes irreparable. Investors as well as customers usually refrain from dealing with non-compliant businesses.

The Indispensible Compliance Function
To build the investors' confidence and brand reputation, to drive the top line growth and protect the bottomline, it's imperative for any start-up to be ready!

Realizing 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 start-up should always consider the following:

Include compliance experts on your team.

The start-ups should commit themselves sincerely in risk and compliance management. Create a community of internal and external professionals to take charge of compliance. By articulating an effective and efficient compliance management system, a thin team can serve the purpose. Less spending can create star functions.

Target to ''earn'' and not only save by timely adherence with compliances!

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