Startups should focus on corporate governance

The raids at Byju’s highlight many issues concerning corporate governance, domicile and taxation. The ongoing funding winter in the startup ecosystem has raised many ugly issues that were perhaps latent in their heyday. These include incomplete accounting records, insufficient compliance and poor corporate governance practices. Though corporate governance practices seem to be lacking in many listed entities, these are quite glaring in several Indian startups. For instance, the board is not efficient enough as it is handpicked by the founders, thereby denying scrutiny of the management’s decisions. It also creates a situation where the promoters treat the company as their fiefdoms unmindful of the impact of their decisions.

In the Byju’s case, though no reports of wrongdoing with regard to FEMA (Foreign Exchange Management Act) violations have come to the fore, it exposes the risks associated with overseas transactions. Importantly, many startups, especially in the SaaS (software as a service) space,consider the US and Europe as their key markets. They engage in M&A (merger and acquisition) operations in those territories as a means to expand their reach and building capacity. Most of such M&A activities require money to be remitted abroad. Given the Reserve Bank of India’s strong stance on FEMA compliance, many such ED raids on startups cannot be ruled out. This implies that startups without a strong finance and compliance team will be subject to such scrutiny, and perhaps raids. Therefore, apart from funding winter, these difficult times will expose the abysmal corporate governance in many startups.

Many such instances have already come to the fore. Fashion ecommerce startup Zilingounderwent such an ordeal after its cofounder Ankiti Bose’s alleged embezzlement of the company’s money. BharatPewitnessed a bitter legal battle when its cofounders fought it over and the former Managing DirectorAshneer Grover was sued for alleged fraud. GoMechanic’sfounders admitted to financial irregularities. The company was subsequently acquired by Lifelong Group in a slump sale. Though these are some of the examples of the state of affairs in the startup ecosystem, these are not all as many instances go unnoticed.

In such a situation, G20 Sherpa and the erstwhile CEO of Niti Aayog Amitabh Kant’s call to Indian startups to improve their corporate governance and create new benchmarks not only for India but also for other G20 nations are both apt and timely. Without robust corporate governance, India’s advantage of being the third largest startup ecosystem will peter into an insignificant phase. Moreover, when companies are embroiled in such controversies, investors lose money and employees their job. It is a known fact that every business creates several indirect jobs. Petty kirana shops, restaurants and many business establishments thrive when adjacent to a big business. It is, therefore, imperative to make sure that startups follow sound corporate governance norms for not only accelerating their growth but also for the greater good of the society.