Blatant Absence of Standards Governing the Startup Ecosystem (Opinion)

By Pratap Venugopal

New Delhi, March 6 (IANS): A startup is typically a small, self-funded early-stage company founded by one or more entrepreneurs, seeking to promote a product or service for which they believe there is a demand.

Sources of funding for startups include friends and family, venture capitalists, crowdfunding, etc.

India, according to the 2021-22 economic study, has become the third largest startup ecosystem in the world after the United States and China, with a total number of recognized startups exceeding 61,400. As of January 14, 2022, startups in India are expected to grow annually at the rate of 12-15%.

India has 83 unicorns (i.e. private tech startups with a valuation of around Rs 7,500 crore or more) worth a total of $277.77 billion (Rs 2, 10, 92 , 32, 60, 65,000), mostly in the service sector, contributing over 50% of India’s GDP.

Although governance standards for listed companies in India are strict and continue to be tightened, there is a distinct lack of standards governing startups.

It is only when a startup has, after having successfully achieved its objectives that institutional investors seek to exist by listing on the stock exchange, that governance standards come into effect and the listed entity becomes subject to the regulation from various regulatory bodies including the Securities and Exchange Board of India (SEBI).

There is an argument that the regulatory framework in India as a startup ecosystem is complex. However, the need for good governance practices is established by recent events at BharatPe, which was co-founded by Ashneer Grover and Shashvat Nakrani in 2018 in New Delhi.

It, at breakneck speed of three and a half years, has grown into a well-known Indian fintech company that caters to smallholders and kirana or convenience stores.

However, in January 2022, an external investigation resulted in preliminary findings of financial manipulation and fraud for periods spent as a startup, involving Ashneer Grover’s wife and brother, resulting in a board decision. of BharatPe to end his services.

Ashneer Grover is currently under investigation and is on leave until April 1, 2022.

BharatPe’s experience reiterates the need for good corporate governance in the startup ecosystem that would hold management and other staff accountable and ensure the values, conduct, and ethical actions of these organizations.

However, it is essential that a balance be found between excessive control and what startups are looking for, namely self-regulation.

Proper regulation and corporate governance in the startup ecosystem will not only promote growth but also ensure transparency and ultimately promote the listing of a good company adding value to investors in the market. securities.

The basis of an efficient and effective corporate governance framework in the startup ecosystem requires clarity of legal requirements to be adopted and followed, authority or authorities responsible for regulating various functions, transparency through appropriate disclosure of financial and non-financial information to all stakeholders, auditing by independent auditors and other similar measures.

Corporate governance requirements for startups should be constantly reviewed and adapted based on requirements that arise from time to time.

Only with proper “checks and balances” can mismanagement, misuse of company resources, and conflicts of interest be curbed, making startups sustainable in the long run.

Corporate governance standards play a vital role in improving the public image of startups and making them attractive to investors.

A startup at each stage of its growth has different requirements when it comes to stakeholders and compliances and therefore requires appropriate corporate governance standards.

Corporate governance standards, although at the inception stage, could be less rigid and more flexible, and as the startup grows and is on its way to an initial public offering (IPO), the needs corporate governance should be tightened to ensure the protection of the interests of the investing public.

There is certainly a need for startups, especially those with exponential growth potential and therefore also potential for securities market disruption, to have strong pro-corporate governance, and to formulate and adopt best practices to avoid situations such as the one that arose in the case of BharatPe.

The establishment of good and appropriate corporate governance in the startup ecosystem, although not an easy task, is essential and of utmost importance in the long term and must evolve taking into account experiences. past and situations that have occurred.

The need for a good corporate governance framework and its implementation in the startup ecosystem has also been recognized by SEBI.

SEBI has from time to time considered the issue of corporate governance for startups, creating a number of committees including business leaders, although regulation by SEBI only comes into effect when registration of startups or in the event that alternative investment funds (AIFs) are involved.

SEBI meanwhile relaxed listing standards to help startups attract big investors.

The SEBI (AIF) (Second Amendment) Regulations, 2021 sought to define a startup as a limited liability company or limited liability company that meets the criteria for startups prescribed by the DPIIT, Department of Trade and Industry , Government of India in the notification dated 19th February 2019 or such other policy as may be issued from time to time by the Central Government.

It is undoubtedly true that legal and accounting standards may not be strictly of paramount importance to a startup that suffers from inadequate resources or finances, but as the startup scales and grows and begins to generate substantial revenue, strong and efficient business governance standards would prevent money laundering, corruption, account manipulation, embezzlement, unfair labor practices, etc.

In summary, while corporate governance should not be equated with bureaucracy, it would be essential to promote the mission as envisioned by the founder(s) of a startup, improve and endear its image to the investing public. with a healthy culture. transparency and focus on an efficient corporate structure.

To achieve this objective, it would be necessary to rethink the roles of regulators and authorities in order to place startups under their jurisdiction, to promote and ensure compliance with good and effective corporate governance practices.

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