Indian Startup Ecosystem: Why These Stricter Regulations Ahead?

In the year 2022-23, numerous of India's highly promising and internationally acclaimed startups encountered significant challenges due to controversies that emerged, involving allegations of financial irregularities, FEMA violations, over-valued startups and unethical marketing tactics.

The well-known names such as Byju’s, Sequoia India, BharatPe, and PharmEasy, have caught media attention in the recent times for unfavourable reasons.

As a consequence of coming under the government's watchful eye, the startup sector is expected to face more stringent regulations. Up until now, the sector has operated with a sense of freedom akin to a free bird, but the impending regulations are likely to change the landscape significantly.

The Indian government is considering the implementation of stricter regulations on startups, as reported by a media. According to sources, the Corporate Affairs Ministry panel, known as the Company Law Committee (CLC), is set to examine the possibility of introducing regulatory measures for startups in the country. The move comes in response to concerns raised about corporate governance issues within these entities.

What Is The Need for a Regulatory Regime?

Startups, although smaller in scale, have witnessed significant growth in recent years, prompting a need for regulatory oversight. Instances of corporate governance concerns within some startup companies have drawn attention to the importance of establishing a regulatory regime for this sector. Experts and industry insiders have emphasized the necessity of finding a fine balance between regulation and ease of doing business for startups.

What Is The Role of Company Law Committee (CLC)?

The CLC, established by the Corporate Affairs Ministry in 2019, is at the forefront of discussing potential regulatory measures for startups. The media report further stated that the committee, led by the Corporate Affairs Secretary, comprises ministry officials and representatives from the industry. 

Its primary responsibilities include effectively implementing the Companies Act, 2013, and the Limited Liability Partnership (LLP) Act, 2008, as well as promoting a business-friendly environment.

What Will The CLC Deliberate On?

The CLC will deliberate on the necessity of a stricter regulatory framework for startups. The discussions will be centred around addressing concerns related to corporate governance within some startups while ensuring that the regulations do not impose undue compliance burdens on these smaller entities. The goal is to strike a balance between facilitating ease of doing business and maintaining a compliance-oriented regulatory approach.

What Are The Current Provisions for Startups?

As per the Companies Act, 2013, a startup is defined as a private company incorporated under the act and recognized as a startup according to the notification issued by the Department for Promotion of Industry and Internal Trade. Startups enjoy certain relaxations, including exemptions from certain procedural compliance requirements. For instance, private companies classified as startups for up to five years from their incorporation date are permitted to accept deposits from members without any restrictions on the amount.

How Is A Startup Different From SME?

Small businesses can register using only their Aadhaar numbers, eliminating the need for paperwork and certifications in the online registration process. For startups in India, registration involves incorporating as Private Limited, Partnership firm, or Limited Liability Partnership, following standard processes, and obtaining a Certificate of Incorporation/Partnership registration. The procedure is straightforward and can be completed online after getting registered under Startup India.