Do Startups Need Self-Regulation?

Union Minister Piyush Goyal recently spoke about how startups should develop corporate governance standards on the basis of which financial auditors can scrutinize accounts and report any wrongdoings

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The Union Minister of Commerce and Industry, Consumer Affairs, Food and Public Distribution and Textiles, Piyush Goyal, recently urged startups to consider putting in place some standards, "maybe for self-regulation", to bring in greater transparency in the way they conduct their businesses and report their financial status. He mentioned how startups should develop corporate governance standards on the basis of which financial auditors can scrutinize accounts and report any wrongdoings.

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"Any such standards will also make life easier for even auditors, who can then declare to the world the transparent governance and ethics system that is driving the Indian start-ups," the minister said. He also spoke about how issues like misreporting of revenue, data fraud or tax evasions by start-ups need to be nipped in the bud. "Otherwise the country will "get a bad name", he said.

In the wake of recent controversies related to financial irregularities that shook the Indian startup ecosystem such as Zilinga, BharatPe, Trell, we spoke to a few experts to understand the regulation the ecosystem may need.

The Indian startup ecosystem is the third-largest in the world and is growing rapidly. The startups in India have attracted both domestic and overseas capital. Many of them are also looking at listing for further fundraising and to provide an exit to investors. "Given this scenario, Hon Minister Piyush Goyal is right in suggesting a need for self-regulation as it helps in continuing confidence of the investors. By nature, startups have a high failure rate and no investor would like to lose money because of wrong or unethical reasons. Hence, it is important to have necessary checks and balances which can be done with proper self-regulations. Good governance is very important for keeping the confidence of all the stakeholders in the ecosystem," said Anil Joshi, managing partner, Unicorn India Ventures.

Nupur Garg, founder, WinPE, investor and independent board member, however, disagrees. "Startups are duly registered, officially licensed legal entities governed by laws and regulations, similar to other businesses that operate. In my view, the concept of startups needing to develop corporate governance standards sounds redundant as they are, in any case, required to comply with certain prescribed governance standards and norms, including maintaining financial accounts and getting audited," she said.

Unlike traditional businesses, startups have also been gathering too much attention. While on one hand, they are being appreciated for attaining unicorn status and raising huge rounds of funding, the tussles, on the other hand, are also making news headlines. They are even becoming dinner table conversations. "What is happening in the startup ecosystem is that there is a lot of visibility. Companies are ramping up very quickly, and they are attracting a large amount of capital. When all of this comes together and something terrible happens, it generates much attention from everyone, including the media, but if we look at internal fights and other governance-related issues that are surfacing, these are things that we have seen in large corporations and boardroom scandals as well. And which we will probably continue to see," said Garg.

However, Joshi feels that as long as a company is bootstrapped it doesn't matter how it is being run as long as things are done right and above board, but when a company raises external capital it becomes fiduciary responsibility to follow good governance. "The self-regulation will certainly help in maintaining the compliances. Any company whether private or limited is obliged to comply with rules and regulations. If a company follows self-discipline it will certainly help in good governance and compliance.

While some experts feel startups shouldn't be treated any differently as they are also incorporated like other businesses, and are governed by applicable laws and regulations prescribed for their structure and jurisdiction, again, like other businesses, some feel self-regulation can help. "Any company goes through ups and downs and startups go through much more as they always lack resources and hence stress. The journey as such for any entrepreneur is lonely and having a good sounding board or mentors will help control any untoward incident," said Joshi.