Startups get fund-raise, compliance norm relief

Jun 19 2017 : The Times of India (Hyderabad)

Startups get fund-raise, compliance norm relief


In its bid to boost the ecosystem for startups, the ministry of corporate affairs (MCA) has notified a slew of operational and compliance relaxations. Key among them is the ability to raise deposits from members, with exemption from procedural compliance for an extended period of five years.“In June 2015, the MCA had enabled all private companies (which would include startups) to obtain deposits from their shareholders to the extent of 100% of their paid-up share capital and free reserves.Such companies were exempt from procedural requirements such as issue of an offer circular or creation of a deposit repayment reserve. Startups have now been specifically included for exemption from such procedural requirements for an extended period of five years,“ says Anita P Basrur, partner, Sudit K Parekh & Co. “In the initial stages, debt finance is hard to come by, especially as startups are low on collateral offering. Enabling shareholders to lend was a useful move, the newly announced procedural relaxation will be more helpful,“ adds Basrur. Other compliance relaxations, announced by the MCA in its notification dated June 13, include exemption from preparing and including cash flow statements with annual accounts. In the absence of a company secretary, a director of a startup is permitted to sign annual returns filed with the registrar of companies. Instead of holding a board meeting every quarter, startups are deemed as compliant with the Companies Act, if they hold a meeting once in six months.

The only caveat is that the gap between two board meetings shall be at least 90 days. Further, the quorum for a board meeting is two.The MCA has notified that interested directors will also be counted towards the quorum provided they disclose their interest in the proposed transaction. Given the small size of the board of directors in a startup, which could even be two, this is a practical step say experts. Startup, according to MCA’s notification, denotes an entity recognised as such by the DIPP’s notification. It can be a private company, firm or LLP, which has not completed seven years from incorporation (10 for biotech sector), is innovative or has a scaleable business model.Further, its turnover for any of the financial years since incorporation should not be more than `25 crore.

“This is a most welcome notification for several reasons. The process of preparing detailed financial reports in the prescribed format has often required founders to lose significant time and productivity, given a young startup’s limited resources,“ said Shubhankar Bhattacharya, venture partner, Kae Capital.

Hundreds of startups go bust each year, the MCA has also notified sections 55 to 58 of the Insolvency and Bankruptcy Code, 2016, pertaining to the fast-track process and held that it would apply to a startup (which is not a partnership firm). The entire process shall be completed in 90 days as opposed to 180 days.