Under the proposed framework, the companies could be mandated to submit their quarterly filing of financial reports with the MCA. This move comes in response to concerns raised regarding corporate governance issues, notably in the case of the edtech firm Byju’s this year.
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Before we examine the implications for startups, let’s delve into what corporate governance entails and how it’s going to shape India’s startup ecosystem.
What is corporate governance, and why is it important?
Corporate governance in India is a set of rules, practices and processes by which a company is guided and controlled. It ensures that the company is run in a fair manner to achieve the best interests of everyone associated with it.
Corporate governance plays a vital role in protecting the rights of thousands of shareholders who possess ownership in the company but are not involved in day-to-day operations. Each stakeholder, including directors, owners, employees, and customers, is held accountable by the corporations.
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The system emphasises transparency through disclosures and mandates that each company’s board of directors contains a certain percentage of independent directors.Why is there a focus on startups?
India has become the world’s third-largest hub for startups, after the US and China. As of May 31, India is home to 108 unicorns with a total valuation of $340.8 billion, according to the Invest India website. As of February 2023, a total of 92,683 startups had been officially recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).
However, some well-known startups like GoMechanic, BharatPe and Zilingo have faced scrutiny due to corporate governance issues, with Byju’s being a recent example.
Byju’s
Founded in 2011, Byju’s has faced numerous allegations of misgovernance in recent months. ET had earlier reported that Byju’s delay in releasing audited financial results for FY21 and FY22 led to the lenders demanding early repayment of the $1.2 billion loan which the company raised in November 2021.
Byju’s faced another setback after board members representing Peak XV Partners (earlier Sequoia Capital India), Prosus and the Chan Zuckerberg Initiative stepped down. On June 22, Deloitte resigned as Byju’s official auditor, citing delays in receiving the company’s financial statements for FY22 even after the auditor wrote several letters to the board.
Following this, the MCA ordered an inspection of Byju’s financial records to identify potential corporate governance lapses and sought a report in one and a half months. Earlier, former Securities and Exchange Board of India chairman Ajay Tyagi had previously called for ensuring stricter governance standards at big unlisted firms.
Zilingo
Singapore-based fashion start-up Zilingo, too, suffered from unfair accounting practices, mistrust and disagreement between founders, and diminishing investor confidence last year. Following complaints of alleged financial misconduct, the company suspended its chief executive officer Ankiti Bose. Thereafter, creditors demanded repayment of loans and more than 100 staff resigned.
Zilingo’s turmoil highlights the lenient internal corporate governance culture that could be seen in some startups. For two years, the company failed to file annual financial statements, which is a basic requirement for all businesses of its size in Singapore.
“Corporate governance should be seen as a collective and unit responsibility of all stakeholders involved in a startup,” Shantanu Deshpande, founder of Bombay Shaving Company, told PTI when asked about the cases of corporate governance lapses in the Indian startup landscape. He added that any lapses or deviations are a wake-up call for the ecosystem and are “deeply saddening.”
Reforms in corporate governance
ET reported that the MCA is currently conducting inter-ministerial discussions to make changes in the Companies Act, 2013. The Act contains many provisions related to good corporate governance such as composition of board of directors, admitting woman directors and independent directors, directors’ training and evaluation, constitution of audit committee, internal audit, risk management committee, among others.
The amendments are expected to be put forth on the recommendations of the Company Law Committee with suitable modifications.
The committee had last year made numerous suggestions such as recognising issuance and holding of fractional shares, restricted stock units and stock appreciation rights; easing the requirement of raising capital in distressed companies and replacing the requirement of furnishing affidavits with the filing of self-certification; bolstering the audit framework and ensuring the independence of auditors.