The start-up founders motivated by the vision and fuelled by the passion of making it a success usually overlook the rules and regulations laid down by the government to run their segment of business.
The start-up founders motivated by the vision and fuelled by the passion of making it a success usually overlook the rules and regulations laid down by the government to run their segment of business. It is pertinent to take a holistic approach by taking care of all the three aspects of a transaction i.e. Commercial, Financial and Compliance. The fine tuning of products and marketing & sales process extracts the best out of them and the tasks of getting licenses and meeting the rules and regulations laid by the state government are put on the back burner or passed on to the lesser trained personnel. Ignorance or lack of experience is also one of the reasons that the compliance culture is not nurtured but if you are running a business, ignorance can’t be your defense. Financial blockades, litigations and finally end of the enterprise are the aftermath of such callousness.
[b]First need to understand the Compliance [/b]
Simple words put together – Complete alliance of all three aspects of a transaction to ensure that we follow the rules!
These rules come from two sources – external and internal. External are the regulatory compliances that are enforced by the law to make sure that the business is adhering to the legal parameters defined by the state. Internal are the standards and policies designed by you to deliver a product or service par excellence.
[b]Non-Compliance Impact on Start-Ups[/b]
Regulatory laws are broadly the standards, laws and regulations laid down by the government, Central and State, covering four broad parameters i.e. (a) WHAT is the enterprise doing? (b) How is the enterprise doing that WHAT? (c) WHERE is the enterprise doing that WHAT and (d) WHO is doing that WHAT? Compliances to be adhered may be due date based, corporate action based and ongoing, and the non compliance of same have detrimental effects on the future of a start-up. Cost associated with non compliance is not only fine and penalties but much more.
[b]Some non-compliances lead to irreversible impact.[/b]
[b]COST OF NON-COMPLIANCE[/b]
[b]PENALTIES AND FINES[/b]
The most catastrophic is the penalty or the fine imposed by the regulator. Income Tax, VAT, CST, Service Tax, Companies Act and other non statutes regulating the trade provide for penalties ranging from few hundred rupees to Crores e.g. if enterprise fails to deduct TDS then such amount is disallowed as expense hence enterprise ends up paying 30% (approx) plus interest and penalty equivalent to amount of TDS. Failure to pay VAT or Service Tax may result in penalty, interest and imprisonment upto 6 months. Under the Companies Act, 2013 penalty for non compliance of provisions of allotment of shares may result in penalty upto the amount of funding. Similar provisions exist in Labour Laws and other relevant trade regulations.
[b]NON-COMPLIANCE RECTIFICATION COST[/b]
Apart from the fines and penalties, non-compliance rectification cost is the most evil residual effect of being non-compliant in the first place. Hiring additional compliance specialist staff at unfair higher prices, devising and implementing compensation plan if the customers are involved, to get the licenses reinstated and managing the paper work – the cost of all of this is usually 10% times higher than if the compliance plan had been in its place right from the inception of the start-up.
[b]LOSS OF BUSINESS[/b]
Every business depending on its activity and nature of business has to obtain various licenses and approvals subject to numerous terms and conditions. Failure to comply may result in termination of approval/license. Hence closure of business.
[b]LOSS OF FUNDING AND GOOD WILL[/b]
The customers are unhappy and the investors are lost. And that is when the slip downhill is inevitable. Most of the start-ups fail to raise funds due to their failure in legal Due Diligence. Hence the impacts of non-compliance are sometimes irreparable. Investors as well as customers usually refrain from dealing with non-compliant Corporates.
[b]THE INDISPENSABLE COMPLIANCE FUNCTION[/b]
To build the investors’ confidence and brand reputation, to drive the top line growth and protect the bottom line, it’s imperative for any start-up to be ready!
Realizing the financial and legal implications of being non-compliant, compliance qualifies to be in the top to-do list of all start-up founders. The think tank of a start-up should always consider the following:
[b]INCLUDE COMPLIANCE EXPERTS IN YOUR PILOT TEAM[/b]
The start-ups should commit themselves sincerely in risk and compliance management. Create a community of internal and external professionals to take charge of compliance. By articulating an effective and efficient Compliance Management System, a thin team can serve the purpose. Less spending can create star functions.
Target to “Earn” and not only save by timely adhering to Compliances!