Indian Entrepreneurs, Be Ready for Jail

Here is one woman entrepreneur…

She worked as tech professional earlier and now aiming to be a business owner.  She has an idea about creating animated content and making it big.

May 2014. Bangalore.

It was a meeting with between three parties. A chartered accountant, company secretary and her.

While pursuing the core tasks of the business idea, she is trying to continue the legal process of registering the company. Hence is in discussions with chartered accountant and the company secretary.  She wanted to register a Pvt Ltd company.

“Why don’t you go for LLP instead of Pvt Limited? LLP is Limited Liability Partnership. It is almost like a company.”

She looks puzzled. “We spoke in March and it seemed ok to be a Pvt Ltd?”

“There is a new company act now. This has made it too difficult for entrepreneurs”

“Like how? ” She was not convinced.

He explained.  Two big issues that bothered her.

  • Compliance Penalties: AGM (Annual General Body Meeting) strictly needs to be on time and minutes to be maintained. If there is delay, she would face INR 100,000 and jail term.  Previously this was INR500 penalty. Further, the delay would further attract INR,5000 per day per director.
  • Restrictions on Auditors: New act limits the number of companies that can be audited by the auditor to 20. Presently there is no limit. If auditor has to choose, he will choose only his top 20 income generators to audit. Cash-strapped startups will never the preference. As a startup, you have to go with newbies. If there is a mistake in financial statements, then there are penalties and could be a jail.
  • DIN (Director Identification Number): Getting DIN is the first step in getting a company formed. There is steep hike in this fees too.
  • CSR: Then there are small things like CSR. Corporate Social Responsiblity is mandatory 2% of the profits. From cost perspective, this is ok. But about CSR, I have different thoughts here.

Biggest concern is, the minimum legal recurring cost: INR 50,000 per year if she adds up the implications.

Apparently all new rules are for better corporate governance and compliance. But for startups, isn’t this an overkill?

She needs to preserve energy and resources for the core tasks initially. Any startup focusing on intellectual property, needs to run in garage mode first. During this period, she has to pay salary of one or two employees. For highly skilled members, she can not pay in full. Some part may be stock option. Also she needs to have the option of getting international venture funds, might need to invest in distribution partners etc.

The legal costs and liabilities would be prohibitive for initial period.

“If I go for LLP route, can I borrow for the company from international venture funds?”

Again he explained.

  • Borrowing: You can not think of VCs investing in the company. Any borrowing is more like personal borrowing.
  • Employee Stock Option: Not possible in LLP. You can not hire a highly skilled employee and share the dream unless he is a director.

She is disheartened. She would proceed with registering Pvt Ltd company, but with the additional burden of legal risks.

That is the output of culture called LicenseRaj in India. This is the hallmark of Congress Culture that prevailed for decades.It is all around policing, licenses and permits.

The tech start-ups will have to suffer. All the enthusiasts wanting to create WhatsApps, Facebooks and Googles, need to pause and rethink.

That was one in the series of tragedy of errors between 2004 to 2014. The lost decade of India in post-reforms world.

Glad that such a government is gone and hopefully it never returns. Even more importantly, hopefully, the entrepreneurs and small businesses remain high on the agenda of new government.

Good days have come.. hopefully.