Why Govt Bring Strict Regulations for Indian Startups?

The Indian government’s Company Law Committee (CLC) is considering implementing stricter regulations for startups in response to multiple instances of corporate governance lapses at these businesses. The panel, operating under the Ministry of Corporate Affairs, is exploring the possibility of formulating regulatory measures specifically tailored to startups. This development comes just a month after the Union Minister of Commerce & Industry, Piyush Goyal, expressed that the government was not inclined towards regulating startups, favoring a self-regulatory approach to allow startups to thrive. Read More Business News on our website.

As of now, Indian startups fall under the laws applicable to unlisted companies, as there are no specific regulations or regulatory bodies dedicated to their unique needs. However, recent instances of governance lapses involving prominent startups like BYJU’S, GoMechanic, Mojocare, Trell, Broker Network, BharatPe, and Zilingo have raised concerns and prompted discussions about the necessity of comprehensive regulations.

Startups play a crucial role in India’s economy, comprising the world’s third-largest startup ecosystem. As they are generally smaller entities with high growth potential, finding a balance in regulations is essential. The government aims to avoid excessive regulation that might hinder its growth while also addressing the issues of corporate governance lapses.

The discussions within the CLC are likely to focus on aspects of the regulatory framework for startups, ensuring ease of doing business while maintaining a compliance-oriented approach. The goal is to strike a balance between promoting the growth and prosperity of startups and addressing corporate governance concerns.

The current definition of startups under the Companies Act, 2013, includes private companies incorporated under the act and recognized as startups according to notifications issued by the Department for Promotion of Industry and Internal Trade. Startups benefit from various relaxations, including exemptions from certain procedural compliance requirements.

The move towards stricter regulations is not limited to corporate affairs alone. Several sectors, including fintech, online pharmacies, cryptocurrency, EVs, healthtech, edtech, ride-hailing, and online gaming, have already seen the implementation of tighter regulations to address regulatory arbitrage.

Major investors are also advocating for the end of regulatory arbitrage in the fintech startup sector, signaling a broader sentiment within the investment community. The push for more regulations is driven by the government’s intent to foster a transparent and sustainable startup ecosystem in India.

The year 2022 witnessed several abrupt policy decisions, which kept startups and stakeholders of emerging sectors on their toes. The government-appointed panel’s discussions on stricter regulations are likely to be influenced by these recent policy changes.

While the ministry has not yet expressed a definitive stance on the need for a more rigorous regulatory framework, the discussions within the CLC, comprising government officials, industry representatives, and experts, are expected to shed light on the way forward.

In conclusion, the Indian government is taking corporate governance concerns at startups seriously and is exploring the possibility of introducing stricter regulations for the sector. The objective is to strike a balance between promoting growth and addressing governance lapses to ensure the long-term sustainability and success of the Indian startup ecosystem.