“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 from the date of their incorporation,” says Anita P Basrur, partner, Sudit K Parekh & Co, a firm of chartered accountants.
“In the initial stages, debt finance is hard to come by, especially as start-ups 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 that are to be filed with the registrar of companies.
“Exempting startups from the requirement of preparing cash flow statements, may seem a move towards non-transparency. However nothing debars potential investors (such as VCs) from requesting that these statements be prepared,” says Basrur.
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.
Start-up, 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 Rs 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.
“Allowing sign-offs from board directors on annual reports puts the onus of governance on the directors, who have a much better understanding of the inner workings of the company,” he added.
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 from initiation of the insolvency resolution till approval of the resolution plan by the adjudicating authority shall be completed in 90 days as opposed to 180 days.
Investors welcomed the move on fast track liquidation for start-ups.
Ashish Fafadia, CFO, Blume Ventures, said, “This would shorten the time-frames for startups that have no defaults. In some sense it’s also an incentive to startups to keep their track records with their stakeholders clean so that in case they have to go through a process of wind down, they can take benefits of this scheme.”
Source: Times of India