CII asks startups to keep their valuations 'as realistic as possible'

It further stated that the start-up should be maintained as a separate legal entity with the organisation's assets distinct from the founders' assets

The Confederation of Indian Industry (CII) on Sunday urged Indian startups to keep their valuation “realistic” and distinguish between the goals of the organisation and its founder.

"Startups may strive for long-term value creation rather than short-term valuations. The valuations of businesses should be kept as realistic as possible," CII said in its Corporate Governance Charter for Startups.

The industry body explained that the charter for startups aimed to make them responsible corporate citizens and enable them a share it with stakeholders to establish themselves as being well-governed.

"The needs of the business entity should be separated from the personal needs of its founder(s), but at the same time, the goals and needs of the founders, promoters, and initial investors should be aligned with the long-term goals of the business,” it added.

The charter also stated that the startup should be maintained as a separate legal entity with the organisation’s assets distinct from the founders’ assets.

"Trust-based coherent working should be promoted between the founder, executive management, and the board," it said, adding that it was important to maintain adequate internal controls and accountability to third parties.

The charter emphasised the external auditing of startups.

"It is important to ensure the maintenance of proper books of accounts, establish transparent policies and procedures to ensure the independence and effectiveness of audit functions, and integrity of reporting," it said.

"An audit of annual financial statements by an external independent auditor and prevention of conflicts of interest from external auditors are crucial."

CII noted that startups must ensure timely disclosures by board members and key management personnel to address issues related to conflict of interest.

As part of the charter, CII also launched an online self-evaluative governance scorecard which a start-up may fill in to understand the current level of governance and its progression.

"For entities to build trust among all its stakeholders, businesses need to adopt the best-in-class Corporate Codes. These Codes set a benchmark for monitoring, evaluating, and improving the prevailing governance practices," said R Dinesh, President of CII and Chairman of TVS Supply Chain Solutions Ltd.

The charter also issued guidelines based on the startup's life cycle, which was segregated into four stages: Inception, Progression, Growth, and Going Public.

At the Inception stage, the startups must focus on board formation, setting the tone at the top, compliance monitoring, accounting, finance, external audit, policies for related-party transactions, and conflict resolution mechanisms.

In the Progression stage, a startup may additionally focus on the expansion of board oversight, monitoring key business metrics, maintaining internal controls, defining a hierarchy of decision-making, and setting up an audit committee.

For the Growth stage, CII said the startups must also focus on building stakeholder awareness towards the vision, mission, code of conduct, culture, and ethics of an organisation, form board committees, ensure diversity and inclusion on the board and fulfill statutory requirements, according to the Companies Act 2013 and other applicable laws and regulations.

At the Going Public stage, a startup must expand its governance in terms of monitoring the functioning of various committees, focus on fraud prevention and detection, minimise information asymmetry, plans for succession, and evaluate board performance.