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Portea Medical, a Bangalore-based home healthcare firm, is K Ganesh's fifth start-up venture. However, the entrepreneur, who successfully exited four greenfield projects, appears flummoxed when it comes to raising fresh funds for his new venture, under the new company law.
"To get investment, we have been battling Companies Act requirements for the last three months," says Ganesh, chairman and co-founder, Portea. In March, Portea had finalised a term-sheet for fresh follow-up funding. However, the new rules and compliance requirements have delayed the closing. "We are still two-four weeks away," says Ganesh. In December 2013, Portea had raised Rs 48 crore from venture capital funds. Ganesh says though Portea can take the delay in its stride, most early-stage start-ups might not be able to. Sombodhi Ghosh, co-founder of social enterprise Aakar Innovations, which helps rural women manufacture and market low-cost bio-degradable sanitary napkins, agrees. His three-year-old start-up has been raising its first round of funds from angel investors. So far, along with Aakar's other co-founder, he has bootstrapped the venture through personal funds, help from friends and family and some government grants. "Our compliance budget, which includes fees to accountants and lawyers, has already risen 50 per cent," says Ghosh. The two co-founders expect fresh funds only by July-end, against the initial plan of March this year.
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Where the shoe bites
Almost all provisions of the new company law apply to private limited companies, a departure from the previous Act. This has significantly increased start-up promoters' time, bandwidth and costs on compliances. The more stringent filing requirements also come with stiff penalties for delay in filing returns.
Typically, a start-up entrepreneur performs several roles; this might lead to inadvertent delay in compliances, says Ganesh. Therefore, many start-up-friendly governments, such as those in the US and Singapore, have fewer filing requirements for similar private limited companies.
What seems to be hurting early-stage start-ups most is the provision that doesn't allow companies to borrow money from any individual other than promoters. More, promoters have to prove the amount lent to the company is only from his/her own income sources, not from borrowings, says Harinderjit Singh, partner, PricewaterhouseCoopers India.
"Friends and relatives are an important source of funds while bootstrapping a start-up," says Pranay Gupta, partner, 91springboard, a plug-and-play hub for start-ups.
When a start-up raises capital through private placement, it has to file a valuation report. While this was a requirement earlier for raising funds from abroad (under Fema guidelines), this is now mandatory for all private placements, making the route cumbersome, say entrepreneurs. Some entrepreneurs fear officials in the Registrar of Companies may question differences in valuations by different investors, leading to compliance issues. Any allotment of shares to a new investor has to be followed by at least three board meetings, as opposed to just a resolution earlier. The cost and time spent on each round of fund-raising will increase 25-30 per cent, even before the company gets on its feet, says Ganesh.
The way/ out
Most start-up founders Business Standard spoke to felt there should be separate rules for start-ups under the company law. "The government should not bracket a company raising Rs 50 lakh with one raising Rs 50 crore," says Ganesh. Also, many say there is a need to bring back some exemptions granted to private limited companies, as under the earlier regime.
Suggestions also include substantial exemption from company law provisions for all private limited companies with paid-up share capital below Rs 10 crore or revenue below Rs 30 crore and summarised annual returns on matters relating to issue of capital, shareholder meetings, and appointment of directors.
"There could be a monetary ceiling of up to Rs 10 crore per company to avoid misuse of this provision," says Ganesh. Also, the valuation requirements should be limited for funds from public sources.
While entrepreneurs and investors agree the Indian start-up ecosystem will gain from stricter corporate governance in the long run, the pain in the short to medium term is here to stay. "We have come across several tech start-ups looking to register their ventures in more business-friendly environment such as Singapore or even Vietnam," says Vijay Anand, founder-chief executive of a Chennai-based tech accelerator for early-stage companies.
With the ministry of corporate affairs reviewing the provisions of the law, the ball is now in its court.
