This article is written by Aditya Srivastava of team iPleaders.

Regulation and compliance are two words that haunt every entrepreneur. Statutory compliances are meant to ensure that there is uniformity in conformation with a rule, specification, policy or standard mandated by law. Due to an increasing number of startups, the need for operational transparency has also seen a significant hike in the past decade. To combat this, startups are adopting consolidated checklists of compliance controls.

If you have a startup, or you are coming up with one, a  comprehensive checklist will help you with your viability,  traction of investors and avoid any legal mishap.

In a report by NASSCOM in the year 2014, India was projected as the fastest growing startup platform in the world. India was also ranked third globally as a startup hub with as many as 4200 startups. With nearly 3 to 4 startups being incorporated every day, they have seen an unprecedented rise. However, this is also indicative of the fact that there is a steep increase in the number of non-compliant startups. A survey by Taxmantra revealed that:

• Every 2nd startup gets Income Tax Notice for tax demands or for non-compliance
• 3 out of 7 startups finds a place on the defaulter list of Registrar of Companies due to non-compliance
• 2 out of 4 startups incur unnecessary pay-out by way of interests and penalties.
• 7 out of 10 startups shut down their business within first 3 years of their operations

While it might seem petty in the beginning, however, the consequences of non-compliance can be far-reaching. Needless to say, it can range from penalties, prosecutions and fines to various other issues that may lead to a close down of your company. Companies like, Buysellbitco.in and Shotpitch, are some examples of startups that had to close their shop because of non-compliances.  

Some of the major consequences that you can face due to non-compliance are

i) Difficulty In Securing Funding

Most startups thrive on funding. It is needed at some point or the other unless they are self-sufficient. However, the bare minimum standard for securing funding is the status of tax payments and other regulatory compliances. A company which hasn’t paid much attention to complying with the laws regulating their industry might not even be able to survive through the term sheet phase. Think of it as an investor, would you invest in a company which does not conform to the laws? Even if your startup manages to secure funding, wouldn’t you be answerable to the investor for additional dues that you are bound to incur because of the delay in meeting statutory compliance?

ii) Cancellation of Bank Loan and Government Tenders

If you fail to get an investor on board, you are most likely to turn to the banks seeking a business loan. Now, there would be a list of documents that a bank would require. For example, audited financials, auditor’s report, a certificate by a CA for the last 3 years, etc. These are certain compliances which are mandatory and cannot be circumvented. In addition, banks have their own verification mechanisms which ensure adherence to compliances for any company seeking a loan. In case of non-compliance, securing a loan from the bank becomes impossible. This also applies when startups seek Government Tenders.

iii) Status of a Dormant Company

In case of a non-filing history of 3 years or more, the Ministry of Corporate Affairs is going to term you a ‘dormant’ company. A dormant company is likely to receive demand notice by the RoC and are not eligible to seek any government/institutional assistance.

iv) Closing Down

A lot of young entrepreneurs believe that closing down the startup could be an easy option, however, that is not the case. Remember the time you were required to register for DIN? As per the Companies Act, 2013, the DIN of a director of a company which has failed to file its income tax returns for 3 consecutive years, is blocked. Which means you will be disqualified from becoming a director of any other company in the future.

Registration of the company is merely the first step towards compliance with law. There is a list of compliances you need to meet pre and post incorporation to be able to function effectively.

Here is a compliance list you ought to follow if you want yourself out of the vicious circle of non-compliance penalties:

#1 Opening A Bank Account

This is the first, and easiest of all compliances. To be able to be a function, the very first requirement is to open a ‘Current’ Bank Account in your company’s name. The fundamental requirement to open a bank account is a PAN Card registered in the name of your company and a copy of a Board Resolution authorising opening a bank account in the name of the company. Here are few noteworthy tips that no one will tell you:

1. There are a number of banks which provide “special privilege accounts” to startups. You should try to get such an account in order to avail additional benefits.
2. In case your PAN Card is still in process, PAN card application challan or the PAN mentioned in your Incorporation Certificate is sufficient to open a bank account.
3. Do not just stick to one bank account, try to open a minimum of two accounts. In case one bank account falters on any occasion, the other account can come to your rescue.

#2 Share Capital Deposition In The Bank Account

Within 60 days of the incorporation of the company, every shareholder is required to deposit their contribution to the dedicated bank account. It is necessary that such transfer is done through the personal accounts of the shareholders to the bank account of the company. It is mandatory that every shareholder who holds share worth Rs. 20,000 or more, deposit the money only by way of a cheque or via internet transaction. Although, the shareholders holding lesser than Rs. 20,000 can deposit the money through cash, however, it is recommended that such transfer is done through a cheque or an online transfer so that the amount is accounted for.

#3 GST Registration

GST registration is mandatory for all startups to avail various benefits under the GST Composition Scheme. Currently, the startups generating less than INR 20,00,000 in India (and INR 10,00,000 in the North Eastern States) are exempted from GST registration. It is important to note that if your startup is supplying goods outside the State in which you are located (Inter-State Trade) you are required to register yourself, irrespective of your turnover. This also applies if you are an online service provider.

#4 Income Tax Return Filing

Income tax returns are statements furnished by the company which includes the details of the company’s earnings, details of tax liable to be paid and tax paid, and any claims or refunds to be credited by the government. Filing of income tax return is mandatory even if the company has made no significant income or no income at all in a financial year. A case of non-compliance can attract a penalty, prosecution, and investigation by the Income Tax Department.

#5 Issuance Of Share Certificates To Shareholders

A share certificate is the proof of the stake any shareholder possesses in the organization. It is imperative for a company to issue share certificates within 2 months of its incorporation.  Non-compliance can add up to a penalty ranging from Rs. 50,000 to Rs. 5,00,000. Directors can be held independently liable for a penalty ranging anywhere from Rs. 10,000 to Rs. 1,00,000, depending on the size and nature of the startup.

#6 Disclosure Of Shareholding By The Directors

In the first board meeting after incorporation of the company, the directors are required to give full disclosure of their ownership status in the company. Every director is required to give the status of his interest, i.e., ownership/shareholding in the company. He is also required to disclose if he holds any such position in any other company or LLP. This is one of the most important compliances as it helps in bringing in transparency of decisions and ensures that third party compliances are duly met.

#7 Maintenance Of Statutory Registers

A company is necessarily required to maintain a record of Minutes of Meetings and various statutory registers like the register of directors, register of members, etc., which need to be filed with the Registrar of Companies from time to time. These registers act as a document of evidence for the decisions taken up by the company. A case of non-compliance can range from Rs. 50,000 to Rs. 3,00,000 and an additional fine of Rs. 1000 per day for continuous default.

#8 Annual Return Filing

In a recent state of affairs, the Ministry of Corporate Affairs has closed down 1 lakh companies for non-compliance with this provision. As per the Companies Act, 2013, every company is required to file its annual returns (in Form MGT-7) with the Registrar of Companies within 60 days of the Annual General Meeting (AGM). The returns are required to be filed in this manner :

1. The financials including Profit and Loss Account and Balance Sheet are required to be filed within 30 days of the AGM
2. The appointment of auditor needs to be filed within 15 days of the AGM

Penalties for non-compliance are massive. The penalty imposed for non-compliance is usually 12 times the cost of filing these statements. However, an additional filing can range anywhere from Rs. 50,000 to Rs. 5,00,000. In addition to this, a director in fault can be independently liable for an imprisonment of 6 months or with a fine ranging from Rs. 50,000 to Rs. 5,00,000 or both.

Apart from these compliances, there is a range of compliances which need to keep in mind. These are compliances such as trademark registration, the procedure for maintaining the books of accounts, the procedure to be followed in an annual general meeting, etc. It is extremely important that all of these legal compliances are duly met.

I have heard the CEO of our company often say, “A company can never survive if the people at the top do not have a 360-degree view of every process that’s involved in it’s making.” It is understandable for you to not have enough legal acumen to ensure that your company is complaint and risk-free. However, it is crucial that you update yourself, so that in future you can tackle with any mishap or even prevent it from happening. For this, you can take up a course like this, which will give you a practical insight on everything you need to know to ensure that there is no holding your startup back.

Till then, all the luck.