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The start-up governance conundrum


India became the third-largest start-up ecosystem in the world after the US and China last year. Further, for the second time in a row, India topped China by creating 23 unicorns in 2022, taking the total number of such high-value companies to 96 as against China’s 11. At present, India, has more than 99,000 start-ups; however, issues in internal processes, accounting, and governance practices have been raised in some of these companies, leading to the need for corporate governance becoming a focal point.

Corporate governance is a crucial aspect of any business. It ensures that organisations are operating in a transparent and ethical manner, which is critical for building trust with investors, customers, and other stakeholders.

The Indian government has also taken steps to promote good corporate governance practices through various provisions of the Companies Act. It has further strengthened the same through regulatory frameworks. The four pillars of accountability, honesty, transparency, and responsibility served as the foundation for most of the government’s regulatory interventions.


Recently, a few Indian start-ups have been reported to have flouted norms around corporate governance, putting at risk the entire start-up ecosystem, making foreign investors sceptical. However, it is important to note that there are some great start-ups with brilliant corporate governance practices too.


The Indian start-up ecosystem, which has been a promising story so far, runs the risk of drifting into unwanted territory due to fiduciary irresponsibility, poor governance, lack of financial control systems, revenue recognition metrics, money swindling, and human resources bungling, which if not quickly fixed by those lacking, can hurt the ecosystem. While there are many instances where start-ups and emerging tech companies have imbibed strong internal controls and external compliance mechanisms, with each passing day, the number of start-ups on the edge of going bust or under suspicion or under forensic audit is unfortunately adding up.


This emerging distrust due to a few badly managed organisations has left investors with no choice but to unleash forensic audits on the very start-ups they were singing praises for a year ago. There is also a rising chorus from certain start-ups that the investors themselves are to blame for having driven growth at all costs, forcing them often to jettison the very systems and processes they may have set up once. The consequence of this meltdown is becoming evident in litigations, layoffs, exiting directors, forensic audits, and more. Investors have now turned the lens on most portfolio companies that are struggling today as the whammy of a funding winter. The questioning of internal practices has forced into the open their business management deficiencies.


This may be also reflective of basic lack of due diligence by some investors who may have invested due to the fear of missing out in earlier years. As freshly-minted unicorns, soon-icorns, and more strutted around, people looked at innovative business models, but not their books for sharp book-building practices, HR management and hiring practices, credibility of numbers, or even existence of any internal control systems.


Due to the faults of some which have forced some new investments to shy away, many start-ups may now get dragged into time-consuming due diligence and audits. It is important to start focusing on start-ups that have worked well and established themselves through prudent business practices without compromising growth. Start-ups operate in various segments with different levels of aspirations. We must look at organisations and their corporate governance practices individually rather than labelling them together due to the malpractices of a few players.


Additionally, investors are increasingly looking at corporate governance practices while making investment decisions, which means that start-ups with good governance practices are more likely to attract investments. Having a good corporate governance framework in place and implementing it is indispensable for the long-term sustenance and operations of Indian start-ups. Companies that have good corporate governance as a priority are more likely to build a stronger brand reputation in the market and attract more resources.


For India to become a $5 trillion economy, maturing of Indian start-ups is mandatory and adopting good corporate governance policies can help get start-up investments back. India’s 115 unicorns have created a cumulative valuation of over $350 billion. To continue to attract FDI in India, start-ups must prioritise good corporate governance.


Start-ups with a sound corporate governance in place, besides attracting FDI and representing brand India can additionally help attract and retain top talent as it demonstrates a commitment to ethical and responsible business practices. It can also help mitigate risks, ensure compliance with regulatory requirements, and support long-term growth and sustainability.


Read More at https://www.financialexpress.com/opinion/the-start-up-governance-conundrum/3145270/

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