Last Updated 12 May 2020

Startups Should Get Basic Checks Done: Ajay Joseph

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Advising the cash strapped startup entrepreneurs over the compliance of laws in the complex land Ajay Joseph, Partner, Lakshmikumaran & Sridharan spoke to Entrepreneur Media. 

Things to look at

Contrary to popular belief the first thing that every entrepreneur should look at is when he is in the market, what is the valuation he is going to reach, how much stake he is going to give out and how much can he raise. Before this a lot of steps go behind this. When I look at the investments being done my potential start-up clients I analyse that they probably never look at what is the law that applies to them.

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There are a lot of examples in the Indians start-up environment where a lot of these companies which raise millions of dollars in venture capital and shut the shop. Look at the cab aggregator industry one incident completely threw it in different spotlight about the legality of that business.

Get basic checks done

When you are a start-up you are very cash strapped, tight on your budget but some of the basic steps you must do is at least  look at what business you are into. Are you able to actually legally do this business that you are venturing into and the example again is the online sale of medicines that e-pharmacy. Pharmacy is a much regulated industry and a lot of start-ups went in without having requisite knowledge of what law that applies to them.

It’s just about getting basic checks done and not about going the last detail of the legal aspect. The most basic check is to see whether you need a licence to do this as there are chances that you need a licence for everything.

With the advent of internet in India there are a lot of forums available to help entrepreneurs. I am not saying that you must always go and engage lawyers to start with citing that you are a bootstrap, tight in cash venture and legal advice at times be expensive. But at least the most basic check can be done on the internet.

Three main pillars

There are a lot of start-ups doesn’t even know where to go to and what to look for so there are three main pillars to stick to. First a charter accountant will be help you structure your account, file your tax return so you don’t fall foul of those. Second, a lawyer that is legal adviser is only needed for you when you are going for M&A fund raising round over to just look at your entire business and tell you whether you are legally kosher. And third is company secretary who will take care of all your compliances, all your secretarial advances and it is far more cost efficient. These three kinds of specialists in the scene will help you manage your cost effectively.

When you are at very nascent stage you don’t need a lawyer, you don’t need a charter accountant but you just need a company secretary to do company incorporation.

Swift effect of non compliance

Complying with the laws is chicken and egg situation in India and the most start-ups are very clear that they have to manage taxes. Because, the effect of not complying with the taxes is swift and the tax department will come after you. But the effect of not complying with other laws is not as swift because enforcement in India probably lapse at the best. But as and when something happens the government will find all of its sticks to beat you up with and you have to be ready for it.

As when the govt will start moving its enforcement stick the people will also start realising of complying with companies act, they will be mindful of shops and establishment act, mindful of exchange conformation while raising money. If you have an impact of contravening a law then you are very mindful of it but govt never enforces and comes after five years and meanwhile you feel like lets like I take a chance. I still think it’s a incremental move, as and when the govt will move one step up the rest of the market will also move one step up.         

Complex laws

I have come across only 15-20 percent startups those are well studied of laws as India is very complex country with complex laws the central and state government make their own different laws respectively. We also have centre and state legislate on the same thing so we have got a minefield of legislation in India and it is impossible for somebody who is not a lawyer to pick through and look through all the various laws on the top of it. 

(As told to Sunil Pol of Entrepreneur India)

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