The Centre is considering the implementation of stricter regulations for startups following instances of corporate governance lapses in these businesses. According to a report by IANS, the Company Law Committee (CLC), which operates under the Ministry of Corporate Affairs (MCA) and is headed by the corporate affairs secretary, is exploring the possibility of formulating regulatory measures tailored for startups.
A Shift in Stance After Minister’s Previous Remarks
This development comes almost a month after the Union Minister of Commerce & Industry, Piyush Goyal, expressed the government’s lack of interest in regulating startups at the Startup20 Shikhar event in Gurugram in July. At the event, Goyal advocated for a self-regulatory approach and emphasized the importance of allowing startups to flourish without excessive interference from the government.
Fine Balancing Act for Startups Regulation
Currently, Indian startups fall under the same laws that apply to unlisted companies since there are no specific laws or regulatory bodies solely dedicated to startup. Balancing the need for regulation with the growth potential of the world’s third-largest startup ecosystem poses a challenge. Overregulation could stifle the growth of startups, despite their generally smaller scale.
Multiple Governance Lapses as a Catalyst
The discussion of government intervention and regulation in the startup ecosystem has emerged recently due to various instances of governance lapses affecting India’s fast-growing startup landscape. Several startups, including BYJU’S, GoMechanic, Mojocare, Trell, Broker Network, BharatPe, and Zilingo, have faced governance-related issues. Some companies, such as GoMechanic, Zilingo, and Mojocare, are on the brink of closure, while others, like Broker Network and BYJU’S, are grappling with significant financial challenges.
A Bid to End Regulatory Arbitrage for Indian Startups
The move towards imposing more regulations on startups may also serve as a step to eliminate regulatory arbitrage for Indian-startup. Many sectors, including fintech, online pharmacies, cryptocurrency, EVs, healthtech, edtech, ride-hailing, and online gaming, have witnessed the implementation of stricter regulations to curb such arbitrage practices. The year 2022 has also witnessed abrupt policy decisions that have kept startup and stakeholders in emerging sectors on edge. Major investors, too, have acknowledged that regulatory arbitrage in the fintech startup sector is no longer viable.
