The Indian startup ecosystem ranks 3rd globally and has seen tremendous growth in the past decade. The start-up culture in India has seen tremendous growth over the past 5 years. From only 471 start-ups in 2016, there are now over 77,000 with more than 100 unicorns. This boom in the entrepreneurial enterprise has led to the present status quo wherein in H1 2022, start-ups raised $17 billion in funding. Looking beyond these numbers we find an intricate and dynamic web of laws and compliances that have to be complied with by these enterprises.
A total of 1,536 acts and 69,233 compliance requirements govern doing business in India. Just in 2022, there were over 4,500 regulatory updates published on more than 2,000 websites by government ministries, departments, and regulators. In addition, as soon as a startup starts to expand its scale, it has to comply with more than 400 compliance requirements in a year. For startups, regulatory complexity lies not only in the number of regulations but also in the nature of compliance. An enterprise with a single manufacturing unit has to fulfil around 50 display requirements, maintain at least 40 unique registers in different formats and obtain at least 30 licenses/ registrations from various different authorities. A startup has to deal with a diverse set of compliances that can be classified into 7 broad categories: finance & taxation; commercial; labour; industry-specific; secretarial; environment, health & safety; and general. Furthermore, every 2 out of 5 regulatory requirements carry a jail term for non-compliance. Entrepreneurs, thus, face a huge burden to stay on the right side of the law. This has led to a situation wherein start-ups are shying away from expanding their business for fear of being overwhelmed by compliances. As per an RBI survey, even after the maturity of the business, 60% of start-ups continue to work with at most 10 employees. Only 3% of start-ups were found to have employed over 100 employees from the sample pool of 1,246 start-ups.
However, this is only the beginning of the regulatory complexity. Criminal penalties are very prescriptive in India's commercial legislation. Two out of every five of these statutes include prison time provisions for infractions. It is the wholesale application of criminal sanctions without regard to notions of 'necessity' and 'proportionality' that has led to such a high degree of criminalization. As an example, under the Indian Penal Code of 1860, the penalty for negligence that results in death can be as severe as the punishment for failing to provide proper drinking water facilities in a plant under the Factories Act, 1948.
The intrinsic animosity contained in the imprisonment rules, along with the sheer number, types, levels, and categories of compliance, makes the likelihood of being incarcerated far too high. This has stifled the country's natural capacity to generate new ideas, new industries, and new sources of income. It is extremely difficult for India's business elite to avoid breaking the law. Startups often have minimal resources, making it difficult for them to meet every regulatory requirement.
It's common to make mistakes, but for business owners in the country, even a little violation of the law can have disastrous effects. The onus is on startups to improve their compliance management system in this highly charged regulatory climate. When it comes to protecting a business against compliance breaches, delays, and defaults, becoming digital is probably the most crucial step. It allows business owners to see and manage compliance processes more clearly and gives them more leeway to anticipate regulatory changes. Digital compliance software is quickly replacing the conventional ad hoc and manual compliance processes due to its unique features such as customizable checklists, real-time regulatory updates, automatic alerts and reminders, and periodic analyses.
Startups and small businesses as a whole should work to institutionalise a culture of compliance. As a result, compliance is typically an unpleasant undertaking and poor compliance are more likely because responsibility for compliance falls largely on a few persons. Collective accountability can be established by the decentralisation of compliance duties. In order to ensure that everyone is doing their part, strong compliance protocols should be in place at every level and in every department. The fundamental tenets of a compliance strategy should be periodic assessments, risk assessments, and corrective interventions. Startups can stop operating in the dark by adopting these compliance solutions, which will arm them with the knowledge and resources they need to navigate India's intricate regulatory landscape.
The onus lies on the startups to strengthen their compliance management system. As enterprises grow, ad-hoc, paper-based, and people-dependent processes fail to scale. They need to adopt digital solutions to move towards a cashless, paperless, and presence-less compliance management system.