When is One Man Company apt for start-ups?

Most of the start-ups land up in trouble due to three specific reasons, says V. Mahesh, a practising company secretary, and the promoter and CEO of VMACS, during a recent interaction with YourStory. Foremost in the list is the focus on the revenue model rather than the cash flow of the business operations. He cites the saying, “Turnover is publicity, profit is vanity, and cash in hand is reality,” and adds that cash is fundamental to any business, be it of services, products-selling and buying (trading), manufacturing and other forms of activity.

What follows is a quick interview with Mahesh, over email and phone, on aspects of importance to start-ups from a company law perspective, ranging from ‘one man company’ to compliance overload.

YS: When is One Man Company apt for start-ups?The concept of One Man Company is proposed to be introduced in the New Companies Bill, 2012/2013, passed already in the Lok Sabha in December 2012 and awaiting the nod of the upper house, and then the Presidential consent and notification.

It simply means, one person acting as a shareholder and director/ promoter can create a separate legal entity and give life to a corporate. This is a welcome step, as it would enable intellectual outputs of an individual to be corporatised and commercially exploited, be they bio-tech and software products, energy-saving technology or devices; also, conceptual ideas in fields such as economics, governance, risk management, structural engineering, and automotive engineering.

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YS: What is the relevance of company law to start-ups?

Company law is very relevant to start-ups, as it gives them a sense of belonging, seriousness about their venture, confidence in the chosen project or activity or business model, and a respectable image with the customers, vendors, suppliers and other stakeholders with whom they need to work, interact and closely coordinate for the success of their venture.

It underlines and emphasises the need for meticulous, organised and focused planning for the business enterprise and sense of self-discipline, which is very important, as most of the start-ups are entrepreneurial-driven and are started by first-generation promoters. (Audio)

YS: Is there a perception of compliance overload for small enterprises?

Yes, there is general lack of appreciation combined with apprehension about what compliance is, and how much of it is a burden, how much of it is self-regulated and, in fact, good for the small enterprises.

True, there are a set of rules and regulations, procedural compliances, which if properly advised, followed and executed do not take more than 3 to 4 working days to complete the process of incorporating a private limited company, and the yearly compliance requires about 50 man-hours in a year, if professionally handled and delivered.

There are some irritants and antiquated provisions in the Companies Act, 1956 which still unfortunately continue; these are sought to be done away with in the new Companies Bill of 2012/2013, but then overall it is a well thought-out, composite piece of legislation keeping in view the dynamics of doing business in India. (Audio)

YS: Can you give examples of problems that start-ups land up in, as regards compliance?

Most of the start-ups land up in trouble due to three specific reasons or areas which are not given adequate importance when business is started.

1) The cash flow of the business operations, not the revenue model: There is a saying, “Turnover is publicity, profit is vanity, and cash in hand is reality.” This is fundamental for any business, be it of services, products-selling and buying (trading), manufacturing and other forms of activity.

Most of the start-ups are the brainchild of technocrats, and marketing persons, who do not have much expertise and understanding of the dynamics of finance, accounting and sometimes compliance as well. This results in them concentrating on ramping up operations, brand-building, customer satisfaction, product improvement, quality, deliverables, etc., all of which are without any doubt very important and crucial for the welfare of the business entity, but then without proper management of funds, everything hits a roadblock. If adequate funds are not there when you need the same, you tend to compromise on most of the matters – compliance, debtors and creditors management, bank funding – and there is huge consequential and cascading effect it creates, resulting in poor management decisions, which are not financially viable in the long run, and soon the corporate runs in to a debt trap, which is very fast and swift.

2) Lack of proper, timely and expert professional advice on matters relating to corporate law compliances, be it direct tax compliance, indirect tax compliance, the Companies Act, and in some cases FEMA, import and export formalities, labour laws, economics laws, and the Factories Act. In India, there is no dearth of laws and it is better to take the help of professional and expert opinion or help at the threshold stage rather than look for them once you get a show-cause notice. This is highly prevalent and they end up coughing up 2 to 3 times more amount, incur waste of human resources, get diverted from their operational activities, and suffer mental fatigue.

3) Most of the promoters and entrepreneurs are under the wrong impression or notion that laws are mostly applicable to big listed entities and are based on turnover and profits, and that the law enforcement and statutory authorities would not “Notice” them or may not bother them. This is totally wrong; most of the laws are applicable to all companies, small or big or larger, in terms of size, sales, and profits. It is, therefore, better to take preventive measures and be clear on your compliances from day one. (Audio)

YS: On awareness of legal issues among start-ups

There is a lot of talk or rhetoric that is going around about MSME/ small and cottage industries, protection to them, proper and timely bank funding to them, special laws or facilities to them, etc. In my personal opinion, most of these are not found in reality and do not reach the businessmen who need them.

First, there is no proper statutory or nodal agency which educates, facilitates, pro-actively advises or promotes, MSMEs at the state level or at the national level, to the best of my knowledge; there is no specific window for fast-track clearances for them in Sales Tax, Service Tax, Income Tax ( for allotment of PAN and TAN), Import and Export Code Number, FEMA formalities, especially if there is a foreign remittance or NRI’s contribution, registration with various authorities or a single-window clearance for MSMEs.

Bank funding for them, again, remains a big challenge. L/C opening facilities, bank guarantees, and term loans are heavily in favour of big corporates. Understanding of MSMEs’ unique business models and diversity is rare in the banking industry.

In the absence of attention to legal issues such as maintenance of records, books of accounts, compliance issues, shareholders agreement, or even the basic printing of share certificates, and recording of events properly, there are later issues among the stakeholders, leading up to break of relationships. (Audio)