The importance of legal compliance for startups


A survey by NASSCOM (2014) revealed that India is the fastest growing startup base in the world and ranks the third among global startups in the world; about three to four startups are born every day. Zooming in on Bengaluru specifically, the city is ranked the 15th biggest startup city in the global level according to Compass (2015), accommodating about 3,100-4,900 active startups. The Compass survey goes on to state that venture capitalists favour Bengaluru over other cities – this could contribute to an accelerated growth rate of startups in the coming years. Though the blooming entrepreneurial spirit may be good for the nation’s economy, on the flip side it could also mean that the number of non-compliant startups is on the rise. Why does a word such as compliance even matter for startups, which just want to take their business to the next level and get investors pumping capital in their business?

Compliance and its importance is often overlooked by many startups new to the business ecosystem simply because they are not aware of the existing laws. Ignorance may not be bliss in such cases as it affects a startup's viability and attractiveness to a potential investor. For instance, the Economic Times reported that venture capitalists are “getting experts to check businesses they have invested in to catch any oversights or discrepancies”, pointing to the necessity of being compliant to the law of the land. Such diligence and foresight would benefit both the company and the investors, simply by assuring potential investors that the startup they are investing is in safe hands, thereby gaining the trust of the investors.

It is always a safer option to get business registered at the initial stage and pay taxes, rather than getting caught later and pay penalties that could result in damaging lawsuit, and lose the credibility of the company in the long run. Failing to comply to legal obligations could also hinder the progress of the company and other several consequences, such as imprisonment and disqualification of key personnel of the company. The compliance laws are so stringent that failing to comply can even lead to the shutdown of the startup even before it gets going. Ignoring the legal terms can subject to intrusive action by regulatory agencies.

How to register your startup and stay compliant?

Often times, new and small firms are unaware of nuances of the issues and can be subjected to intrusive action by regulatory authorities. In order to make compliance for startups friendly and flexible, simplifications are required in the regulatory regime. In early 2016, the Ministry of Labour and Employment mandated a Direction in accordance to the ambitious 'Make in India' and the 'Startup India Action Plan' conceptualised by the Government of India. This Direction has been stated as one of the many regulatory changes sought to be introduced encouraging startups and entrepreneurs. What exactly are these startup-friendly initiatives?

        a. Self-certification

As per the Ministry Directive, startups shall be allowed to self-certify compliance through the startup mobile app with nine labour laws. In case of environment laws, startups that fall under the ‘white category’ (as defined by the Central Pollution Control Board) would be able to self-certify compliance and only random checks would be carried out in such cases.

        b. Inspection

Startups may be inspected on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer. In case of the labour laws, no inspections will be conducted for a period of three years. As the startup may have to eventually hire employees, the following basic documentation needs to be in place:

  1. Confidentiality and non-disclosure agreement (NDA)
  2. Offer letter/ employment agreements
  3. Non-competition and non-solicitation agreements
  4. Intellectual property assignment agreement
  5. HR policy/ Employee handbook


         c. In case of a factory startup

Factories Act embodies the law relating to regulation of labour in factories. The statute prescribes terms of health, safety, working hours, benefits, overtime and leave. The statute is enforced by State governments in accordance with the State-specific rules framed under the Factories Act. Before construction of a factory, environment clearance has to be obtained from Ministry of Environment & Forest. 

The following compliances shall be observed while setting up a factory

  1. Approval of site plan
  2. Factory licence
  3. Consent from Pollution Control Board under Air (Prevention & Control of Pollution) Act, 1981 & Water (Prevention & Control of Pollution) Act, 1974
  4. State Electricity Board - Load Sanction Letter
  5. Local Authority Approval to set up plant / industry

    d. In case of a shop or a commercial establishment

Shop and Establishment Act provides statutory obligation and rights to employees and employers in the unorganised sector of employment, i.e., shops and establishments. A State legislation, each State has framed its own rules for the Act. A certificate of registration of the establishment should be obtained.

So, as you can see, building Smart Cities is not as simple. We need to go beyond technology and gadgets and get a grasp of the real issues so that the foundation and building blocks of the Smart City is there to stay for generations.


(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)


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