INTERVIEW: 'New govt norms ensure money raised by startups not misused'

The term “Legal Compliance” haunts every business owner. The most obvious consequence of compliance is that it decreases your risk of fines, penalties, work stoppages, lawsuits or a shutdown of your business.

Now, a company is considered a start-up for the first 10 years from the date of its registration. Earlier, this was set at 7 years. Image source: Facebook profile

When you start a new venture or raise fund, there may be many compliance issues. Sonam Chandwani, Founder, KS Legal & Associates in an email interview with Zee Business Online talks about how startups should deal with compliance issues and other aspects.

What are the measures needed to minimise or fast-track companies legal compliance?

The term “Legal Compliance” haunts every business owner. The most obvious consequence of compliance is that it decreases your risk of fines, penalties, work stoppages, lawsuits or a shutdown of your business.

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Thus, a bird’s-eye view of the company’s operations is essential for its survival and growth. It is understandable if you do not have the adequate legal acumen to ensure that your company is complaint and risk-free. Nevertheless, it is crucial to keep yourself updated, so that you can effectively tackle mishaps and/or prevent it from happening in future.

Some of the key points to keep in mind while to ease the process of Legal compliance, the following steps can be followed:

• Get top-down commitment to full legal compliance.

• Allocate responsibility.

• Provide compliance training for all relevant employees.

• Adopting consolidated checklists of compliance controls.

• Initiate a compliance-based risk assessment. It will identify what should be on your compliance checklist.

• Deploy professionals with specialized knowledge, as needed.

• Tackle non-compliance incidents without delay.

• Set up a system for compliance reporting and record keeping.

• Conduct periodic compliance audits.

At the end of the day, yes, compliance management can be expensive and difficult to implement, especially for start-ups. Without it, however, your business might end up risking a lot more.

Do you think that the measures taken to come clear on angel tax will help start-ups?

In 2012, Angel tax was introduced with the primary objective to arrest money laundering via small companies. While our government relaxed several norms in February 2019, it has ensured that monies raised by small companies are not disguised or misused. However, Indian start-ups still won’t have it as easy as their peers in Silicon Valley or Singapore. The government has made the following changes:

A company will be considered a start-up for its first 10 years from the date of its registration. Earlier, this was set at 7 years. This allows the start-up to get an exemption from the income tax laws for an additional 3 years.

The entity will remain a start-up if it does not experience a turnover of more than ₹100 crore in any of the financial years, which earlier was set Rs 25 crore. This amendment encourages and accelerates growth in small companies;

The income-tax department issued a notice of exempting start-ups from angel tax, provided they fulfilled certain conditions.

Further, some conditions that qualify a company for exemption from angel tax are:

Post issuance of shares, the paid-up capital and the share premium of a start-up must not exceed Rs 10 crore

A start-up cannot estimate the market value on their own but seek the help of certified merchant bankers

This clarification would help avoid potentially significant tax challenges faced by start-ups and allow them to focus on their core activities such as innovation, development, scalability of business and improvement of products and services.

What is your idea behind starting this legal firm?

In a country, riddled by its own socio-economic injustices, becoming a lawyer is often a onerous task with multiple responsibilities. However, I always had a knack for problem solving and helping others navigate through rough waters. This natural tendency drove me to the world of law and there hasn't been a dull day yet.

After working with law firms and corporate entities, my law school friend and I decided to establish a firm, which is now known as “KS Legal & Associates.” We were in our mid-twenties, possessed raw idealism to bring change in the society and accelerated in that direction with an unflagging spirit and dynamism.

In our 6-year stint as a law firm, we have completed over 300 litigation filings and numerous merger and acquisition (M&A) and private equity transactions. The success of our firm largely goes to its people. This can happen only if you constantly communicate with all your partners so that they are aligned with the goal, strategy and vision of the firm via partner meetings, calls, weekly newsletters and daily emails. Some would call it excessive communication, but we believe internal communication and atmosphere of your workplace is vital for the health of your firm and its employees.

How start-ups should deal with legal compliance without burning much cash?

Compliance comes with a cost. Companies often struggle to strike a balance to fund their compliance initiative, and don’t want to do so at the expense of sales. The good news is that the two are not mutually exclusive.

Firstly, it is wise to invest in the Compliance department. Though it may sound counter-intuitive at first, you should deploy professionals with specialised knowledge in the domain. This will eventually reduce your compliance costs in the long run by allocating budget to your compliance program now.

Further, when setting up new policies and procedures for your company, one of the best things you can do is to have a Forward-Looking approach i.e. where you see your company in the next 5 or 10 years and assess whether your current controls would suffice in that environment. This tip is analogous to the old adage which states, “dress for the job you want, not the job you have.” Also, it’s a lot cheaper to implement changes before they’re needed than to have to go back and fix violations and address issues after the fact.

Finally, one of the most effective ways to reduce your compliance expense is to implement technology solutions that can automate processes and workflows. While technology comes with its own expense, the potential benefits generally far outweigh the costs.

Snapshot on how to future-proof compliance:

Well-articulated compliance culture

Embedded in strategic planning and other processes

Forward-looking model—be preventive instead of reactive

Data-driven, backed by data science and technology

Documented decision-making processes and outcomes

What is your turnover and expansion plan?

Two law school buddies, in their mid-twenties, without connections or family members to lean on to acquire legal business experience had formed a law firm. We struggled in the first few years in private practice – both personally and professionally.

The firm commenced operations with a focus on real estate and commercial matters. Over time, our partners, along with a young, dynamic army of lawyers practising in over 5 locations throughout India have established ourselves as one of the fastest-growing law firms in the Insolvency, Banking and Finance practice area. Due to our established credibility and entrenchment with clients, existing clients and new have started approaching us for practice areas other than those we were previously known for. Today, there is no sector where we do not have a team or active client relationship.

It reminds me of a quote by Mahatma Gandhi, “First they ignore you, then they laugh at you, then they fight you, then you win.” In our early days at KS Legal, nobody paid attention to us, they scoffed at our approach and strategy, then they realised that we were winning. We still are and will continue this streak in future!

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Startups Angel Tax