Changes in Companies Act, sops for MSMEs in economic stimulus 2.0 to benefit startup sector

Decriminalising minor violations under the Companies Act, 2013 will help startups and entrepreneurs to seek better valuation and attract investors, according to industry experts. 

Further multiple startups are likely to restructure themselves as micro, small and medium enterprises (MSMEs) to benefit from the recent government provisions for the sector.

The startup ecosystem has largely been kept out of the Rs 20 lakh crore economic stimulus package 2.0 announced by the finance minister Nirmala Sitharaman. Early-stage companies and entrepreneurs, however, stand to benefit from the change in Companies Act announced on Sunday and the fund of funds and other sops announced for MSMEs on May 14.

On Sunday, the finance minister announced that the number of compoundable offences that can be dealt through internal adjudication will go up from 18 to 58. While there were no details on the time frame provided for the ordinance which is likely to bring in these changes, there are overlaps between the proposed changes and provisions of the Companies (Amendment) Bill, 2020. The bill was introduced in the Lok Sabha on March 17 this year and has been pending since.

In her announcement, the finance minister said that shortcomings in CSR (corporate social responsibility) reporting, inadequacies in board report, filing defaults and delay in holding AGM (annual general meeting) are some of the minor procedural defaults under consideration.

“In their zeal to set up a business, startups often run into minor compliance issues and delays in related filings. Often we see investors and promoters in the company unable to deal with the consequences, especially during a fund raise. The current announcement takes that burden away and allows startups to negotiate a feasible valuation and allows investors to back the company in a risk-free manner,” Atul Pandey, partner -- investments, mergers and acquisitions at Khaitan & Co LLP, told TechCircle.

He added that as part of the announcement in the economic stimulus, startups might also consider restructuring their businesses to benefit from the provisions announced for MSMEs. 

“If we go by the current definition for startups as per Ministry of Commerce and what defines MSMEs, there are certain intersecting features. Some of them might restructure their business to classify as MSMEs as challenges of limited capital and turnover are similar,” Pandey added.