Negotiating compliances key for start-ups in an IPO boom
6 min read 27 Jan 2022, 01:24 PM ISTThe latest episode of Mint Navigating Compliance with Technology series, titled ‘Start-ups: Negotiating GST and tax compliances in the midst of an IPO boom’, powered by Clear, brought together industry experts to discuss effective role in creating space for effective growth.
_1643269714458_1643269725303.jpg "‘Start-ups: Negotiating GST and tax compliances in the midst of an IPO boom’.")
Premium2021 was a headline year for start-ups looking to go public. It was the year when 9 brands ranging from food to fashion came of age with IPOs collectively raising over $6 billion from the markets. Broadly, the start-up ecosystem has raised over thrice the figure of equity investments in just a single year between 2021 and 2020.
Despite the discontent caused by the pandemic, it seems to be raining money for start-ups and more than two dozen brands are waiting in line to get listed this year. From a year that defied all odds, start-ups are looking forward to a year of breakthroughs when it comes to India becoming a true start-up nation if these IPOs come on stream.
But there is still a long way to go for these companies to effectively manage their tax and GST compliances and structure them in a way that takes care of the challenges of today and tomorrow and leaves the bandwidth free for leadership to focus on exponential growth.
In the latest episode of Mint Navigating Compliance with Technology series, titled ‘Start-ups: Negotiating GST and tax compliances in the midst of an IPO boom’, powered by Clear, saw experts discuss the nuances at play when it comes to issues and the solutions that could play an effective role in creating that space for growth.
In the recent past, a large number of start-ups have taken the IPO route and the high volume of money coming into the system has raised expectations for the start-up ecosystem as a whole. The reasons for this are many.
“I think a couple of things are playing that factor. One is that the government has become very, very proactive and is actually promoting start-up as a policy. Also, the kind of problem-solving and work start-ups are doing is not only recognized in India but globally too, creating an ecosystem to scale and grow. Lastly, I think an IPO gives the exit both to the promoters and to the investors," said Lavanya Pachisia, COO, Zivame.
IPOs today are not just for start-ups who have ‘arrived’. A lot of loss-making companies are also going in for IPOs with much fanfare. There is nothing that really stops loss-making companies from going public. In fact, SEBI has a different set of rules for loss-making companies to go public, like tapping the retail investors to 10 percent from the normal 35 percent. The companies could be loss-making as they may have a high investment in technology, high employee acquisition costs, or high marketing costs.
“We need to understand the benefits of these companies – do they have a disruptive technology, or access to a huge customer database, which these days is the new gold, or innovative technology solutions for common issues, or the ability to grow exponentially in digital setups, or tap a differentiated customer base or a newer market set. These kinds of benefits would outweigh current profitability issues with these companies," said Priyanka Seth Wadhera, Chief Financial Officer, Indifi Technologies Private Limited.
Compliance is one space where say the government is adopting technology at a much faster pace as opposed to the rest of the ecosystem.
“The macro-environment from a regulatory and tax standpoint is highly conducive for start-ups to develop, grow, and ultimately become public. Investors really want continuity of policy and the recent measures taken whether it is on the retrospective tax measures that ensure that there is continuity in policy or from the regulators," said Abhishek Gupta, Chief Financial Officer, OYO.
For MSMEs that have seen some stability in the recent past with tax buoyancy and improved tax collections on the GST route, there is a case now for better tax policies to come in. “With e-invoicing, further new GST compliances related to the input tax credit, the government of India is becoming stricter on compliances. It is really important for organizations to focus on tax compliances, not only from a perspective of default or a penalty but also from a working capital perspective," said Rohit Pansari, Chief Financial Officer, Industry Buying.
This is also important to attract offshore investments into the company. “There are hiccups, but yes with digitization and with proper AI tools and Power BI, smart reports eliminating all Excel tools, we can have a robust mechanism to take care of these compliances," he added.
2021 was a year of unicorns for India and several companies made their big IPO debuts. As companies grow, ensuring compliance can be a tedious task for start-up firms, especially as it is seldom that they have fully structured finance functions. This is where players like Clear come into the landscape and make the digitization processes easier to use and implement.
“I think what is happening is an acknowledgment that the overall start-up sector is moving from the nascent stage to teenage or early adulthood. So, more and more rules that apply to the rest of the world are now going to be applied to this world as well. The growth of start-ups is happening when the government has also said that they're tightening overall rules for the whole industry. Working capital is the other area of focus for start-ups looking to go public," said Rohit Razdan, Chief Business Officer, Clear.
The need of the hour is not just getting modern tools in place, but also getting an expert on board who can offer support to adopt the tools and update them as government rules change. “The government has become more AI and technology-oriented. The compliance regime itself is changing, making it complicated for finance teams in growth-oriented companies to adopt the right tools," he added.
Start-ups go through a typical growth cycle from seed series A, B, C funding to the IPO stage, when the broad set of compliance needed also changes, as opposed to established enterprises where there are processes and the business model that remain the same. And yet, they seldom have CFOs and finance teams to manage their compliances.
“There are many tools available to be compliant. While there are established ones like Oracle and SAP that offer specific modules to ensure that your compliance is right and accurate, etc., these may not be cost-efficient. So, you can use other tech solutions like the ones offered by Clear which make tax compliances easy, economical, whether it is tedious returns, GST returns, income tax filings, etc," said Wadhera.
COOs can become enablers of change in their journey from entry models to marketplace models for start-ups. “We cannot restrict tax and compliance only to the finance function. Compliance needs to be incorporated into the very culture of the organization," said Pachisia.
ESOPs are a key attraction for start-ups to attract the right talent. But, there is a need to make them more tax-friendly for employees – at present, employees are taxed twice for the ESOPs they hold.
“The fundamental issue is that ESOPs are taxable at the point when they are exercised at the highest marginal rate of tax and then they have to pay Capital gains tax at the time when they are sold on the price difference. The government has taken a positive step by allowing eligible start-ups being given some benefits. The reality is that there are 28,000 start-ups registered with the DPIT but just 250 are eligible to take the benefits of these ESOP relaxations," said Gupta.
With the IPO boom, compliance is seen as a value driver for international investors and technology can help start-ups meet compliances both at the pre-funding and post-funding stages.
“There is an IFC study across global investors and 100 percent of them would pay up to 28 percent higher for a company with better governance as that is a reflection of the longevity of the organization. Towards that, investors look at compliance as one of the key differentiators, and compliance is not a commodity any longer. Good compliance can be demonstrated today through GST and other records and certificates," Razdan concluded.
Solutions providers like Clear offer all the tools on one platform taking away the pain of compliances from the organizations that can focus on their growth and due diligence for IPOs.
