Regulatory scrutiny of unicorns will bolster startup ecosystem

A key Corporate Affairs ministry panel is considering a proposal to devise a regulatory framework for unicorns in India. Unicorn is an entity whose valuation has surpassed $ one billion. India is home to more than 100 unicorns. Despite minting so many unicorns in 2021 and 2022, the startup ecosystem has been facing hard times owing to funding winter. Such hard times have led to the weak points of startups coming to the fore. Many cash-guzzling unicorns were forced to reduce their operational costs by reducing workforce. Amid this emerged rampant corporate governance violations causing considerable dismay. Some unicorns have not even filed their annual financial reports in the stipulated timeframe. For instance, three directors and the auditor left edtech firm Byju’s are in the dock for over-delaying submission of financial statements in addition to many other corporate governance issues. Some unicorns were not able to pay their employees in time owing to funding crunch. Such state-of-affairs exposed the vulnerabilities of Indian unicorns despite halos created around these entities.

In this context, the ministry’s proposal to increase regulatory scrutiny should be hailed by all stakeholders. If this happens, it will have a lot of positive effect on the overall startup ecosystem.

Firstly, unicorns have emerged as one of the fast-growing employers in India. However, recent events have seen mass layoffs. Such hiring and firing mode of employment puts a lot of staffers in a tight spot. Given the broader responsibility of corporates towards employee well-being, it is better if these large unlisted companies with thousands of staffers get regulated. Secondly, many unicorns have seen serious corporate governance lapses. Undue delay in filing of financial reports, lapse in deposits of employee PF and other social security deposits, treatment of off-balance items in ambiguous manner, severe disagreement with auditors on revenue recognition, and many more have highlighted the rot in the startup ecosystem. If such lapses have to be plugged, then unicorns need tighter scrutiny. Thirdly, many of the unicorn founders behave the company as personal fiefdoms. While founders take the risk and nobody is denying them the credit for setting up a successful enterprise, a good dose of humility serves everyone’s purpose. Recently, we have seen instances where many startup founders have allegedly swindled company money for personal purposes, putting them on a warpath with investors. In other instances, many founders seem to be completely ignoring the board’s suggestions. Such unruly behaviour and attitude can only be controlled through regulatory scrutiny. Lastly, many unicorns have shown faulty business model in which profitability ranks low in their priority list. Regulatory scrutiny can impose business discipline among these unicorns. Hence, any proposal to regulate large unlisted companies is a welcome move. However, regulatory scrutiny shouldn’t stifle innovations within the startup ecosystem. It is, therefore, in the interest of all stakeholders that wide consultations with the large startups are held before finalising rules. Their inputs are, after all, drawn from experiences and wiser counsel.