Impact of Regulatory Changes on Startups: Staying Ahead in a Dynamic Landscape

✍️ Opinions

Muskaan Kapoor

Aug 3, 2024 — 3 min read

Mahesh Krishnamoorthy, Managing Director, Core Integra: Impact of Regulatory Changes on Startups

This article has been contributed by Mr. Mahesh Krishnamoorthy, Managing Director, Core Integra.

It is increasingly becoming evident that India will be a global leader in the Startup ecosystem with the highest number of Entrepreneurs in the next decade. To fuel this segment, there are a plethora of benefits and schemes provided by the Government, and in every budget, this segment has been a key focus area for the last few years. The added advantage is increased domestic demand and consumption of products and services along with the Make in India initiative.

The benefits for promoting growth in this sector include reduced interest rates, collateral-free loans, tax exemptions, and protection against delayed payments, there is no discount or subsidy from the Government when it comes to adherence to Compliance. Non-compliance is viewed seriously and could result in heavy penalties including imprisonment thereby affecting the reputation and business continuity.

Understanding the Scope of Labour Law Compliances

It is often misunderstood that labour law compliances are restricted to workforce-related compliances alone such as compensation, benefits, work conditions, disputes, etc but actually it is far more comprehensive including Establishment compliances, Factory compliances if engaged in manufacturing, Environment, Health, Safety compliances, Contractor compliances and in recent times ESG compliances is gaining relevance. Further, there are specific compliances related to the nature of business as well. The majority of the labour law compliances are applicable to startups irrespective of the scale of operations, vintage, revenue size, or profitability. This is an important perspective that needs to be kept in mind by the leaders of such organizations.

Key Areas of Labour Law Compliances for Startups

Some of the important areas of labour law compliance that would be relevant to the startup organizations would include the following:

Licenses and Registrations under the various Labour Laws/Acts as applicable under the State and Central Laws depending upon the nature of business of the entity.
Statutory benefits such as Provident Fund, Employee State Insurance, Profession Tax, Labour Welfare Fund, Statutory Bonus, Gratuity, Superannuation, Leave encashment.
Registers are to be maintained under the applicable laws of the State and Centre.
Returns are to be filed on a periodic basis under the applicable laws of the State and Centre.
Other important laws such as Minimum Wages, POSH, Rights of Persons with Disabilities, Engagement of Apprentices, Inter-State Migrant Workers, and Industrial Disputes.

To begin with, a startup needs to understand the Laws and Acts applicable to the entity under State and Central Laws depending on the nature of the business and location of operations. From this emanates the next steps which involved procuring the licenses and registrations, many of which are currently available through the online portal of the respective authority. If there are any exemptions offered for startups, the same needs to be considered while checking the applicability of the Laws, Acts, and Registration/Licensing requirements. Post obtaining the requisite license and registration, the appropriate deductions and payments need to be made to respective authorities and acknowledgments need to be maintained for future records, inspections, and responding to notices from authorities, if any. Appropriate policies need to be drafted for defining procedures under labour laws, training, and education initiatives for the employees, and periodic documentation such as registers, and returns need to be maintained.

The above-mentioned could seem to be elaborate and cumbersome, and indeed to some extent it requires diligent fulfilment which may be time-consuming, and with proper knowledge of procedures, there would also be some cost involved towards appropriate adherence to compliance. Larger organizations could afford to have a department with a set of knowledgeable resources which may not be the case with boot-strapped startups which would prefer to have their bandwidth and financial resources used for business growth rather than compliance costs. There are many professional firms and software available in the market at affordable prices that take care of a large part of labour law compliances in a efficient and simple manner. The startups may use these options to utilize their time and efforts on core business while compliances are taken care of by professionals or software.

It is easy and important to comply with labour laws, this is critical from a startup perspective as they will at some stage of their business lifecycle want to raise capital for growth through various means, whether listing in the capital markets or through investors where the due diligence process captures every element of compliance adherence and gaps could result in issues detrimental to the growth and reputation of the entity.