6 reasons why Start-ups should hire Compliance Manager during Investment

A common mistake that many entrepreneurs make is that during investment they do not make necessary compliance or leave the compliance to a traditional CA Firm who has little idea of the nuances of investment market. This creates humongous problem for that start-up in the long run and hampers the growth potential of the business. Many a times it is seen that due to non compliance the Income Tax Department and Ministry of Corporate Affairs come heavily on the start-ups imposing heavy penalty on the companies and its directors.

In this article, we shall try to analyse what are the consequence of non compliance during Investment and why a start-up should hire an effective compliance manager for the process.

1. Penalty– Investors have many ways of investment but usually they prefer investment through a process called Private Placement. This is because this process is simple and involves lesser paperwork in comparison to the other process of investment. However, non compliance such as delay in filing the requisite form (even for a day) can have fatal consequence. Under section 42 of Companies Act, 2013 if there is any type of non compliance during Private Placement the Ministry can impose a penalty of 2 crores! A good compliance manager will not only help to avoid any type of non compliance in this regards but also give you a timeline which shall help you to get a clear picture of the process.

    

    

2. Shutdown– Coming back to the point of the penalty of 2 crores. Don’t you think if any company specially a start-up faces such a huge penalty, they shall be forced to shut down the company? In an industry where cash crunch is almost synonym a penalty of this magnitude can destroy any start-up.

    

3. Taxation– Very few people know that the valuation at which investors invest in start-ups, is to be backed by a Valuation Report from a Registered Valuer. If it is not backed by the valuation report then the business needs to pay taxes upto 30% on the investment. To put this on perspective imagine a start up getting an investment of 1 crore. However, the Investment is not backed by the Valuation report from a Registered Valuer (note that all CAs are not Registered Valuer). Now, if it has to pay 30 lakhs on tax the whole purpose of investment may be lost. A knowledgeable compliance manager shall guide you in this and help you to get a Valuation Certificate which shall reduce your Tax burden.

Read the full article on Taxmantra.com