A self-governance framework tailored to accommodate startups of all sizes might be the government's only intervention in the ecosystem from a legal standpoint, according to lawyer Nishith Desai.
At the Startup20 Shikhar summit in Gurugram on Tuesday, Union Minister Piyush Goyal confirmed his ongoing discussions with Desai regarding startup regulations.
"Desai spoke to me four or five years ago and said the potential is huge and the government shouldn't intervene," Goyal said. The minister recommended that a small group of startups, led by Desai, "can create some sort of a self-regulatory mechanism, before the government starts interfering in their business, or circumstances go out of control".
Desai, in an interview with BQ Prime, said, "I will act as a philosopher and a guide. I don't know if they will have something officially. I would be happy to do whatever is needed."
Highlighting the significance of a self-regulatory framework, Desai said that startups span multiple sectors and operate at several different stages. Imposing rigid and prescriptive rules could hinder their ability to focus on solving the core problems they aim to address.
"Self-regulation is the best way to govern, else someone else will come in and spoil the ecosystem," he said.
Desai clarified that they are not paid vendors and are simply assisting the government in building an ecosystem for startups. This could be India's contribution to the thought leadership to the rest of the world, he said. "These governance standards could be not only good for India but for the whole G20 cohort."
He highlighted recent cases of misgovernance in the tech sector, particularly among unicorns.
Desai attributed these issues to a flawed culture that developed during the startup phase, wherein founders, professional advisors, and investors neglected governance rules—both formal and informal. "The 'chalta hai' mindset needs to be changed."
He also cautioned against venture capitalists pressuring startups to prioritise rapid growth "at all costs".
The India-led Startup20 Engagement Group recently released a report containing recommendations on corporate governance for Indian startups. This report was prepared in consultation with Desai's law firm.
Desai said that the report offers insights into what the structure could be.
The suggested framework consists of a checklist categorised by a company's maturity, encompassing voluntary commitments to corporate governance practices such as disclosure policies, prevention of sexual harassment policies, diverse board representation, dedicated committees, regular audits and more. He also said the framework is intended to supplement existing laws and regulations.
The discussions around regulations for the startup ecosystem come in the wake of corporate misgovernance concerns involving prominent startups such as BharatPe, Trell, Mojocare, GoMechanic, and Byju's.
Currently, the startup sector lacks a dedicated regulatory body or specific laws, relying instead on regulations applicable to unlisted firms. This approach fails to address the unique characteristics of the startup ecosystem, including valuations and substantial venture capital investments.
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