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‘Overregulation bred economic dwarfs who choose to fly under regulatory radar even if it restricts access to capital, talent’

Ease of Doing Business for MSMEs: For formal MSMEs and startups, the regulatory complexity lies not only in the number of compliance but also in the ongoing nature of compliances.

‘Overregulation bred economic dwarfs who choose to fly under regulatory radar even if it restricts access to capital, talent’
Going digital is perhaps the most important step that an entrepreneur can take towards proofing their compliance against lapses, delays and defaults.

By Rishi Agrawal 

Ease of Doing Business for MSMEs: India is home to more than 60 million micro, small and medium enterprises (MSMEs) employing over 110 million people. Its startup ecosystem ranks 3rd globally, with more than 73,000 recognised units. In 2021 alone, roughly 55 startups were created every day. While these numbers paint a rosy picture of India’s entrepreneurial prospects, they conceal the regulatory complexity faced by MSMEs and startups in the country.  

There are 1,536 laws and 69,233 compliances that govern doing business in India. This intricate web of laws and compliances has resulted in excessive regulation in the economy and contributed to massive informalisation; for every 60 informal enterprises in the country, there is just 1 formal enterprise. This is because the moment an MSME or startup expands its scale and becomes a part of the formal sector, it is required to meet more than 400 compliances a year. Overregulation has bred economic dwarfs that choose to fly under the regulatory radar even if it restricts their access to institutional capital and superior talent and compromises their resilience in face of economic vulnerabilities.  

For formal MSMEs and startups, the regulatory complexity lies not only in the number of compliance but also in the ongoing nature of compliances. To illustrate, an enterprise with just a single manufacturing unit faces about 50 display requirements which it must comply with on a continual basis. These include displaying registrations, abstracts of legislations, standing orders, employee-related social security rules, safety signboards, labels on hazardous substances, identification marks on equipment, and so on. In addition, a variety of registers must be maintained which should be current at any given point in time. These include wage registers, muster rolls, leave and attendance registers, temperature registers, and records of waste disposal, among at least 40 other unique registers in various formats. 

While India may have done away with its infamous licence raj through the 1991 economic reforms, MSMEs and startups deal with a different type of licence raj in India’s 21st-century regulatory environment. On average, an MSME or startup is required to obtain at least 30 different licences, registrations and approvals from various authorities. These include EPF and ESI registrations, land registrations, trade licences, environment clearances, factory licences, permanent power, water and sewerage connections from municipal corporations, and vehicle registrations, among others. 

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At the same time, the categories of compliances that an MSME or startup is expected to deal with are diverse and divided into seven broad categories – labour, industry-specific, commercial, environment, health and safety, finance and taxation, secretarial and general. However, compliances are not equally distributed among these categories. For instance, the labour category accounts for 30 per cent of all laws and 47 per cent of all compliances in India’s business ecosystem. Since labour is a concurrent subject under the Constitution of India, compliances relating to labour are implemented both at the union and state levels. Even within the labour category, just a single legislation – the Factories Act, 1948 – accounts for almost half of the compliances. It contains archaic and microscopic prescriptions such as the provision of spittoons, painting inner walls of canteens, and maintaining specific lighting and sound levels, among many others.  

The regulatory complexity, however, does not stop here. India’s business laws are characterised by excessive prescriptions of criminality. More than half of these laws carry imprisonment clauses, with two out of five compliances imposing jail terms for violations. This high intensity of criminalisation stems from the blanket application of criminal penalties without adherence to principles of ‘necessity’ and ‘proportionality’. To illustrate, the failure to provide adequate drinking water facilities in a factory under the Factories Act, 1948 can attract punishment equivalent to death due to negligence under the Indian Penal Code, 1860.  

The sheer number, types, levels and categories of compliance coupled with the inherent hostility enshrined in the imprisonment clauses mean that the probability of ending up behind bars is simply too high. This has inevitably hindered the organic growth of innovation, jobs and wealth in the country. The entrepreneurial class in India faces a huge burden to stay on the right of the law. For an MSME or startup with limited resources to be in full compliance with every minute compliance in the regulatory universe is an immense challenge.  

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To err is human but for entrepreneurs in the country, a single compliance error can result in grave consequences for their business. In such a highly charged regulatory environment, the onus lies on MSMEs and startups to strengthen their compliance management. Going digital is perhaps the most important step that an entrepreneur can take towards proofing their compliance against lapses, delays and defaults. Not only does it enable better visibility and control over compliance functions but makes it increasingly possible for entrepreneurs to stay ahead of the curve. With unique features such as customised checklists, real-time regulatory updates, automated alerts and reminders, and periodic analytics, digital compliance softwares are fast replacing the traditional ad-hoc and manual compliance processes.  

On a more macro level, MSMEs and startups should endeavour to build a culture of compliance across all levels of their organisation. More often than not, the responsibility for compliance falls squarely on a few individuals, making compliance an unenviable task and poor compliance a greater possibility. Efforts should be focused on establishing collective responsibility through decentralisation of compliance tasks. All stakeholders should be made aware of their respective roles and coordination among them must be ensured through robust compliance processes at all levels and departments. Period assessments, risk evaluations, and corrective interventions should form the focal points of the compliance strategy. Embracing these compliance solutions can ensure that MSMEs and startups are no longer flying blind and are equipped with the right tools to tackle India’s complex regulatory environment.  

Rishi Agrawal is the Co-Founder & CEO of TeamLease Regtech. Views expressed are the author’s own.

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