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Unicorns face MCA heat

The ministry believes this could lead to better compliance on reporting results on time to the Registrar of Companies (RoC), according to people familiar with the thinking at the MCA.

Unicorns face MCA heat
“We rarely see early and mid-stage startups delaying their annual results. The late-stage companies delay because they have to re-state their financials for an IPO. So, a reasonable delay with proper reasoning is fine,” Kumar said.

With several unicorns delaying their audited financial filings well beyond the permitted deadlines, the ministry of corporate affairs (MCA) is looking at imposing stiffer penalties and tightening the regulations. The ministry believes this could lead to better compliance on reporting results on time to the Registrar of Companies (RoC), according to people familiar with the thinking at the MCA.

Earlier this month, the ministry wrote to edtech major Byju’s, asking why it had not yet filed its results for FY21, already late by more than 17 months. Byju’s had said on July 4 that its audited financial results for FY21 would be announced in the next 10 days (around July 14) after Deloitte had signed off on it. However, a month after that deadline, the results still haven’t been made available, though the company is reportedly planning to do so by September 6.

Byju’s is one among many. Foodtech unicorn Swiggy delayed its FY21 financial filings by more than 11 months. Mobility unicorn Ola’s subsidiary Ola Electric, which manufactures electric scooters, filed its FY21 financial by at least 13 months late with RoC. Fintech start-up Razorpay, which recently attained billion dollar status, filed its FY21 financials only by March 2022, a whole 12 months late.

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Ashish Kumar, co-founder and general partner at Fundamentum Partners, which recently raised $227 million to invest in early growth-stage startups, says late-stage startups usually delay their filings when they prepare for an IPO. “We rarely see early and mid-stage startups delaying their annual results. The late-stage companies delay because they have to re-state their financials for an IPO. So, a reasonable delay with proper reasoning is fine,” Kumar said.

He believes that very long delays could impact funding rounds. “We’ve had to pull out of investing rounds because the results don’t match with what was promised to us. That is a big, big red flag.”

Brijesh Damodaran, partner of growth stage VC-fund Auxano Capital said that RoC rules need to be respected and not following them might lead to regulators tightening them. “The shareholder agreement does have several compliance requirements to be adhered to by the stakeholders and start-ups have no reason to not follow the rules, especially the unicorns,” he said.

Private companies must file their annual results with the RoC within seven months of the financial year-end. The MCA fines privately registered companies up to Rs 200 per day from the date of the delay. Subsequently, directors of companies, who delay the filing of financials beyond 270 days, can be punished with imprisonment for a term which is not less than six months and which could extend up to 10 years. Although startups do privately prepare these statements for the purpose of fundraising due diligence and income tax filings, many of them have been regularly skipping filing statements in time with the RoC.

Sameer Jain, founder & managing partner at PSL Advocates & Solicitors said that although some level of delay in filing financials is expected from unlisted companies, a delay of more than 12 and 17 months is a huge ‘red flag’.

“There are numerous corporate compliances and sometimes auditing could be delayed. The regulations allow for a few months of delay but when unlisted firms delay financial filings by more than 12-17 months that is, worrisome,” said Jain.

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