The Company Law Committee (CLC), formed by the ministry of corporate affairs, is reportedly discussing the possibility of bringing in stricter regulations for ‘bigger’ unlisted companies. The move is in the right direction as big unlisted companies and “mature start-ups” should be made more accountable, specially after the revelations regarding alleged irregularities at several bigger start-ups. For example, in the past few months, Byju’s faced fire after reports of failing to file its financial accounts on time and skipping an interest payment on its term loan. The committee, which advises the ministry on legislative matters, should know its job as it comprises experts with outstanding and credible track record. Among other regulations, the committee is likely to examine the need for quarterly or biannual financial reporting by unlisted entities, for which an enabling provision was introduced in the Companies Act in 2021. However, a detailed reporting framework has yet to be introduced.
The change is necessary as it is essential for stakeholders to take timely action in case there are lapses or issues in the financials or financial reporting of a company, specially with the start-up ecosystem becoming bigger and several unlisted companies becoming as big as their listed peers. There could be some large unlisted companies which have systemic implications as well. So, private firms above a specified size with debt higher than a certain level should qualify for enhanced disclosures. They need to allow aggregate analyses that are more meaningful than what can be drawn from the ministry’s database where the data is updated too slowly and is hard to navigate. Higher standards of disclosure for private entities would enable superior supervision and also incentivise better internal governance. Recently, former Securities and Exchange Board of India (Sebi) chief Ajay Tyagi had called for a review of corporate governance compliance of mature start-ups. Tyagi rightly said that the ministry must put in place an institutionalised review mechanism on corporate governance compliances of certain mature start-ups in which the valuation has grown high or the turnover has increased beyond a level or there are plans to launch a public issue. This exercise has to be done by the ministry as Sebi can make interventions only at the time of listing.
The issue, however, needs to be addressed carefully as the ministry should not be seen to be trying to interfere too much–reason why many feel that India must adopt a robust system of self-governance if it wants to have a vibrant and energetic start-up ecosystem. But fixing a threshold shouldn’t be so difficult a task as the limits for complying with various company law-related requirements are set based on considerations like paid-up capital, profits and debt levels. These help determine the extent of public interest that calls for additional compliance. The compliance burden should obviously remain low for small companies to foster innovation, but large unlisted companies may have the wherewithal to meet stricter requirements.
Overall, there can be no debate over the fact that more disclosures would only help bigger unlisted companies that are thinking in terms of going public to make a smooth transition. In any case, they should adopt corporate governance practices specified for listed companies well in advance. Several companies have been seen to be waking up at the last minute, projecting a hurried ticking the boxes approach, which doesn’t inspire confidence. After all, there is no short-cut to ethical and transparent processes.
