The Rollercoaster Ride of Compliance
Please hire good advisors!
I want to highlight a PRESSING issue I've seen across the board, namely, missed filing dates for MGT-14 and PAS-3.
For those who don't know what these are, PLEASE read up on them before starting a company.
If you're running a company and have raised money, and don't know what these are (or have them filed), immediately fire your existing Company Secretary.
For context, before any placement of shares, according to the Companies Act (ESSENTIAL reading for investors and founders), you must file an MGT-14 with the Registrar of Companies (RoC), notifying them of upcoming investments into your company.
This has to be done BEFORE raising money.
Post raising money, within 15 days of allotment of shares, you MUST file the PAS-3. You CANNOT use a single rupee of the funds before filing this.
The penalties for missing these filings are BIG. It's up to ₹25 lakh per instance for MGT-14. Failure to file PAS-3 is up to ₹1 lakh per promoter/director, plus additional for the company.
Luckily PAS-4 filing requirements have been removed by Companies Act amendment in 2014, however companies SHOULD still maintain a copy of this form.
For early stage companies, raising from a couple of angels at separate times could result in a few crores in accumulated possible penalties.
While realistically, these are appealable and the penalties can be reduced, as an investor I'm forced to consider the possible worst case scenarios here and consider companies accordingly.
It's a painful task, I fully agree, but PLEASE get good quality CA, CS and Legal advice when setting up.
Meanwhile, for Founders, PLEASE register for DPIIT, there are carve outs that put maximum caps on these fines.
For regulators, PLEASE consider making these caps even better, far too many young founders are struggling to survive and juggling a 100 issues, sometimes these filings get delayed/missed out on.
The plethora of fines that can accumulate can kill most early businesses.
Hell I’ve seen some awesome entrepreneurs, using some tiny angel cheques, get to ~₹50 crore ($6 million+) in revenue, minor PAT positive, who’ve failed to file ANY of these.
When we’ve invested, it’s taken a mountain of work to help them get to a point where these issues are (somewhat) resolved.
Sad truth? Most investors wouldn’t spend this time and effort, especially in an environment like today where there are a LOT of great companies who’ve managed to avoid these missteps (usually 2nd time Founders / older folks).
