Indian startups face many obstacles when it comes to ease of doing business. And even when they no longer want to continue operations, they have to face many hardships and policy confusions, so much so that either out of choice or out of compulsion they sometimes choose not to wind up but continue to exist as a zombie enterprise.
“The voluntary winding up process is a long drawn one, which could involve up to 14 discrete procedural steps and take anywhere between one-and-a-half to three years to complete,” says Kartik Ganapathy, partner at Induslaw. “Given that the process and time taken is so long, people tend to not take the trouble to go through it and let the company languish,” he adds.
Either out of choice or out of compulsion, they sometimes choose not to wind up but continue to exist as a zombie enterprise.
Even as Indian startups struggle to keep up with changing global scenarios, many of them have had to shut shop — but haven’t been able to shut shop completely.
Winding down companies is a difficult process and an area that requires a great deal of attention, says K Vaitheeswaran, founder of Indiaplaza, India’s first e-commerce company, which wound up in 2013. It is almost impossible to shut down formally, he adds.
“There are rules that don’t make sense, like getting a No Objection Certificate from creditors in order to apply for winding up. Which creditor will be ok when you tell him or her that you won’t be able to pay the money back?” he asks.
The process of winding down must become simpler because you don’t want the founder to carry the social stigma of failure for the rest of his/her life, Vaitheeswaran says.
“For the last of couple years, the government of India was running a scheme called ‘fast track exit mode’ wherein companies would take between 4-7 months to wind down operations. But this was applicable only to companies whose balance sheets were clean and who had no debtors or creditors,” says Navin Rungta, co-founder, eLagaan, a business consultancy firm. “Last December, they stopped accepting applications for fast track exit mode. Soon after, a new set of rules were notified for companies who want to wind up”.
The new forms are still under development and have not been notified. So if a startup wants to wind up business today, then it cannot do so because the requisite forms are not ready, says Rungta, who has seven clients waiting to wind up their startups.
The new forms are still under development and have not been notified
A few weeks ago, the Registrar of Companies sent notices to a few lakh companies asking to file their annual returns or face legal action. Some of the dormant companies want to wind up now but cannot do so since the form isn’t there, says Rungta.
In short, they are turning into undead startups.
India improved its ease of doing business ranking last year – moving up from 131 to 130 in a list of 190 countries, but continues to carry the label of being unfavourable to do business in, according to the Hindu.
If the country wants to change that perception then apart from attracting foreign investments it might be a good idea to facilitate policies that encourage and not discourage startups from taking risks and to help the struggling ones fade away in peace.
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