Timely public disclosure of audited financial results is central to ensuring good corporate governance and protecting stakeholders, including creditors, lenders and investors. While regulators are largely effective in ensuring compliance with the Companies Act in listed companies, they appear to be sleeping at the wheel when it comes to unlisted ones, especially start-ups . Take, for instance, the corporate governance lapses in Byju’s, the edtech start-up, which managed to raise around $6 billion from marquee investors such as Sequoia Capital, Tiger Global and Chan Zuckerberg Initiative and was valued at $22 billion in March 2022.
The Byju’s example shows that regulators need to be serious about enforcing compliance with the Companies Act in private sector companies too. Deloitte, Haskins and Sells, the statutory auditors of the parent company, Think and Learn Private Limited, resigned last week stating that the company had not resolved the modifications suggested in the audit report for FY21. They also said that the financial statements for FY22 had not been placed before the shareholders in the annual general meeting yet, despite the regulatory requirement to do so by September 30, 2022. The auditors were therefore unable to commence auditing the books for FY23.
While the way in which Byju’s has been flouting rules came into focus recently, regulators have been aware of these lapses for some time. Several complaints had been received by authorities including the Ministry of Corporate Affairs, Serious Frauds Investigation Office and The Institute of Chartered Accountants of India (ICAI) in 2022, over alleged irregular accounting practices in the company. The MCA had written to the company in August last year demanding to know why it had delayed filing its accounts for FY21 beyond the statutory time limit of six months from the end of the financial year. The Financial Reporting Review Board of the ICAI had commenced review of the company’s financial statements for 2019-20 and 2020-21 last December. The question is, why did the authorities not take stringent action. The auditors too should have raised the red flag earlier, rather than wait for eight months after the due date for disclosing results for FY22. While there could have been apprehensions among regulators over the impact of any action on their part on the start-up funding ecosystem, more harm seems to have been done by their inaction.
Even if banks are not directly lending to these start-ups, there is surely public interest involved here as these start-ups employ people in the thousands and they represent the face of the industry in India. Poor governance and fraud will put off financiers making it doubly difficult for the genuine ones to raise money. It is time that the government applied its mind on a process for ensuring corporate governance in the start-up sector.