At a time when a series of governance lapses and frauds have rocked the Indian startup ecosystem, Info Edge founder Sanjeev Bikhchandani said that the buck stops at the founder's level and a dishonest founder will find his way around any number of regulations or governance measures.
"A determined dishonest founder will find his or her way around structures and frameworks, boards and committees... At the end of the day, independent directors and auditors rely a lot on what the management says. They can only help a founder who wants to be saved from his own mistakes," said Bikhchandani, an early investor in companies like Zomato and Policybazaar.
"Auditors do sample checks. They don't do 100 percent checks. If there is a collusion between the founder and vendors, how will they find out? The default answer is not forensic audit. That will be costly and time-consuming. Even that is not foolproof," he added.
Bikchandani was speaking in Delhi during the weekend at a conference organised by the Indian Institute of Corporate Affairs on the issue of corporate governance in startups. To illustrate the importance of founder integrity, Bikhchandani regaled the gathering with anecdotes from the past.
For instance, when he got employee stock options as a member of the board of MakeMyTrip many years back, Bikhchandani said that he transferred those to Info Edge’s balance sheet. Subsequently, shareholders were pleasantly surprised when the company later made windfall gains from the asset.
“It was said that Info Edge is sitting on a 25 percent premium on its share price because of its corporate governance. When investors are sure that it is a good business and there is corporate governance, you get a premium,” he said.
In another instance, the company faced some issues in interpreting a certain tax provision as different advisors offered different suggestions on how to go about it. Bikchandani said that he directly called up PwC, the company’s statutory auditor at the time, to come to a common ground.
“If you do it the way your auditor thinks is right, you don’t have to wait till the actual audit to find out differences… You have to internalise the understanding that your independent directors and auditors are there to save you from yourself,” he said.
After a couple of boom years when Indian startups raised more than $50 billion in funding and crossed the 100-unicorn mark, the focus has fallen squarely back on profitability and governance amid a worsening funding winter. As a result, investors are taking a closer look at how startups record their revenues and spend their money.
This year alone, issues of misgovernance and alleged fraud have come to light at healthtech startup Mojocare, GoMechanic, and 4B Networks. Industry insiders are also concerned about the unravelling of Byju's, as the edtech giant deals with the aftershocks of an exodus of top investors from its board and is locked in a legal battle with lenders.
Also Read | Behind the scenes: What happened between Byju’s and board members?
“If there are constant failures of corporate governance here and there, global investors will lose faith in the startup ecosystem,” Amitabh Kant, India’s G-20 Sherpa and former NITI Aayog chief, said at the gathering.
"There will be some failures, but we need to learn from them. We need to create a culture of a self-regulatory framework if you want to continue with a very vibrant ecosystem... The minute government gets in, it will kill the innovative spirit," he added.
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