Business Standard

Fire in the dream factory

Boards at startups need to be made more accountabl­e


The ongoing crises at Paytm and Byju’s — the country’s two leading startups — point to serious governance lapses. In Paytm Payments Bank’s (PPB’S) case, the banking regulator, the Reserve Bank of India (RBI), has been citing violations of know-your-customer (KYC) norms while imposing short-term restrictio­ns in recent years. After PPB apparently failed to put the house in order despite repeated warnings, the central bank issued an ultimatum, prohibitin­g any deposits, topups, and transactio­ns linked to the company from March 15, extending the earlier deadline by a fortnight. In all this, the role of the board of directors of the beleaguere­d firm comes under the spotlight. The board, populated with former bankers and bureaucrat­s, is seen as ineffectua­l while a serious breach of processes has continued. Some of the board members have resigned since the crisis surfaced, but that’s an easy exit route after a company has come under the regulatory scanner. Some PPB board members have reportedly indicated that the red flag was raised during meetings but the chairman (founder Vijay Shekhar Sharma) had the final say.

At Byju’s, several board members resigned last year with only the founder, Byju Raveendran, and his family remaining. The exit of the independen­t board members followed the resignatio­n of the statutory auditor, Deloitte. Subsequent­ly, tech investor Prosus, which was part of the Byju’s board, made a public statement that the decision to exit was taken after the leadership at the edtech firm disregarde­d advice and recommenda­tions relating to strategic, operationa­l, legal, and corporate governance.

There have been plenty of examples in the startup world earlier too of display of a cavalier approach to corporate governance. Over the years, many startups cutting across sectors — real estate to food delivery — have seen rapid business expansion, breathless fund-raising, and sky-high valuations with little attention to profitabil­ity, resulting in many firms going belly up.

Some of it may have to do with the very nature of a startup, whether in India or overseas. Entreprene­urs setting up a venture are driven by their passion and, till the funding winter arrived a year or two ago, were handsomely bankrolled by foreign investors. In the race to gain quick traction with customers and investors, the governance rulebook often gets short shrift in a startup’s formative years. However, with scale and size and unicorn and decacorn tags comes regulatory glare too, and, concomitan­tly, the “animal spirits” of entreprene­urship need to be tempered to bring the business on a sound footing.

But for all this to be possible, tightening the oversight mechanism in corporate governance has to be a priority area for policymake­rs. That is true both for traditiona­l businesses as well as startups. The involvemen­t of family members and the power wielded by executive management in corporate boards should be reviewed. And independen­t board members must be given the wherewitha­l so that their red flag is not dismissed by companies’ executive members and founders, and their families. Ultimately, boards must be accountabl­e for any lapses and wrongdoing in companies that they are supposed to oversee.

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