Software product start-ups eyeing global expansion – what are the typical compliance issues faced?

software product and complianceSparked by innovative ideas and led by entrepreneurial talent, the Indian start-up ecosystem has seen skyrocketing growth over the last few years. But every burgeoning business is faced with its own set of challenges. The Indian software products space has shown immense promise; but it has also become vulnerable to compliance related issues.

With many Indian companies exploring global markets for higher growth, they need to conform to local as well as international laws. Regulations under the Companies Act, Foreign Corrupt Practices Act (FCPA), UK Bribery Act and other relevant laws need to be understood, assessed and factored in. Indian entrepreneurs need to actively start their journey toward compliance at an early stage, rather than have a ‘course corrective’ approach after achieving scale.

Some typical compliance related issues faced by Indian software product start-ups that are looking to expand overseas are:

  • Work visas – Indian software products ventures may sometimes be faced with issues related to work visas. In an effort to cut costs, increase turnaround time or due to low awareness about ethical policies and procedures, it is seen that employees of these ventures sometimes end up traveling abroad on incorrect visas. The process of getting a visa can be quite challenging, and entrepreneurs will need to pay tax if they have operations across different countries. Moreover, work visas can take anything between six to eighteen months. So employees may end up moving back and forth, making it a compliance issue.
  • Taxes – Adding on to the first point, many Indian software product ventures do not disclose the total amount of employees while filing returns to potentially evade taxes. This can further give rise to compliance issues.
  • FCPA norms are not fully met – Non- compliance with FCPA could be another challenge faced in the rapidly growing software products start-up space. For example, Indian entrepreneurs may offer small expediting payments across various touch-points to ‘push’ files, or they may route such payments through third parties or ‘agents’. These agents could then invoice inflated ‘service charges’ or ‘miscellaneous charges’ to cover these small payments.

Another FCPA related issue could be around the formalities involved for operating from Special Economic Zone units in foreign markets. If a software products start-up establishes an office there, they would be required to comply with listed requirements and interact with various government offices. Non-compliance with these can lead to cancellation of the permission.

  • Software licenses – Many companies utilise software from larger vendors to develop their intellectual property. Instead of purchasing it directly from the vendors, they may choose to cut costs and download free versions of it through the web. In scenarios, the use of unauthorized or unlicensed software can lead to non-compliance under various laws and regulations (E.g: United States Unfair Competition Law).
  • Accounting/ Financial statements – Another area is concern is when Indian entrepreneurial companies are unable to file their returns regularly. In many cases, the financial statements or filings to the Registrar of Companies are not uploaded on the website. So a lot of information about the company (including its compliance status) remains unknown. This could lead to potential problems when the company wants to expand overseas, as investors (private equity or venture capital) would consider its financials relatively unsteady.

Companies in the software products space need to be cognizant of these risks and imbibe the six pillars of mitigating bribery and corruption risks within their business. These include having effective policies and procedures, conducting adequate third party due diligence, having the right tone at the top, impart training to its stakeholders, continuous monitoring and taking remedial action. These will be critical to address current and imminent threats which can be an obstacle to their expansion plans overseas and erode entrepreneurial value.

Follow @EY_India and track #EYForensic for regular updates

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