The running joke among Indian entrepreneurs is that it's easier to get a divorce than to shut down a company. And the experience of Stayzilla co-founders Yogendra Vasupal and Sachit Singhi shows that it can get extremely messy.
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Closing a company in India can take years, though opening one ！ or many ！ is easy enough.
When Thirukumaran Nagarajan decided to close his edtech startup Eduraft in 2013, a year after setting it up, he simply ceased operations, returned investor money, and moved on.
Two years later, the auditors at his current venture NinjaCart ！his third attempt, and an agri-marketing platform that's managed to raise funding ！ advised him to formally close Eduraft.
It's been four years since he decided to take them up on that advice but he's still trying to wind up the business. "Since we didn't have any creditors and had returned our investor money, we thought we were good to go.
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Later, we found out that it is not as simple as that. Regulatory compliance requires a procedure to be followed while returning money. Not shutting an earlier venture can create roadblocks for the current venture. We are now getting ready to file the winding-up petition," says Nagarajan.
While being an entrepreneur seems exciting and fail-fast is the new refrain, India's archaic laws and labyrinthine processes of liquidation make dealing with shutting down a startup far harder than handling the emotional struggle of giving up.
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And dealing with external stakeholders such as vendors and landlords ！ as in the case of Stayzilla ！ can complicate matters further. "Closing a company under a liquidation process can take years.
Abandoning a business is not the solution. Defaults in company law compliance and inherent shareholder obligations will lead to a black mark in the RoC's (Registrar of Companies') records," said Harshal Kamdar, partner, PwC.
Kamdar says there are quicker ways of winding up. If an asset sale is undertaken, one can kill business in a week or two. If one can demonstrate that the company has no assets and operations for two years, the process can be faster.
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The Insolvency and Bankruptcy Code, which is being finalised, is expected to ease some of the pain involved in the liquidation process. "The current regulations are drafted with a large company mindset. So whether it is a big corporate, for example Kingfisher Airlines, or a small startup, the procedure is broadly the same," said Kamdar. For consumer businesses, the process is particularly tedious.
"The legal processes make it impractical for a retail business to shut shop. For example, the company is expected to obtain a no-objection certificate from all its vendors. That's a hard thing to get," said K Vaitheeswaran, entrepreneur and e-commerce pioneer.
Vaitheeswaran's Fabmall.com, which later became IndiaPlaza, was one of the earliest e-commerce companies set up in 1999.
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Vaitheeswaran knows firsthand ！ the difficulties and pain of dealing with employees, vendors and irate customers when a startup is in its death throes, after having had to watch suppliers and the landlord pick up and walk away with every movable asset in his Bengaluru office in 2013. "Dealing with individuals is difficult.
Large creditors follow due process and understand when a business folds. Smaller creditors don't take it well because a few lakhs is a huge dent for them. Any consumer-facing business is difficult to wrap up, especially if there are orders to be honoured or dues to be paid," he said.
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Natraj M, a vendor on IndiaPlaza, is clear that he will not engage with any e-commerce player after having burned his fingers not once, but twice. "I had a personal relationship with Vaitheeswaran. When he gave me the news, it came as a shock, but there wasn't much I could do. I knew he had taken a hit and I had to commiserate," he said. "But I'm not selling online again. It's too risky."
Employees are among the first to bear the brunt of a slowdown in operations at a startup. While many are able to read the signs of a sinking ship ！ delayed salaries, payouts in instalments, cutting of perks and privileges ！ and bail out, those left behind can lose their cool.
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In November 2015, sacked employees of food delivery startup TinyOwl kept co-founder Gaurav Chaudhary hostage for over two days. They released him on the promise of notice period salary payment.
Bengaluru-based logistics startup Townrush's office was vandalised by its delivery boys after non-payment of salaries for months.
Experts say the big flaw in the government's Startup India plan is its failure to account for shutting down. "We all know the high failure rate of startups. Three years down the line, there will be thousands of companies shutting down. We are staring at a huge social problem," said Vaitheeswaran.