7 Compliance Gaps That Blow Up Series A Diligence
The seven compliance gaps most likely to delay, reprice, or complicate an Indian startup's Series A — ranked, with what each one signals to an investor and how to close it before the round.
The compliance gaps that derail an Indian startup's Series A are predictable — and almost all of them are fixable before the round if you know where to look. Ranked by how often they cause real trouble, the top seven are: missing FEMA filings, unassigned IP, late PAS-3/cap-table inconsistencies, overdue ROC filings, missing ESOP documentation, board-minute gaps, and GST/TDS mismatches. Here's what each one signals and how to close it.
1. Missing or late FEMA filings
The single most common serious finding for funded startups. A late FC-GPR or a skipped annual FLA is binary and easy for a lawyer to verify. Signals: weak controls, possible RBI exposure. Fix: file (or compound) and store every acknowledgement — see the FEMA guide.
2. Unassigned IP
If founders, employees or contractors haven't formally assigned their IP to the company, the company may not own its core asset. Signals: existential risk to the thing being funded. Fix: signed IP assignments from everyone — details here.
3. Late PAS-3 and cap-table inconsistencies
When the statutory PAS-3 record doesn't match your cap-table spreadsheet, the lawyer can't trust either. Signals: the ownership history is unreliable. Fix: reconcile every allotment to a filed PAS-3 — why this matters.
4. Overdue ROC filings
Missing AOC-4/MGT-7 or a deactivated DIN (DIR-3 KYC missed) shows up immediately in MCA master data. Signals: basic hygiene is absent. Fix: bring annual filings current — ROC calendar.
5. Missing ESOP documentation
A pool referenced in the cap table but no board-approved plan, grant letters, or exercise records. Signals: dilution math the investor can't verify. Fix: complete the ESOP plan, grants and register — and know the tax treatment.
6. Board-minute and resolution gaps
Decisions (allotments, borrowings, key hires) taken without properly recorded board/shareholder resolutions. Signals: governance is informal; later acts may be challengeable. Fix: reconstruct and maintain minutes and statutory registers.
7. GST/TDS mismatches
Returns that don't reconcile, or TDS deducted but not deposited. Signals: financial controls are loose. Fix: reconcile and clear before diligence — TDS due dates.
The common thread
Every one of these is a missing or unverifiable artifact — and every one is cheaper to fix now than to explain under deal pressure. None individually kills a Series A; together they slow it, raise legal cost, and hand the investor leverage. The antidote is to run the full Series A diligence checklist on yourself early.
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ComplianceStack flags exactly these gaps as Red/Amber/Green items against your own data, names the missing artifact, and quantifies the penalty exposure — so you fix them on your timeline. Get your free compliance health check.
FAQs
- What are the biggest compliance red flags in startup diligence?
- Missing/late FEMA filings, unassigned IP, late PAS-3 with cap-table mismatches, overdue ROC filings, missing ESOP documentation, board-minute gaps, and GST/TDS mismatches.
- Can compliance gaps actually stop a funding round?
- Rarely on their own — but together they delay closing, increase legal cost, force warranties or conditions, and weaken your negotiating position. Several serious gaps can stall or reprice a round.
- How early should I fix these before raising?
- Ideally months ahead. Some fixes (filing overdue returns, reconstructing minutes, signing IP assignments) take time, and rushing them under diligence pressure is expensive.
This article is general information, not tax, legal or accounting advice. Statutory timelines and thresholds change by notification — confirm applicability and interpretation with your CA, CS, or lawyer before acting.
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