Other BriefingsSeries A Funding Guide: Compliance & Audit Requirements for Indian Startups
We present a step-by-step guide that outlines how Indian startups can prepare for investor due diligence and achieve audit readiness before a Series A round.
In this article, we explain key requirements, including compliance with Indian Accounting Standards (Ind AS), statutory reporting under the Ministry of Corporate Affairs (MCA) and the Foreign Exchange Management Act (FEMA), and other critical obligations.
Series A is the first round of venture financing, raised after startup has secured seed funding. By this stage, a startup already has a working product, some customer traction, and a clear business model.
In India, Series A rounds usually range between US$3 million and US$15 million, depending on sector, market size, and investor appetite. Founders seek for Series A funding to secure capital to build teams, acquire customers, improve product and user experience, and expand to new regions.
Understanding series funding in India
Funding series refers to the different stages of capital raised by startups and early-stage companies as they grow. Each series reflects the maturity of the business, its risk profile, and the type of investors it attracts.
|
Series stages |
Investors |
Purpose |
Funding size |
|
Pre-seed/seed funding: Idea or prototype stage |
Company founders, family & friends, angel investors, incubators, or seed funds. |
Product development, market research, hiring first employees, and proof of concept. |
INR 5 million–INR 70 million (US$57,247–US$801,461) |
|
Series A: Early traction with users, but business model still being validated |
Venture capital (VC) firms, early-stage institutional investors |
Scale operations, build a strong team, refine product-market fit, and expand customer base |
INR 300 million–INR 1.2 billion (US$3.43 million-US$13.73 million) |
|
Series B: Company has proven product-market fit, steady revenue growth, and clear scaling potential |
Larger VC funds, private equity players, and strategic investors. |
Geographic expansion, scaling technology, marketing, and infrastructure. |
INR 800 million–INR 4 billion (US$9.15 million–US$45.79 million) |
|
Series C: Established company with significant revenues, aiming for aggressive expansion |
Late-stage VCs, private equity firms (PE), sovereign wealth funds, hedge funds. |
International expansion, acquisitions, product diversification, or preparing for IPO. |
INR 4 billion–INR 16 billion (US$45.79 million– US$183 million) |
|
Series D and beyond |
PE firms, global investment funds, hedge funds. |
International expansion, pre-IPO growth, strategic acquisitions. |
INR 8 billion–INR 40 billion (US$91.59 million–US$457 million+) |
Audit readiness matters before Series A funding
Institutional investors conduct intensive due diligence before committing capital. They test a startup’s financial transparency, operational discipline, and regulatory compliance. Being audit-ready reassures investors that the company can scale without exposing itself to unnecessary financial or legal risk. Some of the red flags that slow or derail funding could be as follows:
- The records appear inconsistent and suggest weak financial management;
- The financial statements are missing or irregular and indicate control gaps;
- Related‑party transactions are not recorded and reduce transparency; and
- Unbilled income appears and points to failures in running the company.
Financial and accounting preparedness
Ind-AS applicability and transition
The adoption of Ind AS for early-stage startups depends on company type and size. Listed companies, whose shares are traded on a recognized stock exchange, must adopt Ind AS regardless of net worth. For unlisted companies, whose shares are not available for trading on any recognized stock exchange, are required to adopt it once their net worth reaches INR 2.5 billion (US$28.6 million) or more.
Subsidiaries, associates, and joint ventures of Ind AS adopters must also follow the same framework.
When a startup transitions to Ind AS for the first time, it follows Ind AS 101 compliance. It ensures that a company’s opening financial statements under Ind AS are transparent, comparable, and consistent with global practices.
Revenue recognition under Ind AS 115
Revenue recognition is required to ensure revenue is recorded in a company’s books when it meets the given conditions. Ind AS 115 compliance uses a five‑step model for revenue recognition:
- Identify contracts,
- Identify performance obligations,
- Set the transaction price,
- Allocate the price, and
- Recognize revenue when obligations are met.
For software-as-a-service (SaaS) businesses, revenue recognition occurs when subscription revenue is recorded over the subscription term, and performance-based revenue is recognized at its standalone selling price. Companies recognize setup fees over the contract period and record usage-based fees when actual usage takes place.
Companies with e‑commerce models need to determine whether they act as principal or agent, as this decides whether revenue is reported gross or net. If they are selling digital goods, revenue is recognized when customers obtain control of that good. Shipping and handling may be a separate obligation depending on its terms.
Marketplace platforms usually recognize commission when services are delivered. Their listing fees are recognized when the listings are made live, and transaction fees once a transaction is successfully completed.
Legal and regulatory compliance
MCA filings and corporate records
A clean corporate record builds confidence during diligence for Series A funding. Startups should ensure the following measures:
- File AOC-4 (financial statements), MGT-7 (annual return), and ADT-1 (auditor appointment) within deadlines;
- At least four board meetings must be held annually with proper notice and minutes;
- the Annual General Meeting (AGM) must be held within 15 months of the previous one; and
- Proper registers of members, directors, and charges incurred must be maintained.
AOC-4 is an e-form prescribed by the MCA for filing a company’s financial statements with the Registrar of Companies (RoC). It is a mandatory annual compliance requirement under the Companies Act, 2013.
MGT-7 is the annual return form listing key details of the company’s structure and activities during a financial year.
ADT-1 is the form used to inform the ROC about the appointment (or reappointment) of a statutory auditor. To comply with Section 139 of the Companies Act, 2013, which requires every company to appoint an auditor for a 5-year term, subject to ratification.
FEMA, transfer pricing, and SEBI touchpoints
Foreign capital introduces additional reporting obligations for businesses. Under FEMA, Form FC-GPR must be filed within 30 days of allotting shares to non-residents, Form FC-TRS for transfers between residents and non-residents, and the Foreign Liabilities and Assets (FLA) return by July 15 each year. Whereas, transfer pricing compliance requires maintaining arm’s length documents and filing Form 3CEB on time.
For Securities and Exchange Board of India (SEBI) regulated business models such as investment or algorithm advisory platforms, registration with SEBI, fee disclosure, and investor protection measures are mandatory.
Tax compliance and risk management
Tax compliance readiness for startups covers both direct and indirect taxes. For Income Tax (IT) compliance, startups must ensure payment of advance tax based on estimated income, tax deducted at source (TDS), annual Income Tax Return (ITR) filing, and tax audit requirements. The advance tax schedule requires cumulative payments of 15 percent by June 15; 45 percent by September 15; 75 percent by December 15; and full payment by March 15.
Goods and Services Tax (GST) obligations for startups apply at turnover thresholds of INR 4 million (US$45,797) for normal category states and INR 2 million (US$22,898.9) for special category states, with monthly GSTR-1 and GSTR-3B filings. E-invoicing is required once turnover exceeds INR 50 million (US$572,472).
TDS obligations are often reviewed during the Series A funding audit:
- Professional services (Section 194J): 10 percent on payments exceeding INR 30,000 (US$343.48) annually;
- Contractors (Section 194C): 1 to 2 percent depending on the nature of work and the payee; and
- Rent (Section 194I): 10 percent for buildings and 2 percent for machinery.
Before entering Series A negotiations, a three to five year tax health check helps avoid post-deal issues. This should review past filings, pending assessments, documents for tax filings, and financial statements.
Regular reconciliations (accounts comparison and matching) of these taxes and transactions reassure investors that numbers are accurate. To stay ahead, startups can ensure that:
- Bank accounts should be reconciled daily for high-volume accounts and monthly for all others;
- GST and Input Tax Credits (ITC) reconciliation should match books with returns each month;
- TDS records must align with Forms 24Q for salaries and 26Q for others; and
- Payroll registers should reconcile with bank payments and provident fund (PF), Employee State Insurance (ESI) and professional tax.
Data room preparation for Series A funding
An organized data room is an important tool for investors during due diligence. For Series A funding, it should present complete and verified information so investors can quickly assess the company’s position. A data room should have a compelling equity story with all important business metrics because investors are looking at startup’s business plan and differentiation strategies during Series A funding round.
The financial section of the data room must contain audited balance sheets, profit and loss statements, and cash flow reports for the past three years, along with general budget. These records should match filings with MCA, GST and SEBI and be supported by proper schedules.
Legal and corporate documents are equally important components of data room. They include the certificate of incorporation, Articles of Association (AoA), shareholding records, board and shareholder meeting minutes, and any intellectual property (IP) registrations or licensing agreements. For companies with foreign shareholders, all FEMA filings should be complete and on time.
One should also ensure that tax records like GST returns, TDS filings, ITR filings are up to date and organized properly in the data room. Having these in place before initiating discussions will speed up the process and signal companies’ discipline to potential investors.
Operational readiness for scaling post-funding
Investors assess not only a startup’s past performance but also its ability to manage rapid growth after funding. Startups signal readiness by maintaining standard operating procedures (SOPs) for goods procurement and expense approvals. They use cloud-based accounting platforms such as Zoho Books and Tally Prime, which provide encrypted data storage to secure sensitive information in the data room.
Investors also review a company’s human resource compliance. To prevent discrepancies during funding negotiations, companies must properly execute and store employment contracts, non-disclosure agreements, and offer letters. They must also complete registrations for PF and social security schemes, where applicable, in a timely manner.
Common audit pitfalls to avoid
Startups, that are otherwise promising, can face delays or valuation changes if certain issues are not addressed early. The most frequent problems identified in Series A due diligence are as follows:
- Incomplete documents, such as missing contracts or board meeting records;
- Discrepancies between invoicing systems, bank credits, and recorded revenue;
- Liabilities, like vendor dues, that are not reflected in the books;
- Lapses in compliance with FEMA or SEBI rules in companies with foreign investment;
- Informal governance practices without documenting minutes of board meetings, decision taken.
Addressing these areas before engaging with investors can help reduce the probability of unfavorable negotiation terms or not getting the funding at all.
Summary
Series A funding is like a rocket launchpad for Indian startups, and audit readiness is essential for building investor confidence to fuel this rocket. If startups ensure that the data room is complete and secure, business has ready plans for scaling, and has tackled common audit pitfalls, they can present their businesses as a credible investment opportunity to investors.
(US$1 = INR 87.34)
About Us
India Briefing is one of five regional publications under the Asia Briefing brand. It is supported by Dezan Shira & Associates, a pan-Asia, multi-disciplinary professional services firm that assists foreign investors throughout Asia, including through offices in Delhi, Mumbai, and Bengaluru in India. Readers may write to india@dezshira.com for support on doing business in India. For a complimentary subscription to India Briefing’s content products, please click here.
Dezan Shira & Associates also maintains offices or has alliance partners assisting foreign investors in China, Hong Kong SAR, Dubai (UAE), Indonesia, Singapore, Vietnam, Philippines, Malaysia, Thailand, Bangladesh, Italy, Germany, the United States, and Australia.
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