Startups raise funds at different stages, the stages of raising funds are referred to as seed round, series A-B-C etc. While seed money gives the startup just enough runway to move from the early conceptual phase towards developing a prototype or the initial product, the other rounds are mostly led by venture capitalists.
However, raising funds by startups is not as easy as it sounds, as the general high risk nature of startups coupled with lack of collateral makes it increasingly difficult for startups to raise debt or equity, this results in a significant number of startups failing to take – off due to non – availability of capital. To address the situation and provide funding support to Startups, Government proposed the following in the Action Plan:
· Fund of funds: Setting - up a fund with an initial corpus of INR 2,500 crore and a total corpus of INR 10,000 crore over a period 4 years (i.e. INR 2,500 crore per year). The Fund will be in the nature of Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds.
· Debt funding: Debt funding to Startups is also perceived as high risk area and to encourage Banks and other Lenders to provide Venture Debts to Startups, Credit guarantee mechanism through National Credit Guarantee Trust Company (NCGTC)/ SIDBI is being envisaged with a budgetary Corpus of INR 500 crore per year for the next four years.
A company can raise capital through issue of equity or by availing debt. The debt can be availed against issue of debentures or against securitisation of asset. The issue of capital shall be in accordance with the provisions Companies Act and FEMA.
Indian companies eligible to receive FDI, are allowed to issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares to a person resident outside India.
FEMA IMPLICATIONS
When the Company raises equity capital from a non – resident, the following additional requirements arise under FEMA:
When the Company raises equity capital from a non – resident, the following additional requirements arise under FEMA:
(i) In case of issuing companies which are not listed on the stock exchange, price at which shares issued to the person resident outside India under the FDI Policy shall not be less than the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered Accountant as per any internationally accepted pricing methodology on arm’s length basis.
(ii) Further, Indian companies are also allowed to freely issue shares on rights basis to its non-resident shareholders in compliance of the provisions of the Companies Act, at a price which is not less than the price at which the offer on right basis is made to resident shareholders (even if such price is less than the fair market value of shares).
Apart from the compliance of abovementioned pricing guidelines, the Indian entity accepting the investment is required to issue the capital instruments within 180 (one hundred eighty) days from the date of receipt of the inward remittance failing which Indian entity will be required to refund the amount of consideration so received to the non-resident investor through outward remittance. The receipt of consideration and issue of shares is also required to be reported to the Regional Office of the RBI under whose jurisdiction the Registered Office of the company accepting the investment / issuing shares is situated through an Authorised Dealer Category – I bank.
Raising capital through issue of debt instrument
A company can raise capital by way of availing a debt in the form of loans, issuing debentures or any other instrument evidencing debt on the Company. Section 179(3) (d) of the Companies Act gives power to board of directors of a company to borrow monies on behalf of the company, which can be exercised by them only by means of a resolution passed at their meeting. Therefore, a private company may borrow loans of any amount by passing a board resolution.
FEMA IMPLICATIONS
FEMA IMPLICATIONS
Under FEMA, all types of non-convertible, optionally convertible or partially convertible preference shares and debentures issued to persons resident outside India are considered as debt. Accordingly, all norms applicable for ECBs relating to eligible borrowers, recognised lenders, amount and maturity, end-use stipulations, etc. are required to be complied with, at time of issue of non-convertible instruments to the person resident outside India.
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