END OF FOREIGN INVESTMENT PROMOTION BOARD (FIPB)

The Finance Minister during his budget presentation announced the government's plan to phase out Foreign Investment Promotion Board (FIPB).

Now, the government has announced that FIPB will be scrapped and henceforth all decisions on foreign direct investment in India will be taken by respective administrative ministries.

Way Forward

FDI proposals will be considered by the concerned ministry in consultation with the Department of Industrial Policy and Promotion (DIPP), which will soon come out with clear guidelines and operating procedures for clearance of proposals.

Timilines to be fixed for disposal of application for approval of FDI by competent authorities.

Rejection of FDI Proposal by the competent authorities will require concurrence of DIPP.

Quarterly review of FDI Proposals by DIPP is also envisaged.

Thoughts

Scrapping of FIPB is hailed as a decisive move which will further ease of doing business in India as it is expected that the competent authorities under different ministries/ departments would clear the FDI proposal without delay than the FIPB which consists of members from various ministries.

However, the effectiveness of this move would depend on the competency of the competent authorities.

FUND RAISING BY START - UPS (HOW START - UPS RAISE FUNDS?)

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.

Issue of equity:

The share capital of a company can be of two kinds, i.e. equity share capital and preference share capital. An Indian company can raise funds through issue of capital either to its existing shareholders, i.e., rights issue of shares or by making an offer on a private placement basis or preferential allotment of certain specified instruments to a third person.

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:

(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

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.

PROCEDURE FOR RECOGNITION OF START - UP UNDER THE START UP POLICY

In my previous post I had explained the conditions to be satisfied by an entity to qualify as a start - up under the start - up policy. 

In this post, the process for recognition of start - ups is explained:

Startups seeking recognition are required to submit one of the following documents along with their application:

a) a recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator established in a postgraduate college in India; or

b) a letter of support by any incubator which is funded (in relation to the project) from Government of India or any State Government as part of any specified scheme to promote innovation; or

c) a recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator recognized by Government of India; or

d) a letter of funding of not less than 20 per cent in equity by any Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network duly registered with Securities and Exchange Board of India that endorses innovative nature of the business. Department of Industrial Policy and Promotion may include any such fund in a negative list for such reasons as it may deem fit; or

e) a letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; or

f) a patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.

Recognition through mobile app: The Notification issued by GOI also provides for recognition through a mobile app/portal[3] of the Department of Industrial Policy and Promotion.

Once such application with relevant document is uploaded, a real-time recognition number will be issued to the startup.

Penalty for uploading forged documents:

If on subsequent verification, such recognition is found to be obtained without uploading the document or uploading any other document or a forged document, the concerned applicant shall be liable to a fine which shall be fifty per cent of paid up capital of the startup but shall not be less than Rupees 25,000.

Conclusion:

It is understood that DIPP has thus far recognized 798 Startups and 10 Startups have been approved for availing tax benefit by IMB[1].

While the number of startups recognized under the scheme does not tally with the efforts taken by the government, the requirement in the nature of recommendation or a letter of support from an incubation center or an investor for seeking recognition has ensured that only those startups which have the potential for growth are recognized under the Action Plan.

(Contact the author @ muthukumaran.adv@gmail.com for any queries or comments)

---

[1] Start – up status report published by DIPP in http://startupindia.gov.in/status.php

[3] http://startupindia.gov.in/ is the official website launched by Government of India for the purpose of recognition of startups.

Definition of Start – up (Will my entity qualify as Start - up?)

In order to avail the benefits under the Action Plan for start - ups, any entity seeking such benefits should qualify as a start - up.  Let us analyse the entities that would qualify as a start - up and the conditions that the entities need to satisfy for availing the various benefits under the Start - up  policy released by the Government.

Definition of Start - Up

The Government of India issued a notification[2] (Notification) which defines Startup[3] as any entity incorporated or registered in India as a (i) pri­vate limited company; or (ii) limited liability partnership; or (iii) registered partnership firm which satisfies the following conditions:

a.       It has not completed five years from the date of its incorporation/registration

b.      Its turnover for any of the financial years has not exceeded Rupees 25 crore, and

c.  It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property[4];

d.    Such entity is not formed by splitting up, or reconstruction, of a business already in existence.

Other conditions:

i.      The entity is not formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘startup’;

ii.    In order to obtain tax benefits, a startup so identified under the above definition shall be required to obtain a certificate of an eligible business from the Inter-Ministerial Board[6].

Thus, the requirement of Inter - ministerial Boar approval arises only in the case of startups seeking benefits under I.Tax Act and not for IPR related benefits as stipulated under the Action Plan.

---

[1] Entity means a private limited company (as defined in the Companies Act, 2013), or a registered partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2002).

[2] Notification dated 17.02.2016 issued by Ministry of Commerce and Industry (Department of Industrial Policy and Promotion), which has adopted the definition provided in the Action Plan.

[3] The definition is similar to the definition of Startup under the Action Plan except that the

[4] An entity is considered to be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property if it aims to develop and commercialize: a. A new product or service or process, or b. A significantly improved existing product or service or process, that will create or add value for customers or workflow. Provided that the mere act of developing: a. products or services or processes which do not have potential for commercialization, or b. undifferentiated products or services or processes, or c. products or services or processes with no or limited incremental value for customers or workflow would not be covered under this definition.

[5] See, notification dated February 17, 2016 issued by the Ministry of Commerce and Industry.

[6] The Inter – Ministerial Board shall consist of: a) Joint Secretary, Department of Industrial Policy and Promotion, b) Representative of Department of Science and Technology, and c) Representative of Department of Biotechnology.

Startup Action Plan

In order to boost the start – up culture in India and strengthen the start – up ecosystem by nurturing innovation and entrepreneurship, Government of India introduced the start – up action plan (“Action Plan”) on 16^th January, 2016, that aims to empower the start – ups to grow through innovation and design and also address the difficulties faced by new enterprises by relaxing compliance requirements and addressing the regulatory hurdles faced by new enterprises.

The Action Plan is structured on three aspects viz. 

(i) Simplification and Handholding 

(ii) Funding Support and Incentives 

(iii) Industry-Academia Partnership and Incubation.

The Action Plan was followed by amendments in various legislations and notification issued by the government under various enabling legislations, to give effect to the road map laid down by government while introducing the start – up action plan. 

The action points in the Action Plan have been implemented without much delay, which has considerably reduced the number of compliance requirements for a new enterprise. Before analysing the benefits available under the Action Plan, it is important to understand when an entity qualifies as a startup under the Action Plan. 

I will be discussing the various benefits available to startups in the regulatory and legal sphere in my subsequent posts.

New Foreign Trade Policy (2015 - 2020)

Government has unveiled the much awaited Foreign Trade Policy (FTP) which will be in force for the next five years. The Commerce Minister while unveiling the policy has promised that the schemes have been made simple and the conditions and restrictions in the previous policy with respect to usage of scrips has been lifted. The policy is expected to boost the new government's 'Make in India' campaign. I will be covering the major changes in the later posts. The policy is now available at the DGFT website.