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.

Can a foreign company (non - resident) company open a bank account in India?

FEM (Deposit) Regulations, 2000 (Deposit Regulations) permits a person resident outside India to open a (i) Non – Resident Ordinary Rupee (NRO) Account or (ii) Special Non – Resident Rupee Account (SNRR) for remittance in India. The Deposit Regulations specifies the eligibility conditions and the permissible credits or debits with respect to these accounts. The important conditions are mentioned below:

NRO Account

Eligibility: Any person resident outside India may open NRO account with an authorised dealer or an authorised bank for the purpose of putting through bona fide transactions in rupees not involving any violation of the provisions of the Act, rules and regulations made thereunder.

These accounts may be opened/ maintained in the form of current, savings, recurring or fixed deposit accounts. At the time of opening of the account, the account holder should furnish an undertaking to the authorised dealer/ authorised bank with whom the account is maintained that in cases of debits to the account for the purpose of investment in India and credits representing sale proceeds of investments, the account holder will ensure that such investments/ disinvestments will be in accordance with the regulations made by Reserve Bank in this regard.

The following are the permissible credits/ debits in NRO Account

(A) Credits

(i) Proceeds of remittances received in any permitted currency (i.e. a foreign currency which is fully convertible) from outside India through banking channels or any permitted currency tendered by the account-holder during his temporary visit to India or transfers from rupee accounts of non-resident banks.

(ii) Legitimate dues in India of the account holder.

(iii) Transfers from other NRO accounts.

(iv) Any amount received by the account holder in accordance with the rules or regulations made under the Act

(B) Debits

(i) All local payments in rupees including payments for investments subject to compliance with the relevant regulations made by the Reserve Bank.

(ii) Remittance outside India of current income in India of the account holder net of applicable taxes.

(iii) Transfers to other NRO accounts.

(iv) Settlement of charges on International Credit Cards issued by authorised dealer banks in India to NRIs or PIOs, subject to the limits for repatriation of balances held in NRO accounts specified in regulation 4(2) of Foreign Exchange Management (Remittance of Assets) Regulations, 2016.

Thus, the Deposit Regulation permits receipt of fully convertible foreign currency from outside India through banking channels and also permits all local payments in rupees. 

SNRR Account

The following are the conditions relevant under the Deposit Regulations for opening SNRR Account in India:

·         Eligibility: Any person resident outside India, having a business interest in India, may open a SNRR account with an authorised dealer for the purpose of putting through bona fide transactions in rupees, not involving any violation of the provisions of the Act, rules and regulations made thereunder.  

·         The SNRR account should carry the nomenclature of the specific business for which it is in operation.  

·         The debits and credits in the SNRR account should be specific/ incidental to the business proposed to be done by the account holder.

·         All the operations in the SNRR account should be in accordance with the provisions of the Act, rules and regulations made thereunder.

·         The tenure of the SNRR account should be concurrent to the tenure of the contract/ period of operation/ the business of the account holder and in no case should exceed seven years. No operations are permissible in the account after seven years from the date of opening of the account.

·         The balances in the SNRR account shall be eligible for repatriation.

The Deposit Regulations also permits a person resident outside India to open a SNRR Account when it has a business interest in India and the credits or debits in the SNRR Account should be specific/ incidental to the business proposed to be done by such entity. Accordingly, a person resident outside India is permitted to open a SNRR Account with an authorized bank in India.

From the above, it is clear that a company incorporated in another jurisdiction has the option to open a NRO Account or a SNRR Account subject to satisfying the conditions mentioned in the Deposit Regulations. It may be noted that it is the discretion of the Authorised Banks to entertain such accounts and the standards may vary from bank to bank and banks are particularly cautious while opening such accounts for non – residents, some banks have still not issued the internal guidelines for opening these accounts and refuse to open such accounts considering the regulatory aspects involved in such accounts. 

(Author can be contacted @ muthukumaran.adv@gmail.com for queries and comments)