Introduction
Multiple laws apply to start-ups in India. Noncompliance with the regulation and process is required, and noncompliance will result in severe penalties. Start-ups are the economy’s future and backbone in India. It can be organized as a corporation, a partnership business, a one-person corporation, or a limited liability partnership, among other options.
There have been several developments with regards to the easing of regulations and enabling foreign contribution to the start-ups. Some of the major regulations are as follows:
External Commercial Borrowings (ECB) by Startups
The international borrowing rules for a Start-up have been streamlined in an effort to move one step further in terms of ease of doing business. The Reserve Bank of India (RBI) published External Commercial Borrowings (ECB) Policy – New ECB Framework in January 2019. ECB is available to any start-up that is eligible to receive FDI under this framework, regardless of whether it is registered and recognized or not.
According to the new ECB Framework, AD Category-I banks are now allowed to allow Startups to raise ECB via the automatic route up to 3 million USD or equivalent per financial year in rupees, any convertible foreign currency, or a combination of both, for a minimum average maturity period of three years.
Investment by a Foreign Venture Capital Investor (FVCI) registered under SEBI (FVCI) Regulations, 2000
The Sebi in its SEBI (Foreign Portfolio Investors) Regulations, 2019 and its regulation 2(j) define FVCI as:
“Foreign Venture Capital Investor” means an investor incorporated and established outside India, is registered under these Regulations and proposes to make an investment in accordance with these Regulations.Because of its inexperience, a newcomer to the market is not trusted. Investors such as venture capitalists and angel investors specialize in making high-risk investments to solve such problems. This creates a start-up culture, with Venture Capitalists serving as the primary source of capital for young and inexperienced businesses. Start-ups that recruit overseas venture capital investors get a competitive advantage in their development.
In exchange for receiving foreign remittances, start-ups might issue shares, equity related instruments, or loan instruments to FVCI.
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017
Foreign investors can now participate in Indian start-ups by subscribing to “convertible notes” issued by such companies, as of January 10, 2017. The RBI’s notification modifies the Foreign Exchange Management (Transfer or Issuing of Security by a Person Resident Outside India) Regulations 2000 (FEMA Regulations), which are the main regulations governing the transfer and issue of instruments between residents and non-residents.
Only a private company incorporated under Indian law that meets the conditions of a “start-up firm” as defined by the Ministry of Commerce and Industry’s Department of Industrial Policy and Promotion (DIPP) are allowed to issue convertible notes through this route.
Enabling Framework for Regulatory Sandbox
Reserve Bank of India (RBI), on August 13, 2019, issued the ‘Enabling Framework for Regulatory Sandbox’ whereby regulatory mechanisms were issued with respect to the operations of the Fintech companies. Theses are majorly start-ups that focusses on technology to offer financial services to the consumers.
Fintech start-ups, customers, and regulators all benefit from the controlled regulatory framework issued by the RBI. Fintech companies can use the sandbox to live-test their new and innovative products and technologies in real time, subject to supervision and regulatory safeguards along with foreign investment.
Conclusion
It is pertinent to know that even though the foreign investment rules were already in place in our country, the government endeavoured to create a more cogent environment for the start-ups to functions. Such initiative provide a major impetus to the start-ups being operating in India to receive foreign contribution without lagging behind due to different economic and regulatory hurdles.
