The Ministry of Corporate Affairs vide notification dated June 29, 2016 issued the Companies (Acceptance of Deposits) Amendment Rules, 2016 that makes it easier for startups to access funds via the convertible note route. This notification is part of the all-round initiatives planned by the Government of India to strengthen the startup ecosystem in India and to ease the funding challenges for startups.
According to the Companies Act, 2013, any company, including startups, that received money from any person by way of deposit or loan or in any other form , such money was considered as a ‘deposit’ and the company had to follow the stringent Companies (Acceptance of Deposit) Rules, 2014 to keep that deposit.
In order to make it easier for startups to secure funding, funds received by a startup amounting to Rs. 25 lakh or more by way of a convertible note, in a single tranche from a person, will not be treated as a ‘deposit’. The convertible note is to be either converted into equity or repaid within a period of 5 years.
This exemption has only been made to startups that meet the government prescribed norms (as prescribed by the Department of Industrial Policy and Promotion).
Hence, the compliance under Companies (Acceptance of Deposit) Rules, 2014, including, informing the Registrar of Companies,creating a deposit repayment reserve in the books of account, getting credit rating before raising the money, etc. will not apply to startups receiving funding via convertible notes.