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Start-ups can raise 100% capital from FVCI- Ministry of Commerce and Industry August, 2017

With an aim to ensure greater ease of doing business and to attract foreign investors to contribute in job creation and innovation, the Government of India has come up with the latest edition of its consolidated foreign direct investment (With an aim to ensure greater ease of doing business and to attract foreign investors to contribute in job creation and innovation, the Government of India has come up with the latest edition of its consolidated foreign direct investment (“FDI”) policy which has for the first-time featured start-ups. As per the consolidated FDI policy released by the Department of Industrial Policy and Promotion, start-ups can raise up to 100% (one hundred percent) of funds from foreign venture capital investors (“FVCI”).

As per the circular dated 28th August 2017 (“Circular”), start-ups can now issue equity or equity linked instruments or debt instruments to FVCI against receipt of foreign remittance, as per the Foreign Exchange Management Act Regulations. In addition to the aforesaid, startups can issue convertible notes to person resident outside India with certain conditions. A person resident outside India (other than citizens/entities of Pakistan and Bangladesh) will be permitted to purchase convertible notes issued by an Indian start-up company for an amount of INR 25,00,000/- (Indian Rupees Twenty-Five Lakhs) or more in a single tranche. A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the pricing guidelines as prescribed by Reserve Bank of India.

Along with this, NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of the Notification No. FEMA.20/2000-RB dated 3rd May 2000. The Circular also added that the start-up company engaged in a sector where foreign investment requires government approval may issue convertible notes to a non-resident only with the approval of the government. A startup company issuing convertible notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channels or by debit to the NRE/FCNR (B) /Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016. Further, start-ups issuing convertible notes would be required to furnish reports as prescribed by the Reserve Bank of India.

In the recent past, there have been liberalizations in FDI policies in many sectors that included defense, construction and development, security agencies, civil aviation, news broadcasting. These reforms have been incorporated in the document.“FDI”) policy which has for the first-time featured start-ups. As per the consolidated FDI policy released by the Department of Industrial Policy and Promotion, start-ups can raise up to 100% (one hundred percent) of funds from foreign venture capital investors (“FVCI”).

As per the circular dated 28th August 2017 (“Circular”), start-ups can now issue equity or equity linked instruments or debt instruments to FVCI against receipt of foreign remittance, as per the Foreign Exchange Management Act Regulations. In addition to the aforesaid, startups can issue convertible notes to person resident outside India with certain conditions. A person resident outside India (other than citizens/entities of Pakistan and Bangladesh) will be permitted to purchase convertible notes issued by an Indian start-up company for an amount of INR 25,00,000/- (Indian Rupees Twenty-Five Lakhs) or more in a single tranche. A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the pricing guidelines as prescribed by Reserve Bank of India.

Along with this, NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of the Notification No. FEMA.20/2000-RB dated 3rd May 2000. The Circular also added that the start-up company engaged in a sector where foreign investment requires government approval may issue convertible notes to a non-resident only with the approval of the government. A startup company issuing convertible notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channels or by debit to the NRE/FCNR (B) /Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016. Further, start-ups issuing convertible notes would be required to furnish reports as prescribed by the Reserve Bank of India.

In the recent past, there have been liberalizations in FDI policies in many sectors that included defense, construction and development, security agencies, civil aviation, news broadcasting. These reforms have been incorporated in the document.