Crowd funding as the name suggest is a procedure for raising funds by an early stage venture where different people either donate or invest through a specified online platform which acts as an intermediary between the two. The startup culture has boosted the Indian economy and as a result the early stage businesses quite often reach out for various ways to raise capital for their business. Prior to the technological advancements, crowdfunding used to be through subscriptions, door to door raising of capital or through certain events. Now the scenarios have changed with the initiation of digitalization.
The Securities and Exchange Board of India in its consultation paper[1] has defined the crowdfunding and crowdsourced funding as: “Crowdfunding is a solicitation of funds (small amounts) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause.”
Crowdfunding has been further classified into 4 different types which include:
Equity based crowdfunding: In an equity based crowd funding, the growth stage companies raise funds by offering the investors equity, online. There are certain online crowdfunding platforms which act as an intermediary between the investor and the growth stage company.
Nevertheless equity based crowdfunding is totally prohibited in India by SEBI due to innumerable number of scams like the Sahara scam and many more.
Donation based crowdfunding: The donation based crowd funding is the one where the people have the urge to support the cause (through their donations) initiated by the company without expecting any sort of returns. It is one of the most preferred types of crowd funding generally for artistic, social and other purposes.
Reward based crowdfunding: On the other hand in reward based crowd funding people donate in expectation of certain returns as a form of reward
Peer to Peer lending: P2P lending is a type of crowdfunding where the investors invest their money with a probable expectation to get back their money with certain nominal rate of interest. Owing to certain fraudulent acts the RBI has issued guidelines for the P2P lending[2].
In India the crowdfunding concept is taking a solid structure as this type of funding is one of the most easy, fast and one of the most popular methods to bring in funds for the ventures. There are obvious and probable reasons as well as why crowdfunding is chosen to be the most popular or emerging way of fund raising as there is little or in fact not initial cost when it comes to raising funds. The funds are mostly obtained by the promise of certain shares or rewards.
Legality of Crowdfunding in India
When it comes to equity crowd funding specifically digital equity crowdfunding platforms, SEBI has declared such to be unauthorized, unregulated and illegal. Hence equity based crowd funding is prohibited in India, although there is no bar on donation/reward based crowd funding which are also mostly done online. The donation/reward based crowd funding although legal, but there is no specific rule which covers the same. For P2P lending it is the RBI which acts as the regulatory authority.
It is also pertinent to mention the taxability of the crowdfunding. Recent Income Tax guidelines give a complete exemption from taxation to the non-profit establishments that raise their capital under the crowdfunding process. But when it comes to an individual receiving donation through an online crowdfunding platform then such becomes taxable. Also under the Finance Act 2017 there has been certain amendments made which says that in case a donation made in cash exceeds INR 2000/-, the donor won’t be able to avail the tax exemption u/s 80G of the Income Tax Act. So it is to be expected that people donating bigger amounts will do it online and such will be hassle free as India has advanced in the process of digitalization.
There is definitely an urgent need to regulate the other types of crowdfunding as it has been emerging over the years. The post-covid phase is yet to see drastic and more exponential growth. Investors do need to be protected and hence an appropriate regulation to protect the rights of the investors is must. It is often that such investments are prone to fraudulent acts as investors fail to make proper due diligence. The Securities and Exchange board of India (SEBI) has come up with certain proposals in its consultation paper on crowdfunding in India. There have been proposals for a regulatory framework for the security based crowdfunding regime which will be further acting as a governing procedure for the same.
The entrepreneurs are making an impact in the society and online crowdfunding stands out to be instrumental, therefore it becomes very much essential for the start-ups to become more transparent and easily traceable. Now when it comes to transparency it becomes very much crucial for a donor to be aware of where their money is being spent. There are various crowdfunding platforms available online which are not very much transparent and hence under-reporting emerges out to be one of the major issues. There are various such crowdfunding platforms which have emerged over time like the ACT Grant, GiveIndia, Ketto and many more and these are already doing very well in the market. The dynamics of the startups change drastically with these early stage of funding and also help to develop a customer base before the market launch.
Conclusion
There is definitely no doubt as crowdfunding is evolving overtime and more ventures are being aware of it but at the same time there has to be some concrete regulations. A systematic approach has to be taken when it comes to scalability of such crowdfunding platforms. Government of India is coming up with various schemes under the Start-up India programme hence these early/growth stage companies will be looking for more possible ways to raise their capital which is fast and easy, and here crowdfunding becomes one of the most viable option and with this is can be concluded that crowdfunding will accelerate and create a better impact in terms of growth for the new ventures in India.
[1] https://www.sebi.gov.in/sebi_data/attachdocs/1403005615257.pdf
[2] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11137
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