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A Startup is an entrepreneurial venture which is a newly emerged business venture that aims to meet a marketplace need, want or problem by developing a viable business model around products, services, processes or platforms. It is a company that is in the first stage of its operations. These companies are often initially funded by their entrepreneurial founders. The Government of India has come up with the Startup India Scheme to boost innovation and technology oriented businesses in India. Under this scheme, the startups are provided with various benefits such as certain tax exemptions, fast track and upto 80% rebate in patent applications and investment through Alternate Investment Funds and other schemes of the Government of India.

Investment by Foreign Venture Capital Investors (FVCIs):

In line with such benefits and in order to give a fillip to foreign investment in the startups, the Department of Industrial Policy and Promotion under the aegis of Ministry of Commerce and Industry, Government of India in Consolidated FDI Policy 2017 has allowed FVCIs to contribute up to 100% of the capital of startups irrespective of the sector in which it is engaged, under the automatic route. The investment can be made in equities or equity linked instruments or debt instruments issued by the start-ups and if a startup is organised as a partnership firm or an LLP, the investment can be made in the capital or through any profit-sharing arrangement). The separate provisions specific to startups have been brought for the very first time. 

Business Startup

Issuance of Convertible Notes:

In addition to the investment by FVCIs, startups can issue convertible notes to person resident outside India subject to the following conditions:

1. A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered/ incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of twenty five lakh rupees or more in a single tranche.

2. A startup company, engaged in a sector where investment by a person resident outside India requires Government approval, may issue convertible notes to a person resident outside India only with such approval.

3. 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. Repayment or sale proceeds may be remitted outside India or credited to NRE/ FCNR (B) account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

4. A Non-Resident Indian or an Overseas Citizen of India (OCI) may acquire convertible notes on non-repatriation basis in accordance with Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 which states that:

  • The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in NRE/ FCNR(B)/ NRO account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
  • Such investment shall be deemed to be domestic investment at par with the investment made by residents

5. 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 entry routes and pricing guidelines as prescribed for capital instruments. Prior approval from the Government shall be obtained for such transfers in case the startup company is engaged in a sector which requires Government approval.

(Explanation: ‘Convertible Note’ means an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument)

Form Convertible Notes (CN):

a. The Indian startup company issuing Convertible Notes to a person resident outside India shall report such inflows to the Authorised Dealer bank in Form CN within 30 days of such issue.

b. A person resident in India, who may be a transferor or transferee of Convertible Notes issued by an Indian startup company shall report such transfers to or from a person resident outside India, as the case may be, in Form CN to the Authorised Dealer bank within 30 days of such transfer.

c. The Authorised Dealer bank shall submit consolidated statements to the Reserve Bank.

Provided, the format, periodicity and manner of submission of such reporting shall be as prescribed by Reserve Bank in this regard.

Provided further that unless otherwise specifically stated in these regulations all reporting shall be made through or by an Authorised Dealer bank, as the case may be.

The person/ entity responsible for filing the form as prescribed above shall be liable for payment of late submission fee, as may be decided by the Reserve Bank, in consultation with the Central Government, for any delays in reporting.

For the above, an entity to be called as startup should qualify the following definition:

 Definition of Startup (As defined by Department of Industrial Policy and Promotion and updated vide Notification No. G.S.R 364 (E) dated 11th April, 2018): 

Startup means an entity, incorporated or registered in India :

  • Upto a period of seven years from the date of incorporation/registration or upto ten years in case of Startups in Biotechnology sector (Earlier it was 5 years for entities in all sectors)
  • As a private limited company or registered as a partnership firm or a limited liability partnership
  • With an annual turnover not exceeding Rs. 25 crore for any of the financial years since incorporation/registration
  • Working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a Startup

An entity shall cease to be a Startup:

  • On completion of seven years from the date of its incorporation/registration, ten years in case of Startups in Biotechnology sector, or
  • If its turnover for any previous year exceeds Rs. 25 crore.

(The author of this article is a Practicing Company Secretary located at New Delhi and can be reached at [email protected])

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. No part of this document should be distributed or copied without express written permission of the author.

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