It Government of India has recognized Start- ups and introduced a flagship initiative – Start up India. Under this, the Start-ups are encouraged by giving many facilities and incentives and innovation and entrepreneurship in India is promoted.
In India, Startups have occupied a important position in the economy and they are continuously contributing towards growth, new idea and innovations.
Recognising their role in the growth of the nation, Government has given certain incentives to the Start-ups and also have has a liberalized views for the startups. Government has taken further liberal step by notifying liberal guidelines to avail the ECB from overseas for the Startups. As per the specific guidelines issued for them, every Startup which is eligible to receive FDI can avail ECB. This great initiative by RBI enables the startup to avail the foreign funds and use them for the growth.
Who are Start-ups?
The following entities are only eligible to be a startup-
1. A Private Limited Company
2. Limited Liability Partnerships (LLP)
3. Registered partnership firms
The entities are to fulfil the following criteria for being recognized as Startup-
1. The entity should not be older than 10 years from the date of its incorporation/ registration.
2. Its annual turnover does not exceed Rs. 100 crore in any of the financial year since incorporation/registration.
3. Their work is for innovation, development, deployment 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.
Also, it is very important to note that the entity should have not been formed by splitting up or reconstruction of a business in existence.
ECB Guidelines introduced simplified regulations to support Start- ups avail funding from overseas in easy terms.
The ECB framework applicable on the Start- ups are described as under-
1. Who are eligible to avail the ECB: The entity which wish to avail the ECB must be recognised as Start-up by the Central Government, ie the entity must hold the registration certificate issued by the Central Government recognising the entity as the Start up. The recognition must be valid as on the date of availing the ECB.
2. Who are the recognised lender- The lender from whom the ECB funding is being received, must be a resident of a FATF compliant Country.
3. Maturity period for the ECB Loan- The maturity period for the ECB is 3 (three) years, ie the Minimum average maturity period of loan shall not be below 3 (three) years.
4. Currency for the ECB funding: The Startup can avail the ECB loan in any freely convertible currency as well as in Indian Rupee.
5. All-in-cost: This is an area where the RBI has given the complete autonomy to the Start up unlike the ECB for other entities. The Government has left the all in cost terms completely in the hands of the parties and the all in cost is to be agreed between the borrower and the lender.
6. Maximum Amount of ECB: Maximum amount of ECB to be availed by Star up been limited to USD 3 (three) million per financial year.
7. Forms of the ECB: The ECB borrowing can be availed in many forms- viz. a commercial loan, non-convertible / optionally convertible/ or partially convertible preference shares.
8. End uses of the ECB funds: The funds availed under the ECB can be used for the business purposes. Startup can used the ECB funds for any expenditure related to their business.
9. Conversion of ECB into equity shares: The ECB funds availed by the Startups, can be converted into equity, however, on conversion into equity, the regulations related to Foreign Direct Investment (FDI) have to be followed.
10. Security for the loan: It is the choice of the Borrower to provide the security to the Lender- the security can be of movable/ immovable/ intangible assets. Even, issuance of personal or corporate guarantee is allowed under the ECB Framework. However, the following is not permitted- Issuance of Guarantee, Issuance of SBLC, letter of undertaking, letter of comfort by Indian Banks, all India Financial Institutions and NBFCs are not permitted.
11. Hedging for the loan: if the ECB currency is in INR, the lender can hedge their INR exposure. The hedging can be done through permitted derivative available with Category- I AD Bank in India. It is permitted for the lenders to access the domestic market through the branches or subsidiaries of Indian bank overseas or even through the branches of foreign banks.
12. Conversion rate: For the INR ECB, the foreign currency – INR conversion will be at the market rate as on the date of agreement.
13. ECB Liability: Equity ratio- Not applicable in case of ECB by Start Ups.
All other frameworks viz reporting the ECB, obtaining LRN, conversion of ECB into equity etc will be the same as in the revised ECB framework. In case the Start ups which do not meet the criteria as mentioned herewith, then they can avail the ECB funding under the normal ECB framework.
Disclaimer: This article has been prepared in good faith on the basis of information available on the date of publication without any independent verification. The Author does not guarantee or warrant the accuracy, reliability, completeness or currency of the information in this publication nor its usefulness in achieving any purpose. The Author will not be liable for any loss, damage, cost or expenses incurred or arising by reason of any person using or relying on information in this publication. Readers are requested to consult a professional before taking any action.
(Author – Sonika Bharati, FCS, LL.B. is a Company Secretary in Practice from Delhi and can be contacted at sonika.bharati@gmail.com)
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