Foreign Direct Investment in Startup Companies

A Startup company, or simply a startup, is an entrepreneurial venture in its early stages of operations typically aimed at resolving a real life issue with an innovative product or service. These ventures are typically small in nature, new, and funded by entrepreneurial investors who believe in the founder or company concept.

An entity shall be considered as a ‘Startup’-

a) Has not completed seven years from the date of its incorporation/registration, ten years in case of Startups in Biotechnology sector

b) If its turnover for any of the financial years has not exceeded Rupees 25 crore, and

c) It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

FDI policy 2017 has allowed startups to raise 100% funds from SEBI (Securities and Exchange Board of India) registered Foreign Venture Capital Investors (hereinafter referred to as “FVCI”) under the automatic route. Start-ups can issue equity or equity linked instruments or debt instruments to FVCI against receipt of foreign remittance, as per the FEMA Regulation. If a startup is organized as a partnership firm or a Limited Liability Partnership (LLP), the investment can be made in the capital or through any profit-sharing arrangement.

Foreign Direct Investment in Startup Companies

In addition, start-ups can issue convertible notes to person resident outside India subject to the following conditions:

(i) 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.

Convertible Notes is defined as “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.

(ii) A startup company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with approval of the Government.

(iii) 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, as amended from time to time.

Provided that an escrow account for the above purpose shall be closed immediately after the requirements are completed or within a period of six months, whichever is earlier. However, in no case continuance of such escrow account shall be permitted beyond a period of six months.

(iv) NRIs may acquire convertible notes on non-repatriation basis as per the condition require that is the amount of consideration for purchase of shares or convertible debentures of an Indian company on non-repatriation basis, shall be paid by way of inward remittance through normal banking channels from abroad or out of funds held in NRE/FCNR /NRO/NRSR/NRNR account maintained with an authorised dealer or as the case may be with an authorised bank in India.

(v) 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 RBI. 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.

(vi) The startup company issuing convertible notes shall be required to furnish reports as prescribed by Reserve Bank of India.

Thanks
-With Warm Regards
CA Sanskriti Jain
Mb. No- 8745961214
Email Id- [email protected]