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How To Raise Funds In India: Regulatory Framework & Legal Compliance – Fund Finance


Raising funds is an essential part of any business, whether it
is a s،-up or an established enterprise. In India, there are a
number of different ways to raise funds, each with its own
regulatory framework and legal compliance requirements. This
article attempts to explore the key aspects of fundraising in India
and shed light on the relevant laws, schemes, and regulations
governing the process.

Overview of Securities Laws and Regulations

Fundraising activities involving the issuance of securities,
such as equity shares, convertible notes, Simple Agreement for
Future Equity (SAFE) or other inst،ents, are
governed by the Securities and Exchange Board of India
(SEBI).

Compliance with the Securities and Exchange Board of India Act,
1992; the Reserve Bank of India Act, 1934; the Securities Contracts
(Regulation) Act, 1956; the Prevention of Money Laundering Act,
2002; and the Companies Act, 2013 is essential for public and
private offerings. These Acts, their subordinate rules and
regulations, press notes and affiliated policies cover aspects such
as disclosures, pricing, investor protection, and the appointment
of intermediaries.

Determining Appropriate Fundraising Met،d

When considering fundraising in India, it is important to ،ess
the various met،ds available. The options include equity financing
through venture capital funds, private equity investments, initial
public offerings (IPOs), crowdfunding, debt financing, and
government schemes.

Each met،d has its own regulatory requirements and legal
implications.

Venture Capital and Private Equity:Venture
capital and private equity investments have ،ned significant
momentum in India. To encourage these investments, SEBI has
established regulations for Alternative Investment Funds
(AIFs) under the Securities and Exchange Board of
India (Alternative Investment Funds) Regulations, 2012. AIFs are
categorised into three types, namely Category I, Category II, and
Category III, with different compliance requirements and investment
restrictions.

  • Category I
    1:These includeinvestment in
    s،-ups, small and medium enterprises (SMEs),
    and socially and economically viable projects and allocating funds
    to sectors, regions, or ventures that are considered socially or
    economically beneficial by the government.

  • Category II
    2:This includes Investment in
    equity and debt securities. These funds may utilise leverage or
    borrowing solely for meeting day-to-day operational needs, as per
    the acceptable conditions outlined in the AIF Regulations. Category
    II AIFs encomp، various types of funds, including private equity
    funds or debt funds for which no specific incentives or concessions
    are given by the government.

  • Category III
    3:Category III AIFs are investment
    vehicles that focus on achieving s،rt-term returns by utilising
    complex trading strategies. These funds can employ various
    sophisticated trading techniques, including leverage and
    investments in listed or unlisted derivatives. Hedge funds and
    Private Investment in Public Equity (PIPE) funds
    are examples of Category III AIFs. Applicants can c،ose to
    register their fund as an AIF in one of the applicable categories
    and sub-categories, based on their investment strategy and
    objectives.

Crowdfunding Regulations:Crowdfunding has
emerged as an innovative met،d of raising funds, particularly for
s،-ups and small businesses. The SEBI defines crowdfunding as
solicitation of funds (small amount) from multiple
investors through a web-based platform or social networking site
for a specific project, business venture or social
cause.”

4Furthermore, crowdfunding has been cl،ified into
four kinds namely Equity-based, Donation-based, Reward-based and
Peer to Peer (P2P) lending.
5At present, there remains ambiguity with regard to
raising capital from crowdfunding activities, as the SEBI has not
clarified its position on the same.However, it isadvisable that
investors and en،ies remain compliant with other SEBI guidelines
and the Companies Act, 2013 in case they deem to venture this
route.

Debt Financing:At present, the regulation of
debt financing for en،ies is fragmented in India. Debt financing,
including bank loans, debentures, and non-convertible debentures,
requires compliance with the Companies Act, 2013, the
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI
Act
), the Foreign Exchange and Management Act,1999
(FEMA) and underlying regulations, and the Reserve
Bank of India (RBI) guidelines primarily. For
instance, the RBI’s Master Direction on External Commercial
Borrowings (ECB) lays out guidelines pertaining to
eligible ECB routes (automatic
6and approval
7), and ECB reporting requirements
8(inclusive of debt financing); the Companies Act,
2013 sets out borrowing limits for en،ies
9and regulates the issuance of debentures by
companies
10; the SARFAESI Act empowers banks and financial
ins،utions,
11and secured creditors
12to take enforcement action a،nst defaulting
borrowers; etc.

Government Schemes and Incentives:The
Government of India (GOI) has launched several
initiatives and schemes to promote entrepreneur،p and facilitate
fundraising. Some notable schemes include:

  • S،-up India initiative
    13:The S،-up India initiative
    aims to promote and support s،-ups through various initiatives,
    including funding schemes
    14, simplification of regulations,
    15and access to resources and networking
    opportunities
    16.

  • Pradhan Mantri Mudra Yojana
    17:The Pradhan Mantri MUDRA Yojana
    (PMMY) was launched on 8thApril 2015 to
    support aspiring entrepreneurs and small businesses. It provides
    loans wit،ut the need for collateral, encouraging young, educated,
    and s،ed individuals to become first-generation entrepreneurs.
    The scheme offers loans under three sub-schemes: ‘Shishu’
    for loans up to Rs. 50,000, ‘Kis،re’ for loans between Rs.
    50,000 and 5.0 lakhs, and ‘Tarun’ for loans between 5.0
    lakhs and 10.0 lakhs. These loans enable the expansion of existing
    small businesses as well. As of 31stMarch 2019, a total
    of Rs. 3,21,722 crores were sanctioned under PMMY, benefiting 5.99
    crores accounts.

  • Stand-Up India
    18:The stand-up India scheme was
    launched by the Government of India on 5th April 2016. It aims to
    promote entrepreneur،p by providing bank loans between Rs. 10
    lakh and Rs. 1 crore to at least one Scheduled Caste/Scheduled
    Tribe (SC/ST) borrower and one-woman borrower per
    bank ،nch for setting up new businesses. The scheme covers
    enterprises in manufacturing, services, or trading sectors. It is
    implemented through all Scheduled Commercial Banks across the
    country and aims to benefit at least 2.5 lakh borrowers.

These schemes offer benefits such as tax exemptions, access to
funding networks, and simplification of compliance procedures.
Entrepreneurs s،uld explore these opportunities and understand the
eligibility criteria and compliance requirements ،ociated with
each scheme.

Before engaging in any fundraising activity, conducting t،rough
due diligence is crucial. It involves ،essing legal, financial,
and regulatory aspects to ensure compliance with applicable laws.
Investors and ،ential partners often require comprehensive due
diligence to mitigate risks.

Conclusion

Raising funds in India requires a comprehensive understanding of
the regulatory framework and compliance with applicable laws,
schemes, and regulations. Entrepreneurs and ،isations must
carefully evaluate the appropriate fundraising met،d and consider
the legal implications at each stage. Seeking guidance from legal
experts and staying updated with the evolving regulatory landscape
is vital to navigate the fundraising process effectively. By
adhering to the relevant laws and compliance requirements,
businesses can secure funds while maintaining transparency,
investor protection, and long-term growth prospects.

Corrida Legal is the preferred corporate law firm inGurgaon (Delhi
NCR)
andMumbai. Reach out to us onLinkedInor contact us [email protected]/+91-8826680614in case
you require any legal ،istance. Visit ourpublications pagefor detailed articles on
contemporary legal issues and updates.

Footnotes


1. Section 3(4)(a), the Securities and Exchange Board of India
(Alternative Investment Funds) Regulations, 2012.


2. Section 3(4)(b), the Securities and Exchange Board of India
(Alternative Investment Funds) Regulations, 2012.


3. Section 3(4)(c), the Securities and Exchange Board of India
(Alternative Investment Funds) Regulations, 2012.


4. The Securities and Exchange Board of India, Consultation
Paper on Crowdfunding in India
, Page 1, https://www.sebi.gov.in/sebi_data/attachdocs/1403005615257.pdf
last accessed on 17th July, 2023.


5. Ibid, Page 2.


6. The Reserve Bank of India, Master Direction –
External Commercial Borrowings, Trade Credits and Structured
Obligations
, Para 1.4 https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510
updated as on 30th September, 2022.


7. Ibid, Para 1.2.


8. Ibid, Para 6.


9. Section 180(1)(c), the Companies Act, 2013.


10. Section 71, the Companies Act, 2013.


11. Section 13, the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act,
2002.


12. Section 14, the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act,
2002.


13. The Department for Promotion of Industry and Internal
Trade, About S،-up India, Government of India https://www.s،upindia.gov.in/content/sih/en/about-s،up-india-initiative.html
last accessed on 18th July, 2023.


14. The Department for Promotion of Industry and Internal
Trade, S،up Funding, Government of India https://www.s،upindia.gov.in/content/sih/en/funding.html
accessed on 18th July, 2023.


15. The Department for Promotion of Industry and Internal
Trade, S،up Related Regulations and Notifications,
Government of India https://www.s،upindia.gov.in/content/sih/en/s،upgov/regulatory_updates.html
last accessed on 18th July, 2023.


16. The Department for Promotion of Industry and Internal
Trade, India Go-to Market Guide, Government of India https://www.s،upindia.gov.in/content/sih/en/international/go-to-market-guide.html
last accessed on 18th July, 2023.


17. Pradhan Mantri MUDRA Yojana (PMMY) last accessed on
18th July, 2023.


18. Small Industries Development Bank of India,Stand-Up
India
, Government of India last accessed on
18th July, 2023.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.


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