Deposit Norms Relaxed to Help Startups Raise Funds

Deposit Norms Relaxed to Help Startups Raise Funds

In order to make it easier for startups to secure funding, the government has exempted any advance of more thanRs.25 lakh to a startup from being treated as deposit provided that the person giving the money does it in the form of convertible note.

According to the Companies Act of 2013, any company including startups that received money from any person for over 365 days, it was considered as a deposit and the company had to follow the stringent acceptance of deposit rules to keep that deposit.

This exemption, provided by the corporate affairs ministry through a notification on Thursday, has only been made for companies that could be defined as startups under the notification issued by Department of Industrial Policy and Promotion (DIPP).

A convertible note means an instrument either converted into equity or repaid within five years from the date of funding.

“Acceptance of deposit rules makes it difficult for startups to raise money as a lot of compliances have to be made, including informing the registrar, maintaining the deposit repayment re serve and getting credit rating befo re raising the mo ney from for over 365 days,“ said La lit Kumar, partner, J Sagar Associates.

“Crowd funding and raising money through angel rounds for more than a year was earlier considered as a deposit. Start-ups weis norm. Now, they re flouting this norm. Now, they have been exempted,“ said Anshul Jain, partner, Luthra & Luthra law offices.

According to DIPP definition, start-up is a company up to five years from the date of its incorporation only If its turnover for any of the financial years has not ex ceeded `. 25 crore, and it is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

“The money received by companies for a period of more than 365 from alternate investment fund, domestic venture capital funds as well as mutual funds registered with SEBI will exempted from acceptance of deposit rules,“ said Jain.

The corporate affairs ministry has increased the tenure of the convertible debentures from five to ten years and has also exempted money raised through unsecured NCBs. “It will be a big boost for infrastructre investment as earlier the money received through convertible debentures were to be converted within five years else it was considered as a deposit. Now the tenure has been increased to 10 years as infrastructure projects need a longer gestation period,“ said Jain.

The Economic Times  New  Delhi, 01th July 2016