Raising funds is an essential part of any business, whether it is a start-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 instruments, 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 Method

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

Each method has its own regulatory requirements and legal implications.

Venture Capital and Private Equity:Venture capital and private equity investments have gained 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 start-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 encompass 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 short-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 choose 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 method of raising funds, particularly for start-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 classified 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 entities 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 entities 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 entities 9and regulates the issuance of debentures by companies 10; the SARFAESI Act empowers banks and financial institutions, 11and secured creditors 12to take enforcement action against defaulting borrowers; etc.

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

  • Start-up India initiative 13:The Start-up India initiative aims to promote and support start-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 without the need for collateral, encouraging young, educated, and skilled individuals to become first-generation entrepreneurs. The scheme offers loans under three sub-schemes: 'Shishu' for loans up to Rs. 50,000, 'Kishore' 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 entrepreneurship 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 branch 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 should explore these opportunities and understand the eligibility criteria and compliance requirements associated with each scheme.

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


Raising funds in India requires a comprehensive understanding of the regulatory framework and compliance with applicable laws, schemes, and regulations. Entrepreneurs and organisations must carefully evaluate the appropriate fundraising method 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.

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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 Start-up India, Government of India https://www.startupindia.gov.in/content/sih/en/about-startup-india-initiative.html last accessed on 18th July, 2023.

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

15. The Department for Promotion of Industry and Internal Trade, Startup Related Regulations and Notifications, Government of India https://www.startupindia.gov.in/content/sih/en/startupgov/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.startupindia.gov.in/content/sih/en/international/go-to-market-guide.html last accessed on 18th July, 2023.

17. Pradhan Mantri MUDRA Yojana (PMMY) https://www.mudra.org.in/ last accessed on 18th July, 2023.

18. Small Industries Development Bank of India,Stand-Up India, Government of India https://www.standupmitra.in/ last accessed on 18th July, 2023.

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