Introduction
Fundraising is a critical step in the journey of a startup. It shapes a company's growth and potential for success. However, navigating the complex world of fundraising in India involves understanding and complying with regulations set by two key bodies: the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA). This article aims to simplify these regulations, providing essential information to make readers aware and facilitate their understanding regarding fundraising.
Methods of Raising Funds
Startups have various options to raise funds. They can opt for debt or loans from banks or other financial institutions, issue debentures, bonds, or other securities under the Companies Act, 2013. However, the most popular method these days is raising capital by issuing equity or preference shares in exchange for investments.
Startups can raise funds through the private placement of shares under Section 42 of the Companies Act, 2013 and the Rules of the Companies (Prospectus and Allotment of Securities) Rules, 2014. When a company, whether private or listed, selectively allots shares, under Section 62 of the Companies Act, 2013 and the Companies (Issue of Share Capital and Debentures) Rules, 20141, to specific individuals or entities it's referred to as preferential allotment of shares.
The compliance process in Private Placement:
Authorization of Share Capital Increase: The process begins with expanding the authorized share capital, defining the maximum allowable shares a company can issue. Subscribed capital is the portion of authorized capital investors commit to, staying within these limits.
Board Meeting: A board meeting addresses fundraising matters and pass resolutions, including valuation reports, listing allottees, offer durations, finalizing the offer letter, and announcing the Extraordinary General Meeting.
Extraordinary General Meeting (EGM): An EGM is convened to pass a special resolution for the private placement offer. Forms like MGT-14 and PAS-4 from MCA containing the private placement offer are sent to investors/allottees, along with a certified true copy of the special resolution.
Offer Letter Issuance: Upon approval, the private placement offer letter and application are provided to potential investors/allottees within 30 days, in writing or electronically.
Allotment: Share allotment to be done within 60 days of receiving of funds, moreover, return of allotment to be filed with the registrar within 30 days of allotment.
Share Certificates: To be issued to the allottees which officially makes them a shareholder of the startup.
Public offer
Chapter III, Part I of SEBI (Issue of Capital and Disclosure Requirements) Regulations (ICDR Regulations) is dedicated to public offer. Public offer is a method used by public companies to raise capital. When a company first extends the opportunity for the general public to purchase its shares, this event is termed an Initial Public Offer (IPO).
According to the ICDR Regulations, an IPO can take one of two forms: a fresh issue or an offer for sale. In a fresh issue, new shares are offered to the public, thereby increasing the company's capital. In an offer for sale, existing shareholders, including the promoters, have the option to sell their shares to the public as part of the IPO process.
SEBI'S ITP Framework
SEBI introduced the Institutional Trading Platform (ITP) in 2015 to ease startup listings in India, amending the ICDR Regulations. The ITP faced challenges due to stringent requirements, deterring investors and startups. In response, SEBI formed a group in 2018, which engaged with stakeholders and submitted recommendations. SEBI released a consultation paper seeking public feedback.2
The Board removed minimum allocations for specific investor categories, eliminated the 75%-25%3 allocation rule, and lowered the minimum allottees for an IPO from 200 to 50. The existing requirement governed by the Securities Contracts (Regulations) Rules, 19574 to the public was reduced to5 INR 10,00,00,0006, aligned with minimum public shareholding norms (25% of shares offered to the public). These changes aim to streamline the IPO process and promote startup growth, addressing the challenges faced under the original ITP framework.
Conclusion
The process of raising funds for a startup in India involves pre-funding compliance, including increasing authorized share capital, conducting board and extraordinary general meetings, and issuing offer letters. Navigating the complex world of fundraising compliance for startups in India requires diligence, legal awareness, and a comprehensive understanding of the SEBI and MCA regulations. By following the prescribed procedures and adhering to the updated frameworks, startups can secure the funds they need to fuel their growth and pave the way for success in the dynamic Indian business landscape.
Footnotes
1. Rule 13
3. https://www.sebi.gov.in/legal/regulations/sep-2018/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-regulations-2018-_40328.html (Regulation 287)
4. Rule 19(2)(b)
6. https://www.sebi.gov.in/sebi_data/meetingfiles/jan-2019/1547457564323_1.pdf (Point 3.11.2)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
