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Pro-Startup Wave in India: More Reforms in Companies Act 2013; RBI To Allow Smooth Exit For Overseas Investors

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Startup India, Standup India was just the beginning: Indian Government means business now. In order to encourage, nurture and promote entrepreneurship in India, Government and RBI both have announced sweeping changes in the rules.

While Indian Government has proposed drastic changes in the Companies Act, 2013; RBI has announced several amendments in financial and FDI rules which will lure and attract foreign investors to come to India and invest in Indian entrepreneurs.

Changes Proposed in Companies Act, 2013

A panel appointed by Government has proposed that startups and new companies should be able to raise funds easily. Besides, the panel has recommended that senior management should be rewarded without any hassles.

One of the biggest changes proposed is related to shareholders’ control over the management and decision making process. As per Financial Express, this panel has proposed that steps should be taken so that”shareholder democracy don’t cripple the functioning of firms and the businesses they run..”

In 2014, Modi Govt. had already removed some of the draconian regulations from the Companies Act, 2013. This would be the second wave of reforms for this act. (earlier, startups would have been jailed if IT returns were not filed!)

In the current Companies Act, 2013, shareholders’ approval hold vital importance when it comes to deciding remuneration of senior management and to form layers of subsidiaries and investments, which can actually help the business to flourish.

Some other major changes proposed include:

  • Definition of associate company and subsidiary company, so that only “equity share capital” forms the holding-subsidiary relationship, instead of “both equity and preference share capital”
  • Easing of placement process
  • Doing away with the requirement of ‘Offer Letter’
  • Easy registration of company with Registrar of Companies
  • Provisions related with Insider trading and forward trading be deleted from the Act, as per RBI’s recommendations
  • Directors should be allowed to invest in those firms in which they are interested, only after “passing special resolution and adhering to disclosure requirement.”

Government had formed a special ‘Companies Law Committee in June 2015’, which comprised of company secretaries, representatives from the Reserve Bank of India, the Securities and Exchange Board of India and the Institute of Chartered Accountants of India; who were asked to rigorously examine the present Companies Act, 2013 and propose changes which help entrepreneurs to grow in India.

Changes across 78 sections of the Act have been proposed by this panel, and 50 amendments have been suggested. Government will soon come out with a decision on this matter.

You can view all the changes proposed by the panel here.

RBI Lure Foreign Investors With Ease of Investment Rules

In another major development, RBI has now allowed foreign investors to sell their stake in Indian venture to local companies, which means that exit route is now easier.

Besides, startups can directly file their reports online and share transfers would be now easier. Some other changes proposed include:

  • Startups can now access rupee loans under the external commercial borrowing (ECB) framework (only from eligible lenders)
  • Financial instruments like convertible notes can now be used by startups, which will help them to attract foreign investments easily
  • Shares of the primary investors based in overseas location can now be transferred easily to local investors/entrepreneurs

As per various experts, these changes have been proposed for stopping Indian entrepreneurs from moving overseas in order to attract investments. Some of the changes which has been announced would be finalized after Government approval.

Last month, Government had announced the first wave of reforms pertaining to funding for startups, when seed funding tax was abolished. With these new changes announced by RBI, Indian startups aiming for overseas funding can now be more confident.

You can find a summary of all changes proposed by RBI here.

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