MCA Makes It Easier For Startups To Access Funds Through Convertible Route!

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Money Rupee Indian-003

It’s time for entrepreneurs to rejoice as the Ministry of Corporate Affairs (MCA) has relieved startups from treating any advance of Rs. 25 lakhs or more as ‘deposit’, provided such funding happens via a convertible note.

The Companies (Acceptance of Deposit) Rules have also been amended to given effect. Many startups which received funding from angel investors, VCs using the funds for more than a year was treated as a ‘deposit’ under the Companies Act, 2013. The existing provisions under the Acceptance of deposit are very rigorous and come with a lot of “provided…”, “subject to” clauses.

But the MCA, recognizing the situation of startups, has now taken heed to exempt startups from treating these advances as deposits, hence making it easier for startups to access funds and keep them hassle-free. The MCA now exempts any startup which receives funding of more than Rs.25 lakhs, as a convertible note from calling it a ‘deposit’ under the Companies Act, 2013. But the startups that can avail this exemption was notified by the Department of Industrial Policy and Promotion (DIPP).

Startups that can avail this facility would be, as defined under DIPP, ‘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 exceeded Rs.25 crore’ It can be inferred that the startup must have been incorporated during financial year 2011-12 and during the years, it must have earned turnover lesser than 25 crores and ‘it is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.’

Another important thing is that the advance of Rs.25 lakhs must have been procured under a convertible note, which means the note can be converted to equity or be 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 reserve and getting credit rating before raising the money from for over 365 days. Crowd funding and raising money through angel rounds for more than a year was earlier considered as a deposit.”, said an expert in the field.

Another cherry on the cake is that startup companies incorporated between April 1, 2016 to March 31, 2019 will enjoy a ‘tax holiday’ for three financial years, provided the DIPP approves it.

Well since the reform has kicked in, 571 startups have already applied under the Startup India Initiative and most entrepreneurs feel these kind of reforms will help them flourish. The ministry also informed that from the lot of these applications, 106 applications are complete, only 12 startups have been approved to enjoy a tax holiday.

The government, no doubt is promoting startup village but more of the reforms in similar fashion must be drafted soon. Some of the provisions under the Companies Act, 2013 are very harsh on startups and due to which flexibility of startups is paralyzed. Startups must be given ease in operating to make the ‘ease of doing business’ ranking of India to go up the charts.

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