During the 2016 Union Budget, FDI in startups was a burning issue, and Govt. was requested to make it easy for startups to raise funds from foreign investors.
In March this year, when Govt. allowed 100% FDI in B2B online marketplaces, then a hope was raised that maybe B2C would be allowed to raise FDI as well.
Now 7 months later, the first step has been taken in this direction, and the outlook looks promising.
Govt. has now allowed every startup to raise $3 million or Rs 20 crore from foreign investors and lenders within a financial year. Technically, this funding can be done as a external commercial borrowings (ECBs) from foreign based investors and lenders, and every startup (both B2B and B2C) can participate in this.
This funding can be taken in both Indian currency or foreign currency, as per the terms and conditions of the ECB.
Although a tiny step, this will help hundreds of early stage startups, which are either bootstrapped or looking for angel funding in various niches. By opening up a door for easy FDI, Govt. has given a strong signal about more reforms to come in this sector.
By the month end, RBI will issue a notification in this regard.
Startup Reforms Continues By Govt. of India
This current ease of FDI for startups is in continuation with the string of reforms which Govt. of India has already announced to help startups and investors; and take the journey of Startup India, Standup India further ahead.
First of all, Govt. of India clearly defined what exactly is a startup and put identification factors in place for startups.
In June this year, Govt. abolished the draconian Angel Tax of 33%, which was earlier imposed on capital raised by any unlisted Indian company against share issuance in excess of market value. This was hailed as one of the most crucial steps taken to encourage entrepreneurship in India.
In March this year, Govt. introduced a slew of reforms in Companies Act 2013 and allowed smooth exit for overseas investors as well.
In May, Govt. abolished Capital Gains Tax as well.
In July, Govt. made it easy for startups to raise funds via Convertible route, thereby making it easier for raising funds via alternate ways.
Govt. has already increased Startup Fund by 5 times, and an exclusive Ministry of Entrepreneurship has been created to boost entrepreneurship in India. Even help for entrepreneurs is now available via a simple Tweet.
We will keep you updated as more details come in regarding startup reforms by Govt. of India.