Fundraising is an important part of scaling a business, supporting non-profits, or growing startups in India. However, navigating fundraising compliances in India can be challenging and make entities make mistakes leading to legal troubles, fines, and even fundraising failures.

Understanding the common compliance mistakes helps businesses to conduct smooth and legally sound fundraising activities.

• Not registering with relevant authorities: Many businesses fail to register with the relevant regulatory authorities before seeking funds. For instance, NGOs need to be registered under the Societies Registration Act, of 1860, the Trust Act, of 1882 or the Companies Act, of 2013 before they can legally raise funds. Startups and private companies have to adhere to the SEBI (Securities and Exchange Board of India) regulations if they are seeking public investments. Before fundraising, the businesses must ensure they are registered under the correct legal structure. If they are a non-profit entity, the business must be registered under the correct act according to their goals. If you are a Company seeking investment make sure it is compliant with the Companies Act 2013 and SEBI’s fundraising guidelines.
• Violating FEMA Regulations: Many organizations raise foreign funds without adhering to FEMA and FCRA norms. FCRA registration is important for the NGOs receiving foreign donations. If the business violates FEMA norms, they invite legal action and cancellation of licenses. NGOs receiving foreign contributions must register under the FCRA Act. The businesses receiving foreign investments must adhere to FEMA regulations and ensure proper reporting to the RBI. They must maintain accurate records of all foreign transactions and report them to the Ministry of Home Affairs and RBI as required.
• Non-Compliance with SEBI regulations for equity Crowd-Funding: The most common mistake that most startups make when raising funds through crowd-funding is not following SEBI’s guidelines. SEBI prohibits retail investors from participating in equity crowd-funding and allows funding through recognized investors like VCs and Angel Investors. It is advised not to use unauthorized crowd-funding platforms for equity fundraising. The businesses need to ensure all their fundraising campaigns follow SEBI’s alternative investment fund guidelines. If businesses are using a private platform, they must ensure not to solicit funds from more than 200 investors, as per the Companies Act 2013 regulations.
• Lack of proper documentation and agreements: One of the biggest mistakes that startups and other business organizations make in raising funds is there is no proper documentation like shareholder’s agreements, term sheets, and investor’s rights agreements. It is advisable to work with a professional financial expert who will prepare a comprehensive term sheet highlighting the fundraising terms. It is important to have a legal agreement vetted by a lawyer to avoid future disputes. The businesses need to maintain records of all transactions, investor commitments, and obligations according to the Income Tax Act and Companies Act.
• Non-Disclosure of Fund Utilization: One of the main legal requirements of fundraising in India is to disclose how the funds raised will be utilized. Many organizations fail to disclose how they utilize the raised funds. The entities must hire an experienced and certified accountant who will help maintain transparent financial records and submit reports to the investors and regulators. If you are an NGO it is important to adhere to 80G and 12 A certification requirements for tax exemptions and disclose fund utilization regularly. The companies must follow the SEBI’s disclosure norms for investments and financial statements.
• Ignoring income tax regulations on fundraising: Many NGOs and startups fail to comply with income tax laws on investments and donations. For instance, Sector 56 (2) of the Income Tax Act states that the funds received above the fair market value of the shares may be taxed as Income from Other Sources. Businesses must ensure that fundraising valuations are backed by professional reports from registered valuers or chartered accountants. If they are raising funds through angel investors, they must ensure that the fund is raised according to the Angel Tax Provisions. They also have to file the necessary declarations with the Income Tax Department. NGOs need to apply for 12A and 80G registration to avail tax benefits on donations.
• Improper Structuring of Fundraising Instruments: The Corporate fundraising compliance guidelines India require proper structuring of the fundraising instruments. Businesses make the common mistake of using the wrong financial instruments such as convertible debentures, preference shares or loans without proper structuring. This can result in tax inefficiencies and legal issues. It is advisable to work with a professional financial expert before issuing shares or debt instruments. If raising debt, the business must adhere to the RBI and Companies Act regulations. If a company issues shares, it is important to ensure proper valuation and investor agreements.
• Non-Compliance with KYC: Many fundraising efforts fail to conduct due diligence on the investors, leading to potential money laundering or fraudulent activities. SEBI and RBI have strict KYC and Anti Money Laundering compliance for financial transactions. To avoid this mistake, businesses must conduct in-depth due diligence on donors and investors. They have to implement KYC norms by verifying the identity and source of funds. Any suspicious transaction is to be reported as per Financial Intelligence Unit guidelines.
• Failing to file annual returns and compliance reports: Many businesses, especially startups and NGOs fail to the annual compliance reports with the SEBI, MCA or Income Tax Department, leading to fines and loss of credibility. It is important to file annual financial statements and compliance reports on time. A company need to submit annual returns to MCA and must adhere to the Registrar of Companies regulations. The NGOs must file FCRA annual returns and disclose their financials publicly if required.
• Non-Compliance with digital fundraising laws: Businesses must adhere to the digital legal frameworks when raising funds through digital platforms like online donations, and crowd-funding. If there are non-compliant digital fundraising laws, businesses will have to face penalties. To avoid these mistakes only SEBI-registered crowd-funding platforms must be used for fund-raising. It is important to ensure compliance with the IT Act 2000 when collecting funds online.

How professional financial experts help businesses avoid mistakes in fund-raising?

Fundraising is an important process in a business where an established company seeks funds for expansion or a startup looking for initial capital. Navigating the fund-raising landscape can be daunting with many legal, financial and compliance challenges. Many businesses do not adhere to India’s fundraising legal compliance guide and lack experience or knowledge, committing costly mistakes.

Here is where the role of a professional financial expert comes to play. The experienced expert helps businesses avoid pitfalls and secure funding smoothly. Here’s how a certified financial professional guides businesses through fundraising while ensuring compliance, efficiency and long-term financial sustainability.

• Choosing the right fundraising method: Many businesses jump into fundraising without understanding which method suits them best. They might opt for venture capital when debt financing would be better or choose crowd-funding without realizing its limitations. A financial expert evaluates the company’s financial health, growth stage and objectives and recommends the most suitable fundraising option. There are many fundraising options for businesses including equity financing, debt financing, crowd-funding and government schemes and grants. When the right fundraising method is opted for, businesses can reduce the risks and financial strain and attract the right investors.
• Legal and Regulatory Compliance: Businesses unknowingly violate fundraising laws, leading to fines and fund cancellations. The most common mistakes include raising funds from unauthorized investors, failing to adhere to FEMA norms, non-compliance with SEBI regulations and ignoring tax implications on fundraising. A financial expert ensures full compliance with Indian financial laws and norms. By ensuring regulatory compliance, financial expert helps businesses avoid fines, legal troubles and fund rejection.
• Structuring Fundraising deal: Many companies fail to structure their fund-raising properly. This leads to a lack of clear investor agreement, unfavourable valuation and unrealistic financial projections. A financial expert helps structure the deal effectively by conducting professional business valuation according to market trends, revenue and growth potential. They draft or review term sheets, shareholders’ agreements, and investor’s contracts to protect the business’s interests. The expert prepares realistic revenue forecasts, cash flow statements and profit-loss projections alluring investor confidence. With proper deal structuring, businesses can retain control, secure better terms and build long-term investor trust.
• Manage Fund Utilization and Budgeting: After raising funds, many businesses mismanage finances leading to overspending on non-important areas, lack of financial planning for the next funding round and inadequate cash flow management. A professional financial expert ensures the funds raised are effectively allocated to maximize growth. They create a detailed budget plan for product development, marketing, operations and hiring. The expert also ensures that the expenses are according to the revenue generation to avoid a liquidity crisis. Also, they help businesses focus on high– ROI activities, preventing unwanted expenses. By managing fund utilization effectively, businesses avoid financial instability and ensure sustained growth.
• Due Diligence on Investors: Many startups and small businesses accept funds from any investor without verifying their credibility. This can lead to legal complications, investor misalignment and reputational damage. A financial expert conducts due diligence on the investors by verifying their background, checking their past investments, legal disputes and business reputation. They also ensure the investor’s vision aligns with the goals of the company. They negotiate favourable terms and protect the company from unfair terms, excessive control or unfavorable exit clauses. By securing credible investors businesses can build strong and long-term financial partnerships.
• Tax Planning to reduce liabilities: Many companies overlook tax planning during fundraising. This leads to heavy tax liabilities on raised capital, failure to claim exemption and angel tax issues under Sector 56 (2)(viib). A financial expert ensures the funds are raised in a way that reduces the tax burden of the business. The expert advises businesses on claiming exceptions if any. To avoid Angel Tax issues, the financial professional structures the investment to comply with DPIIT. With proper tax planning, businesses can retain more capital and minimize their financial stress.
• Strong Investor Pitch: Many businesses fail to present a compelling case to investors, leading to funding rejections. The common issues include weak business model presentation, lack of financial clarity and unrealistic revenue projections. A financial expert develops a professional investment pitch covering business vision, financials and growth strategy. They ensure investors get clear insights into past performance, revenue models and profit potential. The expert also helps businesses handle due diligence queries with confidence. A well-prepared pitch increases the chance of securing investments quickly.

Raising funds is a complicated process for every business including startups and mistakes in fundraising can cost businesses heavily in terms of fines, legal issues and lost investor trust. A professional financial expert plays an important role in ensuring that fundraising is legally compliant, strategically planned and financially optimized.

FAQs

1. What is the fundraising compliance audit process in India?
Fundraising compliance audit process India involves reviewing a business or NGO’s adherence to legal tax, and regulatory needs under SEBI, FEMA, FCRA, Companies Act, and Income Tax Laws, ensuring lawful fundraising practices and financial transparency.

2. How do financial experts help businesses in fundraising compliance?
A financial expert helps businesses in fundraising compliance by ensuring adherence to FEMA, SEBI, FCRA, Companies Act and tax regulations. The expert structures deals conducts due diligence and optimizes fund utilization to avoid legal and financial risks.

3. What is the due diligence process in fundraising?
The due diligence process in fundraising done by the financial expert involves evaluating the business’s financial health, legal compliance, investor background, fund utilization plans and risk factors to ensure transparency, reduce risks and secure credible investments.

4. Why choosing the right fundraising method is important for every business?
Choosing the right fundraising method is important for every business to ensure optimal capital structure, reduce financial risks, maintain control, comply with regulations and be in sync with long-term growth objectives. It is advisable to work with a professional financial expert who will help businesses choose the right fundraising method.