Fundraising Compliances in India

Simplifying Fundraising, Ensuring Compliance—Your Gateway to Legal Success in India!

Fundraising for Startups in India

Fundraising compliances in India involve adhering to various legal, regulatory, and tax frameworks to ensure that funds are raised lawfully and transparently. These regulations vary depending on the type of entity raising funds, the mode of fundraising, and the nature of the investors involved.

Key Compliance Requirements for Fundraising in India

  1. Companies Act, 2013 (For Private Limited Companies)
  • Share Issuance Compliance:
    • Private placements require approval by shareholders through a Special Resolution under Section 42 and PAS-4 and PAS-5 forms must be filed.
    • Return of Allotment (PAS-3) must be filed within 30 days of allotment.
  • Valuation Report:
    • Valuation must be conducted by a Registered Valuer for the issuance of shares.
  • Shareholder Agreements:
    • Proper Shareholder Agreements (SHAs) should be drafted to protect investor rights.
  • Foreign Direct Investment (FDI):
    • Foreign investments must comply with FDI policies and be reported through FC-GPR and FC-TRS forms under the FEMA regulations.
  1. Securities and Exchange Board of India (SEBI) Regulations
  • For Listed Companies:
    • Compliance with SEBI (ICDR) Regulations for issuing securities.
    • Follow guidelines under SEBI (LODR) Regulations, 2015 for disclosures and investor protection.
  • For Venture Capital Funds (VCFs) and Alternative Investment Funds (AIFs):
    • Register with SEBI under AIF Regulations, 2012.
    • Maintain reporting and disclosure norms as mandated by SEBI.
  1. Foreign Exchange Management Act (FEMA), 1999
  • Foreign Investments:
    • Obtain approvals if required under FDI Policy.
    • File Form FC-GPR for share allotments and Form FC-TRS for transfers between residents and non-residents.
    • Compliance with sectoral caps and restrictions.
  • External Commercial Borrowings (ECB):
    • Follow ECB guidelines and obtain RBI approvals, if necessary, for debt fundraising.
  1. Income Tax Act, 1961
  • Angel Tax Compliance:
    • Funds raised from angel investors must comply with Section 56(2)(viib) to avoid angel tax.
    • Startups registered under DPIIT can claim an exemption from this tax.
  • Tax Deducted at Source (TDS):
    • TDS compliance on interest payments or dividends distributed to investors.
  • Advance Pricing Agreements (APAs):
    • Applicable for international transactions to avoid transfer pricing issues.
  1. Startups and DPIIT Registration
  • Startup India Program:
    • Startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) can benefit from tax exemptions and simplified compliance.
    • Eligible startups are exempted from angel tax and allowed to raise funds more easily.
  1. Fundraising Through Crowdfunding Platforms
  • Compliance with SEBI Regulations related to Alternative Investment Funds (AIFs) if funds are raised through crowdfunding platforms.
  • Adherence to KYC (Know Your Customer) and AML (Anti-Money Laundering) norms.
  1. Private Equity and Venture Capital Regulations
  • SEBI (AIF) Regulations, 2012 apply to Venture Capital and Private Equity funds.
  • Proper documentation of Limited Partner Agreements (LPAs) and investment structures is mandatory.
  1. CSR (Corporate Social Responsibility) Compliance
  • Companies raising funds for social impact or charitable purposes need to comply with Section 135 of the Companies Act, 2013 regarding CSR contributions and reporting.

Reporting and Disclosure Requirements

  1. Filing with Registrar of Companies (ROC): File annual returns and updates on shareholding.
  2. Statutory Audits: Regular audits to verify compliance.
  3. Investor Reports: Provide periodic disclosures to investors as per shareholder agreements.
  4. RBI and SEBI Reporting: Submit compliance reports to RBI (for FDI) and SEBI (for public offerings or AIFs).

Conclusion

Fundraising in India requires meticulous planning and financial compliance with multiple laws to avoid penalties and ensure smooth operations. Various Statutory Guidelines for fundraising in India need to be followed. Therefore, consulting good financial and legal consultants to handle these regulations is highly recommended.