Startups can raise 100% funds from foreign investors

The government has for the first time allowed startups to raise 100 per cent of their funds from foreign venture capital investors (FVCI) but with some riders.

Startups can issue equity or equity-linked instruments or debt instruments to FVCI against receipt of foreign remittance, according to the consolidated foreign direct investment (FDI) policy for 2017, released by the Department of Industrial Policy and Promotion (DIPP) on Monday. “In addition, startups can issue convertible notes to person resident outside India (subject to certain conditions),” it said.

A person resident outside India (other than citizens/entities of Pakistan and Bangladesh) will be permitted to purchase convertible notes issued by an Indian startup company for an amount of Rs 25 lakh or more in a single tranche. Citizens from Bangladesh and Pakistan can invest only under the government route.

Non-resident Indians (NRIs) can also acquire convertible notes on non- repatriation basis, said DIPP.

 “A startup company engaged in a sector where foreign investment requires government approval may issue convertible notes to a non-resident only with approval of the government,” it said, adding that the startup issuing convertible notes would be required to furnish reports as prescribed by the RBI.

The government is focusing on startup companies to promote job creation and innovation.

FDI inflows to India have nearly doubled over the past decade to $42 billion or 1.9 per cent of GDP as of FY17. The FDI inflows into India are expected to rise to 2.5 per cent of the country’s GDP, UBS India Securities had said in a report last week.

Indians living in Nepal and Bhutan as well as citizens both the countries are permitted to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.

The DIPP compiles all changes in FDI policy, issued from time to time, into a single document to make it simple and easy for investors to understand. The NDA government has decided to update the document every year whereas there was no fixed schedule earlier.

The government has announced a host of reforms in FDI policy in more than a dozen sectors, including defence, civil aviation, construction and news broadcasting in last one year.

Foreign investments are considered crucial for India as the requirement has been estimated at around $1 trillion for overhauling only seaports, airports and highways. The FDI inflows also help improve the country’s balance of payments and strengthen the rupee against the US dollar.

“The government has put in place a policy framework on FDI, which is transparent, predictable and easily comprehensible,” the policy statement said.

The DIPP has also decided to take feedback from companies on the initiatives of the states to improve business climate for investors (or ease of doing business) from October, according to the department’s secretary Ramesh Abhishek.