Start-ups can issue equity or equity linked instruments or debt instruments to FVCI (Foreign Venture Capital Investor) against receipt of foreign remittance, as per the Schedule VII of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
In addition, start-ups can issue convertible notes to person resident outside India subject to the following conditions:
(i) A person resident outside India (other than citizen of Pakistan or Bangladesh or an entity which is registered/incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of twenty-five lakh rupees or more in a single tranche.
Explanation: For the
purpose of this Regulation, a ‘startup company’ means a private company
incorporated under the Companies Act, 2013 or Companies Act,1956 and recognised
as such in accordance with notification number G.S.R. 127(E) dated 19th
February, 2019 issued by the DPIIT, Ministry of Commerce and Industry, and as
amended from time to time.
(ii) 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.
Explanation: For the
purpose of this regulation, the issue of shares against such convertible notes
shall have to be in accordance with the Schedule I of the. Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019, which is as follow
A start-up company issuing
convertible notes to a person resident outside India shall receive the amount
of consideration by inward remittance through banking channels or by debit to the NRE/
FCNR (B)/ Escrow account maintained by the person concerned in accordance with
the Foreign Exchange Management (Deposit) Regulations, 2016. Repayment
or sale proceeds may be remitted outside India or credited to NRE/ FCNR (B)
account maintained by the person concerned in accordance with the Foreign
Exchange Management (Deposit) Regulations, 2016
Provided that an escrow
account for the above purpose shall be closed immediately after the
requirements are completed or within a period of six months, whichever is
earlier. However, in no case continuance of such escrow account shall be
permitted beyond a period of six months.
(iii) NRIs may acquire
convertible notes on non-repatriation basis in accordance with Schedule IV of
the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.
(iv) A person resident
outside India may acquire or transfer, by way of sale, convertible notes, from
or to, a person resident in or outside India, provided the transfer takes place
in accordance applicable pricing guidelines under FEMA. Prior approval from the
Government shall be obtained for such acquisitions or transfers in case the startup
company is engaged in a sector which requires Government approval.
(v) The startup company
issuing convertible notes shall be required to furnish reports as prescribed by
the RBI.
Reporting
Requirements: AS per Foreign Exchange
Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations,
2019
The
reporting requirement for any Investment in India by a person resident outside
India shall be as follows:
(1) Form Foreign Currency-Gross
Provisional Return (FC-GPR): An Indian company issuing equity
instruments to a person resident outside India and where such issue is reckoned
as Foreign Direct Investment, defined under the rules, shall report such issue in Form FC-GPR, not later than thirty days from the
date of issue of equity instruments.
(2) Annual Return on
Foreign Liabilities and Assets (FLA): An Indian Company which has received FDI or
an LLP which has received investment by way of capital contribution in the previous year including the current year, shall
submit form FLA to the Reserve Bank on or before the 15th day of July of each year.
Explanation: Year
for this purpose shall be reckoned as April to March.
(3)
Form Foreign Currency-Transfer of Shares (FC-TRS):
(a)
Form FCTRS shall be filed for transfer of equity instruments in accordance with
the rules, between:
i.
a
person resident outside India holding equity instruments in an Indian company
on a repatriable basis and person resident outside India holding equity
instruments on a non-repatriable basis; and
ii.
a
person resident outside India holding equity instruments in an Indian company
on a repatriable basis and a person resident in India,
The
onus of reporting shall be on the resident transferor / transferee or the
person resident outside India holding equity instruments on a non-repatriable
basis, as the case may be.
Note:
Transfer of equity instruments in accordance with the rules by way of sale between a
person resident outside India holding equity instruments on a non-repatriable
basis and person resident in India is not required to be reported in Form
FC-TRS.
(b)
Transfer of equity instruments on a recognised stock exchange by a person
resident outside India shall be reported by such person in Form FC-TRS.
(c)
Transfer of equity instruments prescribed in Rule 9(6) of the Rules, shall be
reported in Form FC-TRS on receipt of every tranche of payment. The onus of
reporting shall be on the resident transferor / transferee.
(d)
Transfer of 'participating interest / rights' in oil fields shall be reported
Form FC-TRS.
The
form FCTRS shall be filed within sixty days of transfer of equity instruments
or receipt / remittance of funds whichever is earlier.
(4) Form Employees'
Stock Option (ESOP): An
Indian company issuing employees' stock option to persons resident outside India
who are its employees / directors or employees / directors of its holding
company / joint venture / wholly owned overseas subsidiary / subsidiaries shall file Form-ESOP, within 30 days
from the date of issue of employees' stock option.
(5) Form Depository
Receipt Return (DRR): The
Domestic Custodian shall report in Form DRR, the issue / transfer of depository
receipts issued in accordance with the Depository Receipt Scheme, 2014 within 30
days of close of the issue.
(6) Form LLP (I): A Limited
Liability Partnerships (LLP) receiving amount of consideration for capital
contribution and acquisition of profit shares shall file Form LLP (I), within 30 days from the date of receipt of the
amount of consideration.
(7) Form LLP (II): The
disinvestment / transfer of capital contribution or profit share between a
resident and a non-resident (or vice versa) shall be filed in Form LLP(II) within 60 days from the date of receipt of funds.
The onus of reporting shall be on the resident transferor/transferee.
(8) Downstream Investment
a.
An
Indian entity or an investment vehicle making downstream investment in another
Indian entity which is considered as indirect foreign investment for the
investee Indian entity in terms of the Rules,
shall notify the Secretariat for Industrial Assistance, DPIIT within 30 days of
such investment, even if equity instruments have not been
allotted, along with the modality of investment in new / existing ventures
(with / without expansion programme).
b.
Form
DI:
An Indian entity or an investment Vehicle making downstream investment in
another Indian entity which is considered as indirect foreign investment for
the investee Indian entity in terms of Rule 22 of the Rules shall file Form DI with the Reserve Bank within
30 days from the date of allotment of equity instruments.
(9) Form Convertible Notes (CN):
a.
The
Indian start-up company issuing Convertible Notes to a person resident outside
India shall file Form CN within 30 days of
such issue.
b.
A
person resident in India, who may be a transferor or transferee of Convertible
Notes issued by an Indian start-up
company shall report such transfers to or from a person resident
outside India, as the case may be, in Form CN
within 30 days of such transfer.
Provided,
the format, periodicity and manner of submission of such reporting shall be as
prescribed by Reserve Bank in this regard.
Provided
further that unless otherwise specifically stated in these regulations all
reporting shall be made through or by an Authorised Dealer bank, as the case
may be.
Delays in reporting
The person / entity responsible for filing the
reports provided in Regulation 4 above shall be liable for payment of late
submission fee, as may be decided by the Reserve Bank, in consultation with the
Central Government, for any delays in reporting
**************************************************************************
Disclaimer-
Information provided here is on the basis of personal research and provisions
as per the act and information existing at the time of preparation. It is not a
professional advise and information is subject to change without any notice.
Author assumes no responsibility for the consequences of use of Information
provided. This in only a knowledge sharing initiative and author has no
intended to accost any profession and businesses
