As per MCA Circular published yesterday, all companies are required to disclose data related to cash holding and use between 8 Nov 2016 & 30 Dec 2016 in prescribed format.
A copy of the circular is pasted below:
New Delhi, the 30th March, 2017
Another funding option opens up for startups after RBI’s announcement for permitting Startup enterprises to access loans under ECB framework.
RBI via its Circular A.P. (DIR Series) Circular No. 13 dated 27 October 2016 has permitted startups to raise external commercial borrowings (ECBs) of up to USD 3 million in a financial year in any freely convertible currency or in Indian Rupees (INR) or a combination thereof. Under this, Funds can be raised with a minimum maturity of 3 years. Click here to download the Circular.
Opening up ECBs will provide startups one more avenue to access capital without diluting promoters’ equity and will encourage foreign lenders to infuse funds into Indian startups. Borrowing in foreign currency will also reduce the cost of conversion and will also be beneficial for startups that make expenses in foreign currency.
What are External Commercial Borrowings (ECBs)
- ECB is an instrument used to facilitate the access to foreign money by Indian companies.
- ECBs are any kind of funding other than Equity funding. If foreign money is used to finance the Equity Capital, it would be classified as Foreign Direct Investment (FDI). ECB should satisfy ECB regulations stipulated by the Government and regulatory agencies such as RBI.
- ECBs include commercial bank loans, buyers’ credit, and suppliers’ credit, bonds, credit notes, asset backed securities, etc.
Highlights of this circular are:
- Eligibility: An entity recognised as a Startup by the Central Government as on date of raising ECB.
- Amount: The borrowing per Startup will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both.
- Maturity: Minimum average maturity period will be 3 years.
- Recognised lender: Lender / investor shall be a resident of a country who is either a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies. Overseas branches/subsidiaries of Indian banks, overseas wholly owned subsidiaries/joint ventures of Indian companies will not be considered as recognized lenders under this framework.
- Instruments: The borrowing can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares.
- End-use: For any legitimate business expenditure of the borrowing Startup.
- Conversion into equity: Subject to regulations applicable for foreign investment in Startups, conversion of ECBs into equity is freely permitted.
- Security & guarantee: Choice of security to be provided to the lender is left to the borrowing entity. Residents as well as non-resident(s) are allowed to issue corporate or personal guarantee.
- Applicability of other provisions related to ECBs: Provisions pertaining to parking of ECB proceeds, reporting to relevant authorities, conversion of ECB into equity, etc will be applicable as per the ECB framework announced vide P. (DIR Series) Circular No. 32 dated November 30, 2015. However, restrictions on leverage ratio and ECB liability to Equity ratio will not be applicable for Startups.
Liberalised provisions for Startups:
- No prescription of cost-ceiling or restriction on the end use of the funds raised. Such conditions are applicable to ECBs by entities across most other sectors.
- Restrictions on leverage ratio and ECB liability to Equity ratio, which are applicable to other ECB borrowers, are not be applicable for Startups.
To qualify for issuing ECBs, Startups have to fulfill the definition laid down by DIPP via G.S.R 180(E) dated 17Feb16. A private limited company is recognized as start-up up to five years from the date of its incorporation if its turnover for any of the financial years has not exceeded Rs.25 crore, and is works towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
Read more on whether your startup meets criteria stipulated by DIPP here: http://advantage-consulting.in/does-your-startup-qualify-for-tax-incentives-under-startup-india-initiative-of-the-government/
Disclaimer: Our articles are available for educational purposes only as well as to give you general information and a general understanding of the regulations. It is not intended to be comprehensive nor does it constitute legal advice. While we aim to ensure that the content is current and accurate, we do not provide representation or warranty regarding the accuracy, completeness or correctness of information contained herein.
Funding of startups by way of loans becomes easier after exemption provided via amendment of Companies Acceptance of Deposits Rules, 2016.
The MCA has exempted any advance of over Rs.25 lakh to a Start-up from being treated as deposit, provided that the person gives money in the form of convertible note and in one go, via notification dated 29Jun2016. This step will now make it easier and cheaper for startups to raise funding. Click here to download the notification.
As per this notification, Start-up Companies can now issue convertible notes (convertible or repayable within 5 years of issue) for over 25 lakhs received from a person in one tranche.
Before this amendment, according to the Companies Act of 2013, money received from any person by companies (including start-ups) for over 365 days, was considered as a deposit, and the companies had to follow the stringent Acceptance of Deposit Rules, thereby making this mode of fundraising unviable.
Another amendment in the same notification is that the limit of acceptance of deposits by a private limited company from its members/shareholders has also been increased from 25% to 35% of its aggregate paid up capital and free reserves of the company.
Convertible notes are defined as instruments evidencing receipt of money initially as debt, and are repayable at the option of the holder or convertible into such equity shares of the start-up company upon occurrence of specified events and as per terms and conditions agreed to and indicated in the instrument.
To qualify for issuing convertible notes, Startups have to fulfill the definition laid down by DIPP via G.S.R 180(E) dated 17Feb16. A private limited company is recognized as start-up up to five years from the date of its incorporation if its turnover for any of the financial years has not exceeded Rs.25 crore, and is works towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
Read more on whether your startup meets criteria stipulated by DIPP here.
The Startup India portal http://startupindia.gov.in and mobile app were launched earlier this week. Startup entrepreneurs can use this portal for:
1. Obtaining Information: on various notifications/ circulars issued by various Government ministries/ departments, towards creation of a conducive ecosystem for Startups.
2. Obtain advice vis Knowledge Hub: Knowledge hub that will work as a hub ‘n spoke model with Governments, VCs, Angel Funds, Incubators, Mentors, etc. Presently lists of recognised incubators and SEBI registered investment funds has been uploaded.
3. Apply for Startup Recognition: apply and obtain recognition as a “Startup” to avail various benefits listed in the Startup India Action Plan. Real time recognition certificate is provided to Startups on completion of the application process. Forms and FAQs for obtaining registrations, as well as guidelines for incubators are all available on the portal.
FAQs are quite comprehensive and uploaded on: http://dipp.nic.in/English/Investor/startupindia/FAQs_StartupIndia_30March2016.pdf
The Government has launched the ‘Startup India’ initiative as a part of 19 point Action Plan through which the government aims to empower startups to grow through innovation and design. Amongst many incentives bestowed through this initiative, key ones include exemption from paying income tax on profit for three years, fast-tracking of patent applications, 80% exemption in patent fees, etc.
A notification was issued by DIPP on February 17, 2016 [F. No. 5(91)/2015-BE. I] defining the term ‘startup’ and prescribing the procedure for its recognition and obtaining tax benefits. This notification is summarized as follows.
Definition of an eligible ‘Startup’
An entity shall be considered as ‘startup’:
- Upto 5 years from its date of incorporation / registration,
- If its turnover has not exceeded Rs.25 Crores in any of the previous financial years, and
- It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
Other criteria for a ‘startup’
- Entity means a private limited company, or a registered partnership firm or a limited liability partnership. Such entity cannot be formed by splitting up or reconstruction of an existing business.
- In order to obtain tax benefits an eligible startup shall be required to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification consisting of:
- Joint Secretary, Department of Industrial Policy and Promotion (DIPP),
- Representative of Department of Science and Technology (DST), and
- Representative of Department of Biotechnology (DBT).
- An entity shall be considered to be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property if it aims to develop and commercialize:
- A new product or service or process, or
- A significantly improved existing product or service or process, that will create or add value for customers or workflow.
- Mere act of developing products or services or processes which do not have potential for commercialization, or undifferentiated products or services or processes, or products or services or processes with no or limited incremental value for customers or workflow will not be covered under the definition of a startup.
Procedure and recognition of your startup
The process of recognition as an ‘eligible startup’ shall be through mobile app/portal of DIPP. Startups will be required to submit a simple application with any of the following documents:
- A recommendation (with regard to innovative nature of business), in a format specified by DIPP, from any Incubator established in a postgraduate college in India; or
- A letter of support by any incubator which is funded (in relation to the project) from Government of India or any State Government as part of any specified scheme to promote innovation; or
- A recommendation (with regard to innovative nature of business), in a format specified by DIPP, from any Incubator recognized by Government of India; or
- A letter of funding of not less than 20 per cent in equity by any Incubation Fund/Angel Fund/Private Equity Fund/ Accelerator/Angel Network duly registered with SEBI that endorses innovative nature of the business; or
- A letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; or
- A patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.
Until such mobile app/portal is launched, DIPP make alternative arrangement of recognizing a ‘startup’. Once such application with relevant document is uploaded a real-time recognition number will be issued to the startup.
On subsequent verification, such recognition is found to be obtained without uploading the document or uploading any other document or a forged document, the concerned applicant shall be liable to a fine which shall be fifty per cent of paid up capital of the startup but shall not be less than Rupees 25,000.
The notification comes into force from February 18, 2016 i.e. the date of its publication in the Official Gazette.
Choosing a correct business entity is an important decision to make. The business structure you choose will influence factors such as business operating regulations, tax and reporting requirements, licences, permits and start up expenses. Also remember that your business isn’t necessarily locked into one particular structure, it can be changed as your startup evolves.
Sole proprietorship is an entity owned by a single individual. The main disadvantage with this form of a legal structure is that there is no legal distinction between the proprietor’s personal and business assets. In case the business goes bankrupt, almost all personal assets of a sole proprietor can be attached to pay for liabilities of the business.
Partnership Firm is an entity where two or more [maximum 10 (banking) /20 (others)] individuals coming together to start a business venture with pre-decided share of capital and decision-making powers. One important feature of a partnership is that any liabilities incurred by a partner during the course of business are not limited to his/her share in the partnership firm. Other partners may end up having to end up paying for one partner’s mistakes.
Company is a legal entity separate from its promoters and shareholders. The liability of the shareholders restricted to their share in the equity of the company. A company also has to comply with the highest number of statutory compliances thereby increasing the compliance cost. There are two basic different types – public, private – these are classified by freedom on transfer of shareholding.
Limited Liability Partnership (LLP) this is a fusion between a partnership firm and a company. It combines the advantages of liability that is limited to a partner’s share in business with lower compliance costs and flexibility of working of a partnership firm.
Joint Venture (JV) is a new entity created by two or more existing commercial entities, for a specific purpose for finite time, with both existing ventures exercising control over the JV. This is more like a temporary partnership.
Society / Trust / Section 8 Company are entities registered to carry out charitable activities. Typically these are managed by a central council/board. A host of tax exemptions are available for these kinds of entities, subject to certain conditions.
A business model ascertains how your business makes money. It identifies the services that your customers value and shows how your business will earn revenue from providing these services. Financial statements form a key part of the business model.
The business plan provides the detailed road map of your business. It takes the focus of the business model and builds upon it. It explains the equipment and staff needed to meet the details of the business model. It also explains the marketing strategy of your business, or how your business will attract and retain customers, and deal with the competition. Furthermore, the business plan illustrates the financial stability of your business at a particular point in time, as well as in the forecasted future.
In brief, the business plan supports the business model and explains the strategy needed to achieve the goals of that model.
The business plan is completely dependent upon the business model. The business model explains the flow of money within the company and the business plan the structure needed to obtain that flow of money.
An action plan integrates all of the strategies you have developed in your business plan into a highly organized and prioritised plan of action designed to achieve your stated business goals. It is a step-by-step action-oriented document that helps you start your business without getting overwhelmed or losing control.
MYTH #1: I don’t have to register my business since it is small.
TRUTH: You do!
Registering a new business is a statutory requirement; it has nothing to do with the size or age of your business.
MYTH #2: There are all kinds of government grants and loan subsidies for people who want to start small businesses.
TRUTH: Not really.
Government grants for starting small businesses are usually earmarked for special groups of people or business ideas or particular regions/economic areas of the country. (To get more of an idea about the kinds of grants that are available, read http://www.venturecenter.co.in/funding/)
MYTH #3: Since I am not planning to raise any funding, I don’t need a business plan.
TRUTH: You do!
You need a business plan. It serves as a roadmap and will give you a clear picture about your mission, your budget and strategy for your business.
MYTH #4: My business idea is great and unique. I should get funding right away.
TRUTH: It is not so easy!
A product/ service idea is considered “fundable” only when a test model can prove that consumers will be willing to pay for it. Also, unless your business has a rock solid business plan and expected robust growth ahead, sourcing funding can be a challenge.
MYTH #5: I can worry about financial management and tax planning when I start making profits.
TRUTH: No way!
All businesses need to prioritize financial resources well ahead of time. Growth needs cash. You do not want to discover that the business has run out of cash at a critical time or that certain expenses are not tax deductible under the tax laws after you are neck-deep in your business.