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.