Start-ups can now raise 100% FDI from venture capitalists

The government released a consolidated FDI policy on Monday, including start-ups for the first time and empowering them to raise 100% foreign direct investment from overseas venture capitals registered with Sebi.

“A Sebi registered Foreign Venture Capital Investor (FVCI) may contribute up to 100% of the capital of an Indian company engaged in any activity mentioned in Schedule 6 of Notification No. FEMA 20/2000, including start-ups irrespective of the sector in which it is engaged, under the automatic route,” the policy document said.

An FVCI is an investment vehicle that backs early-stage companies, providing the required initial capital, in return for a stake in the venture.

It said the start-ups can issue equity or equity linked instruments or debt instruments to FVCI against receipt of foreign remittance, according to the FEMA regulation.

Convertible notes too

In addition, start-ups can issue short term debts that can be converted into equity (convertible notes) to person resident outside India subject to certain conditions.

It also said that a person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered/incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian start-up company for Rs 25 lakh or more in a single tranche.

A ‘start-up company’ was defined as a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with the government notification.

The policy, however, said that a start-up company engaged in a sector where foreign investment requires government approval may issue convertible notes to a non-resident only with the approval of the government. The consolidated FDI policy will come into effect immediately.