Just weeks after the government launched its Startup Action Plan, the Reserve Bank of India’s (RBI) move to enable easy access of foreign funds has provided cheer to the tech startup industry. The sector was waiting for a positive move of this nature.
“Venture capitalists are important investment channels in developed countries. However, in a country like India it is at a very nascent stage. Hence it is important for the government to review the policies on a regular basis where the landscape is changing rapidly and to ease investment restrictions in India to compete with present startup investment friendly countries like Israel and Singapore,” says Swati Gupta, CEO and founder of Industrybuying.com.
According to startups, enabling online submission of A2 forms on the basis of form alone or with supporting documents depending on the nature of remittance will make things easier and streamline the process. “We think it’s a fantastic idea to allow startups to access rupee loans under external commercial borrowing (ECB) framework. This will create a mature lending environment. At the moment, India has only two venture debt funds which are not enough to satiate the demand. Opening up ECB will provide one more avenue to startups to access capital without diluting too much of promoters equity,” adds Gupta.
A report released by VCCEdge, the research platform of VCCircle, says that VC funding in India was $5.4 billion last year whereas it was just $2.3 billion in 2014. However, most of the Indian leading startups have either established themselves abroad or are planning to go global even though they are headquartered in India. This step that the startups resort to have always been in question and often considered as a move of desperation to raise foreign funds.
The measures introduced by RBI in its policy statement aims towards encouraging foreign investors to invest in homegrown startups. Though the startup ecosystem is extremely happy with RBI’s move, they don’t think that this move will stop them from going global because their decision to expand worldwide has very little to do with raising funds.
For instance, Samar Singhla, CEO and co-founder of Jugnoo agrees that RBI even considering to relax and liberalise these norms is a game changer in itself, but this does not mean that startups will stop going to abroad to establish themselves there because global expansion has more to it than raising funds. “By the time a startup even decides to go global it means that they are already big enough to afford that, so it is not going to completely stop startups from moving to abroad,” adds Singhla.
Albinder Dhindsa, co-founder and CEO of Grofers, says, “Global expansion mainly happens when you want to feature at a particular time to the global public market. And then the listing criteria in India is probably a little tougher than elsewhere.
So these are the main factors that calls for a global expansion. Overall I think what RBI has spoken is fairly healthy for the ecosystem. They are definitely in the right direction and we are hoping to see more such changes in the future.”
The regulator stated in its statement last week that the new framework will help investors from overseas to sell their stakes in Indian startups, providing VC funds an easier exit route. Startups will now also have the liberty to file transactional reports over the internet with eased rules governing share transfer transactions, according to the statement.
Further, the report mentioned that the central bank will allow startups to access rupee loans from eligible lenders under the external commercial borrowing (ECB). In order to help startups with attracting foreign direct investment (FDI), RBI said that it would facilitate the issuance of financial instruments like the convertible notes.
Also, in case of transfer of ownership, the regulator will permit receipt of the consideration amount on a deferred basis up to a period of 18 months. It also said that RBI is also working towards issuing of shares without cash payment through sweat equity or against any legitimate payment owed by the company, the remittance of which does not require any permission under the Foreign Exchange Management Act (Fema).
The central bank will also aim at building a penalty structure into the regulations to simplify the process for dealing with delayed reporting of transactions related to FDI. Under
Fema, notifications/circulars will be issued shortly. Moreover, electronic reporting of investment and subsequent transactions will be made on the e-Biz platform only and submission of physical forms will be discontinued on February 8.
“RBI has rightly recognised that MSMEs and startups will benefit far more by making debt capital available at scale, and easing up capital controls for genuine business needs. It is encouraging to see the government’s commitment to
Startup India getting reinforced through RBI’s announcement,” says Alok Mittal, founding member of the Indian Angel Network and the CEO of Indifi Technologies.