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Foreign Direct Investment in Startups


Foreign Direct Investment: A Foreign Direct Investment (FDI) is based on controlling ownership in a business in one country by an entity in another country. FDI provides a situation wherein both the host and the home nations derive some benefits. The home countries take advantage of the massive markets opened by industrial development whereas the host countries get to attain resources extending from financial, capital, entrepreneurship, technological know-how and managerial skills, which assist it in supplementing its domestic savings and foreign exchange.

India’s Foreign Investment is an endorsement of its status as a preferred investment destination amongst global investment. India’s stable economic liberalization and its encirclement of the global economy have been key factors in fascinating FDI. To promote Foreign Direct Investment, the government has put in place an investor-friendly policy. Most sectors are open for 100% FDI under the Automatic Route, except for a few which are under the negative list.

Startups: A Startup is a commercial undertaking that is a newly developed business venture with objectives to meet a marketplace needs, necessities, or problems by creating a sustainable business model connected with the products, services, processes or platforms. It is a company that is in the first stage of its operations. These companies are often funded by their business founders initially.

The Government of India has commenced the “Startup India Scheme” to boost innovation and technology-oriented businesses in India. Further, under the scheme, the startups are delivered with numerous benefits such as certain tax exemptions, fast track and up to 80% rebate in patent submissions and investment through Alternate Investment Funds and other Government schemes of India.

Startups are companies or ventures focused on a single product or service that the founders want to bring to market. These companies typically don’t have a fully developed business model and, more crucially, lack adequate capital to move onto the next business phase. To be recognized as a startup, the following criteria are required to be met:

  • Period of existence and operations should not exceed 10 years from the date of incorporation or formation.
  • Shall be incorporated as a Private Limited Company, Partnership Firm or a Limited Liability Partnership.
  • Since its incorporation, the startup should have an annual turnover that shall not be exceeding Rs. 100 crores for any of the financial years.
  • Should work towards development or improvement of a product, process or service.
  • Need for a scalable business model with high potential for the creation of wealth and employment.

An entity constituted by splitting up or reconstructing an already existing business shall not be treated as a Startup business.

Investment by Foreign Venture Capital Investors (FVCIs)
In accordance with such benefits and to give a boost to foreign investment in the startups, the Department of Industrial Policy and Promotion under the guidance of the Ministry of Commerce and Industry, Government of India has allowed FVCIs to subsidize up to 100% of the capital of startups regardless of the sector in which it is involved, under the automatic route.

The investment can be made either in equities or in equity-linked instruments or debt instruments issued by the startups and if a startup is formed as a partnership firm or an LLP, the investment can be made in the form of capital or through any profit-sharing agreement which is decided mutually by the partners.

Issuance of Convertible Notes
Additionally, to the investment by FVCIs, startups can issue convertible notes to a person resident outside India subject to the following conditions:

  1. A person resident outside India,
    • Other than those individuals who are citizens of Pakistan or Bangladesh; or
    • An entity which is registered or incorporated in Pakistan or Bangladesh;

    may purchase convertible notes allotted by an Indian startup company for an amount of twenty-five lakh rupees or more in a single tranche.

  1. A startup company engaged in a sector wherein investment by a person resident outside India requires Government approval shall issue convertible notes to a person resident outside India only with such approval.
  1. A startup company that issues convertible notes to a person resident outside India shall receive the inward remittance of consideration through banking channels or via a debit to the NRE/ FCNR (B)/ Escrow account maintained by the concerned person according to the Foreign Exchange Management (Deposit) Regulations, 2016.
  1. A Non-Resident Indian (NRI) or an Overseas Citizen of India (OCI) may acquire convertible notes on a non-repatriation basis according to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, which states that:
  • The amount of consideration must be paid as inward remittance from abroad from end to end banking channels or out of funds detained in NRE/ FCNR (B)/ NRO account according to upheld in compliance with the Foreign Exchange Management (Deposit) Regulations, 2016.
  • Such investment shall be deemed to be domestic investment at par with the investment made by resident citizens.

At AJSH, we assist our clients in setting up their businesses in India and ensuring they comply all statutory requirements in a timely manner including RBI compliances for a FDI. If you have any questions or wish to know more about FDI in Startups, kindly contact us.


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