Indian startups to have foreign VC funding without restrictions

Indian startups, mostly fledgling technology ventures, received a shot in the arm on Tuesday with the country's Federal Bank, the Reserve Bank of India, announcing a new policy for the community to access venture capital funding without any restrictions, making it easier for firms to access capital from other countries.

The decision is in line with Prime Minister Narendra Modi's Startup India initiative. Dr Raghuram G Rajan, Governor of the Reserve Bank of India, said that steps will be taken to ease doing business to enable a healthy ecosystem that is conducive for the growth of startups. India is ranked 130 out of 189 countries in the ease of doing business, according to a recent World Bank report.

India is placed third in the world, after the US and the UK, in launching startups; however, the mortality rate of Indian startups is high, with 90 percent of them downing shutters in the initial stages mainly due to a lack of access to funding.

While the startups cannot enter the stock markets and raise funds, the banks, angel investors, and venture capitalists rarely support them by providing funds. As a result, many of them in the ecommerce segment such as Flipkart, Grofers, Mobikon, and Near moved their headquarters to Singapore while others, like Freshdesk and Druva, chose to shift their base to the United States.

"In keeping with the Indian government's Startup India initiative, the bank will take steps to ease doing business and contribute to an ecosystem that is conducive for growth of startups," Dr Rajan said.

"These measures will create an enabling framework for receiving foreign venture capital, differing contractual structures embedded in investment instruments, deferring receipt of considerations for transfer of ownership, facilities for escrow arrangements, and simplification of documentation and reporting procedures," he added, and said that they were also considering whether to allow the startups to issue instruments like convertible notes to foreigners.

Rajan said that he receives scores of representations from entrepreneurs bringing to notice the restrictions imposed on them by the provisions of the Foreign Exchange Management Act (FEMA), and wanted the government to liberalise them. "There is a need to change the policies and the government will come out with its decision soon," he said.

The announcement received widespread support from the entrepreneurs as a majority of them were struggling to find their feet after launching startups.

Founder and CEO of GREX Manish Kumar said that it was good Dr Rajan echoed Modi's view to help improve the ease of doing business for startups in the country.

"These measures will create an enabling framework for receiving foreign venture capital. Startups have only been used to equity as a mode of capital and we believe the RBI initiative will bring in the concept of venture debt which is miserably missing in the ecosystem," he said.

Himanshu Meena, founder and CEO of Parsel, a hyper-local delivery startup providing ready-to-use delivery infrastructure and technology, said that the initiative was extremely refreshing and expected it to help the startup ecosystem in setting up a new enterprise at a much faster rate. "The announcement will help firms like ours gain easy access to capital and the sector is poised to get a great push," he said.

Describing the announcement as "excellent," Mumbai-based Red Ribbon Advisory Services founder Suchit Punnose said the move aimed to enable a friendly startup ecosystem in the country, as with ideas sprouting in every nook and corner of the country, India would see more and more entrepreneurs come to the forefront and take the required risks to run an enterprise.

"Time-consuming procedures such as obtaining licences, reporting procedures, and raising funds required an entrepreneur to run from pillar to post and this will now be eased through the investment framework. These moves will give a fillip to the startup ecosystem and improve the sentiment towards government procedures," Punnose added.