New fund raising norm for start-ups

Deposit amount can equal investor's stake, won't impact his holding as it is a loan

Easing the process of raising funds for start-ups, the ministry of corporate affairs has allowed these companies to raise deposits from their shareholders. This will be over and above the stake one holds in the start-up.

Before the government amended the rules under the Companies Act to this effect, only limited liability partnerships could avail of this.

The Companies Act recognises an entity as a start-up if its annual turnover for any of the financial years since incorporation is less than Rs 25 crore (Rs 250 million).

The deposit could go up to stakeholders’ contribution to the paid-up capital. Since deposits are loans, these would not impact shareholders' stake.

The amendment to the rules is part of a recent efforts by the government to make life easier for start-ups.

The ministry has also amended the rules on exemptions under the Companies Act, sparing start-ups from filing cash flow statements.

These companies will only have to file profit-loss statements.

The ministry has also brought down the number of required board meetings in a year to two, from the earlier four.

Also, according to an amendment in the rules, a start-up has to submit its annual returns vetted by a company secretary or a director. Earlier, only a company secretary could do so.

And, on Friday, the government notified provisions for fast-track resolution of insolvency proceedings in such entities.

Proceedings under the code in this regard are supposed to be completed in 90 days.

According to industry data, about 95 per cent of start-ups are unsuccessful and wind down within two year of starting operations.

Photograph: Parivartan Sharma/Reuters