India in recent months has taken various steps to facilitate investments in the startups sector. The RBI in February this year relaxed the foreign direct investment (FDI) norms for start-ups.
The startups will be allowed to raise funds commercially (ECBs), in Indian rupees, any other convertible currency or a combination of both.
“The borrowing can be in the form of loans or non-convertible, optionally convertible or partially convertible preferred shares,” reads a statement from RBI. The money raised can be used for any expenditure connected with the business of the company.
The RBI, however, specified that ECBs can only be raised from a country which is either a member of the Financial Action Task Force (FATF) or FATF-Style Regional Bodies. The guidelines only allow foreign banks to act as lenders, while excluding overseas branches, the subsidiaries of Indian banks, overseas wholly owned subsidiaries, or the joint ventures of Indian companies.
Interestingly, the Indian banking regulator did not fix any interest rate cap on these borrowings; typically RBI specifies the maximum cost financial institutions can charge when lending money via ECBs.
Earlier in January, Prime Minister Narendra Modi had unveiled a slew of measures to create incentives in the sector. The government has also relaxed the procurement norms for them.
According to a Nasscom report, the number ofstartups is expected to double to 10,500 by 2020 and provide jobs to over 200,000 people. A recent Labour Bureau survey said India’s unemployment rate shot up to a five-year high of 5% in 2015-16. More worryingly, World Bank research says increasing automation and the adoption of technology threatens 69% of the jobs in the country. Startups are expected to open new avenues for job creation and take more people in the organized workforce.