What you need to know about compliance for startups before and after they get funds?
Obtaining funding is essential for any new business that wishes to broaden its scope of products and resources. One component is pitching for funding and negotiating a deal, but founders often find the legal side to be difficult to navigate.
Startups are companies that want to make new products or offer useful services to the public on a public platform. Startups today use technology that is up-to-date to make their products or services.
Startup funding helps business owners grow quickly and reach their goals by giving them the money they need at different stages of development. To get more money from outside sources, you have to meet the requirements for pre-funding for startups and post-funding for startups.
A start-up is any business that:
- Registered under the Private Limited Company Act of 2013, the Partnership Act of 1932, the Limited Liability Partnership Act of 2008, and the One Person Company Act of 2013. ( Companies act, 2013).
- Not more than 10 years after it was founded.
- With sales that don't go over INR 100 crores in any given year.
- Working on coming up with new ideas, making a new product, or making an existing product or service better
- Working on a business model that can be scaled up and has a high chance of generating and creating jobs.
Investors typically contribute financial resources in exchange for equity, which indicates that they obtain a proportionate share of your ownership rights in the firm as well as a percentage of the company's potential future revenues.
When an Indian business or company receives funds for the purpose of carrying out its activities, there are a great number of funding compliances that need to be ensured in order to carry out the transaction successfully.
The first item that needs to be decided is how the funds will be managed; specifically, whether they will be considered equity capital, debt, or convertibles. The organization's current structure as well as its goals for the future should be taken into consideration when selecting the appropriate form for the company. The compliances are also different in each of the cases, and it is necessary to conduct an analysis of them in terms of the amount of money and time that is required.
For example, if a company receives investment in the form of share capital, the company is required to allot shares to its investors in exchange for that funding. This gives the investors a portion of the company's ownership. Such an allocation of shares can be done in a number of different ways. Various approaches are available. However, one must determine which approach to go with by taking into account the type of investor as well as the cost associated with compliance requirements.
StartupCA is able to assist you with all of the necessary Funding Compliances, regardless of whether the inflow of funds is domestic or foreign and irrespective of whether you wish to treat the same as Capital, Debt, or Convertibles.
Compliances for startup funding
Pre-funding for startups and post-funding for startups requirements must be met by Startups seeking external funds. This proves the authenticity of your business, which is essential for the security of your investors.
Compliances before funding
Here is a list of the things that startups must do before they can get funds from outside sources.
Regulatory Compliance for Registration
In accordance with the Companies Act of 2013, you are required to finish the registration process. This provides you with a legitimate standing when it comes to the funding process.
Before you may receive funds, you are required to hold a board meeting in order to complete the remaining compliance requirements. When it comes time to provide initial funding for new businesses, the investors perform the necessary due diligence to ensure that their money will not end up in the wrong hands and be wasted. The following topics are discussed at the board meeting:
- Prepare the report on the company's valuation to provide during the startup fundraising process.
- Create a list of potential new investors for the pre-funding of startup companies.
- Determine the definitive length of the offer time.
- Create a new bank account at one of the specified financial institutions.
- Complete the draught of the offer letter so it may be sent.
- Make sure that the date, time, and location of the extraordinary general meeting are set in stone (EGM)
Conduct the Extraordinary General Meeting, which has been called for.
The EGM resolution shall be valid for a duration of twelve months.
After completing all compliance requirements with the Registrar of Companies, you are ready to obtain startup capital from outside sources.
Compliances After Funding
After completing the pre-funding compliance process for startups, you must initiate the post-funding compliance phase. The compliances after funding are as follows:
After receiving the application fee, a second meeting is convened to allot and distribute shares. The shares must be allocated to the investors within sixty days of investment receipt. Within thirty days of allotment, a return of allotment must be filed with the registrar of companies.
Share Certificates Should Be Issued
The funds raised by startups cannot be used until the issuance of share certificates, which must take place within sixty days of the distribution of shares. If the certificate is delayed for more than sixty days, the investors are entitled to collect the cash that they contributed at the time the business was funded.
Compliances with Regard to Funding for Indian Companies
At StartupCA, our professional people offer comprehensive consulting services about the treatment of funds to be infused from all angles of view.
Rights Issue of Shares
When more funds are being received from existing shareholders of the company, it is simple to use this approach, as it may be simply accepted. The rights issue of shares is the process that requires the least amount of time and effort, has the lowest possible cost, and is easiest to comply with.
Preferential Allotment or Private Placement of Securities
This approach is one that may be taken in the event that money are obtained from a select group of person(s) other than the shareholders already in place. There is a significant amount of documentation involved, including the valuation of shares. Our staff, who are experts in this field, are able to assist you in navigating these processes in an effortless and uncomplicated manner.
Issue of Debentures or Convertibles
Depending on the long-term goals of both the investor and the company, as well as the stage of the company's growth, the terms of repayment, and the ability for repayment, a company may also choose to raise capital by issuing debentures or convertibles. The method of Private Placement of Securities was chosen as the process to follow.
RBI Compliances on foreign funds
When money comes into India in the form of share capital from anywhere else in the world, the reporting process goes through two stages. It requires the submission of a "Advance Reporting Form" and a "FC-GPR" form within the allotted amount of time, in addition to a "Annual Reporting" of the monies that were received throughout the year.
RBI Compliances on External Commercial Borrowings
If such an external borrowing were to take place, a number of RBI laws and FEMA norms would come into play. Commercial loans obtained by an Indian borrower from non-resident lenders are referred to as ECBs. These loans might take the form of bank loans, buyers' credits, suppliers' credits, and shareholder's loans.
Advisory on Funding Compliances
StartupCA offers comprehensive advisory services, including the valuation of shares for the purpose of allotment, the determination of the method of valuation and funding that is most suitable, and guidance on RBI and MCA Compliances. These services ensure that your company is in compliance with the law and does not make any legal violations.