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RBI guidelines to ease stake sale in startups by VC firms


The Reserve Bank of India (RBI) has announced a number of regulatory changes to operations of startups in India allowing venture capital firms who have invested in startups an easier exit. The RBI said that it will be devising regulations for foreign venture capital firms to transfer shares to other residents and non-residents of India.

The RBI proposed that in case of transfer of ownership of a startup, it would permit a receipt of the consideration amount on a deferred basis. The deferred amount will also be maintained in a an escrow or indemnity (a security against loss) for a period of 18 months.

The Reserve Bank is also building a penalty structure for delayed reporting of foreign direct investment related transaction. The regulator will also allow startups to file reports over the Internet. Further notifications and circulars will be issued separately under the Foreign Exchange Management Act.

Also read: RBI norm change will allow VC firms to bypass FDI laws to invest in ecommerce

New financial instruments for startups

The RBI is also allowing startups to issue FDI instruments such as convertible bonds, which aredebt instruments where a holder can convert the bond into shares of a company after a specified time period.

In addition, the RBI will permit startups to access Rupee loans under External Commercial Borrowings (ECBs) and have relaxations for eligible lenders. An ECB is a financial instrument which allows Indian companies to access foreign money through multilateral development banks (an institution which caters to national development) such as the International Finance Corporation (IFC), Asian Development Bank (ADB) and the Australian Foundation Investment Company (AFIC).

Payments collections

Reserve Bank will be issuing clarifications for collection of payments by startups on behalf of their subsidiaries abroad. The move will likely benefit companies such as Apple, Google and Netflix.

Apple Store and Google Play purchases and Netflix subscriptions are processed usually by foreign subsidiaries. MediaNama had pointed out that there is a lot of confusion on the nature of RBI’s two-factor authentication and foreign exchange rules on purchases made via credit/ debit cards on international websites.

Other issues which will get clarity include the issue of shares without cash payment through sweat equity or against any legitimate payment owed by the company.

Image source: Ravi Karandeekar used under CC-BY-SA.

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