The Reserve Bank of India (RBI) on Tuesday relaxed several rules including foreign direct investment norms to boost start-up activity in the country.

To begin with, start-ups are allowed to receive foreign venture capital investment irrespective of the sector in which they operate. The new norms will enable transfer of shares from foreign venture capital investors to other residents or non-residents.

“Proposal for permitting start-ups to receive Foreign Venture Capital Investments is a welcome step,” said Vivek Gupta, Partner, BMR Advisors.

“Currently only Venture Capital Funds (VCF) and Indian Venture Capital Undertakings (IVCU) are eligible to raise foreign venture capital investments. It would be interesting to see whether the free pricing regime as available for investments in VCF and IVCU would also be extended for investment in start-ups,” Mr. Gupta added.

The central bank also permitted, in case of transfer of ownership of a start-up enterprises, receipt of the consideration amount on a deferred basis as also enabling escrow arrangement or indemnity arrangement up to a period of 18 months.

Cross-border deals

“The regulatory changes for easing the cross-border transactions, particularly relating to the operations of the start-up enterprises, are proposed to be made in consultation with the Government of India,” RBI said.

The central bank simplified the process of dealing with delayed reporting of foreign direct investment (FDI)-related transaction by building a penalty structure into the regulations itself.

“RBI has tried to address the regulatory difficulties being faced by the promoters of a start-up by proposing to permit receipt of deferred consideration and enabling an escrow/indemnity arrangement. These clauses are generally insisted upon by an investor and the regulatory restrictions (under the current regime) acts as a roadblock for the start-ups,” said Mr. Gupta.

RBI also said certain proposals are been considered and consulted with the government.

These proposals include, permitting start-up enterprises to access rupee loans under External Commercial Borrowing (ECB) framework with relaxations in respect of eligible lenders, issuance of innovative FDI instruments like convertible notes by start-up enterprises and streamlining of overseas investment operations for start-up enterprises.

“Proposals like permitting start up to access ECB, issuance of innovative FDI instruments etc., which are under consideration as per press release, if goes through will improve investor participation and also help start-ups to raise capital at low cost,” said Amarjeet Singh, Partner – Tax, KPMG in India.

RBI also said certain issues that are permissible under the existing regime shall be clarified like issue of shares without cash payment through sweat equity or against any legitimate payment owed by the company remittance of which does not require any permission under FEMA and collection of payments by start-up enterprises on behalf of their subsidiaries abroad.