Overview of Fundraising Compliance

The main aims behind fundraising by start-ups in India are:

• Secure initial capital: Fundraising helps startups in India to secure the necessary capital to launch their business operations, develop their products or services and cover initial expenses.
• Scale operations: Startups often need additional funding to scale their operations, expand their team, invest in marketing and sales efforts and penetrate new markets.
• Attract top talent: Successful fundraising can enhance a startup's reputation, making it more attractive to top talent in the industry. It enables them to offer competitive salaries and benefits, thus attracting and retaining skilled professionals.
• Build strategic partnerships: Fundraising provides startups with opportunities to connect with potential strategic partners, investors and industry experts who can offer valuable guidance, mentorship and access to networks.
• Research and development: Funds raised through fundraising can be allocated towards research and development activities, allowing startups to innovate, refine their products/services and stay ahead of the competition.
• Marketing and customer acquisition: Startups can utilise funds for marketing campaigns, customer acquisition initiatives and building brand awareness, helping them reach their target audience and grow their customer base.
• Infrastructure and technology: Fundraising enables startups to invest in infrastructure, equipment and advanced technologies necessary for their operations, ensuring efficiency, scalability and competitiveness.
• Business expansion: With sufficient funds, startups can explore opportunities for business expansion, such as opening new branches, entering new markets or launching new product lines, thereby increasing their revenue potential.

The basic checklist required to be fulfilled by enterprises and startups for the purpose of fundraising are:

• Define clear objectives: Determine the specific financial goals and funding requirements for your startup, including the amount of capital needed and the purpose of the funds.
• Develop a compelling business plan: Craft a comprehensive business plan that outlines your startup's vision, mission, target market, competitive advantage, financial projections and growth strategy. This will help investors understand your business and its potential.
• Build a strong team: Investors often look for a capable and committed team. Ensure that your startup has a skilled and diverse team with relevant experience and expertise.
• Research potential investors: Identify and research potential investors who align with your industry, stage of development and investment thesis. Create a target list of investors or venture capital firms that may be interested in your startup.
• Network and attend events: Attend startup events, pitch competitions and networking sessions to connect with potential investors, mentors and advisors. Building relationships and getting referrals can be invaluable for fundraising.
• Prepare financial documentation: Gather all necessary financial documents, such as financial statements, budgets, cash flow projections and any previous funding rounds. These documents will demonstrate your financial stability and growth potential.
• Build a strong online presence: Establish a professional website, update your social media profiles and maintain an active presence on relevant platforms. Investors often conduct online research, so a strong online presence can build credibility.
• Seek advice and mentorship: Reach out to experienced entrepreneurs, industry experts or advisors who have successfully raised funds before. Seek their guidance, feedback and mentorship throughout the fundraising process.
• Practice and refine your pitch: Conduct mock pitches with your team or trusted advisors to receive feedback and make improvements. Practice presenting your pitch deck to ensure a clear and compelling delivery.
• Follow up and maintain relationships: After meeting with potential investors, send personalised follow-up emails expressing gratitude and addressing any additional questions or concerns they may have. Continually nurture relationships with investors, even if they don't invest initially.

Pre funding compliances for startups include the following as mentioned below:

• Comply with Registrar of Companies (ROC) norms: Before accepting any funding, startups in India must ensure compliance with the regulations and requirements of the Registrar of Companies.
• Conduct a Board Meeting: Send a notice to all board members at least seven days prior to the meeting. During the fundraising process, various matters are discussed and decisions are made. These include considering the Valuation Report, determining the number of allottees, deciding the offer period, opening a bank account to receive funds, finalizing the draft offer letter, and setting the date, venue, and time for the Extraordinary General Meeting (EGM).
• Conduct an Extraordinary General Meeting (EGM): The EGM aims to pass a Special Resolution regarding the Preferential Allotment. The Special Resolution is valid for 12 months. File MGT-14 and distribute PAS-4, containing the private placement offer, to the allottees along with a certified true copy of the Special Resolution and an explanatory statement.
• Issuance of Offer Letters: Upon obtaining approval, send the private placement offer letter cum application to the proposed allottees within 30 days, either in writing or electronically. Maintain a complete record of the preferential allotment and file it with the Registrar of Companies. After this step, the company can receive funds from the investors.

What are the Post-Funding Compliances for Startups in India?

Once startups secure funding, they enter a new phase that requires diligent compliance with various regulations and procedures. Post-funding compliances are essential for startups to maintain transparency, meet legal obligations and ensure smooth operations. Here are key compliances to consider:

• Allotment of Shares and Filing Returns: Startups must allot shares to investors within the stipulated time frame. Within 60 days of receiving funds, the shares must be allotted to the respective allottees. After allotment, the startup must file a return of allotment with the Registrar of Companies (RoC) within 30 days. This filing provides details of the shares allotted and ensures compliance with the Companies Act.

• Issuance of Share Certificates: The issuing company is required to allot and issue share certificates to investors within 60 days from the date of allotment. Share certificates serve as legal proof of ownership and should be issued promptly. Until the share certificates are issued, the startup cannot utilise the funds received.

• Compliance with Banking Regulations: Startups need to comply with banking regulations while receiving and utilising funds. In the case of a private placement, the share application money should come from the Investment account of the company through banking channels only. Complying with these regulations ensures transparency and legality in financial transactions.

• Reporting to the Reserve Bank of India (RBI): Startups must fulfill reporting requirements to the Reserve Bank of India when dealing with foreign investors. Upon receiving funds from foreign investors, it is essential to report specific details to the RBI in an advance reporting form. These details include the investors' name and address, the amount received, and the bank/authorized dealer involved. By reporting this information, compliance with RBI guidelines and regulations is ensured. This reporting process serves as a means to maintain transparency and adhere to the necessary protocols when dealing with foreign investments.

If shares are issued to foreign investors located outside India, startups must report the issuance details to the RBI using the FC-GPR form. This report should be submitted within 30 days from the date of share issuance and includes certificates from the company secretary certifying compliance with the Foreign Direct Investment (FDI) scheme and a controller indicating the valuation method used.

• Compliance with the Companies Act: Startups must adhere to the requirements of the Companies Act in all post-funding compliances. This includes following the necessary procedures for share issuance, obtaining approvals, maintaining statutory records and adhering to any other relevant provisions of the Companies Act.

Complying with these post-funding compliances is vital for startups to ensure legal and regulatory compliance, maintain transparency and build trust with investors and stakeholders. It is advisable for startups to engage legal and financial professionals to navigate these compliances effectively and ensure adherence to all applicable laws and regulations. By fulfilling these compliances, startups can operate smoothly and foster a strong foundation for future growth.

What are the Other Compliances for Foreign Investors in India?

With its growing appeal to foreign investors seeking to fund startups, India has emerged as an attractive destination. Nevertheless, it is imperative for startups to grasp and adhere to the fundraising regulations and compliances associated with engaging foreign investors. By understanding and complying with these regulations, startups can navigate the fundraising process smoothly and build trust with potential foreign investors. Some key compliances to consider are:

RBI Compliance for Foreign Investors:

Foreign investment in India comes under regulation of Reserve Bank of India. Startups must adhere to the RBI guidelines and regulations to ensure a smooth fundraising process. The RBI has specific requirements and procedures that need to be followed by startups engaging with foreign investors.

• Advance Reporting to RBI: After receiving funds from foreign investors, startups must provide necessary details to the RBI in an advance reporting form. This includes information such as the name and address of the foreign investors, the date and amount of funds received in rupees, details of the bank or authorised dealer involved, any government approvals obtained and the Know Your Customer (KYC) report of the non-resident investor.
   
• Completion of Share Issuance Process: Startups must complete the share issuance process within the stipulated time frame. Within 180 days from the date of receiving funds, it is necessary to allot the shares to the foreign investors. Failing to meet this deadline can lead to non-compliance with the regulations outlined in the Foreign Exchange Management Act (FEMA).
   
• Reporting of Share Issuance to RBI: Startups must report the issuance of shares or convertible debentures to foreign investors using the appropriate form, typically known as the FC-GPR form. The submission of this report to the RBI is a requirement within 30 days from the date of share issuance. The report should encompass several essential elements, including a certificate from the company secretary certifying compliance with the Foreign Direct Investment (FDI) scheme and relevant regulations. Additionally, a certificate from a controller indicating the valuation method employed for the issued shares must be included.
   
• Compliance with Companies Act: Along with the above mentioned regulations,, startups have to ensure compliance with Companies Act during the issuing of shares to foreign investors. This includes following the procedure for share issuance, obtaining necessary approvals and complying with other statutory requirements related to the allotment of shares.

Complying with these fundraising compliances for foreign investors is essential for startups to maintain transparency, adhere to legal requirements and build trust with investors. Startups are advised to consult professionals like StartupFino who specialise in these areas to ensure compliance with all applicable laws and regulations specific to their circumstances. By navigating these compliances successfully, startups can attract foreign investment and foster growth in their entrepreneurial journey.

Thriving in business necessitates compliance with regulations and rules, which are significant elements for any enterprise. Failure to comply can result in penalties and fines imposed by different laws and regulations. Given the frequent amendments to laws aimed at addressing past business mistakes, the significance of compliance cannot be overlooked in today's landscape. Additionally, when startups secure funding, it becomes the founders' fiduciary duty to ensure that the investor's funds are handled responsibly and securely.

Startupfino is a company that specialises in offering complete services regarding fundraising compliance services. We can aid  with everything right from initially providing advice to ensuring that you meet all the necessary requirements and fulfil necessary compliances.

Our services include the following:

• Experts to help startups understand and comply with the complex fundraising regulations set by regulatory bodies like RBI and RoC.
• Thorough due diligence on startups to ensure their compliance with all legal and regulatory requirements.
• Assisting startups in preparing and organising the necessary legal and financial documents required for fundraising compliance, such as share issuance forms, reporting forms and certificates.
• Managing and preparing regular reports and updates for investors, ensuring transparency and compliance with reporting obligations.
• Providing guidance on best practices for corporate governance, ensuring startups have proper internal controls, policies and procedures in place to meet compliance requirements.
• Assisting startups in navigating the specific compliance requirements related to foreign investment, including reporting to the RBI, complying with Foreign Direct Investment (FDI) regulations and adhering to banking channel requirements.

By availing our services, entrepreneurs can avoid the negative outcomes of non-followance of rules and compliances. StartupFino works hard to provide services that are prompt and effective, so you can manage your business without any issues and without facing penalties or problems.