Friday, September 30, 2016

Startups Can Accept Deposits upto 2.5 Million as Convertible Note Without Charging to Assets !

This is another good news for startups of India . The Ministry of Corporate Affairs has relaxed the rule for acceptance of deposits vide notification No GSR 639 (E) dated 29/06/2016 under the Companies (Acceptance of Deposits ) Amendment Rule 2016 . This amendment has  increased the list of exempted categories of exempted deposits under  Companies (Acceptance of Deposits) Rule 2014

What Positive Change for Startups  ?

A debenture is a kind of loan  for which various innovative ways payback system is formulated under companies act. Under companies act 2013, a company can raise finance by issue of convertible debenture as under

  1. By securing the debenture with a charge on the assets of the company; or 
  2. By issue of debenture that is compulsorily converted into shares within ten years, or 
  3. Non-convertible debentures that are unsecured but listed 

The new amendment has given relief to startups to issue convertible note ( a new term coined !) 
that does not any statutory requirement of creating a charge. That will make life easier for startups as in the beginning they might not have that much assets to secure the debentures.

Amendments Related to Startups

As per sub clause (xvii) of the Rule 2 (1) (c) of the Companies (Acceptance of Deposits ) provides that  a startup can receive an amount of Rs. 25 lacs or more  by way of convertible note (convertible into equity shares or repayable within a period not exceeding 5 years from date of issue) in a single tranche, from a person.

Please note that the amended Rule defines ‘Start-up Company’ to mean a private company incorporated under the Companies Act, 2013 or the Companies Act, 1956, and also fulfilling Start-up India Guidelines issued by the DIPP.

Further the new word ‘Convertible note’ used in the amended Rule has also been defined to mean an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events, and as per other terms and conditions agreed to and indicated in the instrument. 

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