India's new FDI policy includes startups for the first time

Indian government has unveiled a new consolidated foreign direct investment policy framework comprises provisions specific to startups for the first time, a sector that is top on the government's agenda.

The 2017 FDI policy circular has a separate section on startups and spells out provisions that allow them to raise foreign money from venture capital funds and other investors through instruments such as convertible notes.

According to the document released by the Department of Industrial Policy and Promotion (DIPP), startups can raise up to 100% of funds from Foreign Venture Capital Investors (FVCIs). They can issue equity or equity-linked instruments or debt instruments to FVCIs against the receipt of foreign remittance.

"Startups can issue convertible notes to persons resident outside India (subject to certain conditions)" the document said "A startup engaged in a sector where foreign investment requires government approval may issue convertible notes to a non-resident only with approval of the government"

Foreign residents, except those in Pakistan and Bangladesh, will be permitted to purchase convertible notes issued by an Indian startup for Rs 25 lakh or more in a single tranche. Pakistan and Bangladesh citizens are allowed to invest in India only under the government route.

A Pakistan citizen or an entity incorporated in Pakistan is however barred from investing in defence, space, atomic energy and sectors or activities prohibited for foreign investment.

The Indian government had recently relaxed rules for VCs getting funds from fund of funds, allowing them to invest a part of the corpus in firms other than startups. The government hopes this will encourage more VC funds to invest in Indian startups. Non-resident Indians can also acquire convertible notes on a non-repatriation basis.

(With IANS inputs)

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