The booming startup ecosystem in India has led to the birth of over 40 unicorns in 2021 alone positioning India as the epicentre of the world’s startup ecosystem and one of the fastest growing markets for the same. This has attracted a lot of interest from investors globally especially aspiring NRI investors. Investing in India’s private markets can seem complex owing to the multitude of regulations governing this domain.
For NRI’s keen to participate in India’s startup revolution here are the rules and regulations to keep in mind.
- NRIs and foreign nationals are permitted to invest in an Indian Company in accordance with the existing Foreign Direct Investment Policy of India.
- To startuo investing, the investment amount can be remitted by the NRI from the bank account maintained in the country of residence or the NRO/NRE/FCNR accounts maintained in India.
- NRI’s can invest in any sector for startups and there is no restriction on the same.
- NRI’s can invest in shares/convertible debentures of an Indian company through:
- A remittance from its bank account outside India (“Foreign Bank Account”)
- A remittance from its NRE/FCNR(B) Accounts
- Investment into an Indian company from a person resident outside India (including NRIs) will only be considered as FDI, if the investment is made into the following instruments (collectively FDI Instruments):
- Equity shares
- Fully and mandatorily convertible preference shares
- Fully and mandatorily convertible debentures
- The price at which the FDI Instruments can be issued to NRIs shall not be less than the following (Pricing Guidelines):
- The price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company is listed on any recognised stock exchange in India
- The fair valuation of shares done by a SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method (DCF Valuation), where the shares of the company is not listed on any recognised stock exchange in India.
- The price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by RBI from time to time, where the issue of shares is on preferential allotment.
- However, when NRIs subscribe to the Memorandum of Association of an Indian company as its initial subscriber, then such investments may be made at face value.
- However there are restrictions in terms of convertible instruments issues to NRI’s. The FDI policy provides that the price/ conversion formula of FDI Instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations i.e. the Discounted Cash Flow Method (DCF) of valuation for the unlisted companies and valuation in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, for listed companies.