Any money received by a company including start-ups from any person by way of deposit or loan or in any other form, is considered to be a ‘deposit’ under the Companies Act, 2013 (Act) subject to certain exceptions as set out in the Act read with the Companies (Acceptance of Deposits) Rules, 2014 (Deposit Rules). This entails multiple compliance requirements for companies and adds to cost.
The Ministry of Corporate Affairs (MCA) has by a recent notification amended the Deposit Rules, by offering more flexibility to start-ups to raise further capital.
Till recently, start-ups were allowed to raise up to INR 25,00,000 or more, from a person by issuing ‘convertible notes’ , without being considered a ‘deposit’. This exception would apply so long as the convertible notes are converted into equity shares or repaid within a period of 5 years, from the date of issue, in a single tranche. The MCA vide the notification has now extended the time frame to 10 years.
The MCA vide the notification has also extended the period to 10 years (from the earlier time frame of 5 years), by allowing start-ups which are private companies to accept ‘deposits’ from its members without any restrictions. This amendment has been made in-line with the present definition of start-ups , where an entity is considered a start-up up to 10 years from the date of incorporation.
B. Impact and way forward for start-ups:
This notification is a welcome step, as it comes at a time when the start-up community as a whole is facing a cash crunch, due to the economic slowdown. This amendment should start-ups navigate and manage its finances more efficiently.
In essence, this relaxation of allowing start-ups to issue convertibles notes up to 10 years without being considered to be a ‘deposit’, will help attract investments from long term investors, who have the risk appetite to withstand the current economic slowdown.
Dhairal Shah (Associate Partner), firstname.lastname@example.org is part of K Law’s Corporate/Commercial team.
Notification, Companies (Acceptance of Deposits) Amendment Rules, 2020 dated 7th September, 2020
Convertible note means 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 the other terms and conditions agreed to and indicated in the instrument
Start-up company means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number [G.S.R. 127 (E), dated 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade]
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The material contained in this alert is for informational purposes only. The views expressed are not those of K Law and do not constitute legal advice. K Law disclaims all liability to any person or entity for any loss or damage caused by errors or omissions in this alert. . This article was authorized Dhairal Shah (Associate Partner).