Now, India’s new FDI policy includes start-ups

In another move to attract more foreign direct investment (FDI), the government on Monday unveiled a "Consolidated FDI Policy" including in it start-ups for the first time.

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

The new document incorporates in simplified form all the changes made over the past year further liberalising foreign investment rules in over a dozen sectors, including defence, civil aviation, construction and development, private security agencies and news broadcasting.

Start-ups, moreover, can issue convertible notes to residents outside India under certain conditions.

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

A convertible note is issued by a start-up firm to establish that it has received money as a debt, which will be repaid at the discretion of the holder, or will be converted into specified number of the start-up's shares.

Convertible notes to nonresident investors will have to be issued with government's permission in sectors where government approval is required for foreign investment, the FDI policy said.

A person resident outside India will be permitted to buy convertible notes issued by an Indian start-up for an amount of Rs 25 lakh or more in a single tranche.

This, however, does not apply to citizens or entities of Pakistan and Bangladesh, who are allowed to invest in India only under the government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan is also barred from investing in defence, space, atomic energy and sectors or activities prohibited for foreign investment, the document said.

Non-resident Indians (NRIs) can also acquire convertible notes on non-repatriation basis, it added.

FDI flows into India have nearly doubled over the last decade to reach $42 billion in fiscal 2016-17. During the first quarter of the current fiscal, FDI at $10.4 billion rose 37 per cent over the same period last year.

Start-ups can raise up to 100 per cent of funds from Foreign Venture Capital Investors