The Commerce Ministry released its consolidated FDI policy which included startups for the first time. Startups will be allowed to raise upto 100% of funding from Foreign Venture Capital Investor. This move could prove to be the much needed boost for India’s startup industry which seems to be past the boom in the last couple of years.
With a decrease in the investment by VC’s, the new framework will help boost investments in the startup ecosystem. According to the data from Tracxn, the startup intelligence firm, the deal count for the first half of 2017 was down by 27% on a year on year basis. Only 396 tech startups got funded in the six months as compared to 547 in 2016. This decision has come at a crucial time as apart from the big investors like Sequoia, the VC funds have not grown which has led the funds to dry up. This decision will encourage the inflow of funds in India as foreign investors are likely to get higher returns from Indian startups as compared to European ones.
The 2017 FDI policy lists startups as a separate section and spells out provisions that allow them to raise money from foreign investors through instruments such as convertible notes. An individual residing outside India will be allowed to purchase convertible notes issued by an Indian startup company for an amount of Rs 25 lakh or more in a single tranche. A convertible note is used by investors who are investing in startups in order to delay the establishing of a valuation for that startup until a milestone.
This initiative will help many startups to get access to the much needed capital which becomes cumbersome due to procedural reasons. The government has taken measures in supporting startups and allowing a 100% FDCI shows the importance of startups in the government’s scheme. Recently Prime Minister Narendra Modi mentioned that the team in Central government is keen to learn new things which is the reason he asked more than 200 startup founders to play a prominent role in the governance. The government has been trying to nurture startups since its early days of assuming office. Apart from the ‘Startup India’ and its initiatives, the government took steps towards digital economy and gave a boost to FinTech companies.
Data reveals that over $5.19 billion was raised by the tech startups in India during the first half of 2017 but more than 53% of the total capital raised went to only two companies- Flipkart and Paytm which bagged $1.4 billion each in April and May during the year. With PM Modi rooting for a New India by 2022, this change in the FDI policy will be highly instrumental in achieving his mission.
The Government is constantly striving to make it easier for startups in doing business and raising funds. With the various initiatives offered by the Government, the startups have been thriving in a recent couple of years. This strong move will take the startups to a new level.