Startups, quasi capital, venture capital fund (VCF), fund of funds, Regulation & funding, STARTUPS INDIA, Stand Up India, Company Law, LLP Act, MCA, FEMA

1. STARTUPS, QUASI CAPITAL, VENTURE CAPITAL
FUND (VCF) & FUND OF FUNDS
REGULATION & FUNDING
Anuroop Omkar & Kritika Krishnamurthy

2. STARTUPS IN INDIA
AN OVERVIEW

3. DEFINITION- STARTUP INDIA, STAND UP INDIA!
Pvt Co/ LLP/
Partnership Firm
Less than 5 years from
incorporation
Turnover upto INR 25 crore
Working towards innovation,
development, deployment or
commercialization of new
products/ processes/
services driven by
technology or IP
DIPP Approval

4. DEFINITION- STARTUP INDIA, STAND UP INDIA!
Incubator
established in
a
postgraduate
college in
India
Incubator
funded (for the
project) from
GOI or State
Govt under
scheme to
promote
innovation
Recommendat
ion of
innovation
from Incubator
recognized by
GOI
Letter of
funding of not
less than 20%
in equity by
any Incubation
Fund/Angel
Fund/Private
Equity
Fund/Accelera
tor/Angel
Network
registered with
SEBI
endorsing
innovation
Letter of
funding by
GOI or State
Govt under
scheme to
promote
innovation
Patent filed
and published
in the Journal
by the Indian
Patent Office
Any one of the following:

5. Self certification Start-up India hub Patent protection
INR 10,000 crore
fund
National Credit
Guarantee Trust
Company
No Capital Gains
Tax
No Income Tax
for three years
Tax exemption for
investments of
higher value
Building
entrepreneurs
Atal Innovation
Mission
Setting up
incubators
Research parks
Entrepreneurship
in biotechnology
Dedicated
programmes in
schools
Legal support
Rebate
Public
Procurement
Faster exit
Benefits&
Exemptions

6. START UPS
STRUCTURE, MANAGEMENT & FOREIGN INVESTMENT

7. INCORPORATION & MANAGEMENT
Category Company LLP
Prevailing Law Companies Act, 2013 Limited Liability Partnership Act,
2008
Capital
Requirement
No (Previously INR 1 lakh) No
Perpetual
Succession
Yes Yes
Charter Document Memorandum and Article of Association,
Shareholders Agreement
LLP Agreement
Number of
Members
Private- 2 to 200 members; Public-
Minimum 7 members without any limit on
maximum
Minimum 2 partners and no
limitation of maximum number of
partners
Tax Liability (*) Income taxed @ 33.99%. Income taxed @ 33.99%.

8. INCORPORATION & MANAGEMENT
Category Company LLP
Day to day administration Directors Designated Partners
Meetings Board Meetings and General
Meetings
No requirement; as per LLP
Agreement
Maintenance of Statutory
Records
Books of accounts, statutory
registers, minutes etc.
Only books of accounts.
Audit of accounts Required for all All LLPs, except with turnover less
than Rs.40 Lacs or Rs.25 Lacs
contribution in any financial year
Accounting Standards Mandatory Presently not available
Merger / Amalgamation Yes Yes
Oppression &
Mismanagement
Statutory remedy exist No provision relating to redressal

9. FOREIGN INVESTMENT Approval
Route
Entity
Type
Foreign
Investment
Company
Automatic
DIPP Approval
LLP
Automatic in sectors
where 100% FDI allowed
with no FDI linked
conditions
Other- DIPP Approval

10. FUND RAISING- ISSUES
No track
record
No Fixed
Assets
Verification
of Financial
Projections
Commercial
Viability of
idea
Managerial
skills of
entrepreneur
How much
control?

11. QUASI CAPITAL
REGULATORY & COMMERCIAL ASPECTS

12. Equity Shares
Redeemable Preference Shares
Optionally Convertible Preference Shares
Compulsorily Convertible Preference Shares (CCPS)
Compulsorily Convertible Debentures (CCD)
Optionally Convertible Debentures (OCD)
Revenue Sharing/ Net Sales Sharing/ Profit Sharing Agreement
Bank debt/ Asset Backed Lending
QUASI
CAPITAL /
MEZZANINE
DEBT OR
CAPITAL
LowtoHighRiskProfile

13. FEATURES
Startup company with no past
record or assets
Impact investment/ MSMEs
No exit strategy, No IPO possible
High risk compensated by higher,
fixed return than debt
Low or no say in management
Conversion to equity or payout
Debt Mezzanine Equity
Security Secured Subordinated None
Ranking First Second Third
Covenants Tight Flexible None
Term Demand Term/ Patient Patient
Coupon Floating Fixed Dividend
Rate Prime Risk Adjusted Market
Adjusted
Conversion No Convertible Shares
Prepayment
penalty
Yes No- fixed
return
No
Liquidity High Low Right to sell

14. STAGES OF FUNDING
Stage of
Development
Financing Need Risk Level
Seed “Seed” financing to prove a product concept. Completely new
venture or new idea
Very High
Start-ups In existence for 1 year or less. Financing needs could vary Very High
1st Stage Working capital for initial expansion, already in business but may be
operating at a loss
Moderately
High
2nd Stage In growth stage for plant expansion, marketing or new product
development
Moderate
Bridge Expects to go public within 6 months to a year and requires financing
to “bridge” to the IPO
Moderately
High
Leveraged
Buyouts
(LBOs)
To acquire a product line or business (at any stage of development)
with management holding a share of equity
Moderately
High

15. DEBENTURES
Definition
• S. 2(30) of
Companies Act,
2013
• Debenture stock,
bonds or any other
instruments
• Evidencing a debt
• May or may not
constitute a charge
on the assets of the
company
Nature & Rights
• S. 71 of Companies
Act, 2013
• Debt instrument
• Convertible wholly
or partly into equity
• Redeemable
• No voting rights in
company meetings
• Interest payable as
per terms of issue
Redemption
• Creation of
Debenture
Redemption
Reserve Account
• Out of profits
available for
dividend distribution

16. SECURED DEBENTURES OTHER
PROVISIONS
s. 71(3) read
with Rule 18,
Companies
(Share Capital &
Debentures)
Rules, 2014
Redemption
within 10 years
from date of
issue (except
infrastructure
companies)
Create charge
on assets of
company
sufficient for
repayment of
debentures and
interest
If more than 500
persons- charge
in favour of
debenture
trustee
Debenture Trustee
• Offer or invitation
to subscribe to
public or more than
500 persons
• Secured by Trust
Deed
• Liable to show
degree of care and
diligence to protect
interest of
debenture holders
• Not related party of
company (Rule 18
Sh. Cp. & Deb
Rules)
Default
• Tribunal (Presently
CLB)
• Debenture
Trustee- Order
imposing
restrictions on
incurring further
liabilities
• Other debentures-
Order to redeem
with interest and
principal
• Enforceable by a
decree of specific
performance

17. PREFERENCE SHARES
Meaning
• Explanation to S. 43 of Companies Act, 2013
• Company limited by shares
• Shares carrying preferential rights to dividend and redemption during winding up over
equity shares
• Convertible, Cumulative or Participating
Dividend
• Fixed amount or fixed rate
• Free or subject to income tax
• Redemption during winding up
• Preferential right to fixed premium or premium at fixed scale
• Specified in Memorandum & Articles of Association
Deemed Preference Shares
• Even if along with fixed dividend
• Preferential right to participate in profits available to equity shares
• Preferential right to share in surplus available to equity shares in winding up

18. Issue
• S. 55 of Companies Act, 2013 read with R. 9
Companies (Share Capital & Debentures)
Rules, 2014
• Authorized by Articles of Association
• Provided in Memorandum of Association-
Capital Clause
• No subsisting default in redemption of
preference shares or payment of dividend on
preference shares
• Special Resolution of shareholders
• Detailed requirement- Contents of resolution &
Explanatory Statement to Notice of EGM/AGM
Redemption
• Irredeemable not allowed
• Redemption within 20 years from date of issue
• Out of profits available for dividend distribution
or fresh issue of shares
• Create Capital Redemption Reserve Account
• Fully paid up
• Premium on redemption out of profits or
securities premium account
PREFERENCE SHARES

19. REVENUE/ NET SALES/ PROFIT SHARING AGREEMENT
Debt in company's
books of accounts
In lieu of share in
revenue/profits/sales
Definition and mode of
computation of
Revenue/Profits/Sales
Term of agreementReturn not assured
Enforceability tough-
civil suit, specific
performance/arbitration
/mediation

20. VENTURE CAPITAL FUNDS (VCF)
REGULATION & FUNDING

21. SEBI ALTERNATIVE INVESTMENT FUND REGULATIONS
Any fund established or incorporated in India
Trust/ company/ LLP/ body corporate
Privately pooled investment vehicle
Collects funds from investors, whether Indian or foreign,
for investing as per defined investment policy for the
benefit of its investors
Not covered under SEBI (Mutual Funds) Regulations, 1996,
SEBI (Collective Investment Schemes) Regulations, 1999 or
any other regulations of SEBI to regulate fund management
activities
Exemptions
Family trust
ESOP/ Employee Welfare/
Gratuity Trust
Holding Company
Special Purpose Vehicle
Securitization Trusts
Trusts of Asset Reconstruction
Companies (ARC)

22. CLASSIFICATION
Category I AIF Category II AIF Category III AIF
Invests in start-up, early stage
ventures, social ventures, SMEs,
infrastructure or other sectors which
government/ regulators consider
socially/ economically desirable
Does not fall in Category I
and III
Employs diverse or
complex trading strategies
and may employ leverage
including through
investment in listed or
unlisted derivatives
Venture capital funds, SME Funds,
social venture funds, infrastructure
funds and angel investment funds
Does not undertake
leverage or borrowing other
than to meet day-to-day
operational requirements
and as permitted
Hedge funds or funds which
trade to make short term
returns or open ended
funds- no incentives/
concessions by Govt/
Regulator
Generally perceived to have
positive spillover effects on
economy and for which SEBI, GOI
Private equity funds or debt
funds- no incentives/
concessions by Govt/

23. FEATURES & RISK EVALUATION
Features
• Equity shares with differential dividend rights
• Stake dilution based on risk involved
• Right to appoint director on board
• Right to participate in shareholders meetings
• Exit through IPO, buy back or sale to third party investor
• Exit at pre-agreed valuation/ premium
Risk
Involved
• Long-term commitment
• Difficulty in business valuation
• Entrepreneurial/management mismatches
• Lack of knowledge of competitors
• Macro economic & Market demand considerations

24. STAGES OF FUNDING
Stage of
Development
Financing Need Risk Level
Seed “Seed” financing to prove a product concept. Completely new
venture or new idea
Very High
Start-ups In existence for 1 year or less. Financing needs could vary Very High
1st Stage Working capital for initial expansion, already in business but may be
operating at a loss
Moderately
High
2nd Stage In growth stage for plant expansion, marketing or new product
development
Moderate
Bridge Expects to go public within 6 months to a year and requires financing
to “bridge” to the IPO
Moderately
High
Leveraged
Buyouts
(LBOs)
To acquire a product line or business (at any stage of development)
with management holding a share of equity
Moderately
High

25. FUND OF FUNDS
AN OVERVIEW

26. CHARACTERISTICS
No direct investment
Invests in other
Funds which
undertake direct
investment
Everyday
examples: FoF in
mutual funds,
Pension funds,
endowment funds
Focus on sector,
geography, end
result
SIDBI- FoF for
government fund
allocation to venture
capital funds
Fund’s strategy and
risk/return must fit
within existing
portfolio
Allows
diversification
Total fund availability
Target return
Life cycle & Extension option
Number of funds and investment
thresholds (number and percentage)
Management fee
Target portfolio investment size

27. DOWNSIDE
Requires detailed evaluation and due diligence
Based on past performance which does not always
guarantee future projections
Requires intensive monitoring
Fund requires managers with
extreme efficiency and
experience
Too manager centric
Diversification
may reduce
returns

28. QUESTIONS
Anuroop Omkar
omkaranuroop@gmail.com
+91-9560439503
Kritika Krishnamurthy
kritikris@gmail.com
+91-8586074575