STARTUPS, QUASI CAPITAL, VENTURE CAPITAL FUND

(VCF) & FUND OF FUNDS

REGULATION & FUNDING

Anuroop Omkar & Kritika Krishnamurthy

STARTUPS IN INDIA
AN OVERVIEW

DEFINITION- STARTUP INDIA, STAND UP INDIA!

Less than 5 years from
incorporation

Pvt Co/ LLP/

Partnership Firm

Turnover upto INR 25 crore

Working towards innovation,

development, deployment or
commercialization of new
products/ processes/ services
driven by technology or IP

DIPP Approval

DEFINITION- STARTUP INDIA, STAND UP INDIA!

Any one of the following:

Incubator
established in a
postgraduate
college in India

Incubator
funded (for the
project) from
GOI or State
Govt under
scheme to
promote
innovation

Recommendati
on 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/Accelerat
or/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

National Credit
Guarantee Trust
Company

No Income Tax
for three years

Tax exemption
for investments
of higher value

Building
entrepreneurs

Atal Innovation
Mission

Research parks

Entrepreneurship
in biotechnology

Dedicated
programmes in
schools

Legal support

Rebate

Public
Procurement

Faster exit

Self certification

No Capital Gains
Tax

Setting up
incubators

Benefits & Exemptions

Patent protection

INR 10,000 crore

fund

Start-up India
hub

START UPS
STRUCTURE, MANAGEMENT & FOREIGN INVESTMENT

Category

Company

Prevailing Law
Companies
Act, 2013
INCORPORATION
& MANAGEMENT
Capital

LLP
Limited Liability Partnership Act, 2008

No (Previously INR 1 lakh)

No

Yes

Yes

Requirement
Perpetual
Succession
Charter Document Memorandum and Article of Association, LLP Agreement
Shareholders Agreement
Number

of Private- 2 to 200 members; Public- Minimum 7 Minimum 2 partners and no limitation

Members

members without any limit on maximum

of maximum number of partners

Tax Liability (*)

Income taxed @ 33.99%.

Income taxed @ 33.99%.

Dividend

Taxed @ 19.9941176% in companys hands

No tax on distribution of profits

Distribution Tax

Category

Company

Day to day administration

Directors
INCORPORATION
& MANAGEMENT
Meetings

LLP
Designated Partners

Board Meetings and General Meetings No

requirement;

as

per

LLP

Agreement
Maintenance of Statutory Books of accounts, statutory registers, Only books of accounts.
Records

minutes etc.

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 &

Statutory remedy exist

No provision relating to redressal

Mismanagement

FOREIGN INVESTMENT

Entity
Type

Approval
Route
Automatic

Company
DIPP Approval

Foreign
Investment

Automatic in sectors where

100% FDI allowed with no
FDI linked conditions
LLP
Other- DIPP Approval

FUND RAISING- ISSUES

No track
record

No Fixed
Assets

Verification
of Financial
Projections

Commercial
Viability of
idea

Managerial
skills of
entrepreneur

How much
control?

QUASI CAPITAL
REGULATORY & COMMERCIAL ASPECTS

Low to High Risk Profile

Bank debt/ Asset Backed Lending

Revenue Sharing/ Net Sales Sharing/ Profit Sharing Agreement
Optionally Convertible Debentures (OCD)
Compulsorily Convertible Debentures (CCD)
Compulsorily Convertible Preference Shares (CCPS)

Optionally Convertible Preference Shares

Redeemable Preference Shares

Equity Shares

QUASI
CAPITAL /
MEZZANINE
DEBT OR
CAPITAL

FEATURES
Debt

Mezzanine

Equity

Startup company with no past record

or assets

Security

Secured

Subordinated

None

Impact investment/ MSMEs

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

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

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

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

SECURED DEBENTURES

OTHER PROVISIONS
Debenture Trustee

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

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 TrusteeOrder imposing
restrictions on
incurring further
liabilities
Other debenturesOrder to redeem
with interest and
principal
Enforceable by a
decree of specific
performance

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

PREFERENCE SHARES

Issue

Redemption

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

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

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

Enforceability tough- civil

suit, specific
performance/arbitration/
mediation

Return not assured

Term of agreement

VENTURE CAPITAL FUNDS (VCF)

REGULATION & FUNDING

SEBI ALTERNATIVE INVESTMENT FUND REGULATIONS

Exemptions
Any fund established or incorporated in India
Family trust
Trust/ company/ LLP/ body corporate
ESOP/ Employee Welfare/ Gratuity
Trust
Privately pooled investment vehicle
Holding Company
Collects funds from investors, whether Indian or foreign,
Special Purpose Vehicle
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

Securitization Trusts
Trusts of Asset Reconstruction
Companies (ARC)

CLASSIFICATION
Category I AIF

Category II AIF

Category III AIF

Invests in start-up, early stage ventures, Does not fall in Category I and
social ventures, SMEs, infrastructure or III
other sectors which government/
regulators consider socially/
economically desirable

Employs diverse or complex

trading strategies and may
employ leverage including
through investment in listed
or unlisted derivatives

Venture capital funds, SME Funds, social Does not undertake leverage
venture funds, infrastructure funds and or borrowing other than to
angel investment funds
meet day-to-day operational
requirements and as permitted

Hedge funds or funds which

trade to make short term
returns or open ended fundsno incentives/ concessions by
Govt/ Regulator

Generally perceived to have positive

spillover effects on economy and for
which SEBI, GOI or other regulators
may provide incentives or concessions

Private equity funds or debt

funds- no incentives/
concessions by Govt/
Regulator

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

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

FUND OF FUNDS
AN OVERVIEW

CHARACTERISTICS
No direct
investment

Allows
diversification

Total fund availability

Invests in other
Funds which
undertake direct
investment

Target return
Life cycle & Extension option

Funds strategy and

risk/return must fit
within existing
portfolio

Everyday examples:
FoF in mutual
funds, Pension
funds, endowment
funds

Number of funds and investment

thresholds (number and percentage)
Management fee

SIDBI- FoF for

government fund
allocation to
venture capital funds

Focus on sector,
geography, end
result

Target portfolio investment size

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

QUESTIONS
Anuroop Omkar
omkaranuroop@gmail.com
+91-9560439503

Kritika Krishnamurthy
kritikris@gmail.com
+91-8586074575