Foreign venture funds can invest up to 100% in start-ups

A Sebi-registered foreign venture capital investor (FVCI) may contribute up to 100 per cent of the capital of an Indian company engaged in any activity as prescribed in the FDI Policy, including startups irrespective of the sector in which it is engaged, under the automatic route.

A Sebi-registered FVCI can invest in a domestic venture capital fund registered under the Sebi (Venture Capital Fund) Regulations, 1996 or a Category- I alternative investment fund registered under the Sebi (Alternative Investment Fund) Regulations, 2012. Such investments are also subject to the extant FEMA regulations and extant FDI policy, including sectoral caps etc.

The investment can be made in equities or equity-linked instruments or debt instruments issued by the company (including start-ups and if a startup is organised as a partnership firm or an LLP, the investment can be made in the capital or through any profit-sharing arrangement) or units issued by a VCF or by a Category-I AIF either through purchase by private arrangement either from the issuer of the security or from any other person holding the security or on a recognised stock exchange.

It may also set up a domestic asset management company to manage its investments.

Sebi-registered FVCIs are also allowed to invest under the FDI scheme, as non-resident entities, in other companies, subject to FDI Policy and FEMA regulations.

Start-ups can issue equity or equity linked instruments or debt instruments to FVCI against receipt of foreign remittance, as per the FEMA Regulation. In addition, startups can issue convertible notes to person resident outside India subject to conditions.

A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered / incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of Rs25,00,000 or more in a single tranche.

The FDI policy defines a 'startup company' as a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number GSR 180(E) dated 17 February 2016 issued by the Department of Industrial Policy and Promotion, and as amended from time to time.)

FDI is not permitted in trusts other than in 'VCF' registered and regulated by Sebi and 'Investment vehicle'.

FDI is permitted under the automatic route in limited liability partnership (LLPs) operating in sectors/activities where 100 per cent FDI is allowed through the automatic route and there are no FDI-linked performance conditions.

An Indian company or an LLP, having foreign investment, is also permitted to make downstream investment in another company or LLP in sectors in which 100 per cent FDI is allowed under the automatic route and there are no FDI-linked performance conditions.

Conversion of an LLP having foreign investment and operating in sectors/activities where 100 per cent FDI is allowed through the automatic route and there are no FDI-linked performance conditions.

Similarly, conversion of a company having foreign investment and operating in sectors/activities where 100 per cent FDI is allowed through the automatic route and there are no FDI-linked performance conditions, into an LLP is permitted under automatic route.

FDI in LLP is subject to the compliance of the conditions of LLP Act, 2008.