Uncorked! The Pre & Post Funding Compliances for Start-ups

Hey, you have put in all the labour, figured out the jig-saw puzzle, got everything in the right place and you have launched that great Idea of yours - Lo and behold! You got the response - More than what was expected - Man its working!

And just when you have not even basked properly in your success there starts looming another major hurdle to cross in your journey - Funding!

Yes if I were to ask any of the entrepreneurs at this stage the answer is simple and almost as spontaneous as a reflex - Yeah man, it’s funding on my mind!

As for most of the founders this is one unknown frontier you got to concur, and you bet! It makes you sweat more than anything which you had put together till now.

Funding is the most important part of any start-up when it comes to expand your horizons of the products/ services and resources. Pitching for investments and getting a deal is one aspect, but the legal side is something that founders find complicated.

Here is all that you need to know about the compliances for funding of your Private limited company to adhere to while receiving funds from investors from within or outside India and five simple steps to issue the shares for receiving the funding.

Compliance with the Registrar of Companies (RoC)

When a company receives funding, it has to give a piece of equity to its investors in exchange, by allotment of shares. As per the guidelines of the Companies Act, 2013, a private limited company can issue shares to raise money (from within and outside India) by making a Preferential Allotment of Shares.

Preferential allotments are made to people who wish to take a strategic stake in the company, like angel investors, seed investors and venture capitalists. The issuing of shares on a preferential basis should be authorized by the articles of association of the company. Allotment of shares should also be authorized by a special resolution, and the price of such shares should be determined by the company valuation report

5 steps for allotment of shares on a preferential basis

1. Conducting a Board Meeting

A meeting of the Board of Directors of the company should be called for making a proposal for Preferential Allotment.

2. Conducting an Extra Ordinary General Meeting

An Extra Ordinary General meeting of shareholders should be held for approving the Preferential Allotment by passing a Special Resolution (i.e. 75% of votes should be in favor of the resolution). This special resolution is valid for a period of 12 months, and the Preferential Allotment can take place anytime during this validity period.

3. Issue of Offer Letters

Once the proposal has been approved by the majority, the company can go ahead and issue Offer Letters in specified formats to investors. A complete record of Preferential Allotment is to be filed with the Registrar of Companies (RoC), within 30 days of issuing the Offer Letters. After filing this record with the RoC, the company is free to receive money from the investors.

4. Allotment of shares

The company has to allot securities to the investors within 60 days of receiving the funds, by passing a resolution in a Board Meeting, and filing a return of allotment with the Registrar within 30 days of such allotment. The Return of Allotment contains a list of all shareholders, with their full names, addresses, percentage of shareholding allotted and other such relevant information.

5. Issue Share Certificates

On completion of the allotment, the company can finally issue share certificates to the investors that are now the “shareholders” of the company.

The heat is on! And with all the attention and euphoria about the Indian Start-ups world over, it only becomes more pertinent to talk about the additional compliances required for the foreign funds which are flowing in easy and in numbers for the deserving ones.


Stage Reporting Procedures for the Companies Raising Funds from Foreign Investors

RBI Compliance on raising funds from Foreign Investors

A two-stage reporting procedure is to be followed when a company is raising funds from a foreign investor:

On receipt of funds

The company has to provide details in an “Advance Reporting Form” to the RBI, within 30 days of receiving funds from foreign investor(s).

Also, the company has to issue shares within 180 days from the date of receiving funds. Otherwise, it would lead to violation of the Foreign Exchange Management Act (FEMA) regulations.

On issue of shares to foreign investors

The company has to report in specified form (FC-GPR) to the RBI, within 30 days from the date of issue of shares along with:

A) Certificate from the Company Secretary certifying that the company has complied with the procedure for the issue of shares, as laid down under the Foreign Direct Investment (FDI) Scheme, and the investment is below the ceiling permissible under the Automatic Route of the Reserve Bank, and/or in terms of the approval of the government, as the case may be, and that all the requirements of the Companies Act have been complied with

B) A certificate from a Chartered Accountant indicating the manner of arriving at the price of the shares issued to the foreign investors.
The procedures seem lengthy as of now, but with the kind of focus which the Government of India has for making the things simple and transparent, and the