Startups, quasi capital, vcf, fund
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STARTUPS, QUASI CAPITAL, VENTURE CAPITAL FUND (VCF) & FUND OF FUNDS REGULATION & FUNDING Anuroop Omkar & Kritika Krishnamurthy
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Transcript of Startups, quasi capital, vcf, fund
STARTUPS, QUASI CAPITAL, VENTURE CAPITAL FUND (VCF) & FUND OF FUNDSREGULATION & FUNDING
Anuroop Omkar & Kritika Krishnamurthy
STARTUPS IN INDIAAN OVERVIEW
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
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
Recommendation 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/Accelerator/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:
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 schoolsLegal support
Rebate Public Procurement Faster exit
Benefits & Exem
ptions
START UPSSTRUCTURE, MANAGEMENT & FOREIGN INVESTMENT
INCORPORATION & MANAGEMENTCategory 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%.Dividend Distribution Tax
Taxed @ 19.9941176% in company’s hands
No tax on distribution of profits
INCORPORATION & MANAGEMENTCategory 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
FOREIGN INVESTMENTAppro
val Route
Entity Type
Foreign Investme
nt
Company
Automatic
DIPP Approval
LLP
Automatic in sectors where 100% FDI
allowed with no FDI linked conditions
Other- DIPP Approval
FUND RAISING- ISSUES
No track record
No Fixed Assets
Verification of
Financial Projection
s
Commercial
Viability of idea
Managerial skills of entrepren
eur
How much
control?
QUASI CAPITALREGULATORY & COMMERCIAL ASPECTS
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
Low
to
Hig
h Ri
sk P
rofil
e
FEATURES
Startup company with no past record or assetsImpact investment/ MSMEs
No exit strategy, No IPO possibleHigh risk compensated by higher, fixed return than debtLow or no say in management
Conversion to equity or payout
Debt Mezzanine EquitySecurity Secured Subordinate
dNone
Ranking First Second ThirdCovenants Tight Flexible NoneTerm Demand Term/ Patient PatientCoupon Floating Fixed DividendRate Prime Risk
AdjustedMarket Adjusted
Conversion No Convertible SharesPrepayment penalty
Yes No- fixed return
No
Liquidity High Low Right to sell
STAGES OF FUNDINGStage 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 High1st Stage Working capital for initial expansion, already in business but
may be operating at a lossModeratelyHigh
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
ModeratelyHigh
LeveragedBuyouts (LBOs)
To acquire a product line or business (at any stage of development) with management holding a share of equity
ModeratelyHigh
DEBENTURESDefinition
• 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
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
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
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
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 agreement Return not assured
VENTURE CAPITAL FUNDS (VCF)REGULATION & FUNDING
SEBI ALTERNATIVE INVESTMENT FUND REGULATIONSExemptions
Family trust
ESOP/ Employee Welfare/ Gratuity Trust
Holding Company
Special Purpose Vehicle
Securitization Trusts
Trusts of Asset Reconstruction Companies (ARC)
CLASSIFICATIONCategory I AIF Category II AIF Category III AIFInvests 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 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 FUNDINGStage 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 High1st Stage Working capital for initial expansion, already in business but
may be operating at a lossModeratelyHigh
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
ModeratelyHigh
LeveragedBuyouts (LBOs)
To acquire a product line or business (at any stage of development) with management holding a share of equity
ModeratelyHigh
FUND OF FUNDSAN OVERVIEW
CHARACTERISTICSNo 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
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
