Corporate Laws newsletter: FDI Policy on Downstream investments made by NRIs-Apr 2021

The Department of Promotion of Industry and Internal Trade (DPIIT) has reviewed Foreign Direct Investment (FDI) Policy in relation to downward investment by Non-Resident Indian (NRI). In Press Note No. 1 (2021 series) (“PN 1”), the DPIIT has proposed to make certain additions to the FDI Policy to provide clarity on downstream investments made by NRIs. PN 1 provides for insertion of clause which states that any investments by NRI on non-repatriation basis1 are deemed to be domestic investments at par with the investments made by residents. Accordingly, any investment made by an Indian entity which is owned and controlled by NRIs on a nonrepatriation basis will not be construed as indirect foreign investment. Amendments proposed in the FDI Policy through PN 1 will be effective by way of a notification issued under the Foreign Exchange Management Act, 1999. The PN 1 addresses lingering interpretation issues around non-repatriable investments made by NRIs by providing clarification that such investments would be considered as domestic investments at par with investment made by residents. While the issue seems to be addressed, it is important that the proposed amendments are notified at the earliest.

Start-up Seed Fund Scheme- Salient features

Start-ups in India often suffer from capital inadequacy when they are in their development stage. The Central Government has approved the ‘Startup India Seed Fund Scheme (SISFS)’ to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialization. SISFS intends to provide financial assistance to startups via corpus of Rs. 945 Crore that will be disbursed through selected incubators across India in 2021-252 . The seed fund under the SISFS will be disbursed to all eligible startups through eligible incubators across India. SISFS provides for a detailed eligibility criteria for startups as well as for incubators.

1. SISFS is a sector agnostic scheme and will support different startups across all sectors.

2. Eligibility criteria for start-ups under the SISFS inter alia consists of:

(a) A startup, recognized by DPIIT, incorporated not more than 2 years ago at the time of application;

(b) Startup must have a business idea to develop a product or a service with market fit, viable commercialization, and scope of scaling;

(c) Startup should be using technology in its core product or service, or business model, or distribution model, or methodology to solve the problem being targeted;

(d) Startup should not have received more than Rs 10 lakh of monetary support under any other Central or State Government scheme;

(e) Shareholding by Indian promoters in the startup should be at least 51% at the time of application to incubator for the scheme, as per Companies Act, 2013 and SEBI (ICDR) Regulations, 2018.

3. An Experts Advisory Committee (EAC) will be constituted by DPIIT, which will be responsible for the overall execution and monitoring of the SISFS. The EAC will evaluate and select incubators for allotment of Seed Funds, monitor progress, and take all necessary measures for efficient utilization of funds towards fulfilment of objectives of SISFS.

4. Disbursement of Seed Fund to eligible startups by incubators: Seed Fund to an eligible startup by the incubator will be disbursed as follows:

(a) Up to Rs. 20 Lakhs as grant for validation of Proof of Concept, or prototype development, or product trials. The grant will be disbursed in milestone-based installments. These milestones can be related to development of prototype, product testing, building a product ready for market launch, etc.

(b) Up to Rs. 50 Lakhs of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments.

5. The incubator is required to execute a legal agreement with the selected startups before the release of the first installment. The incubators needs to ensure that the necessary terms and conditions, including milestones, related to the Seed Fund are clearly detailed in the agreement along with timelines for achievement of milestones.

6. Startups will be required to utilize the Seed Fund strictly for the purposes it has been granted for and not for any other activities.

The DPIIT has also released guidelines to be adhered to by incubators and start-ups which inter alia consist of methods for accounting and utilization of funds, progress monitoring, process for selection of start-ups and incubators, role and functioning of EAC and indicators to measure successful implementation of the scheme.