Startups play a big role towards the growth of Indian economy. With more and more people turning entrepreneurs, the Indian Government too has realized the potential of startups and has come up with various schemes that are working towards providing them with an ideal ecosystem. Towards this, the Government has specifically liberalized the Foreign Direct Investment (FDI) norms to booster the VC funding and foreign investors funding in Startups.

Funding by Foreign Venture Capital Investors (FVCIs):

With an objective to attract and promote foreign investment inflow in the Startups, the Government of India has included a separate section in its Consolidated FDI Policy for the Indian Startups. According to this, Startups are permitted to raise 100% funding from Foreign Venture Capital Investors (FVCIs) registered under the Securities and Exchange Board of India or SEBI (Venture Capital Funds) Regulations of 1996 through the issue of convertible notes. Besides, Startups can also issue equity and debt instruments to FVCI against receipt of foreign remittance. In case, where a Partnership Firm or the Limited Liability Partnership (LLP) is registered as recognized Startup, the investment can be made in the capital or through any profit-sharing arrangement.

The concept of “Convertible Notes” was introduced by the Ministry of Corporate Affairs with an aim to provide easy source of funding to a Startup Company. “Convertible Note” means an instrument issued by a Startup Company evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the Startup Company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.

A Startup Company can raise funds by issuing of Convertible notes by complying with a simple and easy procedure and without having a requirement of valuation report. In General, the Startup Company has to go through the valuation of its Shares for raising the funds from any mode.

Funding by Persons Outside India:

In addition to this, for the purpose of simplifying the procedure for raising funds from abroad, Reserve Bank of India (RBI) has also allowed Indian recognized Startup Company to issue Convertible Notes for an amount of Rs. 25 lakh or more, to be invested in a single tranche, to a person residing outside India (other than citizens/entity of Pakistan or Bangladesh) with maximum period of conversion or repayment of five years and with some the other condition. i.e.:

  • If a Startup Company is engaged in a sector where foreign investment requires Government approval can issue Convertible Notes to a non-resident only if such approval is granted.
  • A Convertible Note issued by an Indian Startup Company can be converted into equity shares of the Company in accordance with FEMA rules, regulations and guidelines.
  • The amount of consideration shall be received by inward remittance through banking channels or by debit to the NRE/ FCNR (B)/ Escrow account maintained by the person concerned.
  • Any repayment or sale proceeds may be remitted outside India or credited to NRE/ FCNR (B) account maintained by the person concerned in accordance with the FEMA guidelines.
  • A Convertible Note can be issued on repatriation and non-repatriation basis both. However, an NRI or an OCI may acquire convertible notes on a non-repatriation basis in accordance with the instructions / guidelines of RBI.
  • A person resident outside India can acquire convertible notes from a person resident in or outside India or transfer by way of sale the convertible notes to a person resident in or outside India if the transfer takes place in accordance with the entry routes and pricing guidelines as prescribed for capital instruments.


These measures by the Government will go a long way in making the foreign funds available to the Startup community.