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The Corporate Affairs ministry may exempt crowdfunding activities from the Companies Act and bring it under the regulatory authority of SEBI. With this move, the Indian govt aims to ease the way startups raise funding through this route.

To implement this proposal, the govt will have to invoke Section 462 of the companies act. As per this section, the central govt has the power to exempt class or classes of companies from provisions of this act.  This requires Parliament’s approval.

However, there are many hurdles too. In accordance with section 42 of the Companies Act, the number of investors in any private placement can be close to 200 in a year (but not more than 50 at any given time), which is already a concern for SEBI.

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In October 2016, SEBI issued a warning against crowdfunding platforms, calling them unauthorised, unregulated and illegal. A SEBI spokesperson also stated that crowdfunding platforms amount to a contravention of the Securities Contracts (Regulations) Act and the Companies Act. As per SCRA, “Any entity facilitating transactions in securities or investments between two or more parties falls under the definition of an exchange, which has to be mandatorily recognized by SEBI.”

Later in August 2017, SEBI was said to be in process of finalising norms for crowdfunding platforms. Also, recently, SEBI instructed the country’s startup funding platforms and angel networks to carry a disclaimer stating that crowdfunding portals are neither stock exchanges nor authorised by the market regulator to solicit investments.As per various media sources, a few of the proposed guidelines include:

  • Allow institutional lenders and large firms to invest money through crowdfunding portals
  • Information about borrowers and transactions will be available only to investors and not the public at large.
  • Specifying a minimum threshold for all transactions in terms of stake purchases.
  • No single lender will be allowed to gain possession of more than 25% of the investee firm
  • crowdfunding platforms will have to secure the approval of all shareholders, and will also be required to inform the SEBI of the decision.
  • Information about company business and investors will be disclosed only to concerned parties.
  • Access to crowdfunding portals will be password-protected.

Among the crowdfunding platforms currently operating in India are Ketto, Wishberry, FuelADream, Impact GuruBitgiving, Catapooolt and Crowdera, among others. As per a September 2016 report, the crowdfunding platforms in India had raised $52-60 Mn (INR 350-450 Cr) over the past 18 months.

SEBI has been deliberating over the need for crowdfunding regulations for nearly three years now. In June 2014, it released a consultation paper outlining the legal, structural and regulatory framework of such activities in the country. Later in January 2015, it reportedly held talks with the government to issue guidelines on crowdfunding, as part of a move aimed at helping startups raise funds. However, no concrete decision has been taken so far. With the central government now actively working in this regard, we hope the air will get cleared really soon.

(The development was reported by Livemint)

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