Crowdfunding and its legal implications in India

The holy grail of a business eco-system is when good ideas can easily find backers and they come to fruition, making a nice packet for all parties concerned. That is the carrot that equity crowdfunding dangles to both entrepreneurs and investors – particularly in India where there is no dearth of either.

Crowdfunding and its legal implications in India

In India – the disruptive power of crowdfunding has not gone unrecognized. Despite it not being legal, the Securities and Exchange Board of India (SEBI) released a consultation paper on crowdfunding in India. Findings of the paper could be significant in understanding what the future might hold for the sector.

Crowdfunding in India

It is first important to understand exactly what crowdfunding means and the variants allowed in India. Loosely, the SEBI paper defines it as the solicitation of funds from multiple investors via a platform for a specific project. It has also defined different kinds of crowdfunding – depending on the nature of the exchange between the recipient and the giver of funds.

Donation based model of crowdfunding:

The donation-based model of crowdfunding is when a person decides to donate to a project without getting a monetary benefit in return. Such crowdfunding is legal in India and there are multiple online platforms raising funds.

Rewards based model of crowdfunding

The rewards-based model of crowdfunding is when the investors are rewarded with tangible or intangible rewards. Usually, such campaigns work for artistic or innovation campaigns where the reward is the chance to be a part of the creation process.

Equity-based model of crowdfunding

Equity model is where an investor receives the chance to retain some control of the project in return for the investment. This is obviously an attractive option for people looking to invest – because it promises to return and the chance to influence the outcome. As of now, such crowdfunding has been declared illegal for being unauthorized and unregulated.

Lending model of crowdfunding

The SEBI paper looks at the lending aspect of crowdfunding as well. Investors can lend money to a business – and expect not only their money returned but also a neat profit with it. For startups, this model can be risky because turnovers tend to peak slowly.

What SEBI says about crowdfunding

The first model of crowdfunding does not fall under the purview of SEBI or India’s central bank – the Reserve Bank of India because it is not B2C giving but peer-to-peer giving. Overseas donations need to be compliant with the Foreign Contributions Regulation Act.

Peer-to-peer lending falls under the purview of the RBI and parties need to register themselves and follow compliances in order to function. Equity crowdfunding as of now is illegal. But possibilities are definitely on the cards.

SEBI framework is looking to strike the right note between nurturing entrepreneurship, protecting investors and preventing siphoning off of capital. In 2016, over 20 platforms were declared illegal to prevent money laundering. But the latest is that equity crowdfunding of up to Rs 10 crores is allowed provided the investor and the promoter follows certain guidelines with regard to the stake held.

The future is definitely leaning towards a more favorable movement of money to promote a dynamic, startup culture in India.

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