The Ministry of Corporate Affairs on 7th September, 2020 Monday displayed major relaxation for deposit norms related to startup companies. This notification allows an additional 5 years time to repay deposits more than INR 25 lacs for the Start-up Companies. The government has notified the new rules as “The Companies (Acceptance of Deposits) Amendment Rules, 2020, that amended The Companies (Acceptance of Deposits) Rules, 2014.
Previous Scenario – The Companies (Acceptance of Deposits) Rules, 2014
Previously in accordance to the Companies Act, any company including startups which received money from any person for more than a year was considered as deposit in that company or a startup companies. Which also made the startups follow strict rules and regulations such as informing the registrar for the same, maintaining the deposit settlement reserve and receiving credit rating, before raising the money for a year.
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After Amendments: The Companies (Acceptance of Deposits) Amendment Rules, 2020
In The Companies (Acceptance of Deposits) Rules, 2014, in Rule 2(1) (c) (xvii), the words “five years” and the words “ten years” should be substituted.
The term of the convertible debentures has been raised from 5 years to 10 years and has also exempt money raised through the corporate affairs ministry.
Reason for Such Amendments
India has simplified the funding norms to help any Start-up India registration to raise capital to surge over the slowdown caused by the pandemic. Any money received by any company as deposit or loan in any other form will be considered as a “deposit” under the Companies Act, 2013[1] subject to certain exceptions, which increases compliance necessities.
According to the notification by the MCA, fundraising by a start-up will not be considered as a deposit, if it raises INR 25 lakhs or more in a single share through a convertible debenture. The exemption will apply only if the note is exchangeable into equity shares or is repayable within ten years from the issue date.
The existing norms only provided the flexibility of five years to the companies. To claim the advantage, any entity should meet the definition of startup under the February 2019 – notification issued by the Department of Promotion for Industry and Internal Trade.
Conclusion
The decision was taken at that time when startups in India are facing difficulty due to the economical slowdown caused by the covid-19 pandemic that has encouraged companies to lay off workforce or enforced pay cuts. In reply, the government has been imposing norms which includes a recent change related to sweat equity. Any company including startups which received money from any person for more than a year was considered as deposit in that company or startup companies.
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