MCA amends Deposit Rules for Startups

The Ministry of Corporate Affairs has amended the Deposit Rules to allow start-ups to raise funds through corporate bonds or other convertible instruments for 10 years instead of 5 years.

So an amount of twenty-five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding ten years from the date of issue) in a single tranche, from a person shall not be considered as deposit.

The definition of start-up is also changed to bring it in-line with the definition used by the Department for Promotion of Industry and Internal Trade (DPIIT).

As per the new rules, a start-up may accept deposits from its members without any maximum limit for a period upto ten years from the date of incorporation.

The amendment was long overdue considering the changes within the definition of start-up caused by the DPIIT. The disconnect between DPIIT and therefore the MCA led to chaos for the start-ups which has now been ironed out with this notification.

As has been the trend, 5 years might not be sufficient for a start-up to turn-around and begin meeting in financial obligations. Hence the extended period of 10 years should make sure that the start-ups have a minimum of matured enough to manage its finances efficiently.

The notification may be accessed here.

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