Crowdfunding in India
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the Internet (source: Google). Today, Crowdfunding has become a popular method to raise money for early stage business and charitable organizations
As on today i.e. 25.05.2018, the law on the subject of Crowdfunding is limited or fairly unregulated. Presently, most crowdfunding platforms neither operate with proper authorization nor are governed under any law.
From a regulatory perspective, Crowdfunding can be categorized as below : -
1. Donation Crowdfunding: The objective is to raise money for charitable purpose or social cause, and there is no expectation of return.
2. Reward Crowdfunding: The investors get a product or some benefit in return of the investment.
These two types of Crowdfunding are fairly unregulated. However, the basic fiscal legislation/s (income tax) and foreign investment/contribution regulations will be applicable.
3. Equity Crowdfunding: The investors are given/issued shares or any kind of equity in return of the investment. Currently, this form of Crowdfunding and the absence of a specific regulatory framework is India is in highlight. In the current scenario, the existing legal provisions of the Companies Act, 2013, the Securities Contract (Regulation) Act 1956, and the SEBI Act/Regulations governing equity fund raises, etc. will be applicable.
In 2014, the Securities Exchange Board of India (SEBI) had issued a consultation paper on this subject to discuss the possibility of introducing a market for equity crowdfunding in India, there has been very little traction thereafter.
In 2016, SEBI issued a press release cautioning the investors. One of the issue pertained to electronic platforms used by companies for the purpose of raising funds. It was cautioned that these digital platforms are neither authorized nor recognized under any law governing the securities market. Further, it was stated that the electronic
platforms are allegedly facilitating investment in the form of private
placement with companies, as the offer is open to all the investors registered with
the platform amounting to a contravention of the provisions of Securities
Contract (Regulation) Act, 1956 (SCRA) and the Companies Act, 2013. Lastly, it was advised that only recognized stock exchanges provide a platform where equity and other securities issued by companies are listed and traded in accordance with the provisions of
Recently, there have been reports in the media that with alternative capital-raising facilitators like Crowdfunding gaining popularity, the Government of India is mulling setting up a new regulator or authority, other than SEBI or the Reserve Bank of India (RBI), to regulate them.
Rishi Raj Sharma
Supreme Court of India
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