How FDI Regulation will Change the Game for Indian Startups

Capital flow is much like a pyramid. The higher you go the lesser is the capital available per start-up. Even as 36 new funds were launched last year (as per data tracker VCCEdge), late-stage dilemma continues with multiple private equity (PE) and hedge funds ‘revisiting’ their investment strategy. As the market correction continues, recently released new consolidated foreign direct investment (FDI) policy will strengthen much needed foreign investment in startups in India. But will it be a game changer or just a step forward?

The answer to that question would be easy if we look at some facts to understand where India stands right now when it comes to foreign institutional investment (FII). An Ernst & Young’s technology report this year ranks India as the third most preferred investment place for technology investments globally. Meanwhile, FII – equity and debt funding peaked to $7.46 billion in 2016-17 due to expected higher economic growth rate, lowered interest rates and better earnings outlook. That means we aren’t doing bad in contrast to what many start-up pundits say. The biggest believers in Indian start-up story, in terms of the maximum foreign investments since 2012 till August this year, are the US-based investors followed by Singapore, Hong Kong, Japan and the UK.

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With that as the basis, we look at the developments that consolidated policy talks about – first, allowing startups to raise up to 100 per cent of the capital from a foreign fund, registered with Securities and Exchange Board of India (SEBI) as a foreign venture capital investor (FVCI – incorporated and established in a foreign country), through issuance of equities like common or preferred stocks, equity linked instruments or debt instruments like bonds, debentures etc. Read more…