Govt may exempt crowdfunding from Companies Act to give start-ups a leg up

India is looking to make it easier for start-ups to raise money through the crowdfunding route by exempting such fundraising activities from the provisions of the Companies Act, according to a Livemint report.

The ministry of corporate affairs is in discussions to bring crowdfunding under the ambit of the Securities and Exchange Board of India (Sebi). The government is planning to invoke Section 462 of the Companies Act through which it can exempt any company or business from the Act, the report said. 

The details of how the new mechanism will work are not known yet but it is largely being looked at to get around Section 42 of the Companies Act which limits the number of investors in a private entity to less than 50 at one go or 200 in a year.

Crowdfunding usually attracts hundreds or thousands of donors who pay small amounts to usually fund a project or social cause. 

"They're removing the restriction on the number of investors that can be there and that will be very helpful for start-ups. But the kind of companies that raise money through crowdfunding is very different, it's not the regular start-up looking for very focused investment," said Naganand Doraswamy, managing director and founder at Ideaspring Capital.

Doraswamy added that very few product-oriented companies were raising money through the crowdfunding route and it was largely a mechanism used by social impact start-ups or individuals. Still, the full details of the mechanism will need to be seen before how this move will make it easier for start-ups to raise funding can be fully understood.

It is also to be seen if angel networks, which drive a significant portion of the country's early-stage start-up funding, will be able to use this mechanism if implemented. Right now, angel networks usually restrict any investment made in a start-up to around 30 investors owing to the restrictions under Section 42 of the Companies Act.  

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