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Crowdfunding in India
Crowdfunding in India
The Securities and Exchange Board of India (SEBI) has issued laws on digital equity
crowdfunding in India as “unauthorized, unregulated and illegal”.
SEBI’s newly formed framework struggles to find the right balance between
protection of investors and promotion of entrepreneurship.
SEBI has proposed guidelines for crowdfunding aimed at improving access to funds
for start-ups and small-to-medium enterprises.
In light of this positive trend, in 2014, SEBI released a ‘Consultation Paper on
Crowdfunding in India’. This defined crowdfunding as “ solicitation of funds (small
amount) from multiple investors through a web-based platform or social networking
site for a specific project, business venture or social cause.”
According to the report India- Crowdfunding Myth: Three’s a Crowd, the Consultation
Paper proposes a framework for ushering in crowdfunding by giving access to the
capital market to provide an additional channel of early stage funding to startups
and SMEs and seeks to balance the same with investor protection.
The key points raised in the proposal uncovers whether crowdfunding is allowed in
India. The legal issues with crowdfunding for business ventures have continued to
raise eyebrows.
On June 23, 2015, SEBI made it easier for entrepreneur-driven new companies to list
on stock exchange platforms with an easier listing, shareholding and disclosure
norms.
Later in 2016, SEBI declared over twenty equity crowdfunding platforms as illegal.
Business Standard has detailed the Crowdfunding blues in the Indian economy. SEBI
is worried about small investors being sucked into unknown, illiquid companies, as
these platforms operate in a regulatory twilight zone.
SEBI’s discomfort also stems from the fact that none of these platforms meets the
critical net worth criterion of Rs 100 crore required to set up securities
exchanges.
While listing on Indian stock exchanges will ensure a wide array of investors,
crowdfunding will ensure that the company receives funds not only from investors
across the globe but also from investors who feel for the project.
The emergence of India as a start-up hub with wide options on how to raise funds
has most business ventures turning to reward based crowdfunding as the best way to
raise quick funds!
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What is Crowdfunding?
Before going deep into the topic of crowdfunding, let us know the exact definition
of crowdfunding and how it differs from fundraising. Most often, people get
confused between crowdfunding and fundraising.
If you're wondering that crowdfunding is a new concept which is slowly taking over,
it is not. It has been practiced in India since ancient times, mostly for funding
cultural and religious causes. We called it "Chanda" back then. The modern day
crowdfunding originated from the West and is one of the best financing options for
any cause, especially if it has a mass appeal.
Types Of Crowdfunding:
The answer is NO. There are various branches which come under the umbrella of
crowdfunding.
Equity-based crowdfunding
Reward-based crowdfunding
Debt-based crowdfunding
Litigation crowdfunding and lastly,
Donation-based crowdfunding
Here's more about each of them.
Types Of Crowdfunding:
Applications Of Crowdfunding
At any given time in life, you may be in need of financial assistance. It could be
for a celebration, travel, medical emergency, education, a social cause, or more.
And much more, depending on your interests. So, If you lack funds to pursue your
interests, you can opt for crowdfunding. Many individuals have chosen for this
method and have succeeded in gaining funds.
Gathering of funds from various investors to support a housing project is all that
is involved in this kind of crowdfunding. It is also used to fund mortgages secured
by real estate. You can invest in this via debt and equity-based investments.
In the recent times, India has witnessed a massive growth in the startup industry.
It is because people want to break out of the barrier of working 9-5 and our
government supports it. The government has a significant role to play in this, as
they're offering some advantages for startups such as relief from paying tax for
the first three years and much more. Startups often look out for investors and try
to approach VCs to get funding. Sometimes it gets tedious. Startups can try using
crowdfunding as it increases the brand reach and it's easier than approaching a VC.
If you're starting a business and running short of funds, then you might have
thought of approaching a bank to get a loan for yourself. Getting loans from banks
isn't easy as it has a lot of formalities involved. Crowdfunding will help you
fetch funds easier than any bank.
Loans can be of any type - Personal loans, home loans, and even educational loans.
Crowdfunding can be of great help to you in these cases. Whether you're a college
student who's unable to repay the loan taken for completing your university
education or you or your family member wants to undergo treatment for an ailment,
crowdfunding is the answer as many generous individuals contribute to such causes.
Before getting started with crowdfunding, you need to be aware of certain legal
implications and rules related to it.
This is the most common question we hear today - “Is crowdfunding even legal in
India?”
Yes, apart from equity-based crowdfunding, other types are completely legal.
Crowdfunding in India is governed by Securities and Exchange Board of India,
popularly known as SEBI. It is the market regulator which mainly regulates the
securities market. SEBI was set up in the year 1988 as a non-statutory body. The
parliament passed the SEBI Act in 1992, which granted statutory powers to SEBI.
There are certain guidelines laid down by SEBI to govern crowdfunding.
Now that you've got complete knowledge of crowdfunding and its applications and the
legalities associated with it, You might be wondering how to get started?
We've got you covered as we've curated the list of top websites in India, where you
can put forth your project, be it charity based or you've got a certain cause,
these sites give wings to it.
Crowdfunding websites list your project/cause and help you raise money for it. You
just have to create a campaign, set a goal and promote it. Some websites allow you
to set up a campaign free of cost and charge you a minimal platform fee of 5% on
the total funds raised. You can drive the campaign by yourself or for an additional
fee, request the platform for assistance to reach your goal faster.