Startup funds amounting to 25 lakhs by way of convertible notes will no longer be treated as 'deposit' by MCA

The Ministry of Corporate Affairs (MCA) has announced that funds received by a startup amounting to Rs 25 lakh or more by way of a convertible note, in a single tranche from a person, will not be treated as a ‘deposit’. The convertible note will either be converted into equity or repaid within a period of five years. The Companies  Rules have been accordingly amended via a notification dated June 29.

This move will make it easier for startups to acquire funds by way of convertible notes. This notification is part of the set of amendments and initiatives planned by the government to strengthen the startup ecosystem in India. Startups will no longer be required to inform the registrar of companies or create a deposit repayment reserve in the book of accounts.This development comes close in the heels of the announcement that startups will now be exempt of angel tax.

However, it must be noted that both these developments only apply to the startups that have been selected and backed by the DIPP.