In an attempt to boost innovation and create jobs, the Reserve Bank of India has allowed start-ups to raise up to $3 million for a three year term via external commercial borrowing.
The Reserve Bank of India’s (RBI) move comes at a time when India has become the world’s third largest start-up base and is poised to double such ventures by 2020. The growth in the number of start-ups and entrepreneurial ventures is expected to foster innovation as well as augment job creation – a high priority area for the current establishment.
India in recent months has taken various steps to facilitate investments in the startups sector. The RBI in February this year relaxed the foreign direct investment (FDI) norms for start-ups. The startups will be allowed to raise funds commercially (ECBs), in Indian rupees, any other convertible currency or a combination of both.
The RBI, however, specified that ECBs can only be raised from a country which is either a member of the Financial Action Task Force (FATF) or FATF-Style Regional Bodies. The guidelines only allow foreign banks to act as lenders, while excluding overseas branches, the subsidiaries of Indian banks, overseas wholly owned subsidiaries, or the joint ventures of Indian companies.
Interestingly, the Indian banking regulator did not fix any interest rate cap on these borrowings; typically RBI specifies the maximum cost financial institutions can charge when lending money via ECBs. Earlier in January, Prime Minister Narendra Modi had unveiled a slew of measures to create incentives in the sector. The government has also relaxed the procurement norms for them.
According to a Nasscom report, the number of startups is expected to double to 10,500 by 2020 and provide jobs to over 200,000 people. A recent Labour Bureau survey said India’s unemployment rate shot up to a five-year high of 5% in 2015-16. More worryingly, World Bank research says increasing automation and the adoption of technology threatens 69% of the jobs in the country. Startups are expected to open new avenues for job creation and take more people in the organized workforce.