Would RBI's fundraising norm relaxation help start-ups?

The Reserve Bank of India (RBI) on Tuesday gave a thrust to funding needs of start-ups in India by allowing them to raise upto $3 million in external commercial borrowings (ECB) in a given financial year. 

This comes after Prime Minister Narendra Modi unveiling a slew of incentives in January this year; including tax holidays, capital gains tax exemption and a Rs 10,000 crore corpus for start-ups registered with the Government. India being home third-largest number of start-ups globally, the Government has also relaxed some procurement norms. 

Taking into account the available funding channels from overseas for start-ups, "RBI, in consultation with the Government of India, will allow such entities to raise ECB up to $3 million or equivalent per financial year either in INR or in any convertible foreign currency or a combination of both,” it said in a statement.

“Anything that increases the availability of capital to young companies is a good thing. Startups need oxygen in the form of capital and talent so the move, if it doesn't have lots of bureaucratic hurdles, seems to help on the capital side,” said Anand Sanwal CEO of CB Insights a venture capital and angel investment database research firm.

However, according to some of the venture capital funding companies believe that this may not have the desired impact. 

Akshit Gupta, Co-Founder and Director of Fundtonic, a fin-tech company that helps start-ups raise investment, said that at the initial stage of Angel funding for start-ups it will not make a difference as banks will not want to take the risk of funding to them. “Typically at the angel funding round a company is looking for an investment of $1 million – $1.5 million. This is used to grow the company and stabilise it and is one of the most risky stages for investors. Most banks do not have the risk appetite and will be very selective in giving loans to them,” he said.

He added that may be at the Series A or B stage of funding when the company is at much better position and much less risk to failure will banks look at lending to them. At the Series A stage of funding start-ups look for an investment between $1.5 million – $4 million and is used for expansion of their operations.

Similarly, Amit Mathur, Co-founder and CEO of Four Axes a VC company said that when it comes to ECBs they look at repayment obligations. “No banks want to give funding to a start-up without some sort of guarantee that it will get it back,” he said.

He further added that the RBI governor doesn’t control ECBs. “So he (Urjit Patel) by simply saying this doesn’t really help start-ups. If he would have given instructions to banks then probably it would have helped,” he adds.

He is of the opinion that the RBI allowing start-ups to raise $3 million annually via ECBs will not make much of a difference to the start-up environment.