How Startups in India Can Raise Funds: A Legal and Compliance Guide.

Introduction:

A startup in India has multiple ways to raise funds from potential investors. When a startup aims to grow its business, it must choose the right mode of fundraising and understand the legal implications tied to each route.

The first step is finding investors genuinely interested in your business. But once that’s done, the legal journey begins. Raising funds involves a range of corporate compliances under Indian law, and failure to comply can lead to serious consequences—from invalid allotments to hefty penalties.

That’s why it’s crucial to have a professional team that brings expertise in RBI regulations, tax law, FEMA, and corporate compliance. At Prolead, we offer complete business consultancy solutions with experts who bring decades of experience and operate from multiple offices across India.

Common Ways Startups Can Raise Funds:

Here are the three most common and recommended ways Indian startups can raise capital for business growth:

1. Issue of Debentures

Debentures are debt instruments, either secured or unsecured. In case of secured debentures, the company attaches an asset as collateral—if it defaults, the investors can liquidate the asset.

The Debenture Subscription Agreement (DSA) defines the interest rate and repayment terms. This method is ideal when startups want capital without diluting ownership.

2. Issue of CCPS (Compulsorily Convertible Preference Shares)

CCPS are hybrid instruments. Investors get preferential rights during liquidation and, as per the Share Subscription Agreement (SSA), these shares are later converted into equity after a specific term or upon triggering conditions.

It allows companies to raise funds with deferred equity dilution and offers comfort to investors.

3. Issue of Equity Shares

Issuing equity is the most straightforward method but can dilute the promoters' control. It is a strategic decision and must be backed by strong advisory support. With equity dilution, businesses must ensure that they are onboarding value-added investors.

Step-by-Step Legal Compliance Process for Issuing Securities

Whether it’s debentures, CCPS, or equity, the compliance process is largely similar:

Step 1: Check AOA and Authorized Share Capital

• Ensure that the Articles of Association (AOA) authorize the company to issue the desired security.

• If not, amend the AOA through an Extraordinary General Meeting (EGM).

• Pass a special resolution (75% approval).

• File Form MGT-14 within 30 days with the Ministry of Corporate Affairs (MCA).

Step 2: Board Meeting

• Convene a Board Meeting to approve:

  • Issuance of Debentures/CCPS/Equity

  • Terms of issue (interest rate, tenure, conversion, dividend, etc.)

  • Draft of PAS-4 (private placement offer letter)

• In case of equity rights issue, approve the Rights Issue Offer Letter.

Step 3: Draft Offer Documents

• Prepare legal agreements based on the type of instrument:

  • SHA – Shareholders' Agreement

  • SSA – Share Subscription Agreement

  • DSA – Debenture Subscription Agreement

Step 4: Hold EGM

• Conduct the EGM to seek shareholders' approval for the issue of securities.

• File MGT-14 with MCA within 30 days of EGM.

Step 5: Circulate PAS-4

• Circulate PAS-4 (Offer Letter) to proposed investors.

• Must be done at least 3 days prior to the allotment Board Meeting.

Step 6: Receive Funds

• The funds must be received through banking channels only, into a separate bank account designated for this purpose.

Step 7: RBI/FEMA Compliance (For Foreign Investors)

• If funds are being received from a foreign investor:

  • Ensure compliance with FEMA and RBI laws.

  • File FC-GPR or FC-TRS within 30 days of allotment via the RBI FIRMS portal.

Step 8: Second Board Meeting (Allotment)

• Hold a second Board Meeting to:

  • Approve the allotment of securities

  • Authorize issuance of Share Certificates or Debenture Certificates

Step 9: File PAS-3

• File Form PAS-3 (Return of Allotment) within 15 days of allotment.

• Delayed filing can result in heavy penalties—₹1,000 per day (max ₹25 lakhs) under Section 42(9).

Step 10: Issue of Certificates

• Issue Share Certificates or Debenture Certificates within:

  • 2 months of allotment (for shares)

  • 6 months (for debentures)

Step 11: Create Charge (For Secured Debentures)

• If debentures are secured, file CHG-1 within 30 days of charge creation.

• This step is not applicable for equity or CCPS issuance.

Step 12: Maintain Register of Members and Debenture Holders

• Update relevant statutory registers:

  • SH-1 for equity and preference shareholders

  • SH-3 for debenture holders

Conclusion

As a startup founder, your focus should be on building your product and growing your company. But the law simultaneously requires you to stay compliant with a complex web of corporate, tax, and regulatory norms.

Non-compliance can lead to serious consequences—invalid transactions, investor distrust, or penalties.

This is where Prolead comes in. We are your strategic legal and compliance partner, with a team of professionals having decades of experience in:

• Company Law

• FEMA and RBI Regulations

• Taxation and SEBI Regulations

From fundraising to day-to-day compliance, Prolead helps your startup scale confidently and compliantly. Let us handle the complexities so you can focus on what you do best—building the future.