Amidst the ongoing difficult times for various emerging businesses, the Ministry of Corporate Affairs (‘MCA’) has come out with 2 major relaxations in its recent notification dated September 07, 2020 named the Companies (Acceptance of Deposits) Amendment Rules, 2020. The amendment in the Companies (Acceptance of Deposits) Rules, 2014 (‘Deposit Rules’) is aimed at providing relaxation to startups.
The 2 relaxations are as follows:
1. Maximum maturity period of convertible notes increased from 5 to 10 years:
Start-ups are eligible to issue convertible notes for raising capital. Among other restrictions of raising capital through convertible note one restriction is that the convertible note is required to be compulsorily converted into equity or repaid within a period of 5 years from the date of issue.
Now the maximum maturity period of a convertible note has been increased from 5 years to 10 years i.e. a start-up can use the amount raised through convertible note for a longer period of time and do not have to compulsorily convert to equity or repay within 5 years from the date of issue.
2. Relaxation to accept deposit from members for an extended period:
As per the Deposit Rules, a private company can accept from its member's monies not exceeding 100% of the aggregate of the paid-up share capital, free reserves, and securities premium of the company.
However, the above limit is not applicable to a private company which is a start-up, for 5 years from the date of its incorporation.
The recent relaxation has increased the time period from 5 years to 10 years, whereby the above-mentioned limit of raising deposit shall not be applicable to a private company which is a start-up, for 10 years from the date of its incorporation.
These relaxations can go a long way in assisting the emerging startup ecosystem to survive and raise funds to grow bigger in the current scenario where many businesses are finding it difficult to survive.