The growth of the IT sector in India has led to the emergence of Healthcare Tech sector in India. And, as a part of this immense development, to scale up, entrepreneurs look forward to raising funding for healthcare startup from an external source. This article is dedicated to founders in this sector finding answers to ” How can I raise funding for my healthcare startup?”
You can raise funds through 3 routes:
- Venture Capital investment
- Borrow money
- Foreign investment into India is governed by the Foreign Exchange Management Act, 1999 (“FEMA”), the rules and regulations made by the RBI, and the Industrial Policy and DIPP.
- 100 percent FDI is permitted in most sectors under the automatic route (no approval of FIPB”)
- Hospital sector and in the manufacture of medical devices – 100 percent FDI allowed under automatic route
- Pharmaceutical sector – Under the automatic route, FDI is permitted up to 100 % in Greenfield projects and 74% in Brownfield projects and FDI beyond 74% in Brownfield projects requires FIPB approval.
- The cap on FDI in the insurance sector has been increased from 26 percent to 49 with the directive that the ownership of the insurance company be retained in Indian hands.
Venture Capital Investment Route:
- All venture capital investment by entities registered with the Securities Exchange Board of India (“SEBI”) as foreign venture capital investors.
- It is not mandatory for a private equity investor to register as a Foreign Venture Capital Investor (“FVCI”) under the FVCI regulations 11, there are some significant advantages to be gained by registering as an FVCI.
- Registered FVCIs benefit from free entry and exit pricing and are not bound by the pricing restrictions.
- FVCI can opt for both QIP route and QIB route in IPOs.
- FVCI can opt for Lock-in options in case of IPOs.
Borrow Money Route:
Before entering the lending process, analyze the situation first:
- When money lender is a foreigner: These guidelines issued by the Reserve Bank of India (the RBI), regulate not only the returns (prescribed all-in-cost ceilings pegged to 6 month LIBOR cover fees, interest fees etc. except pre-payment fee, commitment fee and fees payable in Indian Rupees) but also the tenure and amount of the loan, the sectors and purposes for which loan can be availed, the type of security and so on. Sometimes approval of the authorized dealers and in some cases that of the RBI may be required.
- Transaction costs: Stamp duty (and sometimes registration duty) plays a significant part in the choice of security, properties (immovable or movable and location of immovable property) and place of execution. It differs across states in India and can be very significant.
- Money advanced against the provisions of Contract Act and Existing Laws: any contract drafted to lend money should be in accordance with Provisions of Contract Act, sometimes due to Ignorance, money is loaned to a minor or for purposes barred by Indian Law. Recovery of money in cases is extremely difficult.
- Taxation Issues: Loan money received has no tax availed on them but when interest is charged, the interest is liable to tax.
To Ensure Recovery of Your Money:
- There are three easy steps to ensure the recovery of your Money-
- Promise Note: A promissory note is an acknowledgment to pay back debt (on demand or otherwise) and may include some simple terms and conditions. If the aim is to include specific or detailed clauses, it is advisable to enter into a loan agreement.
- Loan Agreement: Unlike a promissory note, a loan agreement can be modified. An amendment clause needs to be incorporated in the agreement. It enables the parties to amend the document on mutually-agreed terms and conditions. Thus, when more Complications are Involved
- Money Lender License: If Money Lending is your Business and major part of your Income comes through it you need to get Money Lenders Registration from Local Authorities. Constitution grants power to State Governments to draft Legislations as to Money Lending. Some of them also impose restrictions as for rate of interest, and procedure to be followed and such licenses provide security in legal disputes.
Enforcement Remedies: Given the overstretched judicial system in India where recovery proceedings are typically time-consuming, you can approach the Debt Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, this represents a significant advantage. Some have tried to work around this through inter- creditor arrangements.
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BTW, This blog might interest you Every Venture Wanting to Raise Funds, things you need to know