We have previously discussed the concept of crowdfunding and the broad nature of the legal issues that it might give rise to. Essentially, crowdfunding that involves the issue of securities (equity or debt) would attract the provisions of company law as well as securities laws. While specific crowdfunding legislation has been introduced in several countries (e.g. JOBS Act in the US), there has been no specific legal reform in India. This despite some indication of crowdfunding activity already having commenced in India.
Recognising the market realities and the need for crowdfunding as a source of capital raising by small and medium enterprises (SMEs), SEBI has issued a “Consultation Paper on Crowdfunding in India”. The paper is detailed and contains not only a background discussion regarding the methods of crowdfunding but also a comparative section on how it is regulated in several countries around the world. It discusses the legal regime in India, which primarily consists of the provisions of the Companies Act, 2013 and various SEBI regulations, including the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR). Thereafter, SEBI has raised a number of open-ended questions inviting suggestions as part of the consultation process.
While the crowdfunding mechanism requires companies to be granted the ability to raise capital through private arrangements for which they need to advertise through various means, primarily the Internet, this approach generally tends to militate against the legal regime that usually carefully circumscribes the manner in which companies can offer securities. This is more so in the light of the new provisions in the Companies Act, 2013 relating to private placements, which arguably overregulate such offers largely due to challenging episodes such as Sahara. However, the provisions of the Companies Act do carve out certain exclusions for offer of securities to qualified institutional buyers (QIBs), etc. It is through the exploitation of these exceptions that crowdfunding can be carried out in the Indian context without any legislative amendment and with the mere intervention of SEBI through the issue of appropriate regulation.
It is not clear if the crowdfunding market in India is yet at a stage when targeted regulation is mandated, but SEBI’s move to begin consultation on this issue is welcome. However, SEBI has made it clear that this is only an initial consultation process, and that there is no certainty that a specific regulatory regime for crowdfunding will in fact be introduced.