Monday, July 11, 2016

Paper on Crowdfunding

Arjya Majumdar and I have a paper titled “Regulating Equity Crowdfunding in India: Walking a Tightrope” that is available on SSRN. The abstract is as follows:

Start-up companies face difficulties in raising finances, and the situation has exacerbated since the global financial crisis in 2008. As a result, crowdfunding has made its appearance as an attractive alternative capital-raising mechanism by harnessing technology (primarily the Internet) to access funding from the “crowd”.

In this chapter, we explore the core question of how should one regulate equity crowdfunding in a manner that enhances its appeal to engender the development of small and new-age businesses through accessible funding opportunities and at the same time protect investors against undue risks, such as fraud, which arise from the activity. We analyse the regulatory conundrum on equity crowdfunding by examining the legal regime for crowdfunding in India.

The rules relating to fundraising by companies in India have been considerably tightened under the Companies Act, 2013 that limits crowdfunding activity. However, the Securities and Exchange Board of India (SEBI) has issued a consultation paper that proposes a framework for ushering in crowdfunding in India. We find that the unduly onerous conditions imposed by SEBI have the effect of deterring rather than promoting the growth of crowdfunding. The existing (and proposed) legal framework in India have erred on the side of caution and sought to emphasise more on investor protection than to engender the market for crowdfunding.

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