Fundraising is a critical milestone for any growing company, but it comes with a web of regulatory requirements under the Companies Act, 2013 and FEMA. Whether you are raising funds through equity shares, preference shares, debentures, or convertible notes, each instrument has specific compliance obligations that must be fulfilled. This checklist will help you stay compliant through every stage of the fundraising process.
Pre-Fundraising Compliance
Before initiating any fundraising round, companies must ensure several foundational compliances are in place. This includes obtaining board approval through a properly convened board meeting, passing a special resolution in a general meeting for preferential allotment under Section 42/62 of the Companies Act, and filing Form MGT-14 with the ROC for the special resolution. Additionally, ensure your company’s authorized share capital is sufficient to accommodate the new issuance, and if not, file Form SH-7 for increase in authorized capital.
Valuation Requirements
The Companies Act requires a valuation report from a registered valuer for preferential allotment. If foreign investment is involved, FEMA requires the price to be at or above fair market value as determined by a SEBI-registered merchant banker or CA using the DCF method. The valuation report must be obtained before the shares are allotted and should not be older than 90 days at the time of allotment.
Private Placement Procedure (Section 42)
For private placement of shares, the company must issue a Private Placement Offer Letter (Form PAS-4) to identified persons, limited to 200 persons per financial year (excluding qualified institutional buyers). The offer letter must contain all prescribed particulars, and the company must maintain a complete record of all offers made. File Form PAS-3 (Return of Allotment) within 15 days of allotment along with the list of allottees.
Post-Allotment Filings
After allotment, several filings are mandatory. Form PAS-3 (Return of Allotment) must be filed within 15 days. If shares are issued to foreign investors, Form FC-GPR must be filed with RBI within 30 days. The share certificates must be issued within 2 months of allotment. Update the Register of Members, Register of Allotments, and ensure proper stamp duty is paid on share certificates.
Convertible Notes and CCPS
Startups often use Convertible Notes or Compulsorily Convertible Preference Shares (CCPS) for early-stage fundraising. Convertible notes issued to foreign investors must have a minimum face value of Rs 25 lakh per note under FEMA regulations. CCPS must be converted within 20 years from the date of issuance. Both instruments require specific reporting under FEMA if foreign investors are involved.
Common Mistakes to Avoid
The most frequent compliance failures in fundraising include allotting shares before receiving consideration (the money must come first), not filing PAS-3 within 15 days, missing FC-GPR deadlines for FDI, not obtaining prior government approval for sectors requiring it, and exceeding the 200-person limit for private placement offers. Each of these can attract penalties and may even render the allotment void.
A well-planned compliance strategy can make your fundraising process smooth and investor-friendly. Contact us to ensure your next funding round is fully compliant.