ACCENT JOURNAL OF ECONOMICS ECOLOGY & ENGINEERING
Peer Reviewed and Refereed Journal IMPACT FACTOR: 2.104(INTERNATIONAL JOURNAL) ISSN-2456-1037
Vol.04,Special Issue 04, 2nd Conference (ICIRSTM) April 2019, Available Online: www.ajeee.co.in/index.php/AJEEE
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A STUDY ON CROWD FUNDING MECHANISM IN INDIA- WITH SPECIAL REFERENCE TO ROLE OF SEBI
1Dr. Shalu Kotwani
Assistant Professor, Shri Vaishnav Institute of Management, Indore (M.P.)
2Dr. Sandeep kumar Malu
Associate Professor, Shri Vaishnav Institute of Management, Indore (M.P.)
Abstract:- Finance is the foundation stone on which every business stands. Its crucial need starts with the putting in place of the business. Before establishing business, every businessman thinks about the sources of funds from where he can dig up the required fund for his business. Crowd funding is the fresh concept in the field of finance. It is the boost up concept for the investors, especially to those who have innovative idea but lack of capital. In this research paper, the authors tried to explore the concept of crowd funding, its meaning, selection criteria and risks involved. As in today’s developing India, youth is interested in entrepreneurship the notion of crowd funding is a great startup for them.
Keywords:- Accredited Investors, HNI, QIB, crowd funding and SEBI.
1. INTRODUCTION
According to SEBI, crowd funding is the process of solicitation of funds of small amount from multiple investors through a web based platform or social networking site for a specific project, business venture or social cause. In other words, it may be defined as the route where one party financing a project by requesting and receiving small contribution from many parties in consideration for a form of value to those parties. Crowd funding fills the bridge between investors with small business startups and projects through an online transaction portal that removes barriers to entry.
1.1 History Types
As per IOSCO staff working paper, 2014, crowd funding can be segregated into four categories, namely donation crowd funding, reward crowd funding, peer to peer lending and equity based crowd funding. Donation crowd funding and reward crowd funding are come into the class of community crowd funding while peer to peer lending and equity crowd funding are also known as financial return crowd funding. Donation crowd funding is also known as social lending. It indicates the way of fundraising for social, artistic, philanthropic and mainly for charitable purposes.
Reward crowd funding refers to the process of solicitation of funds in which investors earn some existing or future tangible benefits as return on their investment. Peer to peer lending provides an online platform to the investors and issuers to satisfy their need through unsecured loans. In this method, the platform decides the interest rate of loan. In Equity based crowd funding the fund is raised through offering equity interests in the business to the investors online. Except other financial returns, crowd funding also provides various benefits to the investors, entrepreneurs and economy, some of them are as follows:
To the entrepreneurs:-
1. Through crowd funding, the new entrepreneurs can raise fund without giving up large lots of equity interest to the investors.
2. Crowd funding helps in increasing the flow of credit in the small and medium enterprises sector.
3. Crowd funding provides fund at lower cost of capital as there is no rigid method of issuance is to be followed by the entrepreneurs.
4. Financial crisis of 2008 is the main reason of banks failure and introduction of Basel III capital adequacy norms. This restricted the lending capacity of banks, due to which many SMEs faced problems in raising fund. Then the concept of crowd funding emerged as an alternative source of fund.
5. An attractive idea not only attracts large number of investors but also raises entrepreneurs profile and goodwill in the market.
6. As all the pre-release contents of the project is accessible to the investors for their comments and opinions, instant feedback is available to the creator of the project.
ACCENT JOURNAL OF ECONOMICS ECOLOGY & ENGINEERING
Peer Reviewed and Refereed Journal IMPACT FACTOR: 2.104(INTERNATIONAL JOURNAL) ISSN-2456-1037
Vol.04,Special Issue 04, 2nd Conference (ICIRSTM) April 2019, Available Online: www.ajeee.co.in/index.php/AJEEE
2 To the investors:-
1. As majority of the investors are individuals with small amount of investment, crowd funding helps them to spread the risk.
2. It appeared as the new investment alternative and portfolio diversification to the investors.
3. Individual investors are treated as brand promoter and valuable part of the project.
4. With numerous benefits crowd funding somewhere creates some risks and barriers for the entrepreneurs and investors.
To the entrepreneurs:-
1. If the entrepreneur is unable to achieve the financial objective or to satisfy the investors, it directly affects his goodwill.
2. There is a risk of hacking or plagiarism as the creator has to publicly announce the details of the project.
3. Expected public participation may not be achieved all the time.
To the investors:-
1. As there is no secondary market, investors face risk of illiquidity.
2. Investors also face risk of fraud and disclosure.
3. Lack of transparency is also faced by the investors.
As per SEBI consultation paper on crowdfunding, an early stage startup or SME which is an unlisted public company incorporated in India can raise the capital through crowdfunding if they meet following criteria.
A non-listed company which has completed not more than 4 years.
The company can raise maximum capital 10 crores in a period of 12 months.
A non-promoted company or a company not related to an industrial group has a turnover of more than 25 Crores.
A company should not engage in real estate.
The promoters, directors or associates should not be declared by defaulter or willful defaulter by RBI or CIBIL.
A company cannot raise fund from multiple crowdfunding platforms.
The crowdfunding platform should be recognized by SEBI.
SEBI has made some limitations on the crowd funding investors. According to SEBI, only accredited investors can employ their money in the crowd funding. It has made definite norms for companies, HNIs and retail investors. The accredited investors, in case of companies are those who have incorporated under companies act with minimum networth of 20 crore.
In case of high networth individuals (HNIs) with minimum networth limit is 2 crore.
Retail investors can also invest in crowdfunding if their minimum gross annual earning is 10 lakhs. Retail investors have to acquire services from portfolio manager or investment advisor in addition of filing the income tax return for last 3 years which should certify that they will not invest more than 60,000 on crowd funding platform.
2. CONCLUSION AND SUGGESTIONS
Although SEBI is playing an incredible role in protecting both the parties i.e. investors and entrepreneurs still some more efforts are required. In India, Crowdfunding is at emerging stage, as the investors and companies are not awareness about it. But with the help of SEBI and e-commerce, it will reach the zenith of investment options. In addition to this, strong and transparent norms by SEBI will increase the trust of investors for this innovative field of investment.
