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Understanding Crowd Funding in India

August 27, 2019

What is Crowd Funding in India?

Crowdfunding is a way to raise funds for a specific cause or project by asking a large number of people to donate money, usually in small amounts, and usually during a relatively short period of time, such as a few months. Crowdfunding is done online, often with social networks, which make it easy for supporters to share a cause or project cause with their social networks. Crowdfunding is a way of raising money to finance projects and businesses which also enables the fundraisers to collect money from a large number of people via online platforms. Crowdfunding is most often used by startup companies or growing businesses as a way of accessing alternative funds. It is an innovative way of sourcing funding for new projects, businesses or ideas. Organizations, businesses, and individuals alike use crowdfunding for any type of project, for example: charitable cause; creative project; business startup; school tuition; or personal expenses.

Types of crowdfunding
Crowdfunding varies depending on the product or service you offer and your goals of growth and reimbursement. The SEBI Consultation paper published in 2014 , it states about the following types of crowdfunding including donation-based, debt-based and equity crowdfunding.

• Donation-Based Crowdfunding
Donation-based crowdfunding is where the investors or contributors are promised no financial returns. People usually invest because they believe in the cause as these campaigns are mostly cause-based. Nevertheless, minor tokens can be offered in order to express gratitude towards the investors. These include fundraising for disaster relief, medical bills, charities, and other non-profit ventures.

• Debt-Based Crowdfunding
This method promises the contributors their money back with interest. It is also called ‘peer-to-peer (p2p)’ lending and doesn’t account for much involvement of traditional banking.

• Equity-Based Crowdfunding
This type of funding is different from both the above-mentioned ones as the contributors become part-owners of your company. They acquire equity shares in exchange for capital receiving return on their investment as well as a share of the profits. They are also entitled to a dividend or share in the profits of the company subject to pre-agreed terms and conditions.
• Peer to Peer Crowdfunding
In Peer-to-Peer lending, an online platform matches lenders/investors with borrowers/issuers in order to provide unsecured loans and the interest rate is set by the platform. Some Peer-to-Peer platforms arrange loans between individuals, while other platforms pool funds which are then lent to small and medium-sized businesses.

Legality of Crowdfunding
In India, the scenario of crowdfunding is totally different as compared to the other countries like Australia, United Kingdom where they have specified laws and rules, as there are no specific laws in India which regulate crowd funding in India. However, Securities Exchange Board of India (SEBI) has published its consultation paper on crowd funding in India wherein they have proposed certain recommendations in light of the regulations in force in other countries like UK, USA, Australia, China , Japan, New Zealand to name a few.

1 Consultation Paper on Crowdfunding in India, Securities and Exchange Board of India (dated June 2014) available at https://www.sebi.gov.in/sebi_data/attachdocs/1403005615257.pdf

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