Banking for Start-ups

Indian Institute of Foreign Trade

August 9, 2019
Startup Fund Flow
Capital

B2C Vendors

Startup
Collections Payments

B2B Employees
Capital Infusion

Equity Capital Debt Capital

Domestic Owner’s Equity Domestic Loans
Domestic Shareholders Equity Trade Finance
Foreign Owner’s Equity Forex/ Treasury Limits
Foreign Shareholder’s Equity External Commercial Borrowing
Convertible Note
Foreign Direct Investment

• Foreign currency is a regulated form of equity

infusion
• FDI routes:
▫ Automatic Route
▫ Approval Route
• FDI equity money should be received in Share
Capital Account
• Share Allocation should be completed before the
money is utilized for business purposes
FDI Fund Flow
Remitter USD
Local USA Bank Vostro Account
Company
Account with Corr Bank
(USA)

USD

Beneficiary
Local Indian Bank Nostro Account
Company
Account with Corr Bank
(India) INR
FDI Fund Flow
Remitter
Foreign Bank
Company
Account in USA
(USA)

USD

Beneficiary
Foreign Bank
Company
Account in India
(India)
FDI SWIFT Flow
Remitter MT109
Local USA Bank Vostro Account
Company
Account with Corr Bank
(USA)

MT199 MT199 MT109

KYC KYC
Request

Beneficiary
Local Indian Bank Nostro Account
Company
Account with Corr Bank
(India) MT109

*Society for Worldwide Interbank Financial Telecommunication code

FDI SWIFT Flow
Remitter
Foreign Bank
Company
Account in USA
(USA)

MT109
MT199 MT199
KYC KYC
Request

Beneficiary
Foreign Bank
Company
Account in India
(India)

*Society for Worldwide Interbank Financial Telecommunication code

FDI Reporting Regulations

• The capital instrument has to be issued by the

Indian company within sixty days from the date
of receipt of the consideration.
• FCGPR filing needs to be done within 30 days
from issuance
• FCTRS filing needs to be done within 60 days
from transfer of shares
New guidelines for Ecommerce FDI

• Marketplace – 100% FDI allowed through

Automatic route
• In a marketplace model, the e-commerce firm is
not allowed to directly or indirectly influence the
sale price of goods or services
• If a vendor sells more than 25% of its wares
through an e-commerce marketplace, the latter
will be deemed to have an inventory model, in
which FDI is not allowed
Business Loans

Working Capital Trade Finance Forex

Over Draft Letter of Credit ECB
Cash Credit Bank Guarantee Forwards
Term Loan LC Bill Discounting Cash-Tom-Spot Limits
Invoice Discounting Pre/Post Shipment Finance Foreign Currency Loans

# For startups, Fixed Deposit / Mutual Fund is the most common form of security
External Commercial Borrowings
• ECBs are loans in India made by non-resident lenders in
foreign currency to Indian borrowers.
• These non lenders can be the parent entity, venture
capital / private equity firms
• As per new norms (Jan 2019), any company eligible for
FDI can also raise ECBs
• ECB can be raised for working capital, purchase of assets,
ODIs
• ECB cannot be used to purchase shares in Indian
companies
• Cheaper loan when pegged to LIBOR (now IBOR, Inter
Bank Offered Rate), EURIBOR with respect to INR rate
of interest
Convertible Note

• A convertible note is a form of short-term debt

that converts into equity, typically in
conjunction with a future financing round
• In effect, the investor would be loaning money to
a startup and instead of a return in the form of
principal plus interest, the investor would
receive equity in the company.
Payments
• Traditional
▫ Cash / Cheque / Demand Draft/ Banker’s Cheque
• Card Based
▫ Corporate Debit Card
▫ Corporate Credit Card
 Purchase Cards
 Travel Cards
• Electronic Mode
▫ NEFT
▫ RTGS
▫ IMPS
▫ UPI
▫ API Funds Transfer
• Foreign Remittances
▫ A1 Remittances – For import of goods
▫ A2 Remittances – For services rendered
Collections
• Traditional
▫ Cash/Cheque/Demand Draft/Banker’s Cheque
• Auto Debit - NACH/ECS/ACH
▫ Mandate Registration
▫ Mandate Execution
• ERP Banking
▫ Host2Host Banking E.g: Tally Banking
▫ API Banking E.g: SAP, Oracle, Navision
• E-collect/Virtual Accounts
• Payment Gateway
• Wallet
▫ Closed E.g: MMT, Flipkart
▫ Semi Closed E.g: Mobikwik, Amazon Pay
▫ Open E.g: M-pesa by Vodafone
• UPI collect
• Nodal
Marketplace Nodal Fund Flow
1000
Payment
Customer Gateway PG Charges
20

980

100 Marketplace

Marketplace
Nodal (T+2)

880
Seller
Payment Gateway Nodal Fund Flow
1000
Payment PG Nodal
Customer Gateway PG Charges
(T+2)
20
1000

980

100 Marketplace

Marketplace
Nodal (T+2)

880
Seller
 Typical Nodal Businesses
Marketplace Nodal Wallet Nodal PG Nodal
Example Amazon Amazon Pay PayU
Majority Fund Seller Customer Company using the PG
Ownership services
Minority Fund Marketplace Wallet owns PG provider owns the
ownership transaction charges MDR
Settlement T+2 T+2 T+2 (Nodal to Current)
T+3 (Nodal to Nodal)
Transaction T + Product delivery Non ambiguous Non ambiguous
Completion time + Expiration of
return policy
Definition of T T can be ambiguous T is clear T is clear
Exception Where delivery vs - -
payment (DvP) is
immediate
Thanks for your time!

Sudhanshu Shekhar Aggarwal

Email: sudhaggar@gmail.com
LinkedIn: www.linkedin.com/in/sudhanshu-shekhar-aggarwal