In terms less often used, crowdfunding refers by definition to the process of collecting capital resources by small contributions from a large number of people fundraising. Most crowdfunding online platforms have become an effective way for individuals, businesses, non-profit organizations, and other projects to raise funds. The four primary categories under which crowdfunding can be defined are debt-based, equity-based, reward-based, and donation-based. Donation-based crowdfunding is largely for social purposes. Here, the backers donate to a cause without looking for any form of repayment gains. That is reward-based crowdfunding: here, the backers get nonfinancial rewards, like special privileges or the chance to use the source before the public does. That’s debt-based crowdfunding: people borrow money and agree to pay the amount back, plus interest. Conversely, equity-based crowdfunding gives investors ownership of the company in exchange for shares they buy.
The growth of smartphones, coupled with better internet access and emergence of digital payment facilities, has helped crowdfunding grow in India now. Some of the highly noted fundraising platforms are ImpactGuru, Milaap, and Ketto which can be used for all purposes, such as raising money to fund immediate medical expenditure, schooling, disaster management and business expansion. This becomes all the more important when other sources like bank loans or venture capitalists pompously stipulate every condition and ask for collateral security.
However, crowdfunding in India faces issues like an unavailability of awareness, trust issues and regulatory issues. SEBI has framed the rules regulating equity-based crowdfunding. These are formed to protect the investors and ensure transparency in the process. A population as enormous as that of India, with an increasingly rising culture of collective support, is bound to hold promising chances for crowdfunding despite all the challenges.
It has now become very important to use for solving financial deficits, generating innovations, and for helping the needy. It gives the power to the people over finance, making it the most important component of the Indian financial ecosystem.
Types Of Crowdfunding
Crowdfunding in India can be broadly categorised into four types based on the profile of the audience. These categorisations then provide different funding schemes for individual startups and communities, which go a long way in bringing some flexibility and innovation to overcome financial challenges in an emerging economy.
Donation-based crowdfunding
It is a form of crowdfunding that has no profit-generating characteristic and is devoid of humanitarian benefits wherein people donate for a particular cause and do not expect anything in return. It is mainly used for social causes, emergency medical assistance, disaster relief, scholarships and community development projects. Some instances of this type of crowdfunding platform include Milaap, Ketto, etc.
Reward-based crowdfunding
In reward-based crowdfunding, the incentive would be defined as gifts or merchandise items or exclusive invitations to special events to grant monetary support to people who assist in project realisation in some non-monetary form. Most businesses, artists and creators pursue this model for their projects when they have tried to innovate something new, be it a motion picture, a book or a technology. This concept can be found in India, such as in Wishberry.
Equity crowdfunding
In this model, people can invest in a company or startup and get shares or ownership interests in the return. It is one way for businesses to raise finance while allowing investors to get a share of the upside potential in their growth and success stories. Just like any other good initiative, this one has an extensive monitoring cannon through SEBI to render safety without compromising on transparency.
Debt crowdfunding (Peer-to-Peer Lending)
Debt crowdfunding is offering loans to either individual borrowers or business borrowers, thus making them eligible to attract funds from a number of lenders within a particular timeframe at interest charges while after the last period, the borrower will pay the lenders Most commonly called as peer-to-peer (P2P) lending, this kind of funding is especially good for short-term requirements. Faircent and LenDenClub are names of a few platforms through which such lending is facilitated in India.
Legal Status of Crowdfunding in India
Crowdfunding is legal in India but varies in its legality and regulatory framework based on the type of crowdfunding. Some of the models are quite accepted and function with minimal legal scrutiny, while others have strict regulations or legal boundaries.
Donation-based crowdfunding, being free of legal restrictions, is very commonly used for projects meant for donations for charitable, medical, and social purposes. Such platforms are Ketto, Milaap and ImpactGuru that work on these campaigns under no legal restrictions due to the nature of its contributors’ expectations of no direct monetary returns.
Reward-based crowdfunding is also legal and is mainly used for funding creative projects, launching products, and other innovative ideas. Because contributors are not offered some kind of monetary return but something in return, such crowdfunding in India is tightly regulated at the government level.
In comparison, equity-based crowdfunding is much more complicated and is kept under a very close scanner by the Securities and Exchange Board of India (SEBI). We do not let unregistered entities raise money over the Internet in exchange for equity or ownership stakes. Such campaigns can thus include those businesses that meet the requirements set by SEBI and accredited investors; thus, equity crowdfunding is not something that has become popular in this country.
Debt-based crowdfunding or peer to peer lending is legal and regulated by the Reserve Bank of India. P2P platforms must hence be NBFC-P2P registered and comply with detailed guidelines on loan size and interest type as well as participant verification.
Whereas donation and reward-based crowdfunding have relatively limited rules, the equity and debt-based crowdfunding face rigorous regulations which follow to keep investors and lenders off the venture. With India’s financial landscape ever changing, these regulations will balance innovation with investor protection.
Regulatory Framework of Crowdfunding in India
That is the reason why the present most worried columns of the crowdfunding ecosystem in the country are the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). Below is an arrangement of the regulatory framework under the various headings of crowdfunding:
- Donation-Based Crowdfunding – There is no specific regulatory authority for this. Such activity generally relates to promoting charitable or social causes, like medical needs, disaster relief or education. Requirements of the general legislations also need to be complied with that oversee the use of funds.
- Reward-Based Crowdfunding – There is no particular regulatory authority overseeing this factor. No repayment claim for funds serves to make the regulation more lenient; however, the intellectual property and consumer protection laws must be followed by all the organizers of the campaign, as well as tax obligations specific to their countries.
- Equity-Based Crowdfunding – The Regulatory Body over this SEBI. In 2014, SEBI came out with a discussion paper on crowdfunding and invited comments on draft regulations for equity crowdfunding to be offered strictly to accredited investors- that is, high net-worth individuals and institutional buyers. All platforms for equity crowdfunding shall be mandatorily registered with SEBI. Start-ups that are unlisted and meet a specific turnover test are qualified to access equity crowdfunding. Retail investors may not participate in equity crowdfunding, so they retain anonymity.
- Debt-Based Crowdfunding – RBI regulates crowdfunding, particularly peer-to-peer lending. Reserving guidelines by RBI for peer-to-peer lending platforms in 2017: Those types of entities will be registered as Non-Banking Financial Companies – P2P (NBFC-P2P). Lenders and borrowers should have specified ceilings not exceeding Rupees Fifty Lakh. The said platforms will need to stipulate due diligence, safe data management, and the maintenance of an escrow account for the transfer of funds.
Platforms shall be brought under consumer protection regulations in order to prevent any bias during the participation and reduce possible fraud opportunities. Such platforms would also need to adhere to data privacy and cybersecurity rules set by Information Technology Act 2000. Such contributions are also liable to Goods and Services Tax and would be exempted from tax under Section 80G of Income Tax Act, 1961.
The regulatory framework for crowdfunding is changing in India. The growth of equity and debt-based crowdfunding is on its course to be smooth yet innovation-driven for investors. SEBI and RBI report that both regulators are exploring avenues to further sprout development in the crowdlending sector while simultaneously reducing the risk for the contributors and investors.
Conclusion
Crowdfunding, as it goes in India, is a practical way by which crowds can be drawn to contribute to funds, innovations, and social issues. Indeed, the scenario in this regard is big, but the evolving laws of the country are very much tending to strike a balance between opportunities and constraints imposed by regulation. Both donation-based and reward-based crowdfunding are fully legal, widely used, and normally face very few hurdles from a regulatory perspective. Therefore, they represent a very practical option for individuals or organizations wanting financial assistance for a charity, creativity, or entrepreneurial project. Both equity-based crowdfunding and debt-based crowdfunding, referred to as peer-to-peer lending, are heavily regulated by SEBI and RBI in order to protect investor and lender interest with respect to financial risks and fraudulence while also promoting transparency and due compliance with regulations.
Among these options, equity crowdfunding is the most advanced. The regulation is limited to the public awareness, trust issues, or confidence or the regulatory clutter facing crowdfunding in India. The imposition of restrictions on equity-based crowdfunding could diminish its accessibility for normal lay individuals and thus minimises the potential of such funding as a general source of raising funds. Meanwhile, debt-based crowdfunding still imposes very strict lending limits and regulatory governance that foster accountability and morality in dealings.
As the crowdfunding environment evolves, regulatory agencies of India will bring even more formulated rules that would harbor innovation and care for the contributors. Meanwhile, promotion of transparency, trust and education for the public on various avenues that crowdfunding would present is the way forward to the future.
It can be concluded that though crowdfunding is legal and keeps on upsurging according to Indian legislations, the success will depend on the presence of such a regulatory environment along with higher awareness and responsible participation by all stakeholders.
