Opinion Little by little

The consultation paper on crowdfunding released by Sebi this week provides an opportunity to consider a globally emerging model of raising money for start-ups and private enterprises. Several crowdfunded campaigns offer rewards or benefits in return for contributions, but the elegance of this model lies in the promise that the investment is not seen merely as an instrumental transaction. The internet, the primary medium through which crowdfunding takes place currently, allows ordinary folk to help realise the goals or dreams of entrepreneurs, artists or activists. Given that individuals can choose from an array of start-ups, there is a greater sense of ownership in crowdfunded companies than in a public listing.

Of course, the proposed regulations do not apply to donations or reward-based campaigns, but only to equity and debt-based crowdfunding. Currently, a start-up or small enterprise can raise money through loans, private equity or angel investors. But Indian banks are in poor financial health and there is a lack of a vibrant community of venture capitalists. There is also a prevailing perception among businesses that raising capital in line with the procedure prescribed under the new Companies Act and the Sebi Alternative Investment Funds regulations is cumbersome.

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The consultation paper rightly notes “it is necessary to ensure start-ups/ SMEs can raise funds at ease [and] equally important to ensure no systemic risks are created wherein retail investors are lured by some unscrupulous players”. This will be easier said than done. A new and unregulated field like crowdfunding raises old concerns — Sebi has been struggling to deal with ponzi schemes and chit fund scams that raised money from investors who had no viable alternative to formal banking institutions. To protect retail investors, Sebi has sought to cap their contribution at Rs 60,000 and also mooted eligibility requirements such as an annual income of Rs 10 lakh. Crowdfunding platforms, it is proposed, must be “recognised” by Sebi. The protection of investors’ rights is paramount. But while requiring strict compliance of disclosure norms, Sebi must also be mindful that it doesn’t overregulate, to ensure that small businesses have the option of raising capital through local communities and networks.