In India, the choice of entity for startups seeking venture capital (VC) investment is not strictly mandated by law; however, certain legal and regulatory considerations significantly influence this decision. The choice between operating as a Private Limited Company, Limited Liability Partnership (LLP), or any other form of business entity affects a startup’s ability to attract VC investment, its fundraising capabilities, and its growth trajectory. Among the available options, the Private Limited Company is the most favoured entity type due to its suitability for equity-based fundraising, ease of transfer of shares, possibility of offering stock options to employees (ESOP), and governance mechanisms that protect investor interests. While it is possible for investors to acquire partnership interest for an investment in an LLP, it is often not considered as a viable option as it may be difficult for the investors to secure an exit through a transfer of such partnership interests.

The principal legal documents for a VC equity investment in India primarily establish the terms of investment, rights, and obligations of the parties involved. These documents are crucial for ensuring clarity, setting expectations, and protecting the interests of both the investors and the investee companies. The key documents typically include:

• Term Sheet: This is a non-binding document outlining the key terms and conditions of the venture capital investment. It serves as a blueprint for the investment and is the basis for drafting more detailed legal documents. Term sheets typically include valuation, investment amount, governance rights, and exit strategies.
• Shareholders’ Agreement (SHA): The SHA is a binding contract that details the inter-se rights and obligations of the shareholders, including the investors and the existing shareholders of the company. It encompasses provisions in relation to the governance and management of the company, share transfer restrictions, pre-emption rights, tag-along and drag-along rights, anti-dilution protections, and exit mechanisms.
• Securities Subscription Agreement (SSA): This agreement is used in case of primary investments. It outlines the terms of the investment, including the subscription of securities by the investors. It sets out the terms of investment including the investment amount, the number of securities to be issued, the price per security, the conditions precedent to closing of the investment, and conditions subsequent to closing of the investment. In addition to the foregoing, this agreement typically contains certain representations and warranties along with corresponding indemnities provided by the investee company and the promoters to the investors inter-alia in relation to the legal standing and business of the company, and valid and unencumbered title of investors’ securities.
• Share Purchase Agreement (SPA): In case of secondary investments, a share purchase agreement is executed for sale of existing securities of the target entity. This agreement specifies the terms and conditions under which shares of the company are sold and purchased, including the purchase consideration, number of shares being sold, sale price per share, conditions precedent and conditions subsequent to closing. In addition to the foregoing, it includes (a) representations and warranties along with corresponding indemnities provided by the target entity and its promoters inter-alia in relation to the legal standing and business of the company; and (b) representations and warranties along with corresponding indemnities provided by the sellers in relation to their legal standing, unencumbered title to the shares being sold and their tax residency.
• Employment Agreement: This agreement is typically executed by the promoters and certain key employees of the target entity for the purpose of identifying their terms of employment including roles and responsibilities, remuneration, performance milestones, employment benefits, and obligations in relation to exclusivity, confidentiality, non-compete, non-solicitation and non-disparagement.
• Articles of Association (AoA): The AoA is a constitutional document that sets out the rules and regulations with respect to the governance and management of the affairs of a company. In case of venture capital investments, the AoA is typically amended to incorporate certain key rights and obligations of the company and the shareholders which are captured in the SHA, such as board representation, conduct of board and shareholders’ meetings, share transfer restrictions, pre-emptive rights, terms of exit, and liquidation preference.

The abovementioned documents are confidential in nature and not publicly available, as they are private contracts between the parties. However, the AoA is filed with the Registrar of Companies (RoC) and is publicly available. Any amendments made to the AoA, including those resulting from a VC investment, must be filed with the RoC, making these modifications accessible to the public.

India’s venture capital ecosystem is dotted by several industry bodies and associations that play pivotal roles in representing, advocating, and providing support to the venture capital and startup communities. Among these, the Indian Private Equity and Venture Capital Association (IVCA) stands out as a prominent body. However, as of now, IVCA does not have any template investment documents for VC investments.

In India, the regulatory frameworks governing the offering of shares for sale are primarily enshrined in the Companies Act, 2013, and the rules and regulations issued by the SEBI. Among these, two critical aspects are the restrictions on selling and promoting the sale of shares to the general public and the private placement of shares.

1. Public Offerings:

Public offerings in India are regulated under the Companies Act, 2013, and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). These laws and regulations dictate the processes, disclosures, and compliance requirements for companies aiming to offer shares to the general public through an Initial Public Offering (IPO) or Follow-on Public Offering (FPO).

• Prospectus Requirements: A key requirement is the issuance of a prospectus, a detailed document that provides comprehensive information about the company, its financials, the risks involved, and the specifics of the share offering. The prospectus must be filed with SEBI and the relevant stock exchanges, and made available to the public, ensuring transparency and informed decision-making by potential investors.
• SEBI Approval: The ICDR Regulations mandate that companies seeking to go public must obtain SEBI’s approval, ensuring compliance with specific criteria related to financial health, corporate governance, and disclosure standards.

2. Private Placements:

Private placements of shares are envisaged under Sections 42 and 62 of the Companies Act, 2013, and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, for listed companies. These provisions allow companies to offer shares to a select group of investors, subject to certain conditions and limitations.

• Restriction on Number of Allottees: Offers through private placement cannot be made to more than 200 persons in a financial year, excluding qualified institutional buyers and employees of the company being offered shares under a stock option scheme.
• Private Placement Offer Letter (PPOL): Companies must prepare a private placement offer letter in accordance with the format specified in the Companies Act, providing details of the offer and for the purpose of obtaining the offerees’ approval in relation to the subscription of shares.
• Filing with the Registrar: Details of the private placement, along with a copy of the private placement offer letter and the record of the allottees, must be maintained by the company.

3. Prohibition on Public Solicitation:

The Companies Act expressly prohibits companies from publicly soliciting investments unless the offering is made through a SEBI-approved prospectus for a public offering. This includes restrictions on advertising or public promotions intended to solicit investments from the general public.

The Competition Act, 2002, is the cornerstone of India’s antitrust regime. It aims to promote and sustain competition, prevent practices having adverse effects on competition, and protect the interests of consumers. Within this framework, certain transactions, including mergers, acquisitions, and certain types of investments, require prior approval from the Competition Commission of India (CCI) if they meet specified thresholds related to assets and turnover, both within India and globally.

• Thresholds for Notification: Transactions that exceed the thresholds prescribed under the Competition Act must be notified to the CCI for approval. These thresholds are periodically revised and are designed to capture significant transactions that have the potential to impact competitive dynamics in India.
• De Minimis Exemption: Smaller transactions, which do not meet certain minimum value thresholds, are exempt from notification. This “small target exemption” is particularly relevant for venture capital investments in early-stage companies and startups, where the transaction values may not reach the notification thresholds.
• Assessment Criteria: The CCI assesses notified transactions based on their potential to cause an appreciable adverse effect on competition in India. Factors considered include market share, the extent of competition post-transaction, and potential benefits to consumers.

Foreign Direct Investment (FDI) Policy

India’s FDI policy, framed by the Department for Promotion of Industry and Internal Trade (DPIIT), regulates investments from outside India, including those by foreign venture capital investors (FVCIs). The policy outlines sectors where FDI is allowed, under what route (automatic or approval), and the conditions attached to such investments. India’s FDI policy has three routes:

• Automatic Route: The foreign entity does not need prior approval from the government or the RBI. However, in April 2020, the Indian government mandated that all investments from countries sharing land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, would require government approval.
• Government Route: The foreign entity must get approval from the government.
• Sector-specific FDI thresholds: These thresholds are based on the sensitivity of the sector, regardless of whether the sector falls under the automatic route or the government approval route. For example, up to 100% FDI is allowed for manufacturing, construction, and IT, while up to 74% FDI is allowed for pharmaceuticals and defence.

Further, as per the SEBI (Foreign Venture Capital Investor) Regulations 2000, FVCIs must register with the SEBI to invest in Indian entities. SEBI’s FVCI regulations provide a framework for such investments, including permissible investment sectors, investment conditions, and exit mechanisms.

In India, tax framework has been progressively refined to bolster the venture capital ecosystem. Some of these incentives include:

• Tax Pass-Through Status for VC Funds: Venture Capital Funds registered with the SEBI as Category I Alternative Investment Funds (AIFs) enjoy a tax pass-through status. This means the income earned by the fund is not taxed at the fund level; instead, it is taxed in the hands of the investors based on the nature of the income. This eliminates double taxation and makes VC Funds’ investments more attractive.
• Exemption from Long-term Capital Gains Tax: Investors in venture capital enjoy an exemption from long-term capital gains tax on the sale of shares of a startup, subject to certain conditions. This is applicable if the shares are held for a specified period and the startup is a qualified startup under the government’s startup policy. This exemption is designed to encourage long-term investment in startups.
• Carry Forward and Set Off of Losses: Startups in which VC funds invest can benefit from provisions that allow them to carry forward and set off their business losses against future profits. This is contingent upon the continuity of shareholding of at least 51% and is aimed at easing the initial financial strain on startups, thereby making investments in them more enticing for VCs.

Having said that, it is always advisable to consult tax experts in relation to all aspects of taxation involved in such transactions.

The process of a company issuing shares to investors in India involves several steps and requires internal approvals, compliance with regulatory requirements, and may incur taxes and other fees. This process is governed by the Companies Act, 2013, and the rules made thereunder, as well as the policies of the SEBI, in case of listed companies. The process and approvals typically include:

• Board Approval: The first step involves obtaining approval from the Board of Directors. The Board must assess and approve the proposal to issue shares, which includes determining the type of shares (equity or preference), the number of shares, and the price and other terms at which the shares will be issued.
• Shareholders’ Approval: Pursuant to the board approval, the shareholders are required to approve the offer and issuance of shares to the investors in a general meeting of shareholders. The shareholders’ approval is a crucial step, ensuring that the interests of all parties are considered.
• Valuation Report: A valuation report from a registered valuer is required to determine the fair value of the shares, as companies are restricted from issuing shares at a price less than the fair market value. This ensures that the shares are issued at a fair price. Further, where foreign direct investment is involved, a valuation report issued by a SEBI-registered merchant banker, or a chartered accountant should also be procured.
• Filing of Forms with the Registrar of Companies (RoC): Upon obtaining the necessary approvals, the company must file specific forms with the Registrar of Companies (RoC) within prescribed time frames. For instance, Form PAS-3 (Return of Allotment) must be filed, detailing the allotment of shares to the new investors.
• Amendment to the Articles of Association (AoA): In case of a primary investment, amendment to the company’s AoA may be required for the purpose of incorporating certain key terms negotiated in the shareholders’ agreement. This amendment must be approved by the board and the shareholders and must be filed with the RoC.
• Foreign Investment Considerations: For foreign investors, compliance with the Foreign Exchange Management Act (FEMA) 1999, and the regulations framed thereunder, is necessary. This includes reporting the investment to the Reserve Bank of India (RBI) through Form FC-GPR for a fresh issuance of shares to a person resident outside India and Form DI for issuance of shares to a Indian entity that is owned and controlled by a foreign entity. In case of a transfer of shares where exchange control regulations apply, Form FC-TRS is required to be filed.

Taxes and Fees:

• Securities Transaction Tax (STT): Not applicable for private placements but applicable for transactions in listed securities.
• Income Tax: The issuance of shares at a price more than the fair market value (FMV) may attract income tax under certain circumstances, classified as “income from other sources” for the company receiving the investment. For the investors, capital gains tax considerations apply when they sell these shares.
• Stamp Duty: Stamp duty is payable on the transaction documents executed among the parties involved and the share certificates issued to the investors, and the rates vary across states. In case of secondary investments, stamp duty is required to be paid on the securities transfer form as well.

Having said that, it is always advisable to consult tax experts in relation to all aspects of taxation involved in such transactions.

Indian startup ecosystem is very robust and India has become one of the largest hubs for startups globally. As the Indian startup landscape has matured, the investor pool has also expanded beyond traditional venture capital and private equity funds. Angel investors, family offices, high net worth individuals, and corporate houses are increasingly participating in investment activities. This is evidence of growing attractiveness of Indian markets and the opportunities they present. Incubators, angel investors and micro-venture capital firms play a crucial role in providing early-stage funding to startups. As companies grow, a mix of investors, including family offices, venture capital firms, and other institutional investors contribute to funding requirements of the start-ups.

Venture capital funds typically aim for an investment horizon of around 5 to 7 years for seeking an exit. However, this timeframe may vary depending on factors such as the company’s growth trajectory, the fund’s investment philosophy, prevailing market conditions, and the political climate.

In India, investors often prefer exits through Initial Public Offerings (IPOs), as the IPOs seem to generate maximum premium or valuation with the potential for further price appreciation and liquidity.  However, for undertaking an IPO the companies are required to meet prescribed criteria such as such net tangible assets of INR 30 million, a net worth criterion of at least INR 10 million in three preceding years. To achieve a viable IPO after fulfilling the prescribed conditions,  it is not uncommon to find that the investment period may get extend, allowing sufficient time to companies to reach a stage that is suitable for listing.

In India, venture capital investors focus on several key investment terms to safeguard their interests, some of them are briefly described hereunder:

• Type of instruments: Venture investors typically favour convertible instruments, especially compulsorily convertible preference shares (CCPS). CCPS not only offer preference over equity in receiving dividends and returns during liquidation, but the parties also have reasonable flexibility in determining the conversion ratio. The parties may specify trigger events that will require adjustment to conversion ratio or conversion price, such as fulfilment of pre agreed milestones by the Company, completion of a funding round etc. Also, in case of down rounds, the conversion terms of CCPS may be adjusted to protect existing investors from dilution.
• Anti-dilution: Transaction documents often stipulate that any new issuance of shares by the company will require prior approval of the investor. Further, pre-emptive rights are provided to the investors that give them the opportunity to participate in future fundraising In case of a down round, investors may have the option to subscribe to additional shares at a nominal price, subject to compliance with pricing guidelines under the Indian foreign exchange laws or if the investors are holding convertible instruments, their conversion ratio may also be adjusted as an anti-dilution mechanism. 
• Liquidation preference: The investors often negotiate a waterfall in case of distribution of sale proceeds of company. The investors are entitled to receive their initial investment or a multiple thereof before any proceeds are distributed to other shareholders. The specifics of liquidation preference arrangements often vary based on the stage of investment.
• Vesting and clawback: The agreements often provide that the equity ownership of founders will vest gradually over a specified period. If the founders exit before full vesting, the agreements provide for a claw back mechanism to ensure that the interest of the investor is fully protected.
• Board Representation: Investors often negotiate board rights that are linked to their shareholding stake in the company. Many investors also prefer appointing observers on the board, as the observers typically don’t carry any liabilities and are able to participate in the board proceedings. However, decisions on a lot of strategic matters are often implemented through shareholder affirmative votes as the directors are bound by their fiduciary responsibilities towards the company.
• Representations and indemnities: Robust representations in relation to business and operations of the company, title to the shareholding, intellectual property, tax, litigation are included in the transaction documents. Further, indemnities for breach of warranties from the company are also common. Indemnities are provided with monetary and time caps which may vary depending on the investment stage.
• Affirmative Voting: VC investors usually require a veto on matters on which no action may be taken without consent of investors including key decisions of the company or its subsidiaries like mergers, acquisitions, capital alterations, management changes, ESOP, related party transactions.
• Exit Rights: Investors have exit options through initial public offering (IPOs), strategic sale/ trade sale, buybacks, and drag along rights.

These rights may also be influenced by the type of company, sector, nature of investment, and negotiating abilities, all of which may differ for each investment. Further, in later-stage funding rounds, venture investors have less flexibility to negotiate investor rights due to the requirement for approval from existing shareholders to amend the shareholder agreements.

Parties in venture capital agreements often agree to reimbursing expenses up to a specified threshold. These expenses typically cover costs incurred by the VC fund for due diligence, deal structuring and related activities. However, the fee is usually modest and only partially covers the expenses associated with evaluating a typical startup. VCs typically do not seek arrangement / monitoring fees unless the company is backed by a promoter family or business house with a significant net worth.

Typically, the founders and the key officials are subject to restrictive covenants (RCs) under investment and employment agreements. The RCs are contractual obligations placed on the employees/ shareholders restricting them from engaging or dealing in certain specific activities. Some of popular RCs include non-compete restrictions, non-solicit restrictions, confidentiality obligations, exclusivity provisions, reverse-vesting of shares and clawback, in case of termination, breach or exit by the founders from the company. Under the reverse vesting and clawback provisions, the unvested shares are forfeited and claimed back from the employee/ founder. These RCs may operate during the term of the relevant contract as well as for couple of years after termination of the contracts.

The established ways to incentivise employees include employee stock options (ESOPs), management stock options (MSOPs), sweat equity shares, performance based monetary bonus/ payouts, and phantom stock options or stock appreciation rights. While ESOP is an option granted to employee to receive shares of the company at a future date for a predetermined price; sweat equity shares are issued to the employees or directors as consideration for providing intellectual property rights or know-how or any value additions to the company. MSOPs are generally offered to key management personnel, founders or key officials of the company to provide an upfront incentive / stake in the company and are linked to certain valuation achievements, completion of funding rounds and performance milestones conditions.

Issuance of phantom stocks (or virtual stocks) or stock appreciation rights is also a popular form of providing incentives to the key officials of the company. From Indian law perspective, these incentives may be linked to appreciation of the company’s shares without providing any actual shares to the employees. Unlike ESOPs or sweat equity shares, the phantom stocks are not subject to the provisions of the (Indian) Companies Act, 2013 and would primarily be governed as per the terms agreed under the underlying agreements/ documents only.

Vesting provisions are mostly linked to timelines or performance conditions applicable to the employee. The incentives offered to the founders/ senior management may be made subject to certain performance milestones (such as EBIDTA, business prospects and expected revenue), specific timelines i.e. vesting of the incentives/ options in partly manner over a period of time, or it can be a mix of both. While typical good leaver provisions are death, disability, termination without cause, retirement and acquisition of the company leading to change in control; bad leaver provisions include resignation, and termination for cause such as fraud or indulgence in bribery or corrupt practices.

In case of a good leaver event, the employee/ founder may be entitled to vested shares. However, in case of any bad leaver event, typically all shares are subject to clawback provisions.

Following the Covid-19 pandemic, the investors have become very cautious in seeking better contractual rights to protect the value of their investment. During recent years, some of the main areas of negotiations had been the following:

• Down-round and anti-dilution rights provisions: In view of the funding winter, start-ups have undertaken down-round financing (i.e., funding at lower valuation of the company), which triggered the anti-dilution valuation protection rights for the investors. Such down round funding required adjustment to shareholding or cap tables that involved heavy commercial negotiations for completion of a funding round.
• Liquidation preference: On account of global macroeconomic uncertainties faced by the start-up industry, the investors had been preferring innovative and unconventional liquidation preference provisions over and above the customary rights. Instead of the standard provisions for liquidation preference, which typically are equivalent to the investment amount or pro rata entitlement of liquidations proceeds (as per the shareholding), investors are proposing more complex formulae and conditions for distribution of the liquidation proceeds and are seeking higher preference and returns.
• Reverse flip: Conventionally, a lot of start-ups were held from outside India as those structures used to provide better flexibility in structuring investments and better enforceability of mutual rights. However, in view of recent global uncertainties, and to secure the maximum valuation for companies, such structures are being reversed, and the investors are preferring to hold their stakes directly in the Indian operating companies. Folding the holding structures in the Indian operating company involves costs, tax and expenses, the commercial allocation of which often involve significant negotiations.
• Other important aspects include, founder vesting, minority shareholders rights of the investors, and information and inspection rights and covenants.

India has been seeing a steady increase in the use of convertible debt, and contractual arrangements such as advance subscription agreement (ASA) / simple agreement for future equity (commonly referred to as SAFE). This trend is attributable to the country’s growing and vibrant start-up ecosystem. While traditional equity financing remains common and popular, convertible debt and SAFEs are gaining attention for their simplicity and flexibility which appeal to both founders and investors alike.  Convertible debt and SAFEs are considered founder friendly. These structures allow founders the advantage of not being diluted immediately after the capital raise, no interest or repayment obligations (in case of SAFEs).  They provide comfort by deferring valuation discussions and conversions until subsequent equity rounds when the start-ups have scaled up and have a demonstrated track record. As India’s start-up ecosystem continues to evolve, these instruments and arrangements are expected to play an increasingly prominent role in facilitating start-up financing, and in enabling innovation and growth in the Indian entrepreneurial ecosystem.

The terms of convertible debt and SAFEs can vary depending on deal specifications. However, there are certain customary terms that are common to both convertible debt and SAFEs:

• Conversion Events: Both convertible debt such as convertible notes and SAFEs typically include provisions detailing the conditions under which it will convert into equity. This may include triggers such as future equity rounds and liquidity events like dissolution, mergers, acquisitions, etc.
• Conversion Discount or Valuation Cap: Convertible debt and SAFEs often include conversion terms which allow the investor to convert their investment into equity at a more favorable price compared to future investors and to protect the investor’s investment from dilution. This can be achieved by agreeing on a valuation cap or a conversion discount. A valuation cap sets a maximum conversion price to ensure investors receive favorable valuation as aforesaid, whereas conversion discount offers investors a discount on the price per share in the next equity financing round. These formulations compensate the investor for the risk of investing in an early-stage start-up.
• Most Favored Nation: A Most Favoured Nation (MFN) clause is a special provision within convertible debt and SAFEs that protects investors against future down rounds. An MFN clause states that if the start-up later issues convertible notes to new investors on more favourable terms, the previous investors’ investment will automatically convert at the new/ such favourable terms.
• Rights and Preferences: The agreements (both convertible debt and SAFEs) may outline any additional rights or preferences that the investor will receive upon conversion, such as voting rights, anti-dilution protection or liquidation preferences.

In addition to the aforesaid, for convertible debts the following terms are customary:

• Maturity Date: Convertible debt typically has a maturity date, after which the debt must either be repaid by the start-up or converted into equity.
• Interest Rate: Convertible debt accrues interest over time. The interest is either paid along with the repayment of the principal amount or is converted into additional equity according to the conversion terms.

Some start-up accelerators and venture capital firms offer standard form documents for both convertible debt and SAFE which are then customized based on deal specifications. One of the more prominent standard form models in India is the India SAFE / iSAFE notes formulated by 100X.VC. The standard form SAFE note formulated by ‘Y Combinator’ is also used with certain modifications to suit the India requirements. India lacks clear framework for SAFE notes and therefore often the global / India level templates are tailored suitably to meet local legal requirements especially in terms of Indian Companies Act and Indian foreign exchange control regulations.

Much like equity financing, venture debt financing is used by startups to access growth capital. Over the last two years, the Indian venture debt market accounted for about $60 billion, reflecting a significant percentage increase from the previous years. This is particularly notable given the slowdown in VC deal-making in the equity side. In comparison to venture capital, venture debts are preferred due to its lower dilution impact on founders and in comparison, to traditional bank loan, it is preferred due to its ability to provide a financing option for startups that may lack cash flow or fixed assets. This trend goes to show that venture debt is being perceived not only as a supplement but also as an alternative to equity financing even if in a limited sense.

Venture debt deals in India are tailored to meet the unique needs of borrowers seeking this form of financing. The terms are decided after considering multiple factors including the borrower’s growth stage, risk profile, and business and financial projections. While the terms of a venture debt transaction are somewhat like those in a traditional debt financing, there are also some unique features. Some common terms found in venture debt agreements include:

• Repayment Schedule: Venture debt offers flexibility in repayment schedules, allowing companies to align repayments with their cash flow cycles and growth projections. Repayments can be structured as periodic instalments, bullet payments (a lump sum repayment at the end of the tenure), or a combination of both.
• Interest Rates: Interest rates for venture debt in India are typically higher than those for traditional bank loans due to the increased risk associated with this type of financing. Despite the higher rates, venture debt has remained an attractive option for companies looking to access growth capital without significant equity dilution.
• Maturity Period: The maturity period of venture debt in India can vary but is typically shorter than long term bank loans and depends on the needs of the borrower, cashflow cycles, growth projections and the risk profile of the investment.
• Security or Collateral: Venture debt in India may be secured by company assets, such as inventory, equipment, or intellectual property, to mitigate the risk for the lender. However, for early-stage startups with limited assets, VC firms may not insist on security creation and may rely more on the creditworthiness and future cash flows of the borrower.
• Covenants: Lenders may impose certain financial or operational covenants like those in traditional financing on the borrower, such as restrictions on additional debt, changes in ownership or management, or minimum financial performance thresholds. These requirements are typically less stringent than those of traditional lenders. This aspect provides companies with a more flexible and accessible financing option that complements their growth strategies.
• Warrants or Equity Kickers: It is also common for lenders to negotiate warrants or equity kickers as additional compensation for providing venture debt or in case of default in repayment. These instruments give lenders the option to purchase equity in the borrower at a predetermined price or under certain conditions, providing them with potential upside in addition to interest earnings, adding to the overall ROI bouquet.

In FYs 2022 to 2023, fundraising by VCs mirrored a broader global trend as it experienced headwinds like rising interest rates and persistent inflation, which resulted in a relative slowdown in overall investments by VCs. Yet, India has remained one of the busiest markets in APAC even during this period especially in sectors such as consumer tech, fintech, and software, software as a service (SaaS) and generative AI.  Notably, several sovereign funds, particularly from the Middle East, Singapore, Norway, etc., are increasing their investments in India. Additionally, 2023 also witnessed a surge in exits by VC firms to take advantage of buoyant IPO market as well as high-interest-rate environment due to potential for higher returns on other investment opportunities. In the coming year, we expect VC activity to pick up and grow especially after the country’s general elections.  We expect this growth to be driven by India’s strong economic fundamentals, positive projections and rise in early-stage ventures and start-ups focusing on sectors such as fintech, advanced technologies like AI and blockchain and cross-border commerce.