Crowdfunding: A Creative Game Changer of Indian Economy

Whenever we start a new venture, funding or capital is the first and foremost thing that comes to hit the core of our mind. A young startup might be rich with their thoughts and innovative ideas and those are at the threshold of explosion. In lack of capital or funding it might get covered and unnoticed. If the flow of money continues to be there, the primitive un-organized India can smile and deck-up in the attire of applauds from all the horizons of the globe. Entrepreneurs or startup owners come-up with new and ever trending ideas which are unique and irreplaceable, aiming to transform India into a smart nation.

A Startup can finance itself from banking institutions, venture capitalists, private equity, or angel investors however there are multiple restraints attached to it as well. But, for a new born startup, it is very difficult to have access to all these methods. So, Indian Government is trying heart and soul and introducing new funding schemes of empowering young startups. Amidst a wide range of funding, crowdfunding is the most effective tool for entrepreneurs. In recent times, crowdfunding has become an alternate financial instrument globally that extends beyond the traditional circle of owners, relatives, and venture capitalists.

Crowdfunding is nothing but small amounts of funds are put together by a large number of investors by way of fund-raising campaigns, accompanied by strong advertising for a specified period. These fund-raising projects can be carried out on crowdfunding platforms, social media, and many other effective platforms.

Today’s youth is crazy about social media and in some cases, it is useful too, and here also social media plays an impactful role, and it has become the newest addition and the most significant contributor, accelerator, and amplifier to the crowdfunding landscape of startup ecosystem across the globe.

Impacts of Crowdfunding
Crowdfunding is one of the most effective tools for testing the market out of the online website. It creates momentum in your business, and help you to broaden your network which can attract more investor and it builds your market. Crowdfunding helps to kickstart a business and ensures a significant growth. An average round of crowdfunding can raise $7000. It also enables an entrepreneur to understand the trend of the market even before transitioning their product onto the actual market.

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Trending Crowdfunding Types
Crowdfunding can be accumulated from friends, family, relatives, other acquaintances and entrepreneurs can also contribute. Crowdfunding is very much essential to amplify the growth and future of your aspiration.

1. Equity Based: In this crowdfunding, the benefactor is given a certain part of their equity in the business. The lender will receive a part of the profit by dividend and has a voting right. This type of crowdfunding is illegal in India.

2. Donation Based: Here individuals donate and contribute a small amount of finance without any expectation of return. This kind of crowdfunding is quite popular with NGOs or non-profit organizations who work for social causes and upliftment of society. A recent example of this type is the PMCARES fund, which was started by our honorable prime minister to raise funds to fight against natural calamities and disasters. During the Cyclone ‘Amphan’ in eastern part of India and Covid-19 pandemic, a huge fund was raised through this fund to help the victims.

3. Debt Based or Peer-to-peer Funding: It is quite similar to any other loans and these loans are to be repaid along with interest. The rate of interest is negotiable and can be decided by mutual agreement or understanding. Peer-to-peer lending can be attractive for small businesses that lack collateral or credit history to access traditional bank lending.

Legal Regulations Regarding Crowdfunding
It is of utmost importance to create a statutory regulatory arm to effectively control and regulate the Indian crowdfunding market so that it can grow into a viable investment hub. The market of share and equity is thoroughly regulated by SEBI, but for Peer-To-Peer lending RBI is the sole regulator. As per SEBI’s consultation paper, only ‘Accredited investors’ are eligible to invest through crowdfunding platforms.

Companies incorporated under the Companies Act with a minimum net worth of Rs.20 crore, High Net Worth Individuals (HNIs) with a minimum net worth of Rs.2 crore and the Eligible Retail Investors (ERI) who fulfil the prescribed criteria are the accredited investors. SEBI has proposed that the private placement should be by provisions of Section 42 of the Companies Act, 2013. Additionally, the Eligible Retail Investors (ERI) should not invest more than 10 percent of their net worth i.e., a minimum of Rs,20,000, and cannot invest more than Rs.60,000 in an issue through a crowdfunding platform.

As per the regulations of SEBI-

1. A company which is willing to raise capital should not exceed a maximum limit of Rs.10 Crore in a period of 12 months.
2. A company should not be promoted, sponsored or related to any industrial group which has a turnover of more than Rs.25 Crore.
3. The company which is raising capital should be more than two years old.
4. The company should not be listed on any exchange.
5. A company should not be more than four years old in incorporation.
6. The company should not be engaged in real estate business and other activities which are not permitted under industrial policy of Government of India.

Why India needs more crowdfunding?
To boost the Indian Economy, startups are the most important entities which can lift India from third largest economy to the dominator of the world. Compared to the dominant players like the UK, the US, and China, India is lacking heavily in adoption and utilization of crowdfunding as a tool. Bank financing and venture capitals are still regarded as the viable options of funding in India which end-up with a burden of interest on the entrepreneurs. So, it is essentially necessary to broaden the range of financing instruments available to the ecosystem to continue their role in investment, growth, innovation, and generating employment.

Transaction value in the Crowdfunding market is projected to reach $5.04m in 2023 which will grow till $5.16m by 2027 with exhibiting a CAGR of 0.59 percent. The average funding per campaign in the Crowdfunding market amounts to $3.67k in 2023.

Future of Crowdfunding: In coming days, the trend and uses of crowdfunding platforms will increase and it will become more streamline. A wider range of companies and projects being funded and a large pool of entrepreneurs will come to the frontline and make the country proud with their innovative products and services. This will draw an enormous chunk of foreign currency in the country which will enrich the GDP.

In global scenario, the crowdfunding is projected to grow to over 1.5 billion users by 2040. In couple of years crowdfunding will raise a fund of $50million in India. Harnessing the efficiency of digital platforms and technologies, Medical Crowdfunding will be emerging as a viable tool which can be utilized for critical medical treatments. According to the report of World Bank, crowdfunding has emerged as a multibillion-dollar global industry itself which is expected to have a volume of $300 billion by 2030.

Last note: Standing at the end of the 21st century, it still feels that India is far behind in the line of advancement and adoption of technology. Crowdfunding is still an evolving concept in Indian Business scenario. Crowdfunding to some extent is an unconventional but it is one of the highly effective tools for raising funds for business. A start-up or small business must go through the platform’s policies thoroughly and should also confirm that the platform is within the eligibility criteria of SEBI. Lastly, it can be said undoubtedly that, holding the hands and following the footsteps of crowdfunding, the Indian business sector will soar to an unattainable height and become a burning example to the wealthiest of the wealthiest countries across the globe.