A start-up in the Cloud kitchen business sought our advice during active negotiations to raise funds from both Resident and Non-resident investors. The company had several concerns that needed to be addressed:
- Firstly, the focus was on the convertible capital instrument. The investors wanted an overriding title over the Equity, along with specific details on the Conversion ratio, Anti-dilution rights, and the option for convertibility, which would be at the discretion of the investors.
- Secondly, the company was wary of Tax Considerations. Raising funds at a value exceeding the fair market share price could lead to complicated tax implications, with different rules applying depending on the nature of the capital instrument.
- Thirdly, Compliance with the Exchange Control Norms was essential for both Non-resident investors and the company. Adherence to the Indian Government’s regulations in this regard was crucial.
The project posed following challenges:
- The main one was finding the Ideal Capital Instrument. This involved understanding the diverse nature of capital instruments under Indian Corporate Law and suggesting a single instrument that encompassed the required characteristics.
- Another challenge was determining the Conversion Ratio accurately, considering valuations were linked to revenue targets of the Target, necessitating a precise simulation exercise. Moreover, creating a Tax-Compliant Capital Instrument for India’s tax laws was no easy feat.
- Lastly, navigating through complex cross-border regulations for Exchange Control and devising a capital instrument that allowed future conversion ratio determination (unlike typical convertible instruments) was particularly daunting.
In conclusion, the start-up’s quest for funding required a comprehensive and meticulous approach to tackle these challenges effectively.
