Indian regulators to look into 'crowdfunding' framework

Source: The Economic Times


NEW DELHI: Taking cue from financial market regulators in the US and the UK, India has begun looking into a possible framework for ‘crowdfunding’, an emerging way for raising funds by pooling money from people through Internet.

Crowdfunding is catching up fast globally among young entrepreneurs and some cases have come to light in India as well wherein individuals or small groups of people have raised funds for their ventures through such platforms.

However, there are no clear regulations as yet for such activities and therefore a need has been felt to put in place a regulatory framework if such platforms involve large amounts of money or issuance of securities. This will help check any money-laundering activity or other fraudulent acts in the name of ‘crowdfunding’, a senior official said.

Another official said that any crowdfunding involving sale of securities can be either regulated under Sebi’s existing norms for Collective Investment Schemes or Alternative Investment Funds, or altogether new rules can be prepared depending on discussions among various stakeholders.

The issue needs to be discussed among various financial sector regulators and ministries, such as capital markets watchdog Sebi, banking regulator RBI, Finance Ministry andCorporate Affairs Ministry, before taking a call on who can be the nodal agency for such activities, he added.

Among others, social and professional networking websites like FacebookLinkedIn and Twitter have been used for such fund-raising exercises, while money-pooling also takes place on some dedicated websites for such activities.

The US markets regulator SEC last night proposed new rules to permit companies to offer and sell securities through crowdfunding, while the UK’s Financial Conduct Authority (FCA) also outlined today how it plans to regulate crowdfunding.

In India, the few cases of crowdfunding involves raising of funds for films, technology start-ups, e-commerce ventures and some other businesses that are very small in size.

However, as the trend catches on, it is expected that large-scale funds can be raised through such platforms and that would further increase the risk of possible fraudulent activities, the official said, while stressing on the need for a clear regulatory framework in this regard.

Crowdfunding has been mostly used so far to generate financial support for artistic ventures like films and music recordings, where typically small individual contributions are pooled in a large number of people.

However, crowdfunding has not been used so far to offer and sell securities, as any offering of share in financial returns or profits from business activities could trigger the application of the prevalent securities laws.

However, the proposed rules by the US SEC will allow companies to offer and sell securities through crowdfunding under a prescribed regulatory structure.