Unlocking India’s Entrepreneurial Potential: A Legal Exploration of Equity Crowdfunding

Startups and small businesses in India are continually looking for reliable sources of funding. At the same time, small investors are looking to diversify their portfolios and bet on promising new ventures. This, combined with the rising popularity of the startup environment as a result of TV series such as Shark Tank, has resulted in the emergence of numerous platforms that allow companies to interact with investors and crowdsource their financial needs. However, equity crowdfunding in India operates in a regulatory grey area because there are no clear statutes, rules, or regulations governing it. 

The absence of regulatory clarity provided an opportunity for certain equity crowdfunding platforms to construct creative instruments that are not securities in and of themselves, but have a monetary value comparable to the issuing company’s shares. These platforms enable firms to raise cash from small retail investors using a “community subscription offer plan” (CSOP). A CSOP is an investment plan enabling retail investors to invest in exchange-traded funds and a type of instrument for acquiring shares or rights. 



The path to funding in the form of venture capital and angel investments is difficult to navigate because the latter favour investments, particularly those of significant size. Because of this, many start-ups miss out on the opportunity to introduce a promising idea to the market. Traditional banking sources are unable to meet the specific needs of small business owners. As a result, a lot of startups and small businesses look to alternate funding sources to get by.  

One such alternative funding source that offers small enterprises and start-ups a workable solution for raising capital is crowdfunding. As its name suggests, crowd fundraising is the process of raising modest sums of money from a large number of investors.  

Crowdfunding obtains funds from the general public, as opposed to traditional business financing, which is mostly provided by affluent individuals and institutional investors. There are two varieties of crowdfunding models: equity-based models and non-equity based models. Absence of Equity Online donations or purchases of goods or experiences in exchange for contributions are known as crowdfunding.  



Funding for a crowdfunding offering is open to everybody. If you are an accredited investor, investment crowdfunding is limitless; if not, there are limits on the amount you can invest depending on your income or net worth. Final regulations for the Jumpstart Our Business Startups Act (JOBS Act) were released by the Securities and Exchange Commission (SEC) in 2016. These regulations made it possible for a larger range of investors to participate in crowdfunding in the United States, provided that the necessary regulatory framework was in place. 

Businesses and entrepreneurs can ask for crowdsourcing to finance debt, equity, and real estate purchases. The possibility of losing your entire investment is one risk, as is the lack of liquidity resulting from the difficulty of rapidly reselling crowdfunded shares. Another risk is that your shares are already somewhat diluted and may become even more so if additional funding rounds are held. 



Equity investment crowdfunding is a means of investing funds and acquiring shares in companies, most of which are in their early stages. Companies pique your interest by describing their company goals through web channels. You have a variety of spending options, each with a gradation of percentage investment in the company. These shares increase in value in the event that the business does well, just like ordinary equities do. That being said, given the rather uncertain future of startups, there is risk associated with your ownership position. 



Crowdfunding for investments can also be used to swap loans for stock or interest payments. As a debt investor, you can interact with a sizable organisation that serves as a microloan provider. You’ll be able to evaluate the terms of the loan, such as the length of the loan, the interest rate, and the predicted credit rating of the borrower, through the platform that you use. 

When traditional borrowing is either too expensive or unavailable, borrowers may turn to this source of funding. In order to obtain seed money to launch a new company, entrepreneurs usually borrow money from banks, friends, and family, or they provide stock ownership in exchange for investments from angel and venture capital investors, as well as from friends and family. When alternative options for fundraising are either unavailable or prohibitively expensive, a firm can use investment crowdsourcing to seek relatively small investments from numerous backers. 



One of the fundamental goals of crowdfunding is to close the funding gap for small- to medium-sized businesses and startups by utilising social media and technology through crowdfunding platforms. This lessens the physical distance between the investors and the entrepreneur. By spreading the word about the idea to numerous potential investors online, it serves as a means of accelerating investments and is more effective than the conventional method of borrowing money from friends and relatives. It addresses the issue caused by traditional investment sources’ high interest rates, which frequently make it impossible for small firms to produce a consistent cash flow to pay them back. Additionally, the lack of liquid assets to use as security limits access to a variety of kinds of funding.  

  • Low Entry Barrier: Equity-based crowdfunding, a relatively new financing model, lowers the entry barriers for entrepreneurs by enabling them to acquire capital from a far wider range of possible investors than ever before. Businesses can now obtain capital considerably more quickly and readily than in the past thanks to the ease of access to a wider pool of investors.  
  • Minimal Risk: By utilising equity-based crowdsourcing, investors can benefit from the possibility of large returns without assuming the same degree of risk associated with conventional investing. The risk is capped at the amount invested by the investor because they are not required to make any upfront payments. 
  • Low Cost: In comparison to more conventional financing methods, equity-based crowdsourcing is also significantly less expensive. Paying fees or commissions to a third party is not necessary because the investment is made directly to the business. 
  • Diversification: Portfolio diversification can be achieved by investing in a variety of companies through equity-based crowdsourcing. Both risk and possible profits may be decreased in this way. 



Depending on the platform, crowdfunding campaigns fail somewhere between 69% and 89% of the time. From the viewpoint of investors as well as entrepreneurs looking to raise money, crowdfunding carries a number of dangers. Because crowdsourcing is primarily internet-based, money can be raised from people all over the world, which may cause issues with local laws in the various nations. 

  • When in need of money for medical help, turn to crowdsourcing as a final option. Delays in receiving prompt medical attention may result from persons trying to sell their possessions or apply for medical loans. 
  • Contrary to popular belief, crowdfunding is not just for new or established companies. Charity, NGOs, and individual causes can all benefit from crowdfunding. 
  • The general public’s perception also holds that internet crowdfunding is limited to raising little sums of money. Yet, other fundraising initiatives have brought in millions of dollars for beneficiaries’ social, medical, or personal causes. 
  • Furthermore, a common misconception is that no one uses crowdfunding platforms to make donations. This is untrue. Many fundraisers have noticed a notable outcome after sharing their campaign on social media with their friends and family; nobody, not even complete strangers, has donated to their campaign. 




The Jump Our Business Start-ups Act, 2012 (also known as the “JOBS Act”) was introduced in the United States on April 5, 2012, with the goal of enabling small businesses to sell their securities to the public through the internet. The act did this by amending the Securities Laws that were in place at the time. However, these regulations only went into effect on May 16, 20161. 

In terms of crowdfunding exemptions, the Securities Act of 1933’s Sections 4(a)(6) and 4-A include the majority of the legal criteria. Moreover, all transactions must be carried out via intermediaries registered with the SEC, which might be a registered broker or a “funding portal.”2 



One of the first nations to develop a crowdfunding regulation23 was Italy in 2013. However, the regulations that were created were overly onerous, which prevented the market for equity crowdfunding from expanding3 The regulation was originally intended exclusively for “innovative start-ups,” but it was later broadened to include “innovative SMEs” that wanted to raise money via crowdfunding.  

The regulation contains several significant provisions, such as the requirement that online portals be registered with CONSOB, which is then tasked with the assigned task of shareholder protection; the requirement that controlling shareholders and individuals performing managerial and supervisory functions declare their integrity and adhere to professional standards; and the requirement that information obtained from investors by the portal manager be kept confidential. It is the responsibility of the platforms to educate novice investors about the dangers of investing through equity crowdfunding and to verify the veracity of the claims made by companies looking to raise money through this method.  



In China, the crowdfunding landscape is extremely active and changing quickly4 The lack of governing restrictions, which in turn allows for the setting up and quick start of operations, is the reason for this rapid expansion. Because of the legal ambiguity, crowdfunding in China has taken on a more “sale-oriented” form. This indicates that investors purchase the product at an advanced stage of production, prior to it being manufactured5. Because this helps to transfer the risk from investors to entrepreneurs, the portals that employ this strategy have lower fees overall.  

Similar to the international Crowdfunding platforms, the investors in China likewise need to accept a standard service contract while they open an account with the portal and this contract emphasises on the intermediate role played by the portal between the investors as well as the entrepreneurs. 



Prior to delving into the complexities of India’s crowdfunding laws, let’s examine the Sahara India Real Estate Ltd. v. Securities and Exchange Board of India6 case, which examined crowdfunding perceptions for the first time. 


During an EGM of SIRECL, a special resolution was passed with the aim of raising capital through the issuance of unsecured OFCDs through a private placement. The two unlisted companies under the control of the Sahara Group of Companies are Sahara India Real Estate Corporation Limited (henceforth “SIRECL”) and Sahara Housing Investment Corporation Limited (henceforth “SHICL”). 

The offer details were contained in the Red Herring Prospectus, which the Sahara Group believed needed to be submitted to the Registrar of Companies. It made it very evident that the only people who could invest in the OFCDs were those who had received the Information Memorandum (IM) and/or those who were connected to or associated with the Sahara Group.  

The Sahara Group was also said by the RHP to have no intention of listing. they believed that the RHP would need to be filed with the ROC rather than the Securities and Exchange Board of India in order to list the supplied securities on any recognised stock exchange. 

The fundraising activities of two firms, SIRECL and SHICL, which had raised money by issuing OFCDs to a significant number of people for a considerable amount of time, were the subject of several complaints and concerns from the public. These activities were not included in the DHRP of SPCL. 

Consequently, SEBI requested explanations from Sahara Group, but they declined to reply. Sahara Group argued that as the firms were not intended to be listed on any stock exchange, SEBI was not permitted to request information for the same reason, as stated in the RHP. However, SEBI authorised an investigation to look into if anyone has broken any rules or board directives regarding the securities market since it is concerned about protecting investors.  


The Supreme Court reviewed Act Section which addressed the issuance of debentures to the general public. The proviso of Section 67(3), which specifies that an offer made to fifty or more people will be deemed a public offer and fall under the purview of this section, was highlighted by the court. Regarding this matter, the Court determined that the OFCDs do not fit under the private placement category because they were distributed to the broader public.  

The Court decided that the requirements of Section 73, which included requirements for the required listing of the shares on stock exchanges, would be addressed after determining that the contested offer qualified as a “public offer.” As a result, SEBI was directed to receive a refund of the money received through the RHP, along with 15% interest, from SIRECL and SHICL, whose offers were ultimately deemed to be public offers.  



Due to a lack of rules, there is currently uncertainty in India over the legality of crowdfunding. However, SEBI has a strong position against equity crowdfunding and has declared it unlawful in a Caution Press Release. The release states that SEBI has become aware of fundraising activities taking place through Private Placement on unapproved online platforms (such as websites and other internet-based online portals) in violation of the Securities Contract (Regulation) Act, 1956 and the Companies Act, 2013.  

As a result, it is unlawful to issue securities in India through these unapproved web platforms. Following the press release previously indicated, SEBI sent show-cause notifications to a number of crowdfunding platforms operating in India, requesting details regarding the platforms’ legitimacy’s fund-raising process. Following these platforms’ violations of the private placement guidelines, SEBI received notifications, and as a result, the companies queued up to register as Alternate Investment Funds (AIF) with SEBI.  

The scope of crowdfunding will be significantly limited if the crowdfunding platforms are brought under the AIF, which means they will be subject to the SEBI (Alternate Investment Fund) Regulations, 2012 (also known as the “AIF Regulations”).  

Although the fundamentals of crowdfunding are quite sensible, only investors with a minimum net tangible asset value of two crore rupees are permitted to participate because of AIF regulations. A programme requires a minimum investment of 20 crore rupees, while the minimum investment required from an investor is 1 crore rupees (unless they are employees or directors of funded entities).  

Also, there is a cap of 1,00064 investors at any one time (and the Companies Act, 2013 will apply if the AIF is a corporation). Due to the strict AIF laws that will control the crowdfunding process, it may be concluded from the aforementioned provisions that the fundamental principles of crowdfunding are deteriorating. 

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Masala Bonds: India’s Flavoursome Entry into Global Markets


Masala bonds are bonds issued by Indian companies and valued in rupees that are issued outside of India. They function similarly to conventional bonds, but can only be issued outside of India.

Masala Bonds are a financial instrument that allows Indian entities to raise funds from foreign markets in their home currency, the Indian rupee. These bonds serve as a gateway for investors looking to gain exposure to Indian assets, helping issuers diversify their funding sources.


Masala Bonds, introduced in India by the International Finance Corporation (IFC) in 2014, are rupee-denominated bonds issued by Indian entities operating outside of India. These debt instruments allow foreign investors to raise funds in the local currency. Masala bonds can be issued by both the government and private entities. These bonds can be subscribed to by investors outside India who want to invest in Indian assets. Masala Bonds’ primary goals are to fund infrastructure projects, promote internal growth through borrowing, and internationalise the Indian rupee.

Recognising masala bonds as rupee-denominated bonds that enable Indian businesses to obtain funds in foreign currencies is essential to understanding their meaning. This reduces currency risk for issuers and investors globally. The bonds have a notable variation in maturity periods: three years for amounts up to $50 million in a fiscal year, and five years for amounts greater.


The Kerala High Court ordered the former Finance Minister, Dr. Thomas Isaac, and the Kerala Infrastructure Investment Fund Board (KIIFB) to comply with the Enforcement Directorate’s (ED) summons in relation to the masala bonds case.


Section 2(30) of the Companies Act of 2013 (the “Act”) designates Masala Bonds as debt securities. Consequently, Masala Bonds will be subject to the same rules governing the issuance of debt securities.

Listed companies in India are also required to issue debt securities in accordance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. In a circular dated August 4, 2016, the Securities and Exchange Board of India (SEBI) clarified that foreign investment in Masala Bonds will not be treated as an investment by Foreign Portfolio Investors (FPIs) and will not be subject to the amended SEBI (Foreign Portfolio Investors) Regulations, 2014, further streamlining the regime. The Reserve Bank of India oversees Masala Bonds.


  1. Masala Bonds, issued in INR, provide investors with direct access to India’s growth story.
  2. Masala Bonds can be subscribed to by investors outside India, including those from FATF member countries.
  3. The investor’s country’s securities regulators must be IOSCO members.
  4. Masala Bonds can be used to refinance rupee loans and non-convertible debentures, develop integrated townships and affordable housing projects, and provide corporate working capital.
  5. The funds cannot be used for real estate activities excluding integrated townships and affordable housing, prohibited by Foreign Direct Investment guidelines, investing in domestic capital markets, or purchasing land to lend to other entities.


  • Investors benefit from higher interest rates than other debt instruments. This encourages foreign investors to participate in India’s growth.
  • Masala Bonds boost foreign investors’ confidence in the Indian economy. They help to maintain India’s economic stability by making INR investment more accessible.
  • Capital gains from rupee-denominated bonds are tax-exempt. This encourages long-term investments.
  • Investors can benefit from currency appreciation during the bond’s tenure.


Masala Bonds are a unique financial instrument that allows companies to raise funds from international markets using Indian rupees. These bonds are an appealing investment option for foreign investors, as they provide a taste of the Indian market while diversifying their portfolio. For India, they attract foreign investment, boosting the economy. Masala Bonds add opportunities and benefits for both borrowers and the Indian economy to the financial landscape, making them appealing to investors seeking global opportunities or those simply interested in international finance.


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Case title: Vishal Tiwari vs Union of India & Ors.

Case no.: Writ Petition (C) no. 162 of 2023

Decided on: 03.01.2024

Quorum: Hon’ble Chief Justice of India Dr. D.Y Chandrachud, Hon’ble Justice J.B Pardiwala, Hon’ble Justice Manoj Misra.


In February 2023, a batch of writ petitions filed before this Court under Article 32 of the Constitution raised concerns about the decline in investor wealth and market volatility caused by a drop in the Adani Group of Companies’ share prices.

Hindenburg Research, a “activist short seller,” allegedly caused the situation by publishing a report on the Adani group’s financial transactions on January 24, 2023. The report alleged, that the Adani group manipulated share prices and failed to disclose transactions with related parties and other relevant information in violation of SEBI regulations and securities legislation.

In WP (C) No.162 of 2023 the petitioner seeks the constitution of a committee monitored by a retired judge of this Court to investigate the Hindenburg Report.

In WP (C) No.201 of 2023, the petitioner claims that the Adani group has “surreptitiously controlled more than 75% of the shares of publicly listed Adani group companies, thereby manipulating the price of its shares in the market,” in violation of Rule 19A of the Securities Contracts (Regulation) Rules, 1957. The petitioner requests that the CBI or a Special Investigation Team conduct a court-monitored investigation into the fraud allegations and the alleged involvement of high-ranking officials of public sector banks and lending organisations.

In WP(Crl.) No. 57 of 2023, the petitioner requests that competent investigative agencies to (i) look into Adani Group transactions under the supervision of a sitting judge of this Court, and (ii) look into the involvement of the State Bank of India and the Life Insurance Corporation of India in these transactions.

In order to safeguard Indian investors from market volatility, the court stated that it was necessary to review and strengthen the financial sector’s current regulatory framework. This Court requested comments from the Solicitor General regarding the suggested formation of an Expert Committee for that reason.

The Court noted that SEBI had already taken over the investigation into the Adani group and ordered SEBI to proceed with the investigation, wrap it up in two months, and submit a status report to the Court.

Additionally, the court mandated the creation of an expert committee. This Court made it clear that SEBI and the Expert Committee would cooperate with one another. To put it another way, the SEBI investigation would continue unabated despite the Committee’s appointment. It is required of the Expert Committee to provide this Court with its report in a period of two months.

After that this Court received the Expert Committee’s report. The Court issued an order on May 17, 2023, granting SEBI an extension until August 14, 2023, for the submission of its investigation status report. Informing this Court of the progress of their twenty-four investigations, SEBI filed an interlocutory application on August 14, 2023. In addition, SEBI filed a status report describing the twenty-four investigations on August 25, 2023. SEBI has responded to the Expert Committee’s report, as has the petitioners’ legal representative.


The case is based on the Rule 19A of the Securities Contracts (Regulation) Rules 1957 which mandates a minimum of 25% public shareholding. The petitioners contended that By secretly controlling more than 75% of the shares of publicly listed Adani group companies, thereby manipulating the price of its shares in the market,” the Adani group is in violation of Rule 19A of the Securities Contracts (Regulation) Rules, 1957.


Whether it is possible to seek judicial review of SEBI’s regulatory framework?

Whether the court has the power to transfer the investigation from SEBI to another agency or a SIT?


Mr. Prashant Bhushan, appearing on behalf of the petitioner, broadly pressed his case for the following two requests: first, to establish a SIT to oversee the SEBI investigation into the Adani group and to have all such investigations court-monitored; and second, to direct SEBI to revoke certain amendments to the SEBI (Foreign Portfolio Investments) Regulations, 2014 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

The investments by FPIs violate Rule 19A of the Securities Contracts (Regulations) Rules, 1957 which requires a minimum 25% public shareholding in all public-listed companies.

SEBI’sinabilitytoestablishaprimafaciecaseofregulatorynon-compliance and legal violations by the Adani group promoters despite starting an investigation in November 2020, appears to be prima facie self-inflicted. The unprecedented rise in the price of the Adani scrips occurred between January 2021 and December 2022, over a period when the Adani group was already under SEBI investigation.

They alleged that SEBI has wilfully delayed submitting its status report on the Adani group investigation within the time frame specified by this Court.


The respondents contended that SEBI has completed 22 of the 24 investigations it is currently conducting. In these investigations, enforcement actions/quasi-judicial proceedings would be initiated, where applicable. The delay by SEBI in filing the report is only ten days, which is unintentional and not wilful, given that twenty-four investigations were to be conducted.

They submitted that initially, the FPI Regulations permitted “opaque structures” under certain conditions, including the obligation to disclose beneficial owner information if requested. The subsequent amendment mandated the upfront disclosure of beneficial owners by FPIs. This rendered the disclosure clause redundant, resulting in its omission in 2019. The amendments tightened the regulatory framework by mandating disclosure requirements and eliminating the requirement to disclose only when requested.


The court on judicial review held that the courts do not and cannot act as appellate authorities determining the correctness, suitability, and appropriateness of a policy, nor are courts advisors to expert regulatory agencies on policy matters that they have the authority to formulate. When examining a policy formulated by a specialised regulator, the scope of judicial review is to determine whether it (i) violates citizens’ fundamental rights; (ii) is contrary to Constitutional provisions; (iii) contradicts a statutory provision; or (iv) is manifestly arbitrary. Judicial review focuses on the policy’s legality, rather than its wisdom or soundness.

It held that the statutory regulator should not intervene in the policies that result from technical questions, especially in the fields of economics and finance, when experts in the field have voiced their opinions and the regulator has taken due consideration. As a regulatory, adjudicatory, and prosecutorial body, SEBI’s wide-ranging powers, expertise, and strong information-gathering system give its decisions a great degree of credibility. As such, this Court must be aware of the public interest guiding SEBI’s operations and refrain from imposing its own judgement on SEBI’s decisions.

The court on transfer of investigation has held that the authority to create a SIT or transfer an investigation from a recognised agency to the CBI. These kinds of authority ought to be applied rarely and only in dire situations. Generally speaking, the court will not substitute the authority vested with the investigative power unless it is demonstrated that the authority vested with the investigative power acted blatantly, intentionally, and wilfully ignorant of the facts. In the absence of the authority to transfer, the court may not use such powers unless there is a strong case showing that justice will likely be compromised.

The court also said that the petitioner must provide compelling evidence that the investigating agency was biased or that the investigation was inadequate. Only very rare and extraordinary situations may warrant the transfer of an investigation to an agency like the CBI. Furthermore, since the only thing that can be pleaded for is that the offence be thoroughly investigated, no one can demand that the offence be looked into by a particular agency.

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Written by – Surya Venkata Sujith

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SEBI is a public body and should in the best interests of the Public : Bombay HC criticizes SEBI of non-compliance of court orders.

TITLE : Pina Pankaj Shah and Ors V Securities and Exchange Board of India

CITATION : W.P 530 of 2023

CORAM : Hon’ble justice G.S Kulkarni and Hon’ble Justice Jitendra Jain

DATE:  1st December, 2023


Two writ petitions were filed in which the petitioners were the minority shareholders of Bharat Nidhi Ltd (BNL) and complaint were lodged against them in SEBI for violations of various securities laws.


The petitioners claimed that BNL is violating securities laws including violations pertaining to the Minimum Public Sharing and contended that SEBI should investigate the same. SEBI issued a notice to BNL which was not shared to the petitioners. It was stated that BNL was listed in non functional stock exchange boards. BNL is also a major shareholder of Bennett Coleman and Co. Ltd. SEBI considered the illegalities of BNL. It was contended by the petitioners in front of SEBI board that settlement would not be enough and filed petitions directing SEBI to take appropriate action against BNL under Article 226 of the Constitution.  

The high court directed SEBI to provide the documents relating to the investigations to be published to the petitioners. SEBI issued a special leave in front of the Hob’ble Supreme Court  to dismiss the order which was subsequently rejected. However the documents relating to the investigations were not provided to the petitioners and they deemed it a misconduct.


The court held that SEBI is a public body and should act in the best interests of the public. The court criticised SEBI for persistent non-compliance with the courts order and called it an unacceptable behaviour. SEBI’s claim for not publishing the documents to be fair was dismissed by the court. It held that, despite the orders of the court, SEBI has deliberately acted unreasonably. The court further ordered SEBI to issue the documents as it is a part of their substantive rights to know.

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Written by- Sanjana Ravichandran

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