SEBI to form panel to facilitate crowd funding

Economic Affairs Financial Institutions

The Sebi-constituted committee headed by Infosys founder N R Narayana Murthy, which will work to boost India's thriving start-up ecosystem.
The aim is to frame rules, recommend ways to smoothen investments and also suggest legal changes, including those related to taxation.
The committee's recommendations are also expected to help fund flows into the SME sector.
One of the main focus areas of the panel is crowd funding.

About Crowd funding:

Crowd funding is solicitation of funds (small amount) from multiple investors through a web-based platform or social networking site for a specific project, business venture or social cause.
Crowd sourced funding is a means of raising money for a creative project (for instance, music, film, book publication), a benevolent or public-interest cause (for instance, a community based social or co-operative initiative) or a business venture, through small financial contributions from persons who may number in the hundreds or Those contributions are sought through an online crowd-funding platform, while the offer may also be promoted through social media
Under a consultation paper released by Sebi, crowd funding is expected to be in the nature of private placement. But, Companies Act, 2013 restricts the number of people who could invest in a company through the private placement route at not more than 200 in any financial year.

Benefits of crowd funding:

Crowdfunding provides a much needed new mode of financing for start-ups and SME sector and increases flows of credit to SMEs and other users in the real economy.
Financial crisis (2008) resulted in failure of number of Banks and, consequently the Basel III Capital adequacy norms have been made applicable to Banks. As a result, Banks have become increasingly constrained in their ability to lend money to the ventures or start-ups which may have high risk element. Hence, there is a need for funding for SME through alternative sources.
SMEs are able to raise funds at lower cost of capital without undergoing through rigorous procedures in this mode.
Crowdfunding provides new investment avenue and provides a new product for portfolio diversification of Investors.
It increases competition in a space traditionally dominated by a few providers (providing finance to Start-ups and SMEs).

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