Venture Debt Advisory

Venture debt is a structured loan to equity-backed startups — typically ₹2–20 crore — provided by NBFCs and family offices, not banks. Key features: 18–36 month tenure; interest 14–18% p.a.; warrants (right to buy equity at a fixed price) covering 0.5–2% of post-money equity on the last equity round — the warrant is the lender's upside. Unlike bank loans, venture debt lenders do not require 3 years of profitability or substantial collateral — they rely on the company's venture investor pedigree and last-round valuation.

External Commercial Borrowings under the RBI ECB Framework (Master Direction 2019) allow Indian companies to borrow from foreign lenders. Startups registered with DPIIT can access ECBs under the automatic route from a non-resident (including foreign VC and overseas parent) for a minimum average maturity of 3 years. ECB ceiling for startups under automatic route: USD 3 million or equivalent per year. All-in-cost ceiling: 6-month US$/INR LIBOR/SOFR + 5.5% p.a.

Warrants issued to the venture debt lender as part of the loan arrangement: no taxable event at grant (options/warrants are not taxed at grant). On exercise: the difference between FMV at exercise and exercise price is taxable in the lender's hands — as capital gains if held as investment; as income from other sources if not. The company does not face any tax on warrant exercise. If the lender is a non-resident, withholding tax on gain may apply under Section 195 and applicable DTAA.

When a startup has both a VC investor (equity/CCPS) and a venture debt lender, an inter-creditor agreement (ICA) governs the priority waterfall on liquidation. Venture debt is typically senior to equity in liquidation — CCPS liquidation preference may still have priority over equity but ranks below the lender's secured claim. The ICA must address: consent rights for the lender on future fundraises; event of default triggers; cure periods; and drag-along rights interaction with the debt.

Revenue-Based Finance (RBF): a lender advances capital in exchange for a fixed percentage of future monthly revenue until a repayment cap (typically 1.3–1.5x the principal) is reached. Under FEMA, RBF from a foreign lender is treated as ECB (debt) — not equity. No conversion to shares, no FC-GPR. All-in cost must be within the ECB ceiling. For domestic RBF lenders (NBFCs), no FEMA filing is required — the arrangement is a standard NBFC loan with a non-standard repayment formula.