In order to ease the process to secure funding, the government has exempted funds received by a startup amounting to Rs 25 lakh from being treated as a deposit provided that the person investing the money does it in the form of a 'convertible note'.
A convertible note is a short-term loan to a startup as its first round of funding, however, instead of getting the money back along with interest, the investor would receive equity in the company or the money can be repaid within five years.
The deposit rules are seen as a cumbersome process, as companies have to follow a lot of compliances, "including informing the registrar, maintaining the deposit repayment reserve and getting credit rating before raising the money from for over 365 days."
Although according to the Companies Act of 2013, any company that received money from a person over the period of 365 days, was considered as a 'deposit', however, the act has been amended to make it easier for startups to access funding.
However, one has to keep in mind, that the exemption applies to only those companies, that could be defined as startups according to the criteria laid out by the Department of Industrial Policy and Promotion (DIPP).