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What are the avenues where startups can invest excess funds?

N V S Pawan Kumar (student) (113 Points)

24 February 2022

Hello,

We are a startup and have have idle funds in our current account received from issue of shares at premium.

We have applied for exemption under Section 56(2)(viib) of the Income Tax Act, 1961 which prohibits the investment of amounts received as share premium amount in "shares and securities" (para 4(iii) of the notification number G.S.R. 127(E) dated 19th February 2019 issed by DPIIT).

Does it mean that we are not allowed to invest in Mutual Funds also? Are there any other avenues where the idle funds in the current account can be invested for short/medium term?

Regards

NVS Pawan

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1 Replies

CA Raj Doshi (Practising CA) (8898 Points)
Replied 26 February 2022

Practically, I have seen Startups investing in liquid Funds I.e Debt oriented mutual funds as the funds raised are not immediately required for business use. The restrictions are too long that it is difficult to think of any avenue. You could take an opinion that short term highly liquid mutual funds are more of cash equivalents and not securities. Alternatively, in case there is a scrutiny in the year of fund raised and officer asks whether form 2 is filed with DPIIT, you could say no we do not fulfill the criteria. and you would then have to prove the identity, genuineness and credit worthiness of all investors viz covering letter, ITR copy and extract of bank passbook/statement.