Sample Solution

Crowdfunding is now a global phenomenon and has proven to be effective in different sectors of the market. It has become inter alia a mechanism to garner funds or a financing mechanism for start-ups and small and medium sized enterprises (SMEs). In India, however, crowdfunding is still at a nascent stage. There exists no legal framework to address the problems that are presented as a result of this new funding mechanism. In light of the current government’s policies to encourage the development of start-ups and the proactive role being taken by the Securities and Exchange Board of India (SEBI) to help start-ups and SMEs to acquire funds from capital markets, it is imperative to understand thoroughly this new financing mechanism, by contrasting it with the existing capital funding routes. SMEs historically rely on traditional financing, particularly bank lending, and bank loans are more likely to be given in full to the largest companies. Despite trends predicted by analysts, the crowdfunding industry has been sustaining exponential growth: equity crowdfunding in Europe grew by 116% between 2012 and 2014 and the reward-based version grew by 127%. Thus, the business model demands attention and introspection. It becomes imperative to determine whether crowdfunding is feasible to the Indian economic market, it is essential to understand and analyse the pros and cons of this mechanism and assess its viability.

3.1 Capital Financing

Capital financing is a broad term which refers to methods of infusing capital into the business for funding various activities or expenses of the business. For a new business, the importance of raising capital is crucial, since it may need working capital, inventory, a plant, equipment, or various other machinery essential for the running of the business. Similarly, existing businesses also may need capital fo