VENTURE CAPITAL FUND
REGULATIONS IN INDIA
O. P. GAHROTRA
SENIOR EXECUTIVE DIRECTOR
SECURITIES AND EXCHANGE BOARD OF INDIA
PRESENTATION OUTLINE
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Need for Venture Capital
Potential of the Indian Venture Capital Industry
Growth of Indian Venture Capital Industry
Features of the SEBI (Venture Capital Fund)
Regulations, 1996
Problems faced by Venture Capital Industry
K. B. Chandrasekhar Committee
Amendment to the SEBI (Venture Capital Fund)
Regulations, 1996
Formulation of SEBI (Foreign Venture Capital
Investors) Regulations, 2000
Securities and Exchange Board of India
WHY VENTURE CAPITAL?
Venture capitalist plays an important role in
the emerging economies to:
– Commercialise research and scientific
knowledge in the fastest mode
– Provide Risk Finance
– Management Expertise to first generation
entrepreneurs
– Tap potential intellectual properties
– Promotion of Innovation and
Entrepeneurship
– Quality IPOs
Securities and Exchange Board of India
THE POTENTIAL OF INDIAN VENTURE
CAPITAL INDUSTRY
•Second Largest English speaking scientific
and technical Manpower in the World
•India has some of the best, globally
recognised institutions of Management
(IIMs) and Technical (IITs).
•India graduates 200,000 engineers and
over 40,000 managers every year as quality
human capital
Securities and Exchange Board of India
GROWTH OF VENTURE CAPITAL
FUNDS IN INDIA
Inspite of large potential, size of VC Industry in
India is still very small
– A growth of over 300% in number of the Venture
Capital Fund registered with SEBI - from 8 in
December 1998 to 26 in Sept. 2000. Lot of inquiries
and interest.
– Total funds committed by SEBI registered Venture
Capital Funds have grown from Rs. 207 crores (US
$ 45 million approx.) in 1998 to Rs. 1,665 crores (US
$ 362 million approx.), an increase of nearly 600%
Securities and Exchange Board of India
SEBI (VENTURE CAPITAL FUND)
REGULATIONS, 1996
• Investment Routes for Venture Capital:
– VCFs could invest in Indian companies
– Foreign and offshore investors could invest in
domestic VCFs
– Foreign and offshore investors could also make
direct investments into Indian companies
through the FDI route. However, such
investments would be subject to specific case by
case approval of the Government of India.
Securities and Exchange Board of India
SEBI (VENTURE CAPITAL FUND)
REGULATIONS, 1996 (CONT’D)
• Form of Organisation for VCFs Only Trusts
and Companies could be registered as VCFs.
Minimum Contribution by each investor has to be
Rs. 5 lacs. (US $ 10,500 approx..)
• Filing of Placement Memorandum - Placement
Memorandum to be filed with SEBI prior to funds
raised by Venture Capital Fund.
• Investment Criteria VCF had to invest atleast
80% of corpus in the equity shares of unlisted
companies or listed undertakings which were
“financially sick”.
Securities and Exchange Board of India
PROBLEMS FACED BY VENTURE
CAPITAL FUNDS
• Entry Barriers
– Restrictive Definitions of Venture Capital Fund,
Venture Capital Undertakings resulting in limited
scope of venture capital activity
– Multiplicity of regulations - Govt Guidelines, Income
Tax Rules and SEBI Regulations.
– Offshore investors to seek Government approval for
each investment
– No Registration provisions for Foreign Venture
Capital Investors (FVCIs)
– Mutual Funds not allowed to participate in VCFs.
Securities and Exchange Board of India
PROBLEMS FACED BY VENTURE
CAPITAL FUNDS
• Investment Barriers
– Investment in unlisted securities and securities
of listed sick companies only - investment not
permitted in structured instruments, debt
instruments
– VCFs not allowed to participate in bookbuilding for Initial Public Offerings
• Taxation Issues
– Investors as well as the venture capital fund
taxed for the income generated by the VCFs
Securities and Exchange Board of India
PROBLEMS FACED BY VENTURE
CAPITAL FUNDS
• Exit Barriers
– Limited exit options for investor as well as for VCF
– Lack of facilities for trading in unlisted securities
– Offshore investors to seek Government (FIPB/RBI)
approvals for each disinvestment
– Approval for pricing required from RBI before
disinvestment by Foreign investors maximum
permissible investment limits to be enhanced
– Exit from Investments by VCF to promoter could
attract Takeover Code
Securities and Exchange Board of India
K. B CHANDRASEKHAR COMMITTEE
• Nature of Representation
– Distinguished domestic venture capitalists
– International venture capitalists from
Silicon Valley
– Domestic and International practicing
Lawyers
– Senior Ministry of Finance / SEBI
Officials
Securities and Exchange Board of India
K. B CHANDRASEKHAR COMMITTEE
• Major Recommendations
– Single window clearance and minimum regulation
for domestic Venture Capital Fund and Foreign
Venture Capital Investors - SEBI to be the nodal
regulator
– Granting of QIB Status to VCFs and FVCIs
– Tax pass through status to SEBI registered Venture
Capital Funds.
– Free entry and exit for overseas investment /
disinvestment with minimum regulation
– Flexible Investment Criteria
– More disclosures to investors and no filing of
Placement Memorandum with SEBI.
Securities and Exchange Board of India
SEBI (VENTURE CAPITAL FUND)
(AMENDMENT) REGULATIONS, 2000
• Definition of Venture Capital Fund modified
to include a trust, company or a body
corporate which
– has a dedicated pool of capital
– raised in the manner specified under the
Regulations
– to invest in Venture Capital Undertakings in
accordance with the Regulations.
Securities and Exchange Board of India
SEBI (VENTURE CAPITAL FUND)
(AMENDMENT) REGULATIONS, 2000
(contd.)
•Venture Capital Undertaking
domestic company
means
a
–Whose shares are not listed on a recognised stock
exchange in India
–Which is engaged in business including providing
services, production or manufacture of articles or
things excluding activities mentioned in the
Negative List.
(The negative list mainly includes real estate, nonbanking financial services, gold financing)
Securities and Exchange Board of India
SEBI (VENTURE CAPITAL FUND)
(AMENDMENT) REGULATIONS, 2000
(contd.)
• Minimum contribution and fund size :
– Minimum Contribution from any investor
shall not be less than Rs. 5 lacs (US $ 10,500
approx.)
– Minimum corpus of the fund shall be atleast
Rs. 5 crores (US $ 1.08 million approx..)
Securities and Exchange Board of India
SEBI (VENTURE CAPITAL FUND)
(AMENDMENT) REGULATIONS, 2000
(contd.)
• Investment Criteria
– disclosure of investment strategy to SEBI;
– maximum investment in single venture
capital undertaking not to exceed 25% of the
corpus of the fund;
– Investment in the associated companies not
permitted;
– atleast 75% of the investible funds to be
invested in unlisted equity shares or equity
linked instruments.
Securities and Exchange Board of India
SEBI (VENTURE CAPITAL FUND)
(AMENDMENT) REGULATIONS, 2000
(contd.)
•Not more than 25% of the investible funds
may be invested by way of:
– subscription to initial public offer of a venture
capital undertaking whose shares are
proposed to be listed subject to lock-in period
of one year;
– debt or debt instrument of a venture capital
undertaking in which the venture capital fund
has already made an investment by way of
equity.
Securities and Exchange Board of India
SEBI (VENTURE CAPITAL FUND)
(AMENDMENT) REGULATIONS, 2000
(contd.)
• No more requirement of filing of placement
Memorandum with the Board prior to its issue, however,
more disclosure in the Placement Memorandum.
• QIB Status for Venture Capital Funds to participate in
book-building
• Relaxation in Takeover Code enabling
Company/promoter to buy back Venture Capital Fund
holdings
• Mutual Funds allowed to invest in Venture Capital
Funds
Securities and Exchange Board of India
TAX TREATMENT FOR VCFS
 The income earned by a Venture Capital Fund was
earlier taxed at the hands of the VCF as well as in the
hands of the investors.
 The Finance Bill, 2000 modified the tax computation
for VCFs by exempting the VCFs from income tax
and taxing the investors directly.
 This provided a ‘tax pass-through’ status to VCFs
However the VCF has to divest its investment within
one year of the IPO of the VCU (in which it has
invested ) if it seeks to avail the tax benefits.
Securities and Exchange Board of India
SEBI (FOREIGN VENTURE CAPITAL
INVESTORS) REGULATIONS, 2000
• Definition - Foreign Venture Capital
Investor
is defined as any entity
incorporated and established outside
India and proposes to make investment
in Venture Capital Fund/s or Venture
Capital Undertakings, and is registered
with SEBI.
Securities and Exchange Board of India
BENEFITS TO THE FVCIS
– Hassle Free Entry and Exit :
• SEBI registered FVCIs permitted to make
investment on an automatic route within the
overall sectoral ceiling of foreign investment as
specified by the Government of India.
• SEBI registered FVCIs shall be granted a general
permission from the exchange control angle for
inflow and outflow of funds
• no prior approval of RBI would be required for
pricing for investment / disinvestment. There
would be only ex-post reporting requirement for
the amount transacted.
Securities and Exchange Board of India
SEBI (FOREIGN VENTURE CAPITAL
INVESTORS) REGULATIONS, 2000
• Eligibility Criteria - Any entity incorporated and
established outside India in the form of
– investment company, trust, partnership, pension
fund, mutual fund, university fund, endowment fund,
asset management company, investment manager,
investment management company or other
investment vehicle
– the applicant is regulated by an appropriate foreign
regulatory authority; or
– is an income tax payer; or
– submits a certificate from its banker of its or its
promoters fair track record.
Securities and Exchange Board of India
SEBI (FOREIGN VENTURE CAPITAL
INVESTORS) REGULATIONS, 2000
• Investment Criteria :
– disclosure of investment strategy to SEBI;
– maximum investment in single venture
capital undertaking not to exceed 25% of the
funds committed for investment to India
however it can invest its total fund
committed in one venture capital fund;
Securities and Exchange Board of India
SEBI (FOREIGN VENTURE CAPITAL
INVESTORS) REGULATIONS, 2000
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Investment Criteria :
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atleast 75% of the investible funds to be
invested in unlisted equity shares or
equity linked instruments.
Not more than 25% of the investible
funds may be invested by way of:
subscription to initial public offer of a venture
capital undertaking whose shares are proposed
to be listed subject to lock-in period of one year
debt or debt instrument of a venture capital
undertaking in which the venture capital fund
has already made an investment by way of
equity.
Securities and Exchange Board of India
TRADING IN UNLISTED EQUITY
• SEBI has approved the proposal to permit
OTCEI to develop a trading window for
unlisted securities where Qualified Institutional
Buyers (QIB) would be permitted to
participate.
• Venture Capital Funds and Foreign Venture
Capital Investors are amongst the QIBs.
Securities and Exchange Board of India
Thank You