venture capital fund regulations in india o. p. gahrotra senior executive director securities and...

VENTURE CAPITAL FUND VENTURE CAPITAL FUND REGULATIONS IN INDIAREGULATIONS IN INDIA

O. P. GAHROTRAO. P. GAHROTRA

SENIOR EXECUTIVE DIRECTORSENIOR EXECUTIVE DIRECTOR

SECURITIES AND EXCHANGE BOARD OF INDIASECURITIES AND EXCHANGE BOARD OF INDIA

PRESENTATION OUTLINEPRESENTATION OUTLINE

• Need for Venture Capital Need for Venture Capital • Potential of the Indian Venture Capital IndustryPotential of the Indian Venture Capital Industry• Growth of Indian Venture Capital Industry Growth of Indian Venture Capital Industry • Features of the SEBI (Venture Capital Fund) Features of the SEBI (Venture Capital Fund)

Regulations, 1996Regulations, 1996• Problems faced by Venture Capital IndustryProblems faced by Venture Capital Industry• K. B. Chandrasekhar CommitteeK. B. Chandrasekhar Committee• Amendment to the SEBI (Venture Capital Fund) Amendment to the SEBI (Venture Capital Fund)

Regulations, 1996 Regulations, 1996 • Formulation of SEBI (Foreign Venture Capital Formulation of SEBI (Foreign Venture Capital

Investors) Regulations, 2000Investors) Regulations, 2000

Securities and Exchange Board of India

WHY VENTURE CAPITAL?WHY VENTURE CAPITAL?Venture capitalist plays an important role in the Venture capitalist plays an important role in the emerging economies to:emerging economies to:

– Commercialise research and scientific Commercialise research and scientific knowledge in the fastest modeknowledge in the fastest mode

– Provide Risk FinanceProvide Risk Finance– Management Expertise to first generation Management Expertise to first generation

entrepreneursentrepreneurs– Tap potential intellectual properties Tap potential intellectual properties – Promotion of Innovation and EntrepeneurshipPromotion of Innovation and Entrepeneurship– Quality IPOs Quality IPOs


THE POTENTIAL OF INDIAN THE POTENTIAL OF INDIAN VENTURE CAPITAL INDUSTRYVENTURE CAPITAL INDUSTRY

•Second Largest English speaking scientific Second Largest English speaking scientific and technical Manpower in the Worldand technical Manpower in the World•India has some of the best, globally India has some of the best, globally recognised institutions of Management recognised institutions of Management (IIMs) and Technical (IITs).(IIMs) and Technical (IITs).•India graduates 200,000 engineers and India graduates 200,000 engineers and over 40,000 managers every year as quality over 40,000 managers every year as quality human capitalhuman capital


GROWTH OF VENTURE CAPITAL GROWTH OF VENTURE CAPITAL FUNDS IN INDIAFUNDS IN INDIA

Inspite of large potential, size of VC Industry in Inspite of large potential, size of VC Industry in India is still very smallIndia is still very small

– A growth of over 300% in number of the Venture A growth of over 300% in number of the Venture Capital Fund registered with SEBI - from 8 in Capital Fund registered with SEBI - from 8 in December 1998 to 26 in Sept. 2000. Lot of inquiries December 1998 to 26 in Sept. 2000. Lot of inquiries and interest.and interest.

– Total funds committed by SEBI registered Venture Total funds committed by SEBI registered Venture Capital Funds have grown from Rs. 207 crores (US Capital Funds have grown from Rs. 207 crores (US $ 45 million approx.) in 1998 to Rs. 1,665 crores (US $ 45 million approx.) in 1998 to Rs. 1,665 crores (US $ 362 million approx.), an increase of nearly 600%$ 362 million approx.), an increase of nearly 600%


SEBI (VENTURE CAPITAL FUND) SEBI (VENTURE CAPITAL FUND) REGULATIONS, 1996REGULATIONS, 1996

• Investment Routes for Venture CapitalInvestment Routes for Venture Capital::– VCFs could invest in Indian companiesVCFs could invest in Indian companies– Foreign and offshore investors could invest in Foreign and offshore investors could invest in

domestic VCFs domestic VCFs – Foreign and offshore investors could also make Foreign and offshore investors could also make

direct investments into Indian companies direct investments into Indian companies through the FDI route. However, such through the FDI route. However, such investments would be subject to specific case by investments would be subject to specific case by case approval of the Government of India.case approval of the Government of India.


SEBI (VENTURE CAPITAL FUND) SEBI (VENTURE CAPITAL FUND) REGULATIONS, 1996 (CONT’D)REGULATIONS, 1996 (CONT’D)

• FormForm ofof OrganisationOrganisation forfor VCFsVCFs Only Trusts Only Trusts and Companies could be registered as VCFs. and Companies could be registered as VCFs. Minimum Contribution by each investor has to be Minimum Contribution by each investor has to be Rs. 5 lacs. (US $ 10,500 approx..)Rs. 5 lacs. (US $ 10,500 approx..)

• Filing of Placement Memorandum -Filing of Placement Memorandum - Placement Placement Memorandum to be filed with SEBI prior to funds Memorandum to be filed with SEBI prior to funds raised by Venture Capital Fundraised by Venture Capital Fund..

• InvestmentInvestment CriteriaCriteria VCF had to invest atleast VCF had to invest atleast 80% of corpus in the equity shares of unlisted 80% of corpus in the equity shares of unlisted companiescompanies or listed undertakings which were or listed undertakings which were “financially sick”.“financially sick”.


PROBLEMS FACED BY VENTURE PROBLEMS FACED BY VENTURE

CAPITAL FUNDSCAPITAL FUNDS • EntryEntry BarriersBarriers

– Restrictive Definitions of Venture Capital Fund, Restrictive Definitions of Venture Capital Fund, Venture Capital Undertakings resulting in limited Venture Capital Undertakings resulting in limited scope of venture capital activityscope of venture capital activity

– Multiplicity of regulations - Govt Guidelines, Income Multiplicity of regulations - Govt Guidelines, Income Tax Rules and SEBI Regulations. Tax Rules and SEBI Regulations.

– Offshore investors to seek Government approval for Offshore investors to seek Government approval for each investmenteach investment

– No Registration provisions for Foreign Venture No Registration provisions for Foreign Venture Capital Investors (FVCIs)Capital Investors (FVCIs)

– Mutual Funds not allowed to participate in VCFs.Mutual Funds not allowed to participate in VCFs.


PROBLEMS FACED BY VENTURE PROBLEMS FACED BY VENTURE CAPITAL FUNDSCAPITAL FUNDS

• InvestmentInvestment BarriersBarriers– Investment in unlisted securities and securities Investment in unlisted securities and securities

of listed sick companies only - investment not of listed sick companies only - investment not permitted in structured instruments, debt permitted in structured instruments, debt instruments instruments

– VCFs not allowed to participate in book-VCFs not allowed to participate in book-building for Initial Public Offerings building for Initial Public Offerings

• TaxationTaxation IssuesIssues– Investors as well as the venture capital fund Investors as well as the venture capital fund

taxed for the income generated by the VCFstaxed for the income generated by the VCFs


PROBLEMS FACED BY VENTURE PROBLEMS FACED BY VENTURE CAPITAL FUNDSCAPITAL FUNDS

• ExitExit BarriersBarriers– Limited exit options for investor as well as for VCF Limited exit options for investor as well as for VCF

– Lack of facilities for trading in unlisted securities Lack of facilities for trading in unlisted securities – Offshore investors to seek Government (FIPB/RBI) Offshore investors to seek Government (FIPB/RBI)

approvals for each disinvestmentapprovals for each disinvestment– Approval for pricing required from RBI before Approval for pricing required from RBI before

disinvestment by Foreign investors maximum disinvestment by Foreign investors maximum permissible investment limits to be enhancedpermissible investment limits to be enhanced

– Exit from Investments by VCF to promoter could Exit from Investments by VCF to promoter could attract Takeover Codeattract Takeover Code


K. B CHANDRASEKHAR COMMITTEEK. B CHANDRASEKHAR COMMITTEE

• Nature of RepresentationNature of Representation

– Distinguished domestic venture capitalists Distinguished domestic venture capitalists

– International venture capitalists from International venture capitalists from Silicon ValleySilicon Valley

– Domestic and International practicing Domestic and International practicing Lawyers Lawyers

– Senior Ministry of Finance / SEBI Senior Ministry of Finance / SEBI OfficialsOfficials


K. B CHANDRASEKHAR COMMITTEEK. B CHANDRASEKHAR COMMITTEE

• Major RecommendationsMajor Recommendations – Single window clearance and minimum regulation Single window clearance and minimum regulation

for domestic Venture Capital Fund and Foreign for domestic Venture Capital Fund and Foreign Venture Capital Investors - SEBI to be the nodal Venture Capital Investors - SEBI to be the nodal regulatorregulator

– Granting of QIB Status to VCFs and FVCIsGranting of QIB Status to VCFs and FVCIs– Tax pass through status to SEBI registered Tax pass through status to SEBI registered

Venture Capital Funds.Venture Capital Funds.– Free entry and exit for overseas investment / Free entry and exit for overseas investment /

disinvestment with minimum regulationdisinvestment with minimum regulation– Flexible Investment CriteriaFlexible Investment Criteria– More disclosures to investors and no filing of More disclosures to investors and no filing of

Placement Memorandum with SEBIPlacement Memorandum with SEBI..Securities and Exchange Board of India

SEBI (VENTURE CAPITAL FUND) SEBI (VENTURE CAPITAL FUND) (AMENDMENT) REGULATIONS, 2000(AMENDMENT) REGULATIONS, 2000

• Definition of Venture Capital Fund modified Definition of Venture Capital Fund modified to include a trust, company or a to include a trust, company or a body body corporatecorporate which which – has a dedicated pool of capitalhas a dedicated pool of capital

– raised in the manner specified under the raised in the manner specified under the RegulationsRegulations

– to invest in Venture Capital Undertakings in to invest in Venture Capital Undertakings in accordance with the Regulations.accordance with the Regulations.


SEBI (VENTURE CAPITAL FUND) SEBI (VENTURE CAPITAL FUND) (AMENDMENT) REGULATIONS, 2000 (AMENDMENT) REGULATIONS, 2000

(contd.)(contd.)•Venture Capital Undertaking means a Venture Capital Undertaking means a domestic companydomestic company

–Whose shares are not listed on a recognised stock Whose shares are not listed on a recognised stock exchange in Indiaexchange in India

–Which is engaged in business including providing Which is engaged in business including providing services, production or manufacture of articles or services, production or manufacture of articles or things excluding activities mentioned in the things excluding activities mentioned in the Negative List. Negative List.

(The negative list mainly includes real estate, non-(The negative list mainly includes real estate, non-banking financial services, gold financing)banking financial services, gold financing)



(contd.)(contd.)• Minimum contribution and fund size :Minimum contribution and fund size :

– Minimum Contribution from any investor Minimum Contribution from any investor shall not be less than Rs. 5 lacs (US $ 10,500 shall not be less than Rs. 5 lacs (US $ 10,500 approx.)approx.)

– Minimum corpus of the fundMinimum corpus of the fund shall be atleast shall be atleast Rs. 5 crores (US $ 1.08 million approx..)Rs. 5 crores (US $ 1.08 million approx..)



(contd.)(contd.)• Investment Criteria Investment Criteria

– disclosure of investment strategy to SEBI; disclosure of investment strategy to SEBI; – maximum investment in single venture maximum investment in single venture

capital undertaking not to exceed 25% of the capital undertaking not to exceed 25% of the corpus of the fund;corpus of the fund;

– Investment in the associated companies not Investment in the associated companies not permitted; permitted;

– atleast 75% of the investible funds to be atleast 75% of the investible funds to be invested in unlisted equity shares or equity invested in unlisted equity shares or equity linked instruments.linked instruments.



(contd.)(contd.)

•Not more than 25% of the investible funds Not more than 25% of the investible funds may be invested by way of: may be invested by way of:

– subscription to initial public offer of a venture subscription to initial public offer of a venture capital undertaking whose shares are proposed capital undertaking whose shares are proposed to be listed subject to lock-in period of one year;to be listed subject to lock-in period of one year;

– debt or debt instrument of a venture capital debt or debt instrument of a venture capital undertaking in which the venture capital fund undertaking in which the venture capital fund has already made an investment by way of has already made an investment by way of equityequity. .



(contd.)(contd.)• No more requirement of filing of placement No more requirement of filing of placement

Memorandum with the Board prior to its issue, Memorandum with the Board prior to its issue, however, more disclosure in the Placement however, more disclosure in the Placement Memorandum.Memorandum.

• QIB Status for Venture Capital Funds to participate in QIB Status for Venture Capital Funds to participate in book-buildingbook-building

• Relaxation in Takeover Code enabling Relaxation in Takeover Code enabling Company/promoter to buy back Venture Capital Fund Company/promoter to buy back Venture Capital Fund holdingsholdings

• Mutual Funds allowed to invest in Venture Capital Mutual Funds allowed to invest in Venture Capital FundsFunds


TAX TREATMENT FOR VCFSTAX TREATMENT FOR VCFS The income earned by a Venture Capital Fund was The income earned by a Venture Capital Fund was

earlier taxed at the hands of the VCF as well as in the earlier taxed at the hands of the VCF as well as in the hands of the investors. hands of the investors.

The Finance Bill, 2000 modified the tax computation The Finance Bill, 2000 modified the tax computation for VCFs by exempting the VCFs from income tax for VCFs by exempting the VCFs from income tax and taxing the investors directly. and taxing the investors directly.

This provided a ‘tax pass-through’ status to VCFsThis provided a ‘tax pass-through’ status to VCFs

However the VCF has to divest its investment within However the VCF has to divest its investment within one year of the IPO of the VCU (in which it has one year of the IPO of the VCU (in which it has invested ) if it seeks to avail the tax benefits.invested ) if it seeks to avail the tax benefits.


SEBI (FOREIGN VENTURE CAPITAL SEBI (FOREIGN VENTURE CAPITAL INVESTORS) REGULATIONS, 2000INVESTORS) REGULATIONS, 2000

•Definition -Definition - Foreign Venture Capital Foreign Venture Capital Investor is defined as any entity Investor is defined as any entity incorporated and established outside incorporated and established outside India and proposes to make investment India and proposes to make investment in Venture Capital Fund/s or Venture in Venture Capital Fund/s or Venture Capital Undertakings, and is registered Capital Undertakings, and is registered with SEBI. with SEBI.


BENEFITS TO THE FVCISBENEFITS TO THE FVCIS– Hassle Free Entry and Exit :Hassle Free Entry and Exit :

• SEBI registered FVCIs permitted to make investment SEBI registered FVCIs permitted to make investment on an automatic route within the overall sectoral ceiling on an automatic route within the overall sectoral ceiling of foreign investment as specified by the Government of of foreign investment as specified by the Government of India. India.

• SEBI registered FVCIs shall be granted a general SEBI registered FVCIs shall be granted a general permission from the exchange control angle for inflow permission from the exchange control angle for inflow and outflow of funds and outflow of funds

• no prior approval of RBI would be required for pricing no prior approval of RBI would be required for pricing for investment / disinvestment. There would be only ex-for investment / disinvestment. There would be only ex-post reporting requirement for the amount transacted.post reporting requirement for the amount transacted.



• Eligibility Criteria - Any entity incorporated and Eligibility Criteria - Any entity incorporated and established outside India in the form ofestablished outside India in the form of

– investment company, trust, partnership, pension investment company, trust, partnership, pension fund, mutual fund, university fund, endowment fund, fund, mutual fund, university fund, endowment fund, asset management company, investment manager, asset management company, investment manager, investment management company or other investment management company or other investment vehicle investment vehicle

– the applicant is regulated by an appropriate foreign the applicant is regulated by an appropriate foreign regulatory authority; orregulatory authority; or

– is an income tax payer; or is an income tax payer; or – submits a certificate from its banker of its or its submits a certificate from its banker of its or its

promoters fair track record.promoters fair track record.Securities and Exchange Board of India


• Investment Criteria : Investment Criteria : – disclosure of investment strategy to SEBI; disclosure of investment strategy to SEBI; – maximum investment in single venture maximum investment in single venture

capital undertaking not to exceed 25% of the capital undertaking not to exceed 25% of the funds committed for investment to India funds committed for investment to India however it can invest its total fund however it can invest its total fund committed in one venture capital fund;committed in one venture capital fund;



• Investment Criteria :Investment Criteria : – 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.


TRADING IN UNLISTED EQUITYTRADING 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.


Thank YouThank You

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