VENTURE CAPITAL FUND REGULATIONS IN INDIA

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VENTURE CAPITAL FUND REGULATIONS IN INDIA

• O. P. GAHROTRA
• SENIOR EXECUTIVE DIRECTOR
• SECURITIES AND EXCHANGE BOARD OF INDIA

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PRESENTATION OUTLINE

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

• 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
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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
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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 book-building
  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
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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
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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
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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
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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
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SEBI (VENTURE CAPITAL FUND) (AMENDMENT)
REGULATIONS, 2000 (contd.)

• Venture Capital Undertaking means a domestic
  company
• 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,
  non-banking financial services, gold financing)

Securities and Exchange Board of India
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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
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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
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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
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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
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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
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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
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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
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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
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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
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SEBI (FOREIGN VENTURE CAPITAL INVESTORS)
REGULATIONS, 2000

• 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.

Securities and Exchange Board of India
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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
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• Thank You