Investment by venture capital funds (VCF) and foreign venture
capital investors (FVCI) in India are primarily governed by the
SEBI (Venture Capital Funds) Regulations, 1996 (VCF Regulations),
and the SEBI (Foreign Venture Capital Investors) Regulations, 2000
(FVCI Regulations), which provide, amongst other things, certain
investment restrictions that VCFs and FVCIs must comply with.
One of the restrictions common to both VCFs and FVCIs is that
they are permitted to invest up to 33.33% of their investible funds
in listed companies, but only by way of preferential allotment of
equity shares (unless the issuing company is a financially weak or
sick industrial company, in which case a VCF may also invest in
such company by way of equity linked instruments).
On the other hand, as per Indian exchange control norms, more
particularly, schedule 6 to the FEMA (Transfer or Issue of Security
by a Person Resident Outside India) Regulations, 2000 (FEMA
Regulations) – applicable to investments made by SEBI
registered FVCIs – an FVCI may invest either in
an Indian venture capital undertaking (which is a domestic unlisted
company) or in a VCF. Therefore, and rather interestingly,
the FEMA Regulations do not expressly permit (or prohibit)
investments by FVCIs in listed companies, even to the limited
extent otherwise permitted by the SEBI FVCI Regulations! In the
absence of an express prohibition, it is unclear whether the
intention of the regulators was to limit the avenues of investments
available with an FVCI to unlisted companies alone, or whether
Schedule 6 to the FEMA Regulations should be interpreted liberally
with a view to allow all such investments which have not been
The SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009 (ICDR Regulations), which too in part apply to
VCF and FVCI investments, also do not help solve this conundrum.
Under chapter VIII of the ICDR Regulations, a qualified
institutional buyer (QIB) is permitted to invest in "eligible
securities" of a listed company on satisfaction of certain
prescribed conditions. The ICDR Regulations define the term
"eligible securities" to include "convertible
securities", which have further been defined to mean
"securities convertible into or exchangeable with equity
shares of the issuer". Since FVCIs and VCFs fall within the
definition of QIB for the purposes of the ICDR Regulations,
logically (as well as legally), they too should be permitted to
invest in "eligible securities" of domestic listed
companies, including compulsorily/optionally convertible preference
shares and debentures, and resultantly, should not get limited in
their investment portfolio, as has been effected by the SEBI VCF
and FVCI Regulations; and similarly, FVCIs should not be subjected
to a blanket prohibition to invest in listed companies, as
impliedly understood on a reading of the FEMA Regulations.
Although the FEMA Regulations provide that FVCIs must at all
times abide by the relevant regulations issued by SEBI (both, the
FVCI and the ICDR Regulations have been issued by SEBI), it fails
to clarify which regulation will trump the other in the event of an
inconsistency (as brought out above). It may be argued by purists
that since the VCF and FCVI Regulations are the "mother
regulations" governing VCFs and FVCIs, their provisions will
override all other applicable legislations. However, considering
the limiting effect of such an interpretation on investments by
FVCIs, it is pertinent that the authorities issue a clarification
to put this issue to rest.
The need for consistency in the various legislations governing
foreign investments in general, and foreign venture capital
investments in particular, has been raised by jurists and
practitioners alike. With the existing ambiguities in the law
affecting the flow of foreign investment in India, it is perhaps
time the relevant ministries returned to the drawing board with an
aim of bringing in some uniformity; thereby ensuring that, the
numerous legislations which wholly or in part govern domestic and
foreign venture capital investments, work in tandem, and not
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The Ministry of Corporate Affairs notified on June 5, 2015 that certain provisions of the Companies Act, 2013 shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification.
Whilst trade and barter have existed since early times, the modern practice of forming business relationships through the means of contract has come into existence only since the industrial revolution in the West.
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