Securities And Exchange Board Of India (Foreign Venture Capital Investors) (Amendment) Regulations, 2024

Securities and Exchange Board of India ("SEBI") has notified the Securities and Exchange Board of India (Foreign Venture Capital Investors) (Amendment) Regulations, 2024 ("Amended Regulations") on September 05, 2024, to amend the earlier Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000 ("FVCI Regulations").

On May 18, 2023, SEBI released a consultation paper outlining its proposal to change the FVCI Regulations. On June 27, 2024, the board meeting approved the proposal.

The Amended Regulations, which will take effect on January 01, 2025, aim to expedite the FVCI registration process by giving the Designated Depository Participants ("DDPs") registered with SEBI,the authority to process registration applications of Foreign Venture Capital Investors ("FVCIs") and carry out the due diligence. By making this change, the current Foreign Portfolio Investors ("FPI") framework and the FVCI registration system would be aligned which will provide a clear oversight.

FVCI, is an investor established and incorporated outside India who is registered under the FVCI Regulations and proposes to make investments with accordance to these regulations.

Following are the significant changes made by the Amended Regulations-

1. Certificate issuance by the DDPs

As per the FVCI Regulations, candidates had to send their registration applications and application fees directly to SEBI. Now, as per the Amended Regulations, for FVCI to purchase, sell, or trade securities in India, a certificate issued by the DDP must first be obtained by submitting the application and fees as prescribed by SEBI and the central government from time to time.

The AmendedRegulations give the DDP the authority to, on behalf of SEBI, issue the registration certificate to the FVCI after reviewing the application and verifying that the applicant complies with all other conditions and requirements.

The Amended Regulations make it mandatory for the existing FVCIs to onboard a DDP as well.

2. Revision in the eligibility criteria

The eligibility criteria for registration as an FVCI has been modified. Earlier, SEBI assessed several factors like the applicant's experience, professional competence, track record, nature of applicant's entity, financial soundness, etc.

Now, as per the Amended Regulations, following is the revised criteria for registering as a FVCI:

• The applicant must be an entity or a company which has been established in an International Financial Services Centre or outside of India.

• The applicant must come from a nation having a bilateral Memorandum of Understanding (MoU) with SEBI, or from a nation whose securities market regulator is a party to the IOSCO Memorandum of Understanding.

• Government investors or government-related investors also fall under the eligible category if they are resident of a country which is approved by the Indian government.

• In case of the applicant being a bank, it is mandatory that the central bank of the country from where the applicant bank is, must be a member of the Bank for International Settlements ("BIS"), unless it is regulated by the home banking authority, even if central bank does not form part of the BIS.

• The applicant along with its beneficial owner, must neither be from a nation which is flagged by the Financial Action Task Force ("FATF") for the risk of terrorism financing or for anti-money laundering, nor be included on any United Nations Security Council lists.

• Further, the applicant must be considered a fit and proper person as per the SEBI Regulations.

3. Changes in the registration form

The FVCI registration form has been modified to resemble the Common Application Form (CAF) used for FPI registration in an effort to expedite the process and bring it into compliance with the current framework for FPIs. The updated form includes the necessary KYC information as well as details about the beneficial owner and basic information like name and incorporation details.

4. Renewal/Surrender of FVCI registration Certificate

The procedure for the FVCI registration certificate's renewal or surrender is substantially changed by the Amended Regulations. One of the main modifications is that FVCIs now must pay a registration renewal cost of USD 100 (not including GST) for each block of five years.

Additionally, SEBI has instituted the requirement that late fines be paid upon exceeding the license renewal date (like FPIs).

An FVCI will be deemed to have voluntarily sought for the surrender of their registration if they do not hold investments in India and do not pay the late fee in addition to the renewal fee by the deadline.

On the other hand, the certificate of registration may be suspended or revoked if an FVCI having interests in India fails to pay the renewal fee as well as the late feewithin thirty days from the expiry of the block for which fee has been paid.

5. Beneficial Ownership

The Amended Regulations require both current FVCIs and new FVCI applicants to give their respective DDPs, theinformation on their beneficial owners. In the application form and its annexure, new FVCI applicants must include the information about their beneficial owners, identified as perthe Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.

Information about beneficial ownershipis among the material information ofan FVCI which is why as per the Amended Regulations, FVCIis required to report to SEBI and DDP in the event that any material information changes, including any direct or indirect changes to the ownership or control or structure of the FVCI that was previously disclosed.

6. Custodian

Before making any investments, FVCIs or their global custodians must have agreements in place with both the DDP and custodian.

7. Conditions for grant of license

The conditions governing the registration certificate granted to the FVCIs are altered in a number of significant ways by the AmendedRegulations. The core requirements, which include following the FVCI Regulations and the SEBI Act, appointing a domestic custodian, and forming a partnership with a designated bank to operate a special non-resident rupee or foreign currency account, are not altered.

However, the AmendedRegulations place new duties on FVCIs, including the need to notify SEBI and DDP in writing as soon as possible but no later than seven working days, in the event that the FVCI no longer meets the eligibility criteria. The DDPs are now responsible for confirming that the FVCIs comply with the requirements.

8. Obligations and responsibilities of FVCI

Section 15A has been inserted through Amended Regulations which talks about the obligations and the responsibilities of the FVCI. They shall-

• Follow any additional terms and conditions that the SEBImay from time to time specify, as well as the provisions of the AmendedRegulations as they may apply, and any circulars issued under them;

• regarding its activities as an FVCI, it shall at all times adhere to the laws, rules, regulations, guidelines, and circulars that are currently in effect in India;

• if any information or details previously submitted to SEBI or DDPare found to be false or misleading in any material respect, or if there is a change to the information or details already submitted, notifySEBIand DDP in writing. This communication must be sent in the manner and within the time frames that SEBImay from time to time specify;

• in the manner and within the timeframes that SEBI may from time to time specify, notify the SEBI and the DDP in writing of any material change in the information, including any direct or indirect change in its ownership or control, structure, or control that he previously provided to SEBI or DDP;

• in case of any penalties, pending litigation or proceedings, findings of inspections or investigations for which action may have been taken or is being considered by an overseas regulator against it, notify SEBIand the DDPas soon as possible, but no later than seven working days; in the manner and within the time frames that SEBImay from time to time specify;

• as and when SEBIor any other Indian government agency requests it, provide any records, information, or paperwork pertaining to its venture capital investment activities abroad;

• acquire a Permanent Account Number (PAN) from the Department of Income Tax;

• meet the requirements outlined in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 as a fit and proper person;

• carry out the appropriate KYC on its investors and shareholders in compliance with the regulations that apply to it in the country in which it is headquartered; and

• give any further information or documentation—such as beneficiary ownership details of their clients—that SEBI, the DDP, or any other enforcement agency may request in order to assure compliance with the Financial Action Task Force standards, the Prevention of Money Laundering Act, 2002 (Act No. 15 of 2003), and the rules and regulations that fall under it.

Final Remark

The AmendedRegulations indicate a significant change in the direction of harmonizing the registration frameworks for FVCIs withFPIs, improving efficiency and uniformity.

These changes seek to alleviate the administrative burden of FVCI registration by shifting registration duties to DDPs and incorporating updated procedures for compliance, due diligence, and fee management.

These actions also complement SEBI's larger initiatives to lessen its direct involvement in the day-to-day operations of intermediaries and to concentrate more on policymaking and regulatory oversight for these companies and entities.

The new fee structure, updated eligibility criteria, and increased obligations for both FVCIs and DDPs signify a deliberate attempt to improve regulatory practices and increase transparency. These changes are anticipated to expedite the due diligence and post-registration procedures for FVCIs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.