Venture capital plays an important role in the life cycle of emerging industries by investing in growth oriented high-risk ventures. It fills the void between the high quality ideas and the sources of required funds. Where the traditional methods of funding, such as loan from banks, subsidies from government bodies etc., comes as a costly and cumbersome affair for the new entrepreneurs, venture capital funds have emerged as a saviour thereby providing necessary aid to the cash starved innovative industries in exchange of securities.
In India, venture capital fund ("VCF") is regulated by Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 ("AIF Regulations") issued by the Securities and Exchange Board of India ("SEBI"). It is recognized as Category I Alternative Investment Fund which acts as an intermediary in the financial market, to provide capital to small firms and budding start-ups having high growth potential.
The investments done by a VCF primarily involve investments in unlisted securities of start-ups or emerging or early stage Indian companies, limited liability partnerships involved in new products, new services, technology or intellectual property right based activities or a new business model.
Setting up of a VCF
A company, Limited Liability Partnership, trust or any other body corporate which satisfies the eligibility criteria as provided under the AIF Regulations can set up a VCF in India by obtaining a certificate of registration from the SEBI.
The application for grant of registration certificate can be made by the eligible applicants on submission of a form prescribed under first schedule of AIF Regulations along with the requisite application fee with the SEBI. Basis the review of the application and the information submitted, SEBI may issue registration certificate to VCF subject to certain conditions.
A VCF or any scheme launched by it should be close ended with a minimum tenure of 3 (three) years and the tenure is to be determined at the time of filing application for registration with the SEBI.
Investment in VCF
Investment in VCF is subject to certain conditions such as each scheme of VCF is required to have a minimum corpus of INR 200 Million and every investor is required to invest atleast INR 10 Million (except for the employees and directors of VCF who can invest a minimum of INR 2.5 Million). Further, no scheme can have more than 1000 investors.
The VCF can raise funds from any investor whether Indian, foreign or non-resident Indians ("NRI") by way of issue of units, however, any investment in VCF by a person resident outside India (including a NRI) is governed by Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
Investment conditions and restrictions by VCF
The investment strategy, investment purpose and investment methodology of a VCF shall be mentioned in its information memorandum or placement memorandum.
Investments by VCF are subject to the certain conditions which, inter alia, includes the following:-
- Investment by VCF in securities of companies incorporated outside India are governed by Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, as amended from time to time;
- Investment in an investee company should not exceed 25 % of the corpus;
- Un-invested portion of the corpus can be invested in liquid mutual funds or bank deposits or other liquid assets;
- Investment in associates can be done only if 75% of investors by value of their investment in the VCF approve such investment;
- Funds of a VCF can invest in units of another VCF;
- A VCF shall not borrow funds directly or indirectly or engage in any leverage except for meeting temporary funding requirements for not more than thirty days, on not more than four occasions in a year and not more than ten percent of the corpus;
- at least two-thirds of the corpus shall be invested in unlisted equity shares or equity linked instruments of a venture capital undertaking or in companies listed or proposed to be listed on a Small and Medium Enterprises ("SME") exchange or SME segment of an exchange;
- Not more than one-third of the corpus shall be invested in:
- initial public offer of a venture capital undertaking whose shares are proposed to be listed;
- debt or debt instrument of a venture capital undertaking in which the VCF has already made an investment by way of equity or contribution towards partnership interest;
- preferential allotment, including through qualified institutional placement, of equity shares or equity linked instruments of a listed company subject to lock in period of one year;
- the equity shares or equity linked instruments of a financially weak company or a sick industrial company whose shares are listed;
- special purpose vehicles which are created by the VCF for the purpose of facilitating or promoting investment in accordance with the AIF Regulations.
The Indian economy despite having lot of potential for further growth becomes stagnant due to lack of growing businesses. The venture capitalists have today emerged as the mainstream source of finance for the innovative entrepreneurs thereby providing the requisite solution.
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