Foreign Venture Capital Investment (FVCI) in India come under the ambit of SEBI Regulations and the Foreign Exchange Management Regulations. It is mandatory for a foreign investor to get registered with SEBI before it can invest in India.
FVCI is defined under Regulation 2(g) of the SEBI Regulations, 2000, as –
“An investor that has been incorporated and established outside India and also registered under these regulations and also proposed to make investments in India according to the necessities of these regulations.”
WHAT IS VENTURE CAPITAL?
‘Venture Capital’ is a seed-funding method where the capital is invested by an outsider in ‘ventures’ which are small, new and are still growing.
It is quite different from the traditional sources of funding since the capital here is not given as a loan, it is an investment in exchange for equity stake in that venture, with the hope of high returns.
Since Venture Capitalists fund start-ups and companies having great ideas and future potential but a limited operating history, it is also said to be a “high return, high risk investment”.
For ventures this is a good mode to fund since they don’t have to take loans and in exchange for equity receive mentor and contact access of the VCs.
REQUIREMENTS FOR FVCI
There are three basic legal requirements that a foreign investor has to satisfy before it can make investments in the “venture capital companies” in India:
- The VC must be incorporated / established in any foreign country.
- The VC must be registered with SEBI as a “Foreign Venture Capital Investor”.
- VCI should work in accordance with SEBI regulations.
- After registration with SEBI, further approval of RBI under FEMA regulations is needed.
FVCI could be in any form be it a company, a body corporate or a trust. With respect to taxation on Venture Capital companies, are regulated by Section 10(23FB) and Section 115(U) of the Income Tax Act.
TYPES OF INVESTMENTS MADE BY FVCI IN INDIA
An FVCI can make investments in two categories once the certificate of approval has been granted by SEBI and RBI.
- Indian Venture Capital Undertaking (VCUs): VCUs are recently established private companies, trying to establish themselves in the market and hence require financial support from investors. These companies are incorporated in India whose shares have not yet been listed on a recognised stock exchange.
- Venture Capital Funds (VCFs): VCF is a fund that’s been established by a company / trust, registered under SEBI (Venture Capital Fund) Regulations 1996. It has a dedicated pool of capital raised according to Regulations. It invests in VCUs according to the said Regulations.
SECTORS ALLOWED FOR INVESTMENTS
Foreign Venture Capital Investors are allowed to invest in many sectors:
- Biotechnology
- IT (Software and hardware)
- Poultry Industries
- Seed Research and Development
- Research in pharmaceuticals
- Nanotechnology
- Hospitality
- Dairy Industries
- Production of Biofuel
- Infrastructure
EXEMPTIONS TO FOREIGN VENTURE CAPITAL INVESTORS IN INDIA
With the aim to facilitate these investments in India, FVCI has been granted several relaxations, some of which are as follows:
- Exemptions from – any pricing restrictions during entry and exit
- Exemption from – the Takeover Code (It makes it compulsory for the acquirer to make an open offer on shares beyond threshold limit)
- Exemption from – any lock-in period when the investee company primarily goes public
OBLIGATIONS / RESPONSIBILITIES OF FVCI
The FVCI must follow some obligations and responsibilities while investing in India. They are provided under Chapter IV of the FVCI Regulations. These are including the following:
- Maintain books of accounts and documents for eight years. Inform SEBI about the location of such records.
- The SEBI has power to call for any information regarding its activities.
- The query of SEBI must be answered within the time specified by the board.
- The investor has to enter into an agreement with a domestic custodian for the security of investments.
- A non-resident rupee account or a foreign currency denominated account must be opened in an RBI approved bank.
- Foreign Venture Capital Investors must ensure that the domestic custodian is doing the following:
– Monitoring the FVCI in India
– Periodically furnishing reports to SEBI
– Furnishing information as and when sought by SEBI
CONCLUSION
FVCI promote innovation and conversion of scientific technology into commercial production for new companies. India has inherent strength in technology, manpower, cost-competitive labour and policy support and with funds.
It could be concluded that FVCI are a crucial method of promoting enterprise and innovation in India. India has a strong regulatory framework in the space of eligibility, registration, responsibilities and restrictions on investments for an FVCI.
GoI has been making notable efforts to make venture capital industry strong in India in order to bridge the gap between finance from the banks to the capital requirements of new start-ups.
FVCI is a high-risk activity but the ability of it to expand the economy and businesses, is substantial.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources: lexology.com, https://enterslice.com, https://muds.co.