Foreign Portfolio Investment

Guide on the Foreign Venture Capital Investment (FVCI) in India

Guide on the Foreign Venture Capital Investment (FVCI) in India

Before discussing the facets of Foreign Venture Capital Investment (FVCI), it is necessary to be clear about the concept of the ‘venture capital’. Venture capital is the investment method where seed funding or ‘capital’ is raised by the new startups or new business entities or those who are in troubled state. Venture capital funding is slightly different from traditional funding sources such as banks which provide capital in the form of a loan whereas venture capitalists provide funds in exchange of equity in the business. They take equity in the business with a view to reap higher returns from the business in the future. The ventures too prefer venture capital funding because they do not have to take loans and by extending a portion of equity in their company they get access to the contacts of the VCs and their expertise.     

What is Foreign Venture Capital Investment (FVCI)?

When a foreign investor or a non-resident makes investments in Venture Capital Funds (VCFs) or Venture Capital Undertakings (VCUs), then such investment made is called Foreign Venture Capital Investment (FVCI).  

Regulatory Framework for Foreign Venture Capital Investment in India

The investment made by FVCI is governed by the Regulations framed by Securities and Exchange Board of India (SEBI) and the Foreign Exchange Management Regulations. 

The term “foreign venture capital investor” has been defined under Regulation 2(g) of the SEBI (Foreign Venture Capital Investors) Regulations, 2000 wherein FVCI is defined 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.

Similar definition of FVCI has been given under the Foreign Direct Investment Policy, 2020 (FDI policy).

From the above two definitions, it can be concluded that there are three essential criteria in order to qualify as a foreign venture capital investor in India. They are:

  1. The entity must be a established or incorporated outside  India;
  2. It must be registered with the SEBI as an FVCI; and
  3. The proposal of investment should be made in accordance with the FVCI Regulations.

Eligibility of a Foreign Venture Capital Investor

Regulation 4 of the SEBI (Foreign Venture Capital Investors) Regulations, 2000 lay down the Eligibility criteria for an entity to qualify as a foreign venture capital investor in India. The regulation states that before granting the certificate of a FVCI, SEBI will take into account the following conditions for eligibility:

  1. Applicant’s track record, financial soundness, professional competence, general reputation of fairness and integrity, experience.
  2. Whether the applicant has taken necessary approval from the Reserve bank of India to make investments in India;
  3. Whether the applicant is an investment trust, investment company, pension fund, investment partnership, endowment fund, mutual fund, charitable institution, university fund or any other entity incorporated outside India;
  4. Whether the applicant is an investment manager or investment management company or asset management company or any other investment vehicle incorporated outside India;
  5. Whether the applicant is authorised to invest in a venture capital fund or carry out an activity of a FVCI;
  6. Whether 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 and its promoters track record in case absence of regulation by a regulatory authority or does not pay income tax
  7. The applicant has not been refused the certificate by SEBI
  8. Whether the applicant is a fit and proper person 
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If SEBI finds that the application is devoid of any necessary details or the applicant does not qualify the necessary criteria, then it can reject the application before giving the applicant reasonable time to make the necessary corrections in the application or an opportunity of being heard. However, if the SEBI is satisfied with the details provided in the application, then it shall grant certificate to the applicant as an FVCI.

Types of Investments made by FVCI in India 

An FVCI[1] can make the following types of investments once the certificate of approval has been given by both SEBI and RBI. An FVCI can make the following two types of investments:

  1. Indian Venture Capital Undertaking (VCUs): VCUs are generally newly established companies whose are trying to establish themselves in the market and require financial support and expertise from the potential investors. It is a company incorporated in India whose shares have not been listed on a recognised stock exchange of India and who is not indulging in any of the activity that have been put in the ‘negative list’ of SEBI.
  2. Venture Capital Funds (VCFs): VCF is a fund that has been established by a company or a trust which has been registered under SEBI (Venture Capital Fund) Regulations 1996, has a dedicated pool of capital raised as per the said Regulations and also invests in VCUs according to the said Regulations.

Restrictions FVCI investments

SEBI has laid down certain guidelines within which a VCFI is allowed to make investments and not beyond that. SEBI states that a VCFI can only invest from the “investible funds” which is the corpus of funds committed for making investments in India and includes the net expenditure for managing and administering of funds. The restrictions can be found in Regulation 11 of SEBI (Foreign Venture Capital Investors) Regulations, 2000. An FVCI can invest in the following manner only:

Minimum investment of 66.67% of the investible funds has to be invested in the equity-linked instruments or unlisted equity sharers of a VCU

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 Not more than 33.33% of the investible funds shall be invested in the following manner:

  • Subscription of an IPO of a VCU whose shares are proposed to be linked on a stock exchange
  • Debt r Debt Instrument of a VCU, only if the investment has been made in that VCU through equity
  • Preferential allotment of equity shares of a listed company but with a one year lock-in period
  • Investment in the equity shares or equity linked shares of a company that is sick or financially weak and whose shares have been listed
  • In SPV made for the purpose of investment under these regulations

An FVCI is permitted to make 100% of its funds in a domestic VCF registered with SEBI. However, before making such investment, the FVCI needs to make the following disclosures to SEBI about the investment strategy chosen by itself and the life cycle of the funds. Apart from the above mentioned duties, an FVCI has much other compliance while making such investments.

General Obligations and Responsibilities FVCI investments

Maintenance of Books and Records

  • Every FVCI is supposed to maintain books of accounts, records and documents giving a true and fair picture of the state of affairs of the business of FVCI for a period of 8 years
  • Every FVCI is supposed to intimate SEBI in writing about the place of books of accounts, records and documents.

Power to call for information

  • SEBI can call at any time any information from FVCI relating to its activities as a FVCI and that information is supposed to be provided within the time specified by SEBI. 

General Obligations and Responsibilities

  • An FVCI or a global custodian acting on behalf of FVCI shall enter into an agreement with the domestic custodian to act as a custodian of securities for a FVCI.
  • FVCI is supposed to ensure that the domestic custodian takes the following steps:
  • Monitoring of investment of FVCI in India
  • Furnishing periodic returns to SEBI
  • Furnishing such information as may be called by SEBI from time to time

Appointment of Designated bank

  • FVCI is supposed to appoint a bank branch approved by RBI as a designated branch for opening of foreign currency denominated accounts or special non-resident rupee account.

Taxation aspect of FVCI investments

Tax on income is governed by the provisions of the Income Tax Act, 1961 and the Government of India has entered into Double Tax Avoidance Treaty (DTAA) with many countries. While determining the income tax liability of the income of a Non-Resident from the territory of India, provisions of both the Income Tax Act and DTAA come into play. Section 90(2) of the Income Tax Act state that an assessee will be taxed under the Income Tax Act or the DTAA whichever is more beneficial to them.

A combined reading of section 10(23FB) and 115(U) reveals that VCFs are exempt from taxation on any income earned from investment. However, when such is distributed to investors, it becomes taxable. Thus in practice the FVCU does not get any tax exemption. The only resort that a FVCI has is to reap the benefits offered by the DTAA. For example India and Mauritius have a DTAA between them and the capital gains earned by a resident in Mauritius shall be taxed in Mauritius only and not in India. The fact that Mauritius does not have any tax on capital gains makes it even better proposition for companies to open their businesses and maintain their residential status at Mauritius and not India.

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Advantages for FVCIs in India

It is not that VCFIs do not get advantages in India. In order to attract investments in India, VCFIs have been given a number of relaxations such as:

  • Exemptions on pricing restrictions related to entry and exit.
  • Exemptions from any lock-in period when the investee company goes public for the first time.
  • Exemptions have also been given from the Takeover Code. 

What are the sectors where FVCI can make investments?

FVCIs in India have been allowed to invest in the following sectors:

Nanotechnology, biotechnology, dairy industry, poultry industry, IT (Software and hardware), Research and development of new chemical entities in the Pharmaceutical sector, infrastructure sector etc.

Procedure for registration of FVCIs in India

For an entity to register itself as a FVCI, an application has to be made by an applicant in Form A of the FVCI Regulations asking about details and other supporting documents. Fee has to be submitted as has been prescribed in Part A of the Second Schedule and the same needs to be paid in the manner provided in Part B of the same schedule of FVCI Regulations. Once the application is received by SEBI, then SEBI analyses it and raises any objections or grants certification to the applicant. 

Exit strategy for FVCIs in India

Exit strategy refers to the method adopted by the FVCI to make an exit with all the investments made in India in the past. An exemption has been given to FVCIs where they can all their securities at a rate that is mutually acceptable to both parties. Since, the government has not put any restrictions on the exit strategy, it gives a sense of security to the investors that their investments in India will not be jeopardised.  


From the above discussion, it can be concluded that FVCI is an important tool of promotion of the Indian enterprise and innovation. They give fillip to raw knowledge based ideas and technology and transform them into a means of commercial production. The regulatory framework of India with respect is an attractive one with clearly laid down policies related to eligibility, registration, responsibilities and restrictions on investments for an FVCI.

Further, a number of factors make it favourable for FVCIs to turn to India to grow their investments such skilled and competent workforce, Research and Development, policy support etc. The initiative of Start-up India is another factor that has attracted investment. The government has been making efforts to make venture capital industry proper in India and fill the void between the finance from the banks and capital requirements of new start-ups in the country.       

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