Foreign Investment

Investment pursuant to the FVCI Route

India’s economy is still heavily regulated, the Government has introduced and occasionally liberalised the regulatory framework that applies to foreign venture capital investors (or FVCI) to encourage investment in start-ups and increase venture capital investment. The SEBI (Foreign Venture Capital Investors) Regulations, 2000, were made public by the Securities and Exchange Board of India (SEBI) in 2000 to allow registered FVCIs to take specific advantages. Benefits have also been given to investments made by FVCIs by the Reserve Bank of India in accordance with the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules). 

India has received more foreign investment over the past year than other countries, previously it was considered as favoured country for investment. Indian lawmakers have made considerable changes to the many regulations that regulate the channels of foreign investment that a foreign investor can access while investing in India in order to accommodate this consistent inflow.

Foreign Venture Capital Investment

The term “venture capital in India” refers to the financing facilities provided by Indian venture capitalists who invest in start-ups or relatively new, high-growth companies that have very good potential to become very successful companies. It has elements that are both high-risk and high-return. As a result, it acts as an essential source of capital for entrepreneurs with creative company ideas. For organisations and organisations with sizable upfront financial requirements and no other viable alternatives, it is the best sort of financing.

Foreign Exchange Management and Securities Exchange Board of India regulations apply to investments made by foreign investors in Indian Venture Capital Undertakings (VCU) and Venture Capital Funds (VCF). The Foreign Venture Capital Investor is a foreign nation that invests in venture capital in India.

Eligibility Criteria

The eligibility requirements for an entity to qualify as a foreign venture capital investor in India are outlined in Venture Capital Investor Regulation 4 of the SEBI (Foreign Venture Capital Investors) Regulations^[1], 2000. According to the regulation, SEBI must meet the following eligibility requirements before obtaining an FVCI certificate.

• Track record, financial stability, professional aptitude, overall reputation for fairness and integrity, and experience of the applicant. 
• Whether the applicant has obtained the Reserve Bank of India’s requisite approval to make investments in India.
• Whether the applicant is a pension fund, investment partnership, endowment fund, mutual fund, charity, university fund, or any other organisation incorporated outside of India.
• Whether the applicant is a foreign-incorporated investment management firm, investment manager, asset management firm, or other types of investment vehicle.
• Whether the applicant is qualified to participate in a venture capital fund or engage in FVCI activities.
• Whether the applicant is subject to regulation by an applicable foreign regulatory authority, is a taxpayer, or, in the absence of regulatory authority regulation, presents a banker’s certification attesting to the track record of the applicant and its promoters. 
• SEBI has not rejected the requester’s request for a certificate.
• Whether the candidate is a suitable individual.

Suppose the SEBI determines that the application lacks any relevant information or that the applicant does not meet the requirements. In that case, it may deny the application without giving the applicant a fair amount of time to rectify the application or a chance to be heard. But if the SEBI is pleased with the information presented in the application, it will issue the applicant a certificate designating them as an FVCI.

Permitted Investments

Equity, equity-linked securities, or debt securities issued by an unlisted Indian firm operating in any of the following specified areas are authorised investments.

1. Nanotechnology
2. Biotechnology
3. IT-related hardware and software development
4. Seed research and development
5. Pharmaceutical industry research and development
6. Dairy industry research and development
7. Poultry industry research and development
8. Production of biofuels
9. Hotel/convention centres that can accommodate more than 3,000 people
10. Infrastructure sector.

Investment Criteria for the Foreign Venture Capital Investor

A Venture Capital Foreign Investor is only permitted to make investments that are within the parameters set forth by SEBI. The “investible funds,” defined by SEBI as the corpus of money committed for making investments in India and including the net expenditure for managing and administering funds, are the sole sources from which Venture Capital Foreign Investors may make investments. Regulation 11 of the SEBI (Foreign Venture Capital Investors) Regulation, 2000 contains the restrictions. An FVCI may only invest in the ways listed below:

• A minimum of 66.67% of the investable money must be put into a VCU’s equity-linked securities or unlisted equity shares.
• A maximum of 33.33% of the investible money may be invested in the ways listed below:
• Subscription to a venture capital undertaking “Initial Public Offering” of shares that are intended to trade on a stock exchange.
• Debt or debt instrument of a venture capital undertaking, but only if the investment in that VCU was made using equity.
• Preferential allotment of equity shares of a listed firm is subject to a one-year lock-in period.
• It shall disclose the duration of the life cycle of the fund.
• In compliance with these regulations, special-purpose vehicles are founded to facilitate or promote investment.

An FVCI may invest all of its money in a domestic VCF that has been registered with SEBI. But before making such an investment, the FVCI must inform SEBI of the following information regarding its own investment plan and the life cycle of the funds. An FVCI has many other compliance requirements in addition to the aforementioned ones when making such investments.

Advantages of Investment in FVCI Route 

• FVCIs are free from price standards both when entering and leaving. FVCIs can buy or sell instruments at a price agreeable to both the buyer and the seller/issuer. It is a noteworthy exception because it allows FVCIs to organise a cash-out at any price without having to deal with the complications associated with fair market value.
• When FVCIs sell their shares to promoters under an existing agreement, the open offer-related provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, are not applicable.
• The SEBI (Issue of Capital and Disclosure) Regulations, 2018, exclude FVCIs from the one-year lock-in requirement if they have held the shares for at least a year. As a result, when the investee firm goes public, FVCIs can depart immediately.
• FVCIs are qualified to purchase securities issued at an initial public offering through the book-building process since they are categorised as “Qualified Institutional Buyers” under the ICDR Regulations.
• The pricing standards are not required of FVCIs at the time of admission or leave. It provides FVCI with the advantage when buying or selling instruments at a price that both parties can agree upon. It allows the FVCI to design a cash-out at any cost without worrying about fair market value (FMV) concerns.
• The restrictions pertaining to open offers under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations of 2011 are not applicable when FVCIs sell shares to promoters in accordance with an existing agreement that requires the transfer to be completed.

Disadvantages of Investing Through FVCI

• Only if the investee firm owns equity shares or equity-linked instruments, whether compulsorily convertible or optionally convertible instruments, is an FVCI eligible to invest in non-convertible debentures. That could make investing in the strictly non-convertible debenture difficult.
• Investors who want to invest in industries that are eligible for FVCI can do so with FVCI.
• Up to 33.33% of the investible funds may be placed in debt securities by FVCI. These funds do not include the costs incurred for fund administration and management.

General Obligations And Responsibilities FVCI Investments

The general obligation and responsibilities of foreign venture capital investments are covered in Chapter IV of the Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000, and are as follows:

Maintenance of Books and Records

• For a period of eight years, each FVCI is required to keep books of accounts, records, and documentation that accurately and fairly depict the company’s financial situation.
• Every FVCI is required to inform SEBI in writing where its books of accounts, records, and documents are located.

Power to call for information

SEBI may request any information from FVCI pertaining to its operations as an FVCI at any time, and such information must be delivered within the time frame stipulated by SEBI. 

General Responsibilities and Obligations

• To function as a custodian of securities for an FVCI, an FVCI or a global custodian acting on its behalf must enter into an agreement with the domestic custodian.

• The domestic custodian is expected to conduct the following actions with the help of FVCI:
• Ø  Monitoring FVCI Investment in India
• Submitting Periodic returns to SEBI
• Providing any information that SEBI may request from time to time

Selection of a designated bank

For the purpose of opening special non-resident rupee accounts or accounts denominated in foreign currencies, FVCI is required to choose a bank branch that has received RBI approval as a designated branch.

Conclusion

Investments made by various nations in other nations have greatly increased in order to foster more effective trade and commerce ties and to strengthen domestic economies. Investment in FVCI will be a terrific idea. Additionally, a number of elements, including a talented and knowledgeable workforce, research and development funding, legislative backing, etc., make it advantageous for FVCIs to go to India to expand their investments. Another thing that has drawn investment is the Start-up India initiative. The Government has been engaged in establishing a legitimate venture capital sector in India to develop the Indian economy.

Read our Article:Investment under the Foreign Venture Capital Investment (FVCI) Route