Investment under the Foreign Venture Capital Investment (FVCI) Route

Ankita Tiwari

25 Apr, 2023

In the present scenario, foreign investments are witnessing an exponential rise. One such kind of foreign investment is foreign venture capital investments. These are foreign investments in venture capital. India is a regulated economy however, to boost investment in venture capital, the Indian government has liberalized the regulatory regime pertaining to Foreign Venture Capital Investors (FVCI) from time to time. The Securities Exchange Board of India (SEBI) introduced the SEBI (Foreign Venture Capital Investor) Regulations, 2000 (SEBI (FVCI) Regulation, 2000) to provide the manner for registration of FVCI to avail benefits. In addition to the SEBI (FVCI) Regulation of 2000, the Reserve Bank of India also grants certain benefits to investment under FVCIs. Benefits by RBI were provided pursuant to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules)

Process of Registration and Eligibility Criteria for Investment under FVCI

The process for obtaining FVCI registration has been simplified by introducing the online system for registration. The online system is available not just for registration but also for reporting and filing purposes. SEBI grants certificate of registration to an FVCI after assessing the application based on the applicant’s track record, professional competence and experience, financial soundness, general reputation, fairness and integrity, etc.

Permitted sectors and investments under FVCI

Registered FVCI can invest in an Indian Venture Capital Undertaking (IVCU) or Indian Venture Capital Fund (IVCF) or any schemes issued by IVCFs. IVCUs are unlisted companies that are incorporated in India and are engaged in permitted sectors under FVCI whereas IVCFs are funds that are established in the form of a company, trust or a body corporate registered with SEBI and has dedicated capital. In addition, the instruments in which FVCI can invest are as follows:

1. FVCI can invest in equity or equity-linked instrument or debt instruments issued by an unlisted Indian company engaged in permitted sectors. Under the SEBI (FVCI) Regulations^[1], 2000 and subject to the fulfilment of certain other conditions, FVCIs are not permitted to invest more than 33.33% of the investible funds in listed securities.
2. FVCI can invest in equity or equity-linked instrument issued by a start-up established in India. The investment in a start-up can be made irrespective of the sector in which the start-up is engaged.
3. FVCI can invest in units of venture capital funds (VCF) or Category-I Alternative Investment Funds (AIF) or units of a scheme or a fund set up under VCF or Category-I AIF.

Investment in FVCIs is limited to certain sectors which are as follows:

1. Biotechnology
2. IT sector related to the development of hardware and software
3. Seed research or development
4. Research and Development of new chemical products in the pharmaceutical sector
5. Dairy Industry
6. Poultry Industry
7. Hotel-cum-convention halls with a minimum seating capacity of 3,000
8. Biofuel production
9. Nanotechnology
10. Infrastructure sector

Debt Instruments permitted to be used for investment under FVCI

FVCI can invest in the broadest category of instruments as a non-resident investor. Those instruments are as follows:

1. Compulsorily convertible debt instruments like compulsorily convertible debentures;
2. Optionally convertible debt instruments like optionally convertible debentures;
3. Non-convertible debt instruments such as non-convertible debentures, bonds, etc. However, investment in the non-convertible debt instrument is subject to FVCI holding equity or equity-linked instruments in the investee company.

Standard Operating Procedure (SOP) for FVCIs in Start-ups

To encourage investments under FVCI in start-ups, the Indian government has introduced a set of SOPs for start-ups. Start-ups are defined as an entity that fulfill the following conditions:

1. If it is incorporated as a private limited company or as a partnership firm or a limited liability partnership in India and stays like that for a period of ten years from the date of incorporation or registration.
2. The turnover of the entity has not exceeded 100 crores in any financial year from the date of its incorporation.
3. If the entity is engaged in innovation, development, or improvement of products, processes, and services or if it is a scalable business structure that has a high potential to generate employment or create wealth.

If the entity fulfills the aforementioned condition then it will be referred to as a start-up for the purpose of investment under FVCI. An entity formed by splitting up or restructuring existing entities does not qualify as a start-up.

Benefits of Investing via FVCI Route

1. FVCIs do not have to comply with the pricing norms at the time of entry or exit. This gives FVCI an upper hand in acquiring or selling instruments at a mutually acceptable price. It enables the FVCI to structure a cash-out at any price without being subjected to issues relating to fair market value (FMV).
2. Under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations of 2011, the provisions related to open offers are not applicable when the sale of shares by FVCIs to promoters is dine pursuant to a pre-existing arrangement subject to a condition that such transfer has been effected.
3. FVCIs are free from the one-year lock-in period provided under the SEBI (Issue of Capital and Disclosure) Regulations, 2018 (SEBI (ICDR), 2018). However, this exemption is applicable only if the shares have been held by the FVCI for a minimum period of one year. This enables FVCIs to exit immediately once the investee company goes public.
4. The SEBI (ICDR), 2018 classifies FVCIs as “Qualified Institutional Buyers” which makes them eligible to subscribe to the securities offered at an Initial Public Offering (IPO) through the book-building process. 
5. FVCIs are permitted to invest in the broadest category of debt instruments.

Drawbacks of investing via FVCI Route

1. An FVCI can invest in non-convertible debentures only if the investee company holds equity shares or equity-linked instruments whether compulsorily convertible or optionally convertible instruments. This may act as a challenge for investment in the purely non-convertible debenture.
2. FVCI is an option available to investors who want to invest in sectors permitted to invest in FVCI.
3. FVCI can invest up to 33.33% of the investible funds in debt instruments. These funds are net of expenditure committed for administration and management of the fund.

Conclusion

The continuous growth in the Indian economy makes India an attractive destination to invest in. The efforts made by the Indian Government in liberalizing the investment policy make India even more attractive to foreign investors. Investment under FVCI is permitted in most of the sectors except those providing non-banking financial services, and gold financing. The regulatory and legal environment for FVCI plays an enabling role thereby, making the overall environment for investment under FVCI in India conducive. 

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