Venture Capital

New Master Circular on Foreign Venture Capital Investors (FVCIs)

For foreign venture capital investors, the Securities and Exchange Board of India (SEBI) has released a master circular (FVCIs). The date of this Master Circular’s issuance is March 3, 2023. The Securities and Exchange Board of India (SEBI) has periodically released a variety of circulars to regulate FVCIs effectively. The provisions of the master circulars are merged into this Master Circular for FVCIs so that all relevant requirements and circulars are accessible to stakeholders in one location.

In order to improve the effectiveness of economic connections between India and other nations, there has been significant growth in venture capital investments in India. This has led to favourable revisions to the laws governing these investments.

Venture capital is a finance that is distinct from traditional sources of funding because it differs from them in several ways. Venture capitalists invest in new technologies and concepts that have the potential for rapid growth despite the inherent risk. Professional money managers known as venture capital funds (“VCF”) supply risk funding to entrepreneurs.

In other terms, venture capital is a fund given by an outside investor to support a fledgling, expanding, or struggling company. The investor in venture capital offers the money aware that there is a considerable risk involved with the company’s potential future earnings and cash flow.

Venture Capital Funds

Venture capital is a finance that is distinct from traditional sources of funding because it differs from them in several ways. Venture capitalists invest in new technologies and concepts that have the potential for rapid growth despite the inherent risk. Professional money managers known as venture capital funds (“VCF”) supply risk funding to entrepreneurs. 

In other words, venture capital is a fund from an outside investor to support a fledgling, expanding, or struggling company. The investor in venture capital offers the money aware that there is a considerable risk involved with the company’s potential future earnings and cash flow.

Venture capital funds (VCFs) are investment vehicles that allow people to place money in start-ups that have just been founded, as well as small and medium-sized businesses. These are the kinds of investment funds that concentrate on businesses with the potential to generate big profits. Yet, there is a significant risk associated with investing in these businesses.

Mutual funds and VCFs both consist of a pool of money that has been gathered from various investors. Investors can be high-net-worth people, businesses, or even other funds in this context. Venture Capital Funding is managed by a venture capital firm rather than an asset management firm.

Foreign Venture Capital Investors 

Foreign Exchange Management Regulations and the Securities Exchange Board of India are the regulatory authorities that 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 investing in venture capital in India (FVCI).

According to the SEBI (Foreign Venture Capital Investor) Regulations 2000^[1], an investor who is registered under the FVCI Regulations and is incorporated or established outside of India and plans to participate in venture capital fund(s) or venture capital undertakings in India is referred to as an FVCI.

For this reason, before making an investment in an Indian venture capital company, a foreign investor must first register with SEBI. FVCI is defined as an investor who is incorporated and established outside of India and who intends to make investments in venture capital funds or venture capital undertakings in India and who is registered with SEBI in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.

Eligibility of a Foreign Venture Capital Investor

The eligibility requirements for an entity to qualify as a foreign venture capital investor (FVCI) in India are outlined in Regulation 4 of the SEBI (Foreign Venture Capital Investors) Rules, 2000. According to the regulation, investors 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;
• If the applicant is a foreign-incorporated investment manager, investment management firm, asset management company, 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.
• Ensure the candidate is fit and proper for Foreign Venture Capital Investor.

Suppose SEBI determines that the application lacks any relevant information or that the applicant does not meet the requirements. In that case, it may reject the application without giving the applicant a fair amount of time to rectify it 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.

New Master circular on foreign venture capital investors

• In effect as of the date of issuance is this master circular. The following SEBI circulars and directives on FVCIs are rescinded as of this Master Circular: 

1.  On July 3, 2009, SEBI issued Circular No. IMD/DOF-1/FVCI/CIR.No.1/2009.
2. On January 12, 2010, SEBI issued Circular No. SEBI/IMD/DOF-1/FVCI/CIR-1/2010.
3. On July 6, 2017, SEBI issued Circular No. SEBI/HO/IMD/DF1/CIR/P/2017/75.

• Any application pending with SEBI made in accordance with the rescinded circulars will be considered to have been made in accordance with the corresponding provisions of this Master Circular.

• The appropriate authority has given its approval for the release of this Master Circular.

• In order to safeguard the interests of stockholders, encourage the growth of the securities market, and regulate it, this Master Circular is being issued under the authority granted by Sections 11(1) and 11A of the Securities and Exchange Board of India Act, 1992.

New Amendment in Foreign Venture Capital Investors (Regulation) 2000

Need of a firm commitment to register as a foreign venture capital investor (FVCI)

Upon submitting their applications for registration as FVCI, applicants who wish to register with SEBI as FVCI must secure a firm commitment from their investors for a contribution of at least USD 1 million.

Quarterly Reporting by FVCIs

• Annexure I contains the format for the quarterly report on venture capital activity that FVCIs must provide.

• All FVCIs are required to provide a detailed report on venture capital activity to SEBI in accordance with Regulation 13(1) of the SEBI (Foreign Venture Capital Investors) Rules, 2000 (“FVCI Regulations”).

• Within seven days after the end of each calendar quarter, the report must be posted online on the SEBI portal. It is not necessary to submit hard copies of the report.

• The domestic custodian is in charge of timely submitting the report in line with FVCI Regulations Regulation 14(2).

Online Filing System for FVCIs

SEBI has created an online system for filings connected to FVCIs in order to simplify operations in terms of registering, reporting, and complying with various requirements under the FVCI Regulations. Applications for registration, reporting, and filing under the terms of the FVCI Rules may be submitted online.

All applicants who wish to apply for registration as an FVCI must now do so exclusively online using the SEBI Intermediary Portal. Additionally, all SEBI-registered FVCIs must now use the online system alone to submit compliance reports and applications for any requests made in accordance with the FVCI Regulations. As of July 1 2017, the aforementioned online filing method for FVCI is operating.

On the SEBI website, there is a link to the SEBI Intermediary Portal. Users can consult the portal’s manual or call the helpline number listed in the manual if they have any questions or need explanations.

The activation of existing SEBI-registered FVCIs’ online accounts is advised; a separate activation e-mail has been sent for this purpose.

Conclusion

Investing in venture capital is a high-risk and high-reward endeavour. High net-worth individuals and organisations invest in getting high returns. In our nation, FVCI is crucial for advancing innovation and translating scientific knowledge and technology into commercial manufacturing. The recent advancements in information technology attest to the potential for growth in knowledge-based sectors. Along with the money, FVCI also contributes wise counsel, practical managerial assistance, and knowledge that supports the entrepreneurial visions that result in promising marketable goods.

Also Read:
Approval for Registration of Foreign Venture Capital Investor
Guide on the Foreign Venture Capital Investment (FVCI) in India

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