What is Venture Capital Funding in India?

10 Dec, 2020

Venture capital funds are the investment funds. They seek private equity stakes in growth potential start-ups and invest their money into it. These types of investments are highly risky as well as illiquid but they are backed by well calculated high return & growth in future.

Venture capital funding is good for those investors who have an interest in investing their funds in start-ups. Mainly these investments are rewarding in the long run.

Who are Venture Capitalists?

Venture capitalists is a term used for people who invest capital in a promising venture. Venture capital can come from a single investor or it can come from a group of institutional investors.

Process to Set up a Venture Capital Fund

For setting up a venture capital fund, firstly it is required to verify the eligibility. To operate a venture capital fund, the license shall be granted by the main authority “Securities & Exchange Board of India^[1]”.

Following are the criteria for setting up a venture capital fund under the SEBI (Venture Capital Fund) Regulations, 1996:

In case of Company

Memorandum of the Association shall consist of the object related to activities of venture capital fund.
It must be prohibited to invite the public to subscribe its securities in its memorandum of association & article of association.
It must be assured that its directors or employees or any other principal officer are not involved in any litigation related to securities market which may have an adverse effect on the business.
Its director or an employee or any other principal officer must not have been convicted of any offense involving moral turpitude. They must be a proper person.

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In case of Trust

The trust deed must be duly registered with the authority under the provisions of Indian Registration Act, 1908.
Its main object is to carry on the activity of venture capital fund.
The trustee or in case there are directors in the trustee company, they must not be involved in any litigation in connection with the share market, which can have an adverse bearing on the business.
They must not be convicted of an offense involving moral turpitude.
Applicant must be a proper person.

In case of Body Corporate

A body corporate set up under the central or state legislature.
An applicant who must be a fit and proper person is permitted to carry out the activities related to venture capital fund.
Directors or trustees of such body must not be involved in any litigation in connection with the securities market, which can have an adverse bearing on the business.
The directors or trustees of the body corporate must not have been convicted of any offense involving moral turpitude.

It is required for an applicant to apply Form A under First Schedule of SEBI (Venture Capital Fund) Regulations 1996 with the requisite fees.

Required Documents

In the case of a company, Copy of Memorandum of Association & Article of Association.
In the case of the trust, Copy of Trust Deed.
In case an applicant is a body corporate, Copy of the main objective of the Constitution.
The copy of Investment Management agreement (If applicable).

Details of the Settler/Sponsor

Activities of the sponsor/shareholder and its shareholding pattern and details of the directors.
In the case of an individual, it must be stated that whether the individual is director or employee of the entity registered with the SEBI.
Details in case the sponsor or settlor has floated venture capital funds previously, registered with SEBI and further details in case sponsor or directors have refused the certificate by the board or in case certificate has been suspended under regulation 30 or regulation 31.
State whether the Sponsor or Settler is registered with SEBI, RBI or any other regulatory authority along with the details of the registration.
Details in case sponsor/settler or its holding company are listed on any recognized stock exchange in India.
It has to be stated whether the sponsor/settler or its directors are involved in any litigation in connection with the securities market.
Details of any order passed against them for the violation of securities laws.

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Details of the Trustee/Trustee Company

The activity of the Trustee Company.
Details of the trustees.
Shareholding pattern & details of the directors.
State whether the Trustee Company is registered with SEBI, RBI or any other regulatory authority along with the details of the registration.

Details of the Asset Management Company (AMC) / Investment Manager

The activity of the Asset Management Company / Investment manager.
Shareholding pattern along with the details of the directors.
State whether the Investment manager/AMC is registered with SEBI, RBI or any other regulatory authority along with the details of the registration.
Details of the Key managerial person whether they are the employees of the registered entity with SEBI, if yes, then details.
State whether the applicant has applied for registration with SEBI or already registered with SEBI in any capacity.
List of the associated registered with the SEBI along with Registration No.

After all the compliances are done, SEBI will issue an intimation for the payment of fees of Rs. 5,00,000 within the period of 21 days of application. After that SEBI will issue a certificate of registration.

Conclusion

Considering the risk in venture capital investments, one should always do research of the project being considered. It will be helpful, weighing the risk return ratio expected.