- It is an essential source of funding for start-up and other companies that have a limited operating history and no access to capital markets. <\/li>
- A venture capital firm typically looks for new and small businesses with a perceived long term growth potential that will result in a large payout for investors. <\/li>
- A venture capitalist is mostly limited partnerships that have a fund of pooled investment capital with which to invest in many companies. They vary in size. <\/li>
- VCs may be a small group of investors or an affiliate or subsidiary of a large commercial bank, an investment bank, or insurance company that makes investments on behalf clients of the parent company or outside investors. <\/li>
- VC aims to use the business knowledge it has, experience and expertise to fund and nurture companies that have high potential to yield a substantial return on the VC’s investment.<\/li><\/ul>\n\n\n\n
![\"Foreign](\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Foreign-Venture-Capital-Investment.png\")
<\/figure>\n\n\n\nRegulatory Framework governing the Foreign Venture Capital in India<\/h2>\n\n\n\n
Have a look at the following regulations which govern\nthe foreign venture capital in India:<\/p>\n\n\n\n
- SEBI (Foreign Venture Capital Investor) Regulations, 2000[1]<\/strong><\/a><\/sup><\/li>
- FEMA (Transfer or issue of Security by a Person Resident Outside India) Regulations, 2017<\/li>
- SEBI (ICDR) Regulations, 2009<\/li>
- SEBI (Intermediaries)Regulations, 2008<\/li>
- Income Tax Act<\/li>
- SEBI ( Substantial Acquisition of Share and Takeovers) Regulations, 2011<\/li>
- The Companies Act, 2013<\/li>
- SEBI (
Alternate<\/g> Investment Fund), 2012<\/li> - Tax Treaties<\/li>
- Foreign Exchange<\/a><\/strong> Management (Deposit) Regulations, 2016.<\/li><\/ul>\n\n\n\n
Who are Foreign Venture Capital Investors (FVCI)?<\/h2>\n\n\n\n
Definition\nof Foreign Venture Capital Investors has been provided under two regulations:<\/p>\n\n\n\n
- SEBI (FVCI) Regulations, 2000 <\/li>
- FEMA (Transfer or issue of Security by a Person Resident Outside India) Regulations, 2017<\/li><\/ul>\n\n\n\n
![\"Who](\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Foreign-Venture-Capital-Investment-1.png\")
<\/figure>\n\n\n\nEligibility Criteria for Foreign Venture Capital Investor [FVCI] <\/h2>\n\n\n\n
An\nFVCI has to apply for registration to SEBI. For the grant of a certificate to\nan applicant as a Foreign Venture Capital Investor, the Board shall consider\nthe following conditions for eligibility, namely:<\/p>\n\n\n\n
- the applicants track record,\nprofessional competence, financial soundness, experience, general reputation of\nfairness and integrity. <\/li>
- Whether the applicant has been\ngranted necessary approval by the Reserve Bank of India for making investments\nin India; <\/li>
- whether the applicant is an\ninvestment company, investment trust, investment partnership, pension fund,\nmutual fund, endowment fund, university fund, charitable institution or any\nother entity incorporated outside India; or <\/li>
- whether the applicant is an\nasset management company, investment manager or investment management company\nor any other investment vehicle incorporated outside India; <\/li>
- whether the applicant is\nauthorised to invest in venture capital fund or carry on activity as a foreign\nventure capital investor; <\/li>
- Whether the applicant is\nregulated by an appropriate foreign regulatory authority or is an income taxpayer;\nor submits a certificate from the banker of its or its promoter’s track record\nwhere the applicant is neither a regulated entity nor an income taxpayer. <\/li>
- The applicant has not been\nrefused a certificate by the Board. <\/li>
- Whether the applicant is a fit\nand proper person.<\/li><\/ul>\n\n\n\n
The\napplicant can be a pension fund, mutual fund, investment trust, Investment Company,\ninvestment partnership, Asset Management Company, endowment fund, university\nfund, charitable institution or any other investment vehicle incorporated and\nestablished outside India etc<\/p>\n\n\n\n
Conditions for the investment by FVCI<\/h2>\n\n\n\n
All\ninvestments to be made by FVCIs shall be subject to the following conditions:- <\/p>\n\n\n\n
- It shall disclose to the Board\nits investment strategy,<\/li>
- it can invest its total funds\ncommitted in one venture capital fund<\/li>
- It shall reveal the duration of\nthe life cycle of the fund.<\/li><\/ul>\n\n\n\n
Apart\nfrom the above, the following conditions also needs to be taken care of:<\/p>\n\n\n\n
- An FVCI have to invest at least 66.67% of the investible funds in unlisted equity shares or equity-linked instruments of Venture Capital Undertaking<\/li>
- On the other hand, not more than 33.33% of the investible funds may be invested by way of:
- Subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed. <\/li>
Debt or<\/g> debt instrument of a venture capital undertaking in which the foreign venture capital investor has already invested by way of equity;<\/li> - Preferential allotment<\/a> of equity shares of a listed company subject to
lock in<\/g> period of one year. <\/li> - the equity shares or
equity linked<\/g> instruments of a financially weak company or a sick industrial company whose shares are listed. <\/li> - special purpose vehicles which are created for the purpose of facilitating or promoting investment in accordance with these Regulations. (d)It shall disclose the duration of
life<\/g> cycle of the fund. <\/li><\/ul><\/li> - Every Foreign Venture Capital Investor shall maintain for a period of eight years, books of accounts, records and documents which shall give a true and fair picture of the state of affairs of the Foreign Venture Capital Investor.<\/li>
- Foreign Venture Capital Investor or a global custodian acting on behalf of the foreign venture capital investor shall enter into an agreement with the domestic custodian to act as a custodian of securities for Foreign Venture Capital Investor.<\/li>
- Foreign Venture Capital Investor shall appoint a branch of a bank approved by Reserve Bank of India as designated bank for opening of foreign currency denominated accounts or special non-resident rupee account.<\/li><\/ul>\n\n\n\n
Benefits and Relaxations to FVCIs<\/h2>\n\n\n\n
FVCIs\nenjoy a number of regulatory relaxations; some of the significant ones are:<\/p>\n\n\n\n
- Exemption from pricing norms at the time of entry as well as an exit; <\/li>
- Exemption from “lock-in” period requirements when the investee company goes public; FVCIs are thus effectively allowed to exit the investment, immediately on the listing of the investee company; <\/li>
- Exemption from “Takeover Code” (which mandates making of an open offer by the acquirer, on the acquisition of shares beyond prescribed threshold limits) in respect of shares sold by the FVCI to the promoters of the company, after the company goes public<\/li><\/ul>\n\n\n\n
![\"Benefits](\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Foreign-Venture-Capital-Investment-2.png\")
<\/figure><\/div>\n\n\n\nInvestments by the FVCI<\/h2>\n\n\n\n
With\na view to promote innovation, enterprise and conversion of scientific\ntechnology and knowledge based ideas into commercial production, it is very\nimportant to promote venture capital activity in India. <\/p>\n\n\n\n
A\nflourishing venture capital industry in India will fill the gap between the\ncapital requirements of technology and knowledge based start-up enterprises and\nfunding available from traditional institutional lenders such as banks.<\/p>\n\n\n\n
Hence,
following<\/g> are the two ways which a Foreign Venture Capital Investor has:<\/p>\n\n\n\n ![\"Investments](\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Foreign-Venture-Capital-Investment-3.png\")
<\/figure>\n\n\n\n- Investment\nby FVCI under Schedule I of Regulations<\/strong><\/li><\/ul>\n\n\n\n
Under\nSchedule 1, an FVCI is allowed to invest under FDI scheme as non resident\nentities in other companies subject to FDI norms and FEMA provisions. An FCVI\nneeds to determine before investing in an Indian Company whether the investment\nis under FDI scheme or under FCVI scheme and report accordingly<\/p>\n\n\n\n
- Investment\nby FVCI under Schedule VI of Regulations<\/strong><\/li><\/ul>\n\n\n\n
A SEBI registered Foreign Venture Capital Investor (FVCI) with specific approval from RBI under FEMA Regulations can invest in Indian Venture Capital Undertaking (IVCU) or Indian Venture Capital Fund (IVCF) or in a Scheme floated by such IVCFs subject to the condition that the VCF should also be registered with SEBI.<\/p>\n\n\n\n
![\"FVCI\"](\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Foreign-Venture-Capital-Investment-4.png\")
<\/figure><\/div>\n\n\n\nAn\nIndian Venture capital undertaking [IVCU] is defined as a company <\/p>\n\n\n\n
- incorporated in India<\/li>
- whose shares are not listed on\na recognized stock exchange in India<\/li>
- which is not engaged in an\nactivity under the negative list specified by SEBI.<\/li><\/ul>\n\n\n\n
In\nsimple words, a Indian Venture capital Fund [IVCF] is defined as a fund\nestablished in the form of a trust, a company including a body corporate and\nregistered under the Securities and Exchange Board of India (Venture Capital\nFund) Regulations, 1996 which has a dedicated pool of capital raised in a\nmanner specified under the said Regulations and which invests in Venture\nCapital Undertakings in accordance with the said Regulations.<\/p>\n\n\n\n
- FVCIs can purchase equity \/\nequity linked instruments \/ debt \/ debt instruments, debentures of an IVCU or\nof a VCF through initial public offer or private placement in units of schemes\n\/ funds set up by a VCF. <\/li>
- At the time of granting\napproval, the Reserve Bank permits the FVCI to open a Foreign Currency Account\nand\/or a Rupee Account with a designated branch of an AD Category – I bank.<\/li>
- The purchase \/ sale of shares,\ndebentures and units can be at a price that is mutually acceptable to the buyer\nand the seller. AD Category – I banks can offer forward cover to FVCIs to the\nextent of total inward remittance. In case the FVCI has made any remittance by\nliquidating some investments, original cost of the investments has to be\ndeducted from the eligible cover to arrive at the actual cover that can be\noffered.<\/li><\/ul>\n\n\n\n
Conclusion <\/h2>\n\n\n\n
The ever growing Indian economy and the potential to grow further definitely makes India one of the most liked destination also strong fundamentals comprising of favourable demographic profile, human capital, trade openness, increasing urbanization and rising consumer spending has made India one of the fastest growing markets in the world. In case of further clarification, please contact Enterslice<\/a><\/strong>.<\/p>\n\n\n\n
Further, you can read about Foreign Venture Capital\nInvestors on the following blogs:<\/p>\n\n\n\n
1. Approval for Registration of Foreign Venture Capital Investor<\/a> <\/p>\n\n\n\n
- Investment\nby FVCI under Schedule VI of Regulations<\/strong><\/li><\/ul>\n\n\n\n
- Investment\nby FVCI under Schedule I of Regulations<\/strong><\/li><\/ul>\n\n\n\n
- Preferential allotment<\/a> of equity shares of a listed company subject to
- SEBI (Foreign Venture Capital Investor) Regulations, 2000[1]<\/strong><\/a><\/sup><\/li>