Registration of foreign venture capital investor
India continues to be a regulated economy, in order to boost investment in the venture capital space (which is fairly capital intensive in nature) and incentivize investments in start-ups, the Government has introduced and, from time to time, liberalized the regulatory regime applicable to foreign venture capital investors (“FVCI”). In 2000, the Securities and Exchange Board of India (“SEBI”) announced the SEBI (Foreign Venture Capital Investors) Regulations, 2000 (“FVCI Regulations”) for enabling registered FVCIs to avail of certain benefits. Additionally, benefits have also been granted by the Reserved Bank of India (“RBI”) pursuant to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”) to investments by FVCIs. The cumulative investment by FVCIs for the year 2017 was INR 46,031 crores Foreign Venture Capital Investment in India The term refers to investments made by a Non-Resident / Foreign investor in Venture Capital Undertakings (“IVCU”) and Venture Capital Funds (“VCF”). In India, such investments are governed by the Securities Exchange Board of India (“SEBI”) Regulations and the Foreign Exchange Management Regulations. The foreign country which chooses to invest in India’s Venture Capital is known as the Foreign Venture Capital Investor (“FVCI”). The term has been defined under Regulation 2(g) of SEBI (Foreign Venture Capital Investors) Regulations, 2000 as an investor which is incorporated and established outside India, is registered under this Regulation and has proposed to invest in VCF or Venture Capital Undertakings (“VCU”s) in India. The Foreign Direct Investment Policy, 2020 (“FDI Policy”), gives a similar definition of the term FVCI by stating FVCI is an investor incorporated and established outside India, registered under the SEBI (FVCI) Regulations, 2000 (“FVCI Regulation”) which proposes to invest according to these Regulations. Thus, from the above two definitions we can conclude that there are 3 essentials which a foreign investor must satisfy before it can start making investments in India’s venture capital enterprises: It must have been established and incorporated in a country other than India; and It must be registered with SEBI as an FVCI; and While making investments in VCFs and VCUs in India, it must act in accordance with FVCI Regulation Eligibility and Registration In order to be recognized by SEBI as an FVCI, the applicant/ foreign investor must fulfil certain conditions which have been listed in Regulation 4 of the FVCI Regulations. These include: The Applicant’s track record Professional competence Financial soundness Experience in the field Reputation with respect to fairness and integrity If the applicant is an investment company, investment trust, investment partnership, pension fund, mutual fund, endowment fund, university fund, charitable institution or any other entity incorporated outside India If the applicant is an asset management company, investment manager or investment management company or any other investment vehicle incorporated outside India If the applicant is authorised to invest in venture capital fund or carry on the activity as a foreign venture capital investors If the applicant is regulated by an appropriate foreign regulatory authority or is an income tax payer; or submits a certificate from the banker of its or its promoter’s track record where the applicant is neither a regulated entity nor an income taxpayer If the applicant has not been refused a certificate by the Board Reserve Bank of India (“RBI”) must have given approval to the Applicant for making investments in India The Applicant must be a ‘fit and proper person’, according to the criteria laid down in Schedule II of the SEBI (Intermediaries) Regulations, 2008 If the application is incomplete or the necessary criteria have not been fulfilled, the Board may reject the application after giving the applicant time to remove the objections / an opportunity of being heard. Contrarily, if the Board is satisfied that the applicant satisfies the eligibility conditions, it shall grant a certificate of registration as FVCI to the applicant. Types of Investments made by an FVCI 1. Indian Venture Capital Undertaking VCUs are generally newly inaugurated, private companies that are yet to establish themselves in the market and require finances and expert advice from investors. It may be defined as a company: Which is incorporated in India Whose shares have not been listed on a recognized Indian stock exchange Which is not engaged in any activity or sector included in the ‘negative list’ by SEBI 2. Venture Capital Fund As the name suggests, it is a ‘fund’ that has been established as a trust or a company. It must: Be registered under the SEBI (Venture Capital Fund) Regulations of 1996 Have a dedicated pool of capital, which was raised in the manner given in the aforementioned Regulations Invest in VCUs according to the said Regulations Key Benefits of FVCI Route v. FDI Route 1. FVCIs are exempted from pricing norms at the time of entry as well as exit. As a result, FVCIs can acquire or sell instruments at a price mutually acceptable to the buyer and the seller/issuer. This is a significant exemption as it enables FVCIs to structure a cash-out at any price and without being subject to the fair market value related hassles. 2. The open offer related provisions under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 are not applicable in case of sale of shares by FVCIs to promoters, if such transfer is effected pursuant to a pre-existing arrangement. 3. FVCIs are exempted from the one year lock-in requirement under the SEBI (Issue of Capital and Disclosure) Regulations, 2018 (“ICDR Regulations”), provided that the shares have been held by such FVCIs for at least one year. As a result, FVCIs have an opportunity to exit immediately once the investee company goes public. 4. FVCIs are classified as ‘Qualified Institutional Buyers’ under the ICDR Regulations and are therefore eligible to subscribe to securities offered at an initial public offering through the book building process. Restrictions on Investments A minimum of 66.67% of the investible funds must mandatorily be invested in the equity-linked instruments or the unlisted equity shares of a VCU It may invest 33.33% of the investible funds (and not more
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