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 than that) in:
- Subscribing to the initial public offer of a VCU whose shares are proposed to be listed on a stock exchange
- The Debt or debt instrument of a VCU, if the investor has already made an investment in the VCU by equity
- Subject to a 1-year lock-in period, in the preferential allotment of equity shares of a listed company
- Investment in the equity shares/equity linked instruments of a company that is sick or financially weak, and whose shares have been listed
- In special purpose vehicles, which were made for promoting investments under these Regulations
It must be noted that the Rule also permits an FVCI to invest 100% of its funds in a domestic VCF registered under SEBI. The investment strategy chosen by the Foreign Venture Capital Investor and the life cycle of the funds must be disclosed to the Board before making any investments in India. Apart from this important duty, an FVCI has many other responsibilities to pay heed to while making such investments.
Responsibilities and Obligations of an FVCI
These obligations have been given in Chapter IV of the FVCI Regulations. They are:
- Foreign Venture Capital Investors must maintain records, documents and books of accounts for a period of 8 years.
- These records must reflect a true and fair picture of the IVCI’s state of affairs
- The Board must be informed in writing about the location where these records, documents and books are kept.
- SEBI has the right to call for any information which the Board may require regarding the activities of the FVCI
- The Investor must supply the information sought within the time period given by SEBI
- The FVCI must appoint a ‘designated bank’ that is approved by the RBI for opening a special Non-Resident Rupee account or a foreign currency dominated account.
- The FVCI (or a global custodian on its behalf) must enter into an agreement with the domestic custodian, who shall act as the custodian of securities for the FVCI.
- Foreign Venture Capital Investors shall ensure that the domestic custodian is doing the following:
- Monitoring the Foreign Venture Capital investment in India
- Periodically furnishing reports to SEBI
- Furnishing information as and when sought by SEBI
FAQs
What are the benefits given to Foreign Venture Capital Investors in India?
- Exemptions from any pricing restrictions during entry and exit
- Exemption from any lock-in period when the investee company first goes public
- Exemption from the Takeover Code, which makes it compulsory for the acquirer to make an open offer on shares beyond a threshold limit. This applies with respect to the shares sold by the Investor to the promoters after the company goes public.
Which sectors are FVCI allowed to invest in?
Foreign Venture Capital Investors in India are allowed to invest only in the following sectors:
- Dairy industry
- Poultry industry
- Nanotechnology
- Biotechnology
- Research and development of new chemical entities in the Pharmaceutical Sector.
- IT (software and hardware)
- Seed research and development
- Production of biofuel
- Hotel-cum-convention centres with a seating capacity of more than three thousand;
- Infrastructure sector
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