INVESTMENT BY FOREIGN VENTURE CAPITAL INVESTOR IN India

By Naved Askari Advocate advo.naved@gmail.com The investments by a foreign investor in Indian Venture Capital Undertakings (VCU) and Venture Capital Funds (VCF) are governed by Foreign Exchange Management (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000 and SEBI (Foreign Venture Capital Investor) Regulations 2000.

A foreign investor who wants to make investment in a venture capital company in India has to ensure that it has been registered as a Foreign Venture Capital Investor in India with SEBI under SEBI (Foreign Venture Capital Investor) Regulations 2000.

According to the definition given in Regulation 2(iiia) of Foreign Exchange Management (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000, FVCI means an investor incorporated and established outside India and which proposes to invest money in Venture Capital Funds or Venture Capital Undertaking in India and is registered with SEBI. SEBI (Foreign Venture Capital Investor) Regulations 2000 also defines FVCI as an investor incorporated and established outside India and is registered under the said regulations and proposes to make investments in accordance with the se regulations. Therefore it is mandatory for a foreign investor that it should have got itself registered with SEBI before it proceeds to make investment in Venture Capital Company of India.

Thus there are three requirements to be satisfied by a foreign investor before it can make investments in venture capital companies in India: 1. It should have been incorporated and established in any country outside India;

2. It should be willing to make investment in VCFs or VCUs in India in accordance with SEBI regulations; and 3. It should have got itself registered with SEBI as a FVCI.

Such an FVCI can be in form of a company including a body corporate or a trust. Before a Foreign Investor can obtain certificate of recognition as FVCI from SEBI it has to satisfy certain eligibility criteria as are provided in Reg. 4 of SEBI (Foreign Venture Capital

Investor) Regulations 2000. Some of these criterion which are to be considered by SEBI are the applicants track record, professional competence, fairness and integrity of applicant, financial soundness of applicant, prior experience, whether applicant is fit and proper person in accordance with SEBI (Criteria for Fit and Proper Person) Regulations, 2004, etc. Further it has to be seen that whether the applicant has got necessary approvals from RBI for making investments in India or not.

Once the SEBI is assured that applicant satisfies all conditions under Reg. 4 it can proceed to grant registration to the applicant as FVCI allowing him to make investment in Indian VCUs and VCFs in accordance with applicable rules and regulations. This depends upon the discretion of SEBI which can impose suitable terms and conditions upon the applicant before it is recognised as FVCI.

After an investor has been recognized and registered as FVCI by SEBI it has to seek further approval of RBI under FEMA Regulations before making investment in India. Such an FVCI can apply to RBI for general permission through SEBI to invest in IVCU or VCF or in a scheme floated by such VCF [Reg. 5(5) and Sch. 6 of FEM (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000].

The definitions of VCFs and VCU are given both in FEM (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000[Reg. 2(xi) and Reg. 2(va) respectively] and SEBI (Foreign Venture Capital Investor) Regulations 2000[Reg. 2(1)(l) and Reg. 2(1)(m) respectively]. The definitions are almost similar in nature except the fact that SEBI Regulation uses the term VCU whereas FEM regulations use the term IVCU. Joint reading of both these regulations explains the terms VCFs and VCU in following manner:

Indian Venture Capital Undertaking (IVCU):: IVCU means a company incorporated in India whose shares are not listed on a recognized stock exchange in India and which is not engaged in an activity specified under the negative list specified by the SEBI. IVCU is generally a new born private company which is yet to establish itself and is in need of funds and experienced advice and support.

Venture Capital Fund (VCF):: It is a fund established in the form of a trust or a company including a body corporate and registered with SEBI under SEBI(Venture Capital Fund) Regulations 1996 and which has a dedicated pool of capital raised in manner specified in regulations and which invests in VCU in accordance with said regulations. A VCF is also allowed to make investments in VCU subject to provisions in SEBI(Venture Capital Fund) Regulations.

Therefore a FVCI that has got registered with SEBI as such and has been permitted by RBI to make investments in India can make investment in either IVCU or VCF or both. FVCI that has been permitted by RBI to make investment in IVCU or VCF can make investment by purchasing equity or equity linked instruments or debt instruments or debentures of an IVCU or of a VCF. Equity linked instruments means and includes instruments that are later convertible into equity shares or share warrants, preference shares or debenture convertible into equity. These investments can be through Initial Public Offer or Private Placement or in units of schemes/funds set up by VCF [Schedule 6 of Foreign Exchange Management (Transfer or Issue of Security by a person Resident Outside India) Regulations, 2000]. But an FVCI registered with SEBI and permitted by RBI can make investment only in those IVCU and VCF that are also registered with SEBI under respective SEBI regulations [Master Circular on Foreign Investment in India No. 6/2004-05 Dated 1-7-2004].

According to Reg. 11 of SEBI (Foreign Venture Capital Investors) Regulations, 2000 a FVCI registered with SEBI is permitted to make investment in following manner:

1. An FVCI can invest all of its funds in a domestic VCF- a registered FVCI is allowed to invest 100% of its funds in a VCF registered under SEBI(Venture Capital Fund) Regulations. 2. It has to invest atleast 66.67% of its investible funds in unlisted equity shares or equity linked instruments of Venture Capital Undertakings. 3. It can invest only 33.33% of its funds (and not more), by

Subscribing to initial public offer of adventure capital undertaking whose shares are proposed to be listed; Investing in debt or debt instrument of the VCU provided it has already invested by way of equity in such a VCU Preferential allotment of equity shares of a listed company subject to lock in period of one year. Investment by subscription or purchase in the equity shares or equity-linked securities of a financially weak listed company or industrial listed company. Investment by way of subscription or purchase in Special Purpose Vehicles created for the purpose of facilitating or promoting investment in accordance with these regulations.

FVCI have a fixed life cycle. Every FVCI making investments in IVCU or VCF has to mandatorily disclose life cycle of its fund before making any investments. It has to further disclose all its investment strategies to the SEBI before it makes any investment in India.

VENTURE CAPITAL INVESTMENT and PRIVATE COMPANY

Venture capital is a means of financing fast growing private companies who are in their adolescent stage and are in need of support in form of money and corporate advice. Capital venture companies seek to invest in companies which are capable of giving high returns in future. Private companies when established have limited resources in term of their capital as they are not allowed to raise money from public at large. As such they are dependent on their members who may also not be willing or capable of investing money more than a fixed extent. Here venture capitalists come in handy for such company. Venture capitalists are those people who are in control of more than sufficient, in fact a very large amount, of money and are willing to make investment in companies which they feel can give them high returns in future. They are ready to take risks and invest money in companies which are still making efforts to establish themselves in the market but because of the novelty of their ideas and innovations in their filed of business they are capable of earning high returns in near future. Venture capitalist invest in such company without seeking any sort of control over such company and only expect their share of profits once the company succeeds in its business. Therefore they are not only a source of funds for a newly established private company but also a means of encouraging business innovations.

FCVI registered in India are usually in form of a trust or a company including a body corporate. They make investments in the private companies and when such a company establishes itself in the market they sell their share of interest in the company and leave it. Before selling their interest in such a company and leaving it they continue to take their share of profits earned by a company depending upon the extent and nature of investment made by them in the growth of the company. The general mode of leaving the company is the time when the company in which the FVCI has invested its money makes an Initial Public Offer and decides to go public. At such moment the investing company may decide to leave the company by offering its share holding in the company to the company itself or to public. FVCI are allowed to make purchase or sale of shares, debentures or units of a scheme of VCF at a price mutually acceptable to both the buyer and seller. Thus they are free to determine the price which they feel appropriate according to their discretion at the time of making investment as well as at the time of leaving the company.