RECENT CHANGES IN VENTURE CAPITAL REGULATION

By Vinod Kumar Raina, Company Secreary, Ne! "e#$i

Pre#iminary%
The object of the venture capital financing is to invest in high-risk projects with the
anticipation of high returns. The funds are invested in such growing enterprises, where
the ideas are there but the conventional funding from banks, financial institutions are not
available. This is because that these enterprises do not have collateral to offer. These type
of enterprises are usually first generation enterprises.
Venture capitalists generally:
Finance new and rapidly growing companies
urchase e!uity securities
"ssist in the development of new products or services
"dd value to the company through active participation
Take higher risks with the e#pectation of higher rewards
$ave a long-term orientation
In&e'men in India (y Venure capia#i'')
%iven hereunder is the list of sectors where the investment is usually made by the venture
capital companies.
&. 'T and 'T-enabled services
(. )oftware roducts *+ainly ,nterprise-focused-
.. /ireless0Telecom0)emiconductor
1. 2anking
3. )4 5isinvestments
6. +edia0,ntertainment
7. 2io Technology02io 'nformatics
8. harmaceuticals
9. ,lectronic +anufacturing
&:. ;etail
'n this article the latest changes in venture capital regulations have been given.
"e*iniion o* Venure capia#%
5efinitions in various countries:
India%
Venture capital fund is a fund formed as a trust or a company under the regulations which
- $as dedicated pool of capital
&
- raised in the specified manner and
- invested in venture capital undertaking
Venture <apital undertaking is domestic company,
- whose shares are not listed
- which is in the business for providing services, production or manufacturing of
articles which are not in the negative list.
- ,ach scheme launched or fund set up by a venture capital fund shall have firm
commitment from the investors for contribution or an amount or at least ;upees
five crores before the start of operations by the venture capital fund
=egative list covers following activities:
- =on-banking financial services >e#cluding those =on ? 2anking Financial
companies which are registered with ;eserve 2ank of 'ndia and have been
categori@ed as ,!uipment Aeasing or $ire urchase companies.
- %old financing >e#cluding those companies, which are engaged in gold financing
for jewellery.
- "ctivities not permitted under the 'ndustrial olicy of %overnment of 'ndia
- "ny other activity which may be specified by the ),2'.
UK
Venture capital includes the business of carrying
- 'nvesting in, advising on investments which are, venture capital investment
- managing investments which are, arranging transaction in, venture capital
investments.
- "dvising on investments or managing investments in relation to portfolios or
establishing, operating or winding up collective investment schemes invests only in
venture capital investments
- "ny custody activities as related to above.
Venture <apital 'nvestment is investment which at the time of investment is made, is,
- in a new and developing company
- in a management buy out or buy-in or
- +ade as means of financing the invitee <ompany or venture and accompanied by a
right of consultation.
+a#ay'ia%
Venture capital company *V<<- and Venture <apital +anagement <ompany *V<+<-
means a corporation that deals in investments of securities of venture companies and are
registered as V<< or V<+< under the guidelines:
Venture company means a company which utili@es seed-capital, start-up and early stage
financing and,
- in relation to V<< is not listed and
- in relation to V<+< is not listed at the point of first investment by such V<+<.
Tai!an
Venture capital investment enterprise is a <ompany limited by shares, which,
- engages in venture capital investment business under the approval of +inistry of
Finance,
(
- speciali@es in the investments either in foreign or domestic technological enterprises
assist the management and supervision of such enterprise
C$ina
Foreign invested venture capital investment *F'V<,'- means foreign invested enterprise
established within the territory of <hina by foreign investors or foreign investors with
<ompanies and established under <hinese Aaw.
Venture capital investment means a type of investment activity pursuant to which e!uity
investment are injected mainly into high and new-tech enterprises that have not been
publicly listed.
In India ear#ier $e &enure capia# *undin, !a' no a##o!ed in $e Rea# E'ae and
$e Go#d -inancin,)
To redress these issues and the other operational issues )ecurities and ,#change 2oard of
'ndia *),2'- set up an "dvisory <ommittee on Venture <apital under the <hairmanship
of 5r. "shok Aahiri, <hief ,conomic "dvisor, +inistry of Finance, %overnment of 'ndia
for advising ),2' in matters relating to the development and regulation of venture capital
funds industry in the country.
Terms of ;eference for "dvisory <ommittee on Venture <apital were -
&. To advise ),2' on issues related to development of Venture <apital Fund
industry.
(. To advise ),2' on matters relating to regulation of Venture <apital Funds and
Foreign Venture <apital 'nvestors.
.. To advise ),2' on measures re!uired to be taken for changes in legal framework 0
amendments.
The major recommendations of the committee were:
OPERATIONAL ISSUES
.) Loc/0in o* '$are' a*er #i'in,%
The re!uirement of lock-in of shares after listing may be removed.
1) In&e'men in #i'ed companie'%
The minimum limit of investment in unlisted companies may be reduced from 73 per
cent, as present, to 66.67 per cent. The remaining portion of ..... per cent or less may be
permitted to be invested in listed securities. The aforesaid limit of investment shall be
achieved by the end of the life cycle of a fund. " life cycle of more than &: years will
have to be justified by the fund and subject to careful e#amination by ),2'. /herever
such investments trigger the takeover code, all re!uirements of the code will have to be
fulfilled by the V<F0FV<' and no e#emption from the clauses may be provided.
$owever, where as a result of investments made under mandatory re!uirement of
takeover code, investment restrictions are breached, the same may not be considered as a
violation of ),2' *V<F0FV<'- ;egulations.
.
2) Type o* in'rumen' o* in&e'men%
)ome kind of hybrid instruments which are optionally convertible into e!uity may be
permitted as a class of investment instruments under the 66.67 per cent *now
recommended- portion of the investible funds.
3) Specia# Purpo'e Ve$ic#e' 4SPV5%
)Vs which are mandated for promotion0investment of a Venture <apital 4ndertaking
*V<4- may be permitted up to a ma#imum of ..... per cent portion of investible funds.
6) In&e'men in Non Ban/in, -inancia# Ser&ice'%
V<Fs0FV<'s may be permitted to invest in =2F< in e!uipment leasing and hire
purchase.
7) In&e'men in Rea# E'ae%
V<Fs0FV<'s may be permitted to invest in real estate.
8) In&e'men in Go#d -inancin,%
%old financing may be removed from negative list for V<F0FV<'. $owever, such
financing should be restricted to gold financing for jewelry alone and not pure trade and
speculation in gold.
ISSUES RELATING TO VENTURE CAPITAL -UN"S
.) In&e'men in o**'$ore VCU'%
V<F may be permitted to invest in offshore V<4s. ;2' may be re!uested to periodically
announce the overall limit for investment by the V<Fs and inform ),2' accordingly.
1) -#e9i(i#iy o di'ri(ue in0'pecie%
The in-specie distribution of assets may be permitted at any time, as per the preference of
investor*s-.
ISSUES RELATING TO -OREIGN VENTURE CAPITAL INVESTORS%
.) Appoinmen o* cu'odian':
The appointment of custodian by FV<' may be continued to facilitate the maintenance of
records and a smooth transition when the V<4Bs shares get listed.
1) In&e'men Limi'%
The restriction of not investing more than (3 per cent of the investible funds of a FV<' in
a single V<4 may be removed.
TA: RELATE" ISSUES
.) Secion .;412 -B5%
'f clause *c- of ,#planation ' of )ection &:*(.F2- is deleted, no further amendments to
this )ection will be re!uired whenever ),2' changes the definition of CVenture <apital
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4ndertakingB. "fter deletion of this clause, all V<Fs which are formed as trust0company
duly registered with ),2' would be eligible for e#emption under )ection &:*(.F2-.
"lternatively, the definition of CVenture <apital 4ndertakingB under clause *c- of
,#planation ' of )ection &:*(.F2- may be aligned with definition of CVenture <apital
4ndertakingB as defined under ),2' ;egulations.
1) E9i'%
For the sake of clarity and for the removal of ambiguity, a suitable clarification may be
issued through a <entral 2oard of 5irect Ta#es *<25T- circular. "lternatively, in line
with ,#planation ( under section &:*(.F2-, ,#planation . may be added providing that
V<Fs would continue to enjoy ta# e#emption even after they receive foreign securities in
lieu of domestic securities held by them in a CVenture <apital 4ndertakingB.
2) Secion ..6U%
For the sake of clarity and uniformity, a suitable illustration may be issued through a
<25T circular.
-OREIGN E:CHANGE CONTROL RELATE" ISSUES
/holly owned 'ndian subsidiaries of FV<'s registered with ),2' may be e#empted from
the minimum capitali@ation re!uirement of an 'ndian company.
+ajority of these recommendations have been accepted by ),2' and others have been
send to ;eserve 2ank of 'ndia for their recommendations.
Conc#u'ion%
The changes in the venture capital regulation will have a positive impact on investment
by venture capitalists. 'n (::. 'ndia was ranked fifth in the "sia pacific region with
investment of D771.:& million in 1( companies. Eapan topped the list with investment of
D7(97.7& millions in 77 companies.
Venture capital investments in 'ndia has been increasing over the period.
rivate e!uity and venture capital firms invested about D&.3 bln in &(3 'ndian companies
during (::3. The (::3 'ndian V< activity represented a slight decrease from (::1 when
&(9 companies raised D&.6 bln. " total of 6. out of the &(3 companies closed rounds of
over D&: mln. The Venture capital investment will definitely get the boost as the
investment has now been allowed in ;eal ,state and %old Financing and certain other
restrictions have been eased with.
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