sebi

1. SEBI (Venture Capital Funds)(Amendment) Regulations, 2000 and the SEBI (Foreign Venture Capital Investors)
Regulations, 2000.
1. Following are the salient features of SEBI (Venture Capital Funds)(Amendment) Regulations, 2000 :
1.1 Definition of Venture Capital Fund : The Venture Capital Fund is now defined as a fund established in the
form of a Trust, a company including a body corporate and registered with SEBI which:
A. has a dedicated pool of capital;
B. raised in the manner specified under the Regulations; and
C. to invest in Venture Capital Undertakings in accordance with the Regulations."
1.2 Definition of Venture Capital Undertaking: Venture Capital Undertaking means a domestic company :-
a. Whose shares are not listed on a recognised stock exchange in India
b. Which is engaged in business including providing services, production or manufacture of articles or things,
or does not include such activities or sectors which are specified in the negative list by the Board with the
approval of the Central Government by notification in the Official Gazette in this behalf. The negative list
includes real estate, non-banking financial services, gold financing, activities not permitted under the
Industrial Policy of the Government of India.
1.3 Minimum contribution and fund size : the minimum investment in a Venture Capital Fund from any investor
will not be less than Rs. 5 lacs and the minimum corpus of the fund before the fund can start activities shall be
atleast Rs. 5 crores.
1.4 Investment Criteria : The earlier investment criteria has been substituted by a new investment criteria which
has the following requirements :
o disclosure of investment strategy;
o maximum investment in single venture capital undertaking not to exceed 25% of the corpus of the fund;
o Investment in the associated companies not permitted;
o atleast 75% of the investible funds to be invested in unlisted equity shares or equity linked instruments.
o Not more than 25% of the investible funds may be invested by way of:
a. subscription to initial public offer of a venture capital undertaking whose shares are proposed to be
listed subject to lock-in period of one year;
b. debt or debt instrument of a venture capital undertaking in which the venture capital fund has
already made an investment by way of equity.
It has also been provided that Venture Capital Fund seeking to avail benefit under the relevant provisions of the Income
Tax Act will be required to divest from the investment within a period of one year from the listing of the Venture Capital
Undertaking.
1.5 Disclosure and Information to Investors: In order to simplify and expedite the process of fund raising, the
requirement of filing the Placement memorandum with SEBI is dispensed with and instead the fund will be required
to submit a copy of Placement Memorandum/ copy of contribution agreement entered with the investors along with
the details of the fund raised for information to SEBI. Further, the contents of the Placement Memorandum are
strengthened to provide adequate disclosure and information to investors. SEBI will also prescribe suitable
reporting requirement from the fund on their investment activity.
2. QIB status for Venture Capital Funds : The venture capital funds will be eligible to participate in the IPO through book
building route as Qualified Institutional Buyer subject to compliance with the SEBI (Venture Capital Fund) Regulations.
3. Relaxation in Takeover Code: The acquisition of shares by the company or any of the promoters from the Venture
Capital Fund under the terms of agreement shall be treated on the same footing as that of acquisition of shares by
promoters/companies from the state level financial institutions and shall be exempt from making an open offer to other
shareholders.
4. Investments by Mutual Funds in Venture Capital Funds: In order to increase the resources for domestic venture
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2. capital funds, mutual funds are permitted to invest upto 5% of its corpus in the case of open ended schemes and upto 10%
of its corpus in the case of close ended schemes. Apart from raising the resources for Venture Capital Funds this would
provide an opportunity to small investors to participate in Venture Capital activities through mutual funds.
5. Government of India Guidelines: The Government of India (MOF) Guidelines for Overseas Venture Capital Investment
in India dated September 20, 1995 will be repealed by the MOF on notification of SEBI Venture Capital Fund Regulations.
6. The following will be the salient features of SEBI (Foreign Venture Capital Investors) Regulations, 2000 :
6.1 Definition of Foreign Venture Capital Investor : any entity incorporated and established outside India and
proposes to make investment in Venture Capital Fund or Venture Capital Undertaking and registered with SEBI.
6.2 Eligibility Criteria : entity incorporated and established outside India in the form of investment company, trust,
partnership, pension fund, mutual fund, university fund, endowment fund, asset management company, investment
manager, investment management company or other investment vehicle incorporated outside India would be
eligible for seeking registration from SEBI. SEBI for the purpose of registration shall consider whether the applicant
is regulated by an appropriate foreign regulatory authority; or is an income tax payer; or submits a certificate from
its banker of its or its promoters track record where the applicant is neither a regulated entity nor an income tax
payer.
6.3 Investment Criteria :
o disclosure of investment strategy;
o maximum investment in single venture capital undertaking not to exceed 25% of the funds committed for
investment to India however it can invest its total fund committed in one venture capital fund;
o atleast 75% of the investible funds to be invested in unlisted equity shares or equity linked instruments.
o Not more than 25% of the investible funds may be invested by way of:
a. subscription to initial public offer of a venture capital undertaking whose shares are proposed to be
listed subject to lock-in period of one year;
b. debt or debt instrument of a venture capital undertaking in which the venture capital fund has
already made an investment by way of equity.
7. Hassle Free Entry and Exit : The Foreign Venture Capital Investors proposing to make venture capital investment
under the Regulations would be granted registration by SEBI. SEBI registered Foreign Venture Capital Investors shall be
permitted to make investment on an automatic route within the overall sectoral ceiling of foreign investment under
Annexure III of Statement of Industrial Policy without any approval from FIPB. Further, SEBI registered FVCIs shall be
granted a general permission from the exchange control angle for inflow and outflow of funds and no prior approval of RBI
would be required for pricing, however, there would be ex-post reporting requirement for the amount transacted.
8. Trading in unlisted equity : The Board also approved the proposal to permit OTCEI to develop a trading window for
unlisted securities where Qualified Institutional Buyers(QIB) would be permitted to participate.
Notifications & Circulars
SEBI Guidelines for Overseas Investments by Venture Capital Funds
Guidelines for Overseas Investments by Venture Capital Funds
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3. CIRCULAR NO. SEBI/VCF/CIR NO. 1/ 98645 /2007, DATED 9-8-2007
1. SEBI registered Venture Capital Fund (VCFs) are permitted to invest in securities of foreign companies in terms of
regulation 12(ba) of the SEBI (Venture Capital Funds) Regulations 1996. Reserve Bank of India (RBI) vide its Circulars
dated April 30, 2007 and May 04,2007, issued in this regard, has permitted these VCFs to invest in equity and equity
linked instruments only of off-shore venture capital undertakings, subject to overall limit of USD 500 million and applicable
SEBI regulations.
2. Accordingly, SEBI registered VCFs, desirous of making investments in offshore Venture Capital Undertakings may
submit their proposal for investment (in the attached format) to SEBI for its prior approval. It is clarified that no separate
permission from RBI is necessary in this regard.
3. For the purpose of such investment, it is clarified that -
i. "Offshore Venture Capital Undertakings" means a foreign company whose shares are not listed on any of the
recognized stock exchange in India or abroad.
ii. Investments would be made only in those companies which have an Indian connection (i.e. company which has a
front office overseas, while back office operations are in India) and such investments would be upto 10% of the
investible funds of a VCF.
iii. The allocation of investment limits would be done on 'first come- first serve' basis, depending on the availability in
the overall limit of USD 500 million.
iv. It is clarified that in case a VCF who is allocated certain investment limit, wishes to apply for allocation of further
investment limit, the fresh application shall be dealt with on the basis of the date of its receipt and no preference
shall be granted to it in fresh allocation of investment limit.
v. An applicant VCF shall have a time limit of 6 months for making allocated investments in offshore venture capital
undertakings. In case the applicant does not utilize the limits allocated in the stipulated period of 6 months from
the date of its approval, SEBI may allocate such unutilized limit to other VCFs/applicants whose applications are
pending with it.
4. These investments would be subject to necessary amendments to Notification No. FEMA120/RB-2004 dated July 7,
2004 [Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004], and will also be
governed by the related directions issued by the RBI from time to time.
Roles within Venture Capital Firms
Within the venture capital industry, the general partners and other investment professionals of the venture capital
firm are often referred to as "venture capitalists" or "VCs". Typical career backgrounds vary, but broadly speaking
venture capitalists come from either an operational or a finance background. Venture capitalists with an
operational background tend to be former founders or executives of companies similar to those which the
partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds
tend to have investment banking or other corporate finance experience.
Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:
Venture partners - Venture partners are expected to source potential investment opportunities ("bring in deals")
and typically are compensated only for those deals with which they are involved.
Entrepreneur-in-residence (EIR) - EIRs are experts in a particular domain and perform due diligence on potential
deals. EIRs are engaged by venture capital firms temporarily (six to 18 months) and are expected to develop and
pitch startup ideas to their host firm (although neither party is bound to work with each other). Some EIR's move on
to executive positions within a portfolio company.
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4. Principal - This is a mid-level investment professional position, and often considered a "partner-track" position.
Principals will have been promoted from a senior associate position or who have commensurate experience in
another field such as investment banking or management consulting.
Associate - This is typically the most junior apprentice position within a venture capital firm. After a few successful
years, an associate may move up to the "senior associate" position and potentially principal and beyond.
Associates will often have worked for 1-2 years in another field such as investment banking or management
consulting
CHAPTER I
PRELIMINARY
Short title and commencement
1. (1) These regulations may be called the Securities and Exchange Board of India (Foreign Venture
Capital Investor) Regulations, 2000.
(2) They shall come into force on the date of their publication in the Official Gazette.
Definitions
2 (1) In these regulations, unless the context otherwise requires, -
(a) "Act" means the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(b) "certificate" means a certificate of registration granted by the Board under regulation 7.
(c) "designated bank" means any bank in India which has been permitted by the Reserve Bank of India to
act as banker to the Foreign Venture Capital Investor.
(d) "domestic custodian" means a person registered under the Securities and Exchange Board of India
(Custodian of Securities) Regulations, 1996.
1*
[(e) "enquiry officer" means an enquiry officer appointed by the Board, under regulation 24].
2*
[(ee) "Inspection or Investigation Officer" means an officer appointed by the Board, under regulation 16].
(f) "equity linked instruments" includes instruments convertible into equity share or share warrants,
preference shares, debentures compulsorily ; 3*[or optionally] convertible into equity.
(g) ; 4*["foreign venture capital investor" means an investor incorporated and established outside India, is
registered under these Regulations and proposes to make investment in accordance with these
Regulations.
(h) "form" means any of the forms set out in the First Schedule.
(i) "investible funds" means the fund committed for investments in India net of expenditure for
administration and management of the fund.
(j) "negative list" means a list of items as specified in Third Schedule.
(k) "Schedule" means a schedule annexed to these regulations;
(l) "Venture Capital Fund" means a Fund established in the form of a Trust, a company including a body
corporate and registered under Securities and Exchange Board of India (Venture Capital Fund)
Regulations, 1996, which
(i) has a dedicated pool of capital;
(ii) raised in the manner specified under the Regulations; and
(iii) invests ; 5*[*****] in accordance with the Regulations.
(m) "venture capital undertaking" means a domestic company:-
(i) whose shares are not listed in a recognised stock exchange in India;
(ii) which is engaged in the business of providing services, production or manufacture of articles or things,
but does not include such activities or sectors which are specified in the negative list by the Board, with
approval of Central Government, by notification in the Official Gazette in this behalf."
(2) Words and expressions used and not defined in these regulations but defined in the Act or Securities
and Exchange Board of India (Venture Capital Funds) Regulations, 1996 shall have the same meaning
as are respectively assigned to them in the Act or the said regulations.
CHAPTER II
REGISTRATION OF FOREIGN VENTURE CAPITAL INVESTORS
Application for grant of certificate
3. For the purposes of seeking registration under these regulations, the applicant shall make an
application to the Board in Form A along with the application fee as specified in Part A of the Second
Schedule to be paid in the manner specified in Part B thereof.
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5. Eligibility Criteria
4. (1) For the purpose of the grant of a certificate to an applicant as a Foreign Venture Capital Investor,
the Board shall consider the following conditions for eligibility, namely: -
(a) the applicants track record, professional competence, financial soundness, experience, general
reputation of fairness and integrity.
(b) Whether the applicant has been granted necessary approval by the Reserve Bank of India for making
investments in India; 6*[**]
(c) whether 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; or
(d) whether the applicant is an asset management company, investment manager or investment
management company or any other investment vehicle incorporated outside India; 7*[**]
(e) whether the applicant is authorised to invest in venture capital fund or carry on activity as a 8*[foreign
venture capital investors]; 9*[**]
(f) whether the applicant is regulated by an appropriate foreign regulatory authority or is an income tax
payer; or submits a certificate from its banker of its or its promoter’s track record where the applicant is
neither a regulated entity nor an income tax payer.
(g) the applicant has not been refused a certificate by the Board.
(h) whether the applicant is a fit and proper person.
10*
[ Applicability of Securities and Exchange Board of India (Criteria for Fit and proper Person)
Regulations, 2004
4A. The provisions of the Securities and Exchange Board of India (Criteria for fit and proper person)
Regulations, 2004 shall, as for as may be, apply to all applicants or the foreign venture capital investors
under these regulations”]
Furnishing of information, clarification
5. The Board may require the applicant to furnish such further information as it may consider necessary.
Consideration of application
6. An application which is not complete in all respects shall be rejected by the Board:
Provided that, before rejecting any such application, the applicant shall be given an opportunity to
remove, within thirty days of the date of receipt of communication, the objections indicated by the Board.
Provided further that the Board may, on being satisfied that it is necessary to extend the period specified
above may extend such period not beyond ninety days.
Procedure for grant of certificate
7. (1) If the Board is satisfied that the applicant is eligible for the grant of certificate, it shall send an
intimation to the applicant.
(2) On receipt of intimation, the applicant shall pay to the Board, the registration fee specified in Part A of
the Second Schedule in the manner specified in Part B thereof.
(3) The Board shall on receipt of the registration fee grant a certificate of registration in Form B.
Conditions of certificate
8. The certificate granted to the foreign venture capital 11*[investor] under regulation 7 shall be inter-alia,
subject to the following conditions, namely:-
(a) it shall abide by the provisions of the Act, and these regulations;
(b) it shall appoint a domestic custodian for purpose of custody of securities;
(c) it shall enter into arrangement with a designated bank for the purpose of operating a special non-
resident rupee or foreign currency account.
(d) it shall forthwith inform the Board in writing if any information or particulars previously submitted to the
Board are found to be false or misleading in any material particular or if there is any change in the
information already submitted.
Procedure where certificate is not granted
9. (1) On considering an application made under regulation 3, if the Board is of the opinion that a
certificate should not be granted, it may reject the application after giving the applicant a reasonable
opportunity of being heard.
(2) The decision of the Board to reject the application shall be communicated to the applicant.
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6. Effect of refusal to grant certificate
10. Any applicant whose application has been rejected under regulation 9 shall not carry on any activity
as a Foreign Venture Capital Investor.
CHAPTER III
INVESTMENT CONDITIONS AND RESTRICTIONS
Investment Criteria for a Foreign Venture Capital Investor
11. All investments to be made by a foreign venture capital investors shall be subject to the following
conditions: -
(a) it shall disclose to the Board its investment strategy.
(b) 12*[**] it can invest its total funds committed in one venture capital fund 13*[***].
(c) it shall make investments 14*[**] as enumerated below:
(i) atleast 15*[66.67%] of the investible funds shall be invested in unlisted equity shares or equity linked
instruments 16*[of Venture Capital Undertaking].
(ii) not more than 17*[33.33%] of the investible funds may be invested by way of:
(a) subscription to initial public offer of a venture capital undertaking whose shares are proposed to be
listed 18*[**]
(b) debt or debt instrument of a venture capital undertaking in which the 19*[foreign venture capital
investor] has already made an investment by way of equity.
(c) 20*[preferential allotment of equity shares of a listed company subject to lock in period of one year].
(d) 21*[ the equity shares or equity linked instruments of a financially weak company or a sick industrial
company whose shares are listed].
Explanation 1:- For the purpose of these regulations, a “financially weak company “ means a company,
which has at the end of the previous financial year accumulated losses, which has resulted in erosion or
more than 50% but less than 100% of its net worth as at the beginning of the previous financial year.”
(e) 22*[Special Purpose Vehicles which are created for the purpose of facilitating or promoting investment
in accordance with these Regulations].
Explanation – the investment conditions and restrictions stipulated in clause (c) of regulation 11 shall be
achieved by the Foreign Venture Capital Investor by the end of its life cycle”.
(d) 23*[It shall disclose the duration of life cycle of the fund].
22. Clause (e) in sub clause (ii) ) inserted by the SEBI (Foreign Venture Capital Investors) ( Amendment)
Regulations, 2004 published in the Official Gazette of India dated 5.04.2004.
23. Clause (d) in Regulation 11 inserted by the SEBI (Foreign Venture Capital Investors) ( Amendment)
Regulations, 2004 published in the Official Gazette of India dated 5.04.2004
CHAPTER IV
GENERAL OBLIGATIONS AND RESPONSIBILITIES
Maintenance of books and records
12. (1) 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.
(2) Every Foreign Venture Capital Investor shall intimate to the Board, in writing, the place where the
books, records and documents referred to in sub-regulation (1) are being maintained.
Power to call for information
13. (1) The Board may at any time call for any information from a Foreign Venture Capital Investor with
respect to any matter relating to its activity as a Foreign Venture Capital Investor.
(2) Where any information is called for under sub-regulation (1) it shall be furnished within the time
specified by the Board.
General Obligations and Responsibilities
14 (1) 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.
(2) Foreign Venture Capital Investor shall ensure that domestic custodian takes steps for,-
(a) monitoring of investment of Foreign Venture Capital Investors in India
(b) furnishing of periodic reports to the Board
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7. (c) furnishing such information as may be called for by the Board.
Appointment of designated bank
15. 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.
CHAPTER V
INSPECTION AND INVESTIGATIONS
Board's right to inspect or investigate
16. The Board may, suo-moto or upon receipt of information or complaint, cause an inspection or
investigation to be made in respect of conduct and affairs of any foreign venture capital investor by an
Officer whom the Board considers fit for any of the following reasons namely: -
(a) to ensure that the books of account, records and documents are being maintained by the foreign
venture capital investor in the manner specified in these regulations.
(b) to inspect or investigate into complaints received from investors, clients or any other person, on any
matter having a bearing on the activities of the foreign venture capital investor;
(c) to ascertain whether the provisions of the Act and these regulations are being complied with by the
foreign venture capital investor; and
(d) to inspect or investigate suo-moto into the affairs of a foreign venture capital investor in the interest of
the securities market or in the interest of investors.
Obligation of Foreign Venture Capital Investor on investigation or inspection by Board
17. (1) It shall be the duty of every Foreign Venture Capital Investor in respect of whom an inspection or
investigation has been ordered under regulation 16 and any other person associated who is in
possession of relevant information pertaining to conduct and affairs of such Foreign Venture Capital
Investor including asset management company or fund manager, to produce to the Inspecting or
Investigating Officer such books, accounts and other documents in his custody or control and furnish him
with such statements and information as the said Officer may require for the purposes of the inspection or
investigation.
(2) It shall be the duty of Foreign Venture Capital Investor and any other person associated who is in
possession of relevant information pertaining to conduct and affairs of the Foreign Venture Capital
Investor to give to the Inspecting or Investigating Officer all such assistance and shall extend all such co-
operation as may be required in connection with the inspections or investigations and shall furnish such
information sought by the Inspecting or Investigating Officer in connection with the inspections or
investigations.
(3) The Inspecting or Investigating Officer shall, for the purposes of inspection or investigation, have
power to examine on oath and record the statement of any person responsible for or connected with
activities of Foreign Venture Capital Investor or any other person associated having relevant information
pertaining to such Foreign Venture Capital Investor.
(4) The Inspecting or Investigating Officer shall, for the purposes of inspection or investigation, have
power to get authenticated copies of documents, books, accounts of Foreign Venture Capital Investor,
from any person having control or custody of such documents, books or accounts.
Submission of the Report
18. The Inspecting or Investigating Officer shall on completion of inspection or investigations, submit a
report to the Board.
Board's right to issue any direction to Foreign Venture Capital Investor
19. The Board may after consideration of the inspection or investigation report and after giving a
reasonable opportunity of hearing to the Foreign Venture Capital Investor, require it to take such measure
or issue such directions as it deems fit in the interest of capital market and investors, including directions
in the nature of: -
(a) requiring the person concerned to dispose of the securities or disinvest in a manner as may be
specified in the directions;
(b) requiring the person concerned not to further invest for a particular period;
(c) prohibiting the person concerned from operating in the capital market in India for a specified period.
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8. CHAPTER VI
PROCEDURE FOR ACTION IN CASE OF DEFAULT
Board's right to suspend or cancel certificate of registration
20. Without prejudice to the appropriate directions or measures under regulation 19, it may after
consideration of the investigation report, initiate action for suspension or cancellation of the registration of
such Foreign Venture Capital Investor:
Provided that no such certificate of registration shall be suspended or cancelled unless the procedure
specified in regulation 23 is complied with.
Suspension of certificate
21. The Board may suspend the certificate where the Foreign Venture Capital Investor:
(a) contravenes any of the provisions of the Act or these regulations;
(b) fails to furnish any information relating to its activity as a Foreign Venture Capital Investor as required
by the Board;
(c) furnishes to the Board information which is false or misleading in any material particular;
(d) does not submit periodic returns or reports as required by the Board;
(e) does not co-operate in any enquiry or inspection conducted by the Board;
Cancellation of certificate
22. The Board may cancel the certificate granted to a Foreign Venture Capital Investor: -
(a) when the Foreign Venture Capital Investor is guilty of fraud or has been convicted of an offence
involving moral turpitude;
Explanation: The expression "fraud" has the same meaning as is assigned to it in section 17 of the Indian
Contract Act, 1872. (9 of 1872)
(b) the Foreign Venture Capital Investor has been guilty of repeated defaults of the nature mentioned in
the regulation 21; or
(c) Foreign Venture Capital Investor does not continue to meet the eligibility criteria laid down in these
regulations;
(d) contravenes any of the provisions of the Act or these regulations.
Manner of making order of cancellation or suspension
23. No order of penalty or cancellation of certificate shall be imposed on the Foreign Venture Capital
Investor except after holding an enquiry in accordance with the procedure specified in the regulation 24.
Manner of holding enquiry before suspension or cancellation
24. (1) For the purpose of holding an enquiry under regulation 23, the Board may appoint one or more
enquiry officers.
(2) The enquiry officer shall issue to the Foreign Venture Capital Investors, at its registered office or its
principal place of business or its agent or representative in India, a notice setting out the grounds on
which action is proposed to be taken against it and calling upon it to show cause against such action
within a period of fourteen days from the date of receipt of the notice.
(3) The Foreign Venture Capital Investor may, within fourteen days from the date of receipt of such
notice, furnish to the enquiry officer a written reply, together with copies of documentary or other evidence
relied on by it or sought by the Board from the Foreign Venture Capital Investor.
(4) The enquiry officer shall give a reasonable opportunity of hearing to the Foreign Venture Capital
Investor to enable him to make submissions in support of its reply made under sub-regulation (3).
(5) Before the enquiry officer, the Foreign Venture Capital Investor may appear through any person duly
authorised by the Foreign Venture Capital Investor:
Provided that no lawyer or advocate shall be permitted to represent the Foreign Venture Capital Investors
at the enquiry:
Provided further that where a lawyer or an advocate has been appointed by the Board as a presenting
officer under sub-regulation (6), it shall be lawful for the Foreign Venture Capital Investor to present its
case through a lawyer or advocate.
(6) The enquiry officer may, if he considers it necessary, ask the Board to appoint a presenting officer to
present its case
(7) The enquiry officer shall, after taking into account all relevant facts and submissions made by the
Foreign Venture Capital Investor, submit a report to the Board and recommend the penal action, if any, to
be taken against the Foreign Venture Capital Investor as also the grounds on which the proposed action
is justified.
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9. Show-cause notice and order
25. (1) On receipt of the report from the enquiry officer, the Board shall consider the same and may issue
to the Foreign Venture Capital Investor a show-cause notice as to why the penal action as proposed by
the enquiry officer or such appropriate action should not be taken against it.
(2) The Foreign Venture Capital Investor shall, within fourteen days of the date of the receipt of the show-
cause notice, send a reply to the Board.
(3) The Board, after considering the reply, if any, of the Foreign Venture Capital Investor, shall, as soon
as possible pass such order as it deems fit.
Effect of suspension and cancellation of certificate
26. (1) On and from the date of the suspension of the certificate, the Foreign Venture Capital Investor
shall cease to carry on any activity as a Foreign Venture Capital Investor during the period of suspension,
and shall be subject to such directions of the Board with regard to any records, documents or securities
that may be in its custody or control, relating to its activities as Foreign Venture Capital Investor, as the
Board may specify.
(2) On and from the date of cancellation of the certificate, the Foreign Venture Capital Investor shall, with
immediate effect, cease to carry on any activity as a Foreign Venture Capital Investor, and shall be
subject to such directions of the Board with regard to the transfer of records, documents or securities that
may be in its custody or control, relating to its activities as Foreign Venture Capital Investor, as the Board
may specify.
Publication of order of suspension or cancellation
27. The order of suspension or cancellation of certificate passed under regulation 25 may be published by
the Board in two newspapers.
Action against intermediary
28. The Board may initiate action for suspension or cancellation of registration of an intermediary holding
a certificate of registration under section 12 of the Act who fails to exercise due diligence in the
performance of its functions or fails to comply with its obligations under these regulations.
Provided that no such certificate of registration shall be suspended or cancelled unless the procedure
specified in the regulations applicable to such intermediary is complied with.
24*
[Appeal to Securities Appellate Tribunal]
Sebi board clears VCF norms sans tax sops
ENS ECONOMIC BUREAU
MUMBAI, SEP 14: The Securities and Exchange Board of India (SEBI) has finally approved the amendments envisaging
relaxation of regulations in venture capital (VC) norms, but without tax concessions. The one-year exit clause in the
guidelines has upset fund managers and corporates.Domestic VC funds seeking to avail benefit under the relevant tax
provisions of the Income Tax Act are required to divest the investment within one year's time from the listing of the company
got funding. However, SEBI, being a nodal agency for VC regulation, would continue to pursue the issue with the Central
Board of Direct Taxes, which is the final authority in the case, Sebi chairman DR Mehta said.Federation of Indian Chambers
of Commerce and Industry (FICCI) termed as "retrograde" the stipulation of a one-year time frame for venture capital funds to
off-load their stakes in portfolio companies. "Indian stock markets are illiquid and traded volumes in most listed stocks are
insignificant. Hence, the VCs who hold significant stakes in portfolio companies would not be in a position to dispose off their
entire holdings in a year," FICCI said.The Sebi board which met here today cleared the Sebi (Venture Capital Funds)
(Amendment) Regulations, 2000 and the Sebi (Foreign Venture Capital Investors) Regulations, 2000. The government of
India guidelines (MoF) guidelines for overseas venture capital investment in India dated September 20, 1999 will be repealed
on notification of Sebi guidelines.Mehta said the objective of the whole exercise was to create an environment for the healthy
growth of venture capital funds in the country. He said there was clear evidence that as an industry it was gaining momentum
with the number of Sebi-registered VCFs growing from 8 in April 1999 to 26 registered till date and the committed funds
during the period rising from Rs 250 crore to around Rs 1700 crore.
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10. The regulations also take care of an important recommendation of the KB Chandrasekhar committee which called for
providing foreign venture capitalists the facility of registering with Sebi like FIIs which would enable them to make
investments in India automatically and within sectoral limits prescribed under the industrial policy statement of government of
India. In addition, the regulations ensure that foreign venture capitalists get "hassle free" exit without requiring pricing
approval from RBI based on the old CCI formula.
Now Sebi registered foreign venture capital investors (FVCIs) will be permitted to make investment on an automatic route
within the overall ceiling of foreign investment under Annexure II of Statement of Industrial Policy without any approval from
FIPB.Further, Sebi registered FVCIs will be granted a general permission from the exchange control angle for inflow and
outflow of funds and no prior approval of RBI would be required for pricing. However, there would be "ex-post" reporting
requirement for the amount transacted.
Trading in unlisted stocks allowed
MUMBAI: The SEBI board also approved a proposal to permit the Over-The-Counter Exchange of India to develop a trading
window for unlisted securities, where qualified institutional buyers would be permitted to participate.Initially trading, in the
unlisted securities will be allowed only on OTCEI and Sebi may consider it on other exchanges after some time, Sebi
chairman D R Mehta said.Though the proposal was approved earlier, constraints in the form of too many regulations did not
permit OTCEI to launch such a product, he added. Though an entity incorporated or set up outside India in any of the various
permitted forms were eligible for seeking SEBI's registration, the regulator would consider level of regulation in the country of
origin, tax assessment status, bankers certificate on the firm's or its promoter's track record, he said.
SEBI clears internet equity trading, VCF norms
ENS ECONOMIC BUREAU
NEW DELHI, JAN 22: E-broking (electronic-broking or stock trading via the internet) has finally become a reality in India. The
Securities and Exchange Board of India today approved the recommendations of the Birla committee on corporate
governance and allowed trading of shares through internet. The market regulator also approved, in-principal, venture capital
norms receommended by the K B Chandrasekhar committee. On corporate governance, Sebi has drawn up a time-frame of
implementation, which will be enforced through the listing agreement. On Internet-based securities trading, the market
watchdog approved the order routing system in the absence of cyber laws. In its board meeting held in New Delhi, Sebi also
permitted foreign corporates/individuals to invest in the Indian capital markets albeit with some restrictions. According to Sebi,
both the mandatory and the non-mandatory recommendations of the Birla panel would be applicable to the corporates
through the listing agreement. For those seeking newlistings, these recommendations would be applicable with immediate
effect. However, companies which figure in BSE's specified list or in the Nifty, the Birla committee recommendations would
be applicable by fiscal 2000-2001. Companies which have a paid-up equity of Rs 10 crore and more (or a networth of Rs 25
crore plus) would have to abide by these norms by fiscal 2001-2002. Companies with a paid-up capital of Rs 3-10 crore
would get an additional year as breather. Listed banks and financial institutions, which are incorporated under other statutes,
would be exempt from these proposals.
According to Sebi chairman D R Mehta, companies which do not adhere to the norms would be punished. However, the
punitive action would not be in the form of a delisting as "that would hurt small investors". The market regulator and stock
exchanges concerned could consider initiating criminal proceedings against an errant company. Besides the `stick approach',
Mehta said, even a `carrot' in the form of better valuations forcompanies who follow the norms would go a long way in
ensuring compliance. ``Every company's annual report will now mandatorily have a disclosure on the level of corporate
governance achieved and that alone may ensure some compliance,'' Mehta added.
For Internet-based trading, Mehta said, the regulatory framework was now in place. ``However, each stock exchange will
have to individually certify the specifications and we hope the process will be kicked off within a month,'' he added. While a
client will necessarily have to go through a broker, his transaction time will be cut drastically under the new system. Based on
an agreement with the broker, a client can log in using a password and he will receive on-screen quotes. He punches his
buy/sell order, which goes through the mainframe of a stock exchange through a filter of the broker. What this means is that
the deal will be governed under the exposure/margin limit of the broker concerned.
To promote venture capital activities, Sebi also approvedrecommendations of the Chandrasekhar committee. Few proposals
like one nodal agency for approval and an FII status would be decided by the government, Mehta said, as they were outside
the purview of Sebi. But maters directly related to Sebi like relaxation of entry norms for IPOs were approved. According to
10

11. the new norms, funding by a Sebi-registered venture capital fund would qualify a company to float an IPO (akin to a project
appraised and finance up to 10 per cent by a bank or FI). The three-year profitability criterion will not be applicable in this
regard. In order to lure more foreign inflows, Sebi also relaxed the entry norms for foreign corporate and individuals to invest
in the Indian capital markets. Earlier these had to be through a pool of 20 people; now they can invest via a registered FII.
However, the total investment made by all these investors in this category cannot be more than 5 per cent of the total paid-up
capital of the company (and tat too, within the prescribed FII limit).According to Mehta, ``This should not be termed as hot
money as experience shows that FIIs are more likely to withdraw from a country instead of individuals.'' Sebi has also
allowed domestic asset management companies and Sebi registered domestic portfolio managers to manage foreign
investments through the portfolio investment route. The market watchdog has also amended the regulation concerning
disclosure of mutual fund scheme portfolio. The present regulations provide that scheme-wise portfolio of investments is to
be disclosed by mutual funds in their annual reports and despatched to unit-holders within six months from date of closure of
relevant accounting year. Mutual funds will now be required to send a complete statement of their scheme portfolios to all
unit-holders within one month from the close of each half-year (March 31 and September 30). However, the requirement of
such disclosure shall be dispensed with if the statement of portfolio is published as an advertisement in twonewspapers.
The latest sebi initiatives
Internet stock trading through order routing system
Foreign corporates and individuals permitted to invest in domestic capital markets through FII route
Sebi-approved AMCs and domestic portfolio managers allowed to manage foreign investments through the portfolio route
Birla panel report on corporate governance accepted in toto
Approval for Chandrasekhar panel report on venture capitalists, allowing easier access to funds for first-time entrepreneurs
MFs to disclose scheme-wise portfolios on half-yearly basis
MFs will also be liable to pay interest to unitholders in case of delayed despatch of dividend warrants
Half-yearly results of cos to be subjected to limited audit review
Venture Capital in India - Chandrasekhar Committee on Venture Capital
Analysis of Ground Situation
Why Venture Capital
The venture capital industry in India is still at a nascent stage. With a view to promote innovation, enterprise and
conversion of scientific technology and knowledge based ideas into commercial production, it is very important to
promote venture capital activity in India. India's recent success story in the area of information technology has
shown that there is a tremendous potential for growth of knowledge based industries. This potential is not only
confined to information technology but is equally relevant in several areas such as bio-technology,
pharmaceuticals and drugs, agriculture, food processing, telecommunications, services, etc. Given the inherent
strength by way of its skilled and cost competitive manpower, technology, research and entrepreneurship, with
proper environment and policy support, India can achieve rapid economic growth and competitive global strength
in a sustainable manner.A flourishing venture capital industry in India will fill the gap between the capital
requirements of technology and knowledge based startup enterprises and funding available from traditional
institutional lenders such as banks. The gap exists because such startups are necessarily based on intangible
assets such as human capital and on a technology-enabled mission, often with the hope of changing the world.
Very often, they use technology developed in university and government research laboratories that would
otherwise not be converted to commercial use. However, from the viewpoint of a traditional banker, they have
neither physical assets nor a low-risk business plan. Not surprisingly, companies such as Apple, Exodus, Hotmail
and Yahoo, to mention a few of the many successful multinational venture-capital funded companies, initially
failed to get capital as startups when they approached traditional lenders. However, they were able to obtain
finance from independently managed venture capital funds that focus on equity or equity-linked investments in
privately held, high-growth companies. Along with this finance came smart advice, hand-on management support
and other skills that helped the entrepreneurial vision to be converted to marketable products.
Beginning with a consideration of the wide role of venture capital to encompass not just information technology,
but all high-growth technology and knowledge-based enterprises, the endeavor of the Committee has been to
make recommendations that will facilitate the growth of a vibrant venture capital industry in India.
11

12. The report examines-
1. the vision for venture capital
2. strategies for its growth and
3. how to bridge the gap between traditional means of finance and the capital needs of high growth startups.
Critical Factors for Success of Venture Capital Industry
While making the recommendations the Committee felt that the following factors are critical for the success of the
VC industry in India:
A. The regulatory, tax and legal environment should play an enabling role. Internationally, venture funds have
evolved in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability.
B. Resource raising, investment, management and exit should be as simple and flexible as needed and
driven by global trends
C. Venture capital should become an institutionalized industry that protects investors and investee firms,
operating in an environment suitable for raising the large amounts of risk capital needed and for spurring
innovation through startup firms in a wide range of high growth areas.
D. In view of increasing global integration and mobility of capital it is important that Indian venture capital
funds as well as venture finance enterprises are able to have global exposure and investment
opportunities.
E. Infrastructure in the form of incubators and R&D need to be promoted using Government support and
private management as has successfully been done by countries such as the US, Israel and Taiwan. This
is necessary for faster conversion of R & D and technological innovation into commercial products.
Recommendations
Multiplicity of Regulations - Need for Harmonisation and Nodal Regulator
Presently there are three set of Regulations dealing with venture capital activity i.e. SEBI (Venture Capital
Regulations) 1996, Guidelines for Overseas Venture Capital Investments issued by Department of Economic
Affairs in the MOF in the year 1995 and CBDT Guidelines for Venture Capital Companies in 1995 which was
modified in 1999. The need is to consolidate and substitute all these with one single regulation of SEBI to provide
for uniformity, hassle free single window clearance. There is already a pattern available in this regard; the mutual
funds have only one set of regulations and once a mutual fund is registered with SEBI, the tax exemption by
CBDT and inflow of funds from abroad is available automatically. Similarly, in the case of FIIs, tax benefits and
foreign inflows/outflows are automatically available once these entities are registered with SEBI. Therefore, SEBI
should be the nodal regulator for VCFs to provide uniform, hassle free, single window regulatory framework. On
the pattern of FIIs, Foreign Venture Capital Investors (FVCIs) also need to be registered with SEBI.
Tax pass through for Venture Capital Funds
VCFs are a dedicated pool of capital and therefore operates in fiscal neutrality and are treated as pass through
vehicles. In any case, the investors of VCFs are subjected to tax. Similarly, the investee companies pay taxes on
their earnings. There is a well established successful precedent in the case of Mutual Funds which once
registered with SEBI are automatically entitled to tax exemption at pool level. It is an established principle that
taxation should be only at one level and therefore taxation at the level of VCFs as well as investors amount to
double taxation. Since like mutual funds VCF is also a pool of capital of investors, it needs to be treated as a tax
pass through. Once registered with SEBI, it should be entitled to automatic tax pass through at the pool level
while maintaining taxation at the investor level without any other requirement under Income Tax Act.
Mobilisation of Global and Domestic resources
A. Foreign Venture Capital Investors (FVCIs)
12

13. Presently, FIIs registered with SEBI can freely invest and disinvest without taking FIPB/RBI approvals.
This has brought positive investments of more than US $10 billion. At present, foreign venture capital
investors can make direct investment in venture capital undertakings or through a domestic venture capital
fund by taking FIPB / RBI approvals. This investment being long term and in the nature of risk finance for
start-up enterprises, needs to be encouraged. Therefore, atleast on par with FIIs, FVCIs should be
registered with SEBI and having once registered, they should have the same facility of hassle free
investments and disinvestments without any requirement for approval from FIPB / RBI. This is in line with
the present policy of automatic approvals followed by the Government.
Further, generally foreign investors invest through the Mauritius-route and do not pay tax in India under a
tax treaty. FVCIs therefore should be provided tax exemption. This provision will put all FVCIs, whether
investing through the Mauritius route or not, on the same footing. This will help the development of a
vibrant India-based venture capital industry with the advantage of best international practices, thus
enabling a jump-starting of the process of innovation.
The hassle free entry of such FVCIs on the pattern of FIIs is even more necessary because of the
following factors:
i. Venture capital is a high risk area. In out of 10 projects, 8 either fails or yield negligible returns. It is
therefore in the interest of the country that FVCIs bear such a risk.
ii. For venture capital activity, high capitalisation of venture capital companies is essential to
withstand the losses in 80% of the projects. In India, we do not have such strong companies.
iii. The FVCIs are also more experienced in providing the needed managerial expertise and other
supports.
B. Augmenting the Domestic Pool of Resources
The present pool of funds available for venture capital is very limited and is predominantly contributed by
foreign funds to the extent of 80 percent. The pool of domestic venture capital needs to be augmented by
increasing the list of sophisticated institutional investors permitted to invest in venture capital funds. This
should include banks, mutual funds and insurance companies upto prudential limits. Later, as expertise
grows and the venture capital industry matures, other institutional investors, such as pension funds,
should also be permitted. The venture capital funding is high-risk investment and should be restricted to
sophisticated investors. However, investing in venture capital funds can be a valuable return-enhancing
tool for such investors while the increase in risk at the portfolio level would be minimal. Internationally,
over 50% of venture capital comes from pension funds, banks, mutual funds, insurance funds and
charitable institutions.
Venture Capital in India - Chandrasekhar Committee on Venture
Capital - Recommendations
Flexibility in Investment and Exit
A. Allowing Multiple Flexible Structures: Eligibility for registration as venture capital funds should be neutral to
firm structure. The government should consider creating new structures, such as limited partnerships,
limited liability partnerships and limited liability corporations. At present, venture capital funds can be
structured as trusts or companies in order to be eligible for registration with SEBI. Internationally, limited
partnerships, Limited Liability Partnership and limited liability corporations have provided the necessary
flexibility in risk-sharing, compensation arrangements amongst investors and tax pass through. Therefore,
these structures are commonly used and widely accepted globally specially in USA. Hence, it is necessary
to provide for alternative eligible structures.
B. Flexibility in the Matter of Investment Ceiling and Sectoral Restrictions: 70% of a venture capital fund's
investible funds must be invested in unlisted equity or equity-linked instruments, while the rest may be
invested in other instruments. Though sectoral restrictions for investment by VCFs are not consistent with
the very concept of venture funding, certain restrictions could be put by specifying a negative list which
could include areas such as finance companies, real estate, gold-finance, activities not legally permitted
13

14. and any other sectors which could be notified by SEBI in consultation with the Government. Investments
by VCFs in associated companies should also not be permitted. Further, not more than 25% of a fund's
corpus may be invested in a single firm. The investment ceiling has been recommended in order to
increase focus on equity or equity-linked instruments of unlisted startup companies. As the venture capital
industry matures, investors in venture capital funds will set their own prudential restrictions.
C. Changes in Buy Back Requirements for Unlisted Securities : A venture capital fund incorporated as a
company/ venture capital undertaking should be allowed to buyback upto 100% of its paid up capital out of
the sale proceeds of investments and assets and not necessarily out of its free reserves and share
premium account or proceeds of fresh issue. Such purchases will be exempt from the SEBI takeover
code. A venture-financed undertaking will be allowed to make an issue of capital within 6 months of buying
back its own shares instead of 24 months as at present. Further, negotiated deals may be permitted in
Unlisted securities where one of the parties to the transaction is VCF.
D. Relaxation in IPO Norms: The IPO norms of 3 year track record or the project being funded by the banks
or financial institutions should be relaxed to include the companies funded by the registered VCFs also.
The issuer company may float IPO without having three years track record if the project cost to the extent
of 10% is funded by the registered VCF. Venture capital holding however shall be subject to lock in period
of one year. Further, when shares are acquired by VCF in a preferential allotment after listing or as part of
firm allotment in an IPO, the same shall be subject to lock in for a period of one year. Those companies
which are funded by Venture capitalists and their securities are listed on the stock exchanges outside the
country, these companies should be permitted to list their shares on the Indian stock exchanges.
E. E. Relaxation in Takeover Code: The venture capital fund while exercising its call or put option as per the
terms of agreement should be exempt from applicability of takeover code and 1969 circular under section
16 of SC(R)A issued by the Government of India.
F. Issue of Shares with Differential Right with regard to voting and dividend: In order to facilitate investment
by VCF in new enterprises, the Companies Act may be amended so as to permit issue of shares by
unlisted public companies with a differential right in regard to voting and dividend. Such a flexibility already
exists under the Indian Companies Act in the case of private companies which are not subsidiaries of
public limited companies.
G. QIB Market for Unlisted Securities: A market for trading in unlisted securities by QIBs be developed.
H. NOC Requirement: In the case of transfer of securities by FVCI to any other person, the RBI requirement
of obtaining NOC from joint venture partner or other shareholders should be dispensed with.
I. RBI Pricing Norms: At present, investment/disinvestment by FVCI is subject to approval of pricing by RBI
which curtails operational flexibility and needs to be dispensed with
Global Integration and Opportunities
A. Incentives for Employees: The limits for overseas investment by Indian Resident Employees under the
Employee Stock Option Scheme in a foreign company should be raised from present ceilings of
US$10,000 over 5 years, and US$50,000 over 5 years for employees of software companies in their
ADRs/GDRs, to a common ceiling of US$100,000 over 5 years. Foreign employees of an Indian company
may invest in the Indian company to a ceiling of US$100,000 over 5 years.
B. Incentives for Shareholders: The shareholders of an Indian company that has venture capital funding and
is desirous of swapping its shares with that of a foreign company should be permitted to do so. Similarly, if
an Indian company having venture funding and is desirous of issuing an ADR/GDR, venture capital
shareholders (holding saleable stock) of the domestic company and desirous of disinvesting their shares
through the ADR/GDR should be permitted to do so. Internationally, 70% of successful startups are
acquired through a stock-swap transaction rather than being purchased for cash or going public through
an IPO. Such flexibility should be available for Indian startups as well. Similarly, shareholders can take
advantage of the higher valuations in overseas markets while divesting their holdings.
C. Global Investment Opportunity for Domestic Venture Capital Funds (DVCF): DVCFs should be permitted
to invest higher of 25% of the fund's corpus or US $10 million or to the extent of foreign contribution in the
fund's corpus in unlisted equity or equity-linked investments of a foreign company. Such investments will
fall within the overall ceiling of 70% of the fund's corpus. This will allow DVCFs to invest in synergistic
startups offshore and also provide them with global management exposure.
14

15. Infrastructure and R&D
Infrastructure development needs to be prioritized using government support and private management of capital
through programmes similar to the Small Business Investment Companies in the United States, promoting
incubators and increasing university and research laboratory linkages with venture-financed startup firms. This
would spur technological innovation and faster conversion of research into commercial products.
Self Regulatory Organisation (SRO)
A strong SRO should be encouraged for evolution of standard practices, code of conduct, creating awareness by
dissemination of information about the industry.
Implementation of these recommendations would lead to creation of an enabling regulatory and institutional
environment to facilitate faster growth of venture capital industry in the country. Apart from increasing the
domestic pool of venture capital, around US$ 10 billion are expected to be brought in by offshore investors over
3/5 years on conservative estimates. This would in turn lead to increase in the value of products and services
adding upto US$100 billion to GDP by 2005. Venture supported enterprises would convert into quality IPOs
providing over all benefit and protection to the investors.
Additionally, judging from the global experience, this will result into substantial and sustainable employment
generation of around 3 million jobs in skilled sector alone over next five years. Spin off effect of such activity
would create other support services and further employment. This can put India on a path of rapid economic
growth and a position of strength in global economy.
Follow-up Action on the Report of Chandrasekhar Committee
[source: Extract from SEBI Annual Report for 2000-01]
SEBI had set up K B Chandrasekhar Committee to identify the impediments in the development of venture capital
industry in India and to suggest suitable measures for its rapid growth. The report of the Committee was
submitted to the SEBI Board in January 2000. The recommendations of the Committee were widely discussed.
The recommendations were accepted in-principle by the Government also and pursuant to the same, the Finance
Minister in the Budget 2000 speech announced that SEBI would be the single point nodal agency for registration
and regulation of both domestic and overseas venture capital funds and the SEBI registered Venture Capital
Funds would be given total tax pass-through.
In the light of the recommendations of the SEBI Committee on Venture Capital and the Budget announcements,
the Board of SEBI in its meeting held on September 14, 2000 approved the SEBI (Venture Capital Funds)
(Amendment) Regulations, 2000 and also the SEBI (Foreign Venture Capital Investors) Regulations, 2000.
The SEBI (Substantial Acquisition of Shares and Takeover) Regulations were amended whereby the acquisition
of shares from venture capital funds/foreign venture capital investors either by company or by any promoter/s (on
the same footing as that of acquisition from the state level financial institutions) would be exempt from making an
open offer to other shareholders. The venture capital funds/foreign venture capital investors are eligible to
participate in the IPO through book building route as Qualified Institutional Buyer subject to compliance with the
SEBI (Venture Capital Fund) Regulations. Board also approved the amendment in the SEBI (Mutual Fund)
Regulations permitting mutual funds to invest in venture capital funds. SEBI notified the Foreign Venture Capital
Investors, Regulations, 2000 on September 15, 2000. The SEBI submitted a proposal to the Government to
reconsider the condition of exit from investment within one year from the date of listing of shares of venture capital
undertaking to seek tax pass-through, Government agreed to remove such condition. Accordingly, the Board at its
meeting held on December 22, 2000 amended the regulations removing the clause requiring mandatory exit.
The SEBI advised all the registered venture capital funds vide circular no. Cir-1-2001 dated February 12, 2001 to
report every quarter about their resource mobilisation and investments.
15

16. Introduction
The venture capital investment helps for the growth of innovative entrepreneurships in India. Venture capital
has developed as a result of the need to provide non-conventional, risky finance to new ventures based on
innovative entrepreneurship. Venture capital is an investment in the form of equity, quasi-equity and
sometimes debt - straight or conditional, made in new or untried concepts, promoted by a technically or
professionally qualified entrepreneur. Venture capital means risk capital. It refers to capital investment, both
equity and debt, which carries substantial risk and uncertainties. The risk envisaged may be very high may
be so high as to result in total loss or very less so as to result in high gains
The concept of Venture Capital
Venture capital means many things to many people. It is in fact nearly impossible to come across one single
definition of the concept. Jane Koloski Morris, editor of the well known industry publication, Venture
Economics, defines venture capital as 'providing seed, start-up and first stage financing' and also 'funding the
expansion of companies that have already demonstrated their business potential but do not yet have access
to the public securities market or to credit oriented institutional funding sources. The European Venture
Capital Association describes it as risk finance for entrepreneurial growth oriented companies. It is
investment for the medium or long term return seeking to maximize medium or long term for both parties. It
is a partnership with the entrepreneur in which the investor can add value to the company because of his
knowledge, experience and contact base.
The Origin of Venture Capital
In the 1920's & 30's, the wealthy families of and individuals investors provided the start up money for
companies that would later become famous. Eastern Airlines and Xerox are the more famous ventures they
financed. Among the early VC funds set up was the one by the Rockfeller Family which started a special fund
called VENROCK in 1950, to finance new technology companies. General Doriot, a professor at Harvard
Business School, in 1946 set up the American Research and Development Corporation (ARD), the first firm,
as opposed to a private individuals, at MIT to finance the commercial promotion of advanced technology
developed in the US Universities. ARD's approach was a classic VC in the sense that it used only equity,
invested for long term, and was prepared to live with losers. ARD's investment in Digital Equipment
Corporation (DEC) in 1957 was a watershed in the history of VC financing. While in its early years vc may
have been associated with high technology, over the years the concept has undergone a change and as it
stands today it implies pooled investment in unlisted companies.
SEBI Venture Capital Funds (VCFs) Regulations, 1996
A Venture Capital Fund means a fund established in the form of a trust/company; including a body corporate,
and registered with SEBI which (i) has a dedicated pool of capital raised in a manner specified in the
regulations and (ii) invests in venture capital undertakings (VCUs) in accordance with these regulations.
A Venture Capital Undertaking means a domestic company (i) whose shares are not listed on a recognised
stock exchange in India and (ii) which is engaged in the business of providing
services/production/manufacture of articles/things but does not include such activities/sectors as are
specified in the negative list by SEBI with government approval-namely, real estate, non-banking financial
companies (NBFCs), gold financing, activities not permitted under the industrial policy of the Government
and any other activity which may be specified by SEBI in consultation with the Government from time to
time.
16

17. Registration
All VCFs must be registered with SEBI and pay Rs.25,000 as application fee and Rs. 5,00,000 as registration
fee for grant of certificate.
Recommendations of SEBI (Chandrasekhar) Committee, 2000 SEBI appointed the Chandrasekhar Committee
to identify the impediments in the growth of venture capital industry in the country and suggest suitable
measures for its rapid growth. Its report was submitted in January, 2000. The recommendations pertain to
1. Harmonisation of multiplicity of regulations
2. VCF structures
3. Resource raising
4. Investments
5. Exit
6. SEBI regulations
7. Company law related issues and
8. Other related issues.
Types of Venture Capital Funds
Generally there are three types of organised or institutional venture capital funds: venture capital funds set
up by angel investors, that is, high net worth individual investors; venture capital subsidiaries of corporations
and private venture capital firms/ funds. Venture capital subsidiaries are established by major corporations,
commercial bank holding companies and other financial institutions. Venture funds in India can be classified
on the basis of the type of promoters.
1 . VCFs promoted by the Central govt. controlled development financial institutions such as TDICI, by ICICI,
Risk capital and Technology Finance Corporation Limited (RCTFC) by the Industrial Finance Corporation of
India (IFCI) and Risk Capital Fund by IDBI.
2. VCFs promoted by the state government-controlled development finance institutions such as Andhra
Pradesh Venture Capital Limited (APVCL) by Andhra Pradesh State Finance Corporation (APSFC) and Gujarat
Venture Finance Company Limited (GVCFL) by Gujarat Industrial Investment Corporation (GIIC)
3. VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI-Cap by State Bank of
India.
4. VCFs promoted by the foreign banks or private sector companies and financial institutions such as Indus
Venture Fund, Credit Capital Venture Fund and Grindlay's India Development Fund.
The Venture Capital Investment Process:
The venture capital activity is a sequential process involving the following six steps.
1. Deal origination
2. Screening
3. Due diligence Evaluation)
4. Deal structuring
5. Post-investment activity
6. Exist
Venture Capital Investment Process
Deal origination:
17

18. In generating a deal flow, the VC investor creates a pipeline of deals or investment opportunities that he
would consider for investing in. Deal may originate in various ways. referral system, active search system,
and intermediaries. Referral system is an important source of deals. Deals may be referred to VCFs by their
parent organisaions, trade partners, industry associations, friends etc. Another deal flow is active search
through networks, trade fairs, conferences, seminars, foreign visits etc. Intermediaries is used by venture
capitalists in developed countries like USA, is certain intermediaries who match VCFs and the potential
entrepreneurs.
Screening:
VCFs, before going for an in-depth analysis, carry out initial screening of all projects on the basis of some
broad criteria. For example, the screening process may limit projects to areas in which the venture capitalist
is familiar in terms of technology, or product, or market scope. The size of investment, geographical location
and stage of financing could also be used as the broad screening criteria.
Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with evaluating an investment
proposal. The venture capitalists evaluate the quality of entrepreneur before appraising the characteristics of
the product, market or technology. Most venture capitalists ask for a business plan to make an assessment
of the possible risk and return on the venture. Business plan contains detailed information about the
proposed venture. The evaluation of ventures by VCFs in India includes;
Preliminary evaluation: The applicant required to provide a brief profile of the proposed venture to establish
prima facie eligibility.
Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in greater detail. VCFs
in India expect the entrepreneur to have:- Integrity, long-term vision, urge to grow, managerial skills,
commercial orientation.
VCFs in India also make the risk analysis of the proposed projects which includes: Product risk, Market risk,
Technological risk and Entrepreneurial risk. The final decision is taken in terms of the expected risk-return
trade-off as shown in Figure.
Deal Structuring:
In this process, the venture capitalist and the venture company negotiate the terms of the deals, that is, the
amount, form and price of the investment. This process is termed as deal structuring. The agreement also
include the venture capitalist's right to control the venture company and to change its management if
needed, buyback arrangements, acquisition, making initial public offerings (IPOs), etc. Earned out
arrangements specify the entrequreneur's equity share and the objectives to be achieved.
Post Investment Activities:
Once the deal has been structured and agreement finalised, the venture capitalist generally assumes the role
of a partner and collaborator. He also gets involved in shaping of the direction of the venture. The degree of
the venture capitalist's involvement depends on his policy. It may not, however, be desirable for a venture
capitalist to get involved in the day-to-day operation of the venture. If a financial or managerial crisis occurs,
the venture capitalist may intervene, and even install a new management team.
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19. Exit:
Venture capitalists generally want to cash-out their gains in five to ten years after the initial investment.
They play a positive role in directing the company towards particular exit routes. A venture may exit in one
of the following ways:
1. Initial Public Offerings (IPOs)
2. Acquisition by another company
3. Purchase of the venture capitalist's shares by the promoter, or
4. Purchase of the venture capitalist's share by an outsider.
Methods of Venture Financing
Venture capital is typically available in three forms in India, they are:
Equity : All VCFs in India provide equity but generally their contribution does not exceed 49 percent of the
total equity capital. Thus, the effective control and majority ownership of the firm remains with the
entrepreneur. They buy shares of an enterprise with an intention to ultimately sell them off to make capital
gains.
Conditional Loan: It is repayable in the form of a royalty after the venture is able to generate sales. No
interest is paid on such loans. In India, VCFs charge royalty ranging between 2 to 15 percent; actual rate
depends on other factors of the venture such as gestation period, cost-flow patterns, riskiness and other
factors of the enterprise.
Income Note : It is a hybrid security which combines the features of both conventional loan and conditional
loan. The entrepreneur has to pay both interest and royalty on sales, but at substantially low rates.
Other Financing Methods: A few venture capitalists, particularly in the private sector, have started
introducing innovative financial securities like participating debentures, introduced by TCFC is an example.
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