Venture Capital is the initial capital provided to a business typically at a start-up stage. Venture capital normally comes in where the conventional sources of finance do not fit in such as bank loans or capital from public market. Majority of venture capital investors are either, a group of High Networth Individuals (HNIs), investment banks or other financial institutions. They pool in investments or form a partnership to raise capital.
A venture capital fund is a pooled investment scheme that primarily invests the capital of third-party investors in an enterprise. The fund makes money by owning equity in the companies it invests in, generally with strong growth potential. A venture capital fund is characterized as high-risk/high-return opportunity but most times, the fund structure diversifies risks. The Venture Capital Fund investors use their business knowledge, experience and expertise to yield substantial return on the investment.
Every venture capital fund shall issue a placement memorandum to its proposed investors or enter into a subscription agreement with its proposed investors. It shall specify the terms and conditions subject to which monies are proposed to be raised.
The placement memorandum or the subscription agreement shall contain:
The Venture Capital Funds (VCF) Regulation 1996 issued by Securities and Exchange Board of India (SEBI), is a comprehensive set of laws to be followed by any venture capital fund in India. From the registration of venture capital funds to the action to be taken in case of default, the regulation has been divided in VI chapters.
Regulation 2(m) of the VCF Regulation defines a venture capital fund as follows: “venture capital fund” means a fund established in the form of a trust or a company including a corporate body and registered under these regulation which-
The VCF Regulation 1996 provided for the registration of a company or a trust which either was functioning as a venture capital fund before the commencement of this act or proposes to do so after the commencement of this act. A venture capital fund can either be a fund established as a trust under the Indian Trust Act, 1882 or a company under Companies Act, 1956. The eligibility criteria for grant of a certificate of registration are given in Regulation 4 of SEBI (Venture Capital Funds) Regulations 1996.
However, SEBI on May 21, 2012 notified the SEBI (Alternate Investment Fund) Regulations, 2012 (“AIF Regulations”) aiming at a complete overhaul of the regulatory regime governing private pooled investment vehicles in India and in the process replacing the VCF Regulations 1996.
All AIFs whether operating as Private Equity Funds, Real Estate Funds, Hedge Funds, etc. must register with SEBI under the AIF Regulations. However, existing VCFs shall continue to be regulated by the VCF Regulations till the existing fund or scheme managed by the fund is wound up. Such VCFs may also seek reregistration under AIF regulations subject to approval of 66.67% of their investors by value.
Until now, the regulatory environment governing management of private pool of funds, albeit at a retail level, was restricted to Mutual Funds (MF), Collective Investment Schemes (CIS), Venture Capital Funds (VCF) etc. Hence, there was a need felt to address and focus on the non-retail segment. Moreover, the cardinal reason behind the Securities and Exchange Board of India (“SEBI”) coming up with the SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations”) was to provide impetus and encourage various start up enterprises, by providing the necessary seed fund. However, over the years, VCFs have come to be used as vehicles for funds such as PE, real estate, infrastructure etc. There is no doubting of the objectives of such funds but what happened in the process is that the objective and the principal reason in enactment of the VCF Regulations got diluted.
Thus, acknowledging the dynamic nature of the market and the ever evolving landscape of the capital market of a developing economy, there was a need of much required revision to the old rules, so that they do not prove to be bottleneck in the progress and development of the economy.
The AIF Regulations are a broad-based legislation governing various kinds of private funds and permitting more investment opportunities for investment managers. The VCF Regulations restricted some of the accepted investment avenues worldwide—like secondary transactions in listed stock, derivative transactions, debt funds and investing using a fund of funds model. SEBI seems to have permitted such investments and has created a regulatory structure governing such investments under the AIF Regulations.
AIF means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. Thus typically, after the enactment of the AIF Regulations, the following are the investment vehicles:
An application can be made to SEBI for registration as an AIF under one of the following categories:
A VCF under AIF Regulations attracts certain restrictions, which include investment restrictions (investment of at least 66% of the corpus in equity or equity linked instruments). AIF may raise funds from any investor whether Indian, foreign or non-resident Indians by way of issue of units.
All AIFs whether operating as Private Equity Funds, Real Estate Funds, Hedge Funds, etc. must register with SEBI under the AIF Regulations.
However, existing VCFs registered under VCF Regulations 1996 shall continue to be regulated by the VCF Regulations till the existing fund or scheme managed by the fund is wound up. Existing VCFs, however, shall not increase the targeted corpus of the fund or scheme as it stands on the day of Notification of these Regulations. Such VCFs may also seek re-registration under AIF regulations subject to approval of 66.67% of their investors by value.
Existing funds not registered under the VCF Regulations will not be allowed to float any new scheme without registration under AIF Regulations. However, schemes floated by such funds before coming into force of AIF Regulations, shall be allowed to continue to be governed till maturity by the contractual terms, except that no rollover/ extension or raising of any fresh funds shall be allowed.
ArthVeda Star Fund is the existing scheme of the SEBI registered venture capital Fund/ Trust and will be governed under SEBI Venture Capital Fund Regulation, 1996 and under all other relevant Indian Laws till its target corpus is achieved. However, the future schemes of the Fund will be set up and operate in accordance with the Indian laws, including but not limited to the SEBI (Alternative Investment Funds) Regulations, 2012, the regulations and provisions of SEBI, FDI, FEMA and tax laws. Investors should seek independent advice in this regard.