What is Venture Capital Fund?

What is Venture Capital?

Venture capital is a type of private equity capital typically provided by outside investors to new businesses. Generally made as cash in exchange for shares in the investee company, venture capital investments are usually high risk, but offer the potential for above-average returns.

What is Venture Capital Fund?

A venture capital fund is a pooled investment scheme that primarily invests the financial capital of third party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies, or ventures, with limited operating history, who cannot raise funds through a debt issue.

What is SEBI (Venture capital funds) Regulations 1996?

The SEBI (Venture capital funds) Regulations 1996 (”VCF Regulations”) issued by the Securities and Exchange Board of India (“SEBI”) are a comprehensive set of laws to be followed by the venture capital funds 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 Regulations defines as venture capital fund as follows: “venture capital fund” means a fund established in the form of a trust or a company including a body corporate and registered under these regulation which—

(i) has a dedicated pool of capital;

(ii) raised in a manner specified in the regulations; and

(iii) invests in accordance with the regulations;

How is Registration of Venture Capital Funds Done?

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 regulations 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 proposed to do so after the commencement of this act. The list of registered venture capital funds with SEBI can be found here

What are the Conditions and Restrictions on Investments into a Venture Capital Fund?

An investment in a venture capital fund, which is registered with SEBI and is established as a trust, can be made under the automatic route (i.e. without government approval) by any person who is a person resident in India or a SEBI registered Foreign Venture Capital Investor (“FVCI”). Persons resident outside India (other than FVCIs) such as non-resident entities / individuals, including non-resident

Indians (NRIs), can invest in such a VCF only with the prior approval of the Foreign Investment Promotion Board (FIPB). Investments by all investors of a VCF are subject to the requirements specified in the VCF Regulations, including that the minimum investment amount should be INR five lakhs (this does not apply to investment made by the employees, directors or the principal officers of the company or by the trustee where the venture capital fund is a trust).

An entity seeking to register as a VCF with SEBI is required to submit an application that discloses details of the venture capital fund, including, the investment strategy of the venture capital fund, the duration of its life cycle etc. Once registered, the venture capital fund is subject to the investment restrictions specifed in the VCF Regulations, such as

a. Not more than 25% of the fund shall be invested in a single venture capital undertaking.

b. Investments are to be made in the following manner:

i) At  least  66.67%  of  the  fund  to  be  invested  shall  be  invested  in  unlisted  equity  shares  or  other instruments linked to equity shares of the venture capital undertaking.

ii) Not more than 33.33% of the investible fund shall be invested by the way of IPO of a venture capital undertaking whose shares are proposed to be listed, the debt instrument of the venture capital

undertaking in which the venture capital fund has already invested, preferential allotment of equity shares of a listed company, equity shares or equity linked instrument of a financially weak company and SPV’s which have been created by the venture capital fund..  No venture capital fund shall get its units listed on any recognized stock exchange till the expiry of the years from the date when they were issued to the investors by the venture capital fund. The venture capital funds shall also not invite any member of the public by way of advertisement to subscribe to its units. The venture capital fund may receive investments only through private placements of its units.

What is Placement Memorandum or Subscription Agreement?

Every venture capital fund shall issue a placement memorandum to its proposed investors which contains all the terms and conditions relating to the scheme through which money is proposed to be raised from the investors. The venture capital fund may also enter into a subscription agreement with the investors which would specify the terms and conditions of the scheme through which money is proposed to be raised. The venture capital fund shall submit a copy of such placement memorandum or subscription agreement with SEBI along with the report of the money actually raised through such agreement or memorandum. The placement memorandum or the subscription agreement shall cover the following:

It shall contain the details of the trustee and the trust as well as the details of the directors and the principal officers of the venture capital fund. It shall also state the minimum amount of money to be raised to start the venture capital fund and the minimum share to be invested in every scheme of the venture capital funds. Tax implications which would be applied to the investors shall also be stated. The manner of subscription to the units of the fund, the period of maturity of the fund if any and the manner in which the fund would be wound up shall also be stated.

Every venture capital fund shall maintain a book of record for a period of eight years which would generate the true picture of the venture capital fund. SEBI at any time can call for information regarding the working of the venture capital fund, the information shall be submitted to SEBI in the specified time period.