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Regulatory Reforms in Venture Capital

Regulatory Reforms in Venture Capital

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Regulatory Reforms in Venture Capital

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  1. Regulatory Reforms in Venture Capital by SAMEER RASTOGI 26th April 2007 INDIA JURISInternational Law

  2. EVOLUTION OF VC REGULATORY CLIMATE IN INDIA • 1988 - Guidelines were issued by (then)Controller of Capital Issues, stipulating the framework for establishment and operation of funds/companies. • 1996 - SEBI introduced SEBI (Venture Capital Fund) Regulations for regulating and promoting activities of domestic VCFs 2

  3. EVOLUTION OF VC REGULATORY CLIMATE …….Cont. • 1999 - A committee was set upon VC headed by Mr.K.B.Chandrasekhar to provide a global perspective on Venture Capital • 2000 - SEBI introduced SEBI (Foreign Venture Capital Fund) Regulations enabling foreign VC and PE investors to register with SEBI and avail certain benefits provided there under 3

  4. EVOLUTION OF VC REGULATORY CLIMATE …….Cont. • 2000 - Finance Act 1995, 1999 and lastly 2000 fueled the growth of VCF/FVCI by inserting section 10(23FB) and 115U in Income Tax Act • 2003 - Report by Advisory Committee headed by Dr. Ashok Lahiri, which helped SEBI in considering the amendments in the regulations that facilitated further the development of vibrant VC industry in India 4

  5. EVOLUTION OF VC REGULATORY CLIMATE …….Cont. • Amendments in Companies Act 1956, FDI Policy and FEMA from time to time has contributed to the growth of VC industry • Regulatory reforms over the years have resulted increase in inflow of VC/PE from $500 mn in 1999 to around $7 bn last year 5

  6. FRAMEWORK VCFFVCI SEBI RBI FIPB TAX • SEBI Act, 1992 • SEBI (VCF) Reg. 1996 • SEBI (FVCI) Reg. 2000 • SCR Act,1956 • SEBI (SAST) Reg.1997 • SEBI (DIP) Guidelines, 2000 • FEMA 1999 • Transfer or Issue of • Security by a Person • Resident Outside India • Regulations 2000 • FDI Policy • Investment Approvals • Press Notes • IT Act, 1961 • DTAA • - Singapore • - Mauritius • - Cyprus • …..etc 6

  7. REGULATORY REFORMS • 1999 - The Companies (Amendment) Act, 1999 - Prior approval of Central Govt. dispensed with. investment by a company exceeding 60% [paid-up share capital + free reserves] or 100% free reserve, whichever is more, can be made by way of Special Resolution in General Meeting • 2000 - SAST not to apply to the shares transferred from VCF or FVCI to the promoters or to the company itself, if effected as per pre-existing agreement between VCF or FVCI & promoters of the company. If promoters buy back the shares from FVCI then no requirement of public offering. 7

  8. REGULATORY REFORMS cont… • 2000 - As per FEMA, FVCI can acquire or sell any investment held by it at a mutually acceptable price • 2001 - The Companies (Amendment) Act, 2001 reduced the period of issue of fresh shares from 24 months to 6 months from when the company completes the buy back of its shares • 2001 - The Companies (Issue of share capital with differential voting rights) Rules 2001, allowed every company limited by shares to issue shares with differential rights (voting or dividend) 8

  9. REGULATORY REFORMS cont… • 2003 - Qualified Institutional Buyer “QIB” status granted to VCF / FVCI as per SEBI(DIP) guidelines. Can subscribe securities at IPO of a VCU through book-building process. • 2004 - Lock-in period of one year after listing removed. -Investible fund limit decreased to 66.67% from 75% in unlisted companies -Removal of Real Estate from negative list of Schedule III 9

  10. REGULATORY REFORMS cont… Permitted to invest in NBFC engaged in equipment leasing or Hire Purchase. • 2004 - - Permitted to invest in companies engaged in gold financing for jewellery. - FVCI allowed to invest 100% in one VCU, as compared to 25% earlier. • 2005 - Press Note 1 of 2005, exemption from prior Govt. approval under press note 18 of 1998 10

  11. BUDGET IMPACT Change proposed in Budget 2007- 08 Pass-through status to be granted to VCF only in respect of investments in VCU in biotechnology; information technology relating to hardware and software development; nanotechnology; seed research and development; research and development of new chemical entities in the pharmaceutical sector; dairy industry; poultry industry; and production of bio-fuels, and hotel-cum-convention centers of a certain description and size. 11

  12. BUDGET IMPACT • Sectors such as Telecom, Healthcare, KPO/ BPO etc, may get adversely affected in attracting VCF • Domestic VCF are hit more as compared to Foreign VC • Foreign funds remain unaffected as they are set up in Mauritius / Singapore etc; and can avail benefit of DTAA • On the other hand Domestic VCF may feel restricted to prescribed 9 sectors, as they will not get tax exemptions in other sectors 12

  13. BUDGET IMPACT • Domestic VCF may find difficult to raise funds from overseas, since the preference of overseas investors may be Foreign VC funds. • Adverse effect on Early stage investments as domestic VCF are main investor in seed stage. 13

  14. Regulatory Reforms Required • Flexible Structure - LLP / LLC • VC Fund are set up for limited life and on maturity returns are distributed amongst the investor. • Therefore the structure of VC Fund should protect interest of investor and liquidation process should also be simple. • LLP, LLC are most commonly used worldwide for VC funds. eg. USA 14

  15. Regulatory Reforms Required • Flexible Structure …………. continued • LLP / LLC provides limited liability and pass through vehicle for tax purposes • In this direction LLP Bill 2006 has been introduced in Rajya Sabha in Dec 2006 • Flexibility in investment • At present VCF cannot invest more than 25% of the funds in one VCU. 15

  16. Regulatory Reforms Required • Flexibility in investment …………. continued • At present VCF has to invest at least 66.67% of the investible funds in unlisted equity shares • At present VCF cannot invest more than 33.33% of the investible funds by way of subscription to IPO • Though SEBI has relaxed VC guidelines, but since VC is a high risk capital, it needs more flexibility in investment 16

  17. Regulatory Reforms Required • Relaxation in lock-in period • At present investment of VCF in preferential allotment of equity shares of a listed company is subject to lock in period of one year • At present there is a lock in period of one year on pre IPO shares, held by VCFs or FVCIs (exceptions) • Relaxation in above lock in shall be considered. 17

  18. THANK YOUINDIA JURISF-105 Samarth Plaza, Jaipuria Enclave,Kaushambi, GZB-201010, NCR DelhiPh: +91-120-6567067 / 4120997 /2115135 Fax: +91-120-2776538 / 18