Law Firm Delhi India (Trustman & Co) Venture Capital Fund Guidelines India

VENTURE CAPITAL INVESTMENT IN INDIA

In recognition of growing importance of Venture Capital as one of the sources of finance for Indian industry, particularly for the smaller unlisted companies, the Government has announced a policy governing the establishment of domestic Venture Capital Funds/Companies. An amendment has also been carried out in the SEBI Act empowering the Securities and Exchange Board of India (SEBI) to register and regulate Venture Capital Funds (VCFs) and Venture Capital Companies (VCCs) through specific regulations.

With a view to augment the availability of Venture Capital, the Government has decided to allow overseas venture capital investments in India subject to suitable guidelines as outlined below :

Offshore investment may invest in approved domestic Venture Capital Funds/Companies set up under the new policy after obtaining FIPB approval for the investment. There is no limit to the extent of foreign contribution to a domestic venture capital company/ fund. An offshore venture capital company may contribute 100% of the capital of domestic venture capital fund, and may also set up a domestic asset management company to manage the Fund.
Establishment of an asset management company with foreign investment to manage such funds would require FIPB approval and would be subject to the existing norms for foreign investment in non-bank financial services companies.
Once the initial FIPB approval has been obtained, the subsequent investment by the domestic venture capital company/fund in Indian companies will not require FIPB approval. Such investments will be limited only by the general restriction applicable to venture capital companies viz.-
1. A minimum lock-in period of three years will apply to all such investments.
2. VCFs and VCCs shall invest only in unlisted companies and their investment shall be limited to 40% of the paid up capital of the company. The ceiling will be subject to relevant equity investment limits that may be in force from time to time in relation to areas reserved for the Small Scale Sector.
3. Investment in any single company by a VCF/VCC shall not exceed 20% of the paid-up corpus of the domestic VCF/VCC.
The tax exemption available to domestic VCFs and VCCs under Section 10(23F) of the Income Tax Act, 1961, will also be extended to domestic VCFs and VCCs which attract overseas venture capital investments provided these VCFs/VCCs conform to the guidelines applicable for domestic VCFs/VCCs. However, if the VCF/VCC is willing to forego the tax exemptions available under Section 10(23F) of the Income Tax Act, it would be within its rights to invest in any sector.
Income paid to offshore investors from Indian VCFs/VCCs will be subject to tax as per the normal rates applicable to foreign investors.

Offshore investors may also invest directly in the equity of unlisted Indian companies without going through the route of a domestic VCF/VCC. However, in such cases each investment will be treated as a separate act of foreign investment and will require separate approval as required under the general policy for foreign investment proposals.