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Regulatory Reforms in Venture Capital . by. SAMEER RASTOGI. 26 th April 2007. INDIA JURIS International Law Firm www.indiajuris.com. EVOLUTION OF VC REGULATORY CLIMATE IN INDIA.

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regulatory reforms in venture capital

Regulatory Reforms in Venture Capital

by

SAMEER RASTOGI

26th April 2007

INDIA JURISInternational Law Firmwww.indiajuris.com

slide2

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

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slide3

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

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slide4

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

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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

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vcf fvci

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

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slide7

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.

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slide8

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)

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slide9

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

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slide10

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

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slide11

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.

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slide12

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

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slide13

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.

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slide14

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

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slide15

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.

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slide16

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

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slide17

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.

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THANK YOUINDIA JURISF-105 Samarth Plaza, Jaipuria Enclave,Kaushambi, GZB-201010, NCR DelhiPh: +91-120-6567067 / 4120997 /2115135 Fax: +91-120-2776538 / 4120998www.indiajuris.com

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