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Regulatory Reforms in Venture Capital

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

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

  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 www.indiajuris.com 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 www.indiajuris.com 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 www.indiajuris.com 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 www.indiajuris.com 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 www.indiajuris.com 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. www.indiajuris.com 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) www.indiajuris.com 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 www.indiajuris.com 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 www.indiajuris.com 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. www.indiajuris.com 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 www.indiajuris.com 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. www.indiajuris.com 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 www.indiajuris.com 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. www.indiajuris.com 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 www.indiajuris.com 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. www.indiajuris.com 17

  18. 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 www.indiajuris.com 18

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