Although India continues to be a regulated economy, in order to boost investment in the venture capital space (which is fairly capital intensive in nature) and incentivize investments in start-ups, the Government has introduced and, from time to time, liberalized the regulatory regime applicable to foreign venture capital investors (“FVCI”). In 2000, the Securities and Exchange Board of India (“SEBI”) announced the SEBI (Foreign Venture Capital Investors) Regulations, 2000 (“FVCI Regulations”) for enabling registered FVCIs to avail of certain benefits. Additionally, benefits have also been granted by the Reserved Bank of India (“RBI”) pursuant to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”)  to investments by FVCIs. The cumulative investment by FVCIs for the year 2017 was INR 46,031 crores[1].

Eligibility and Registration

The application process for obtaining the FVCI registration has been simplified. SEBI has now introduced an online system for registration, as well as for reporting and filing on an on-going basis.[2] While assessing an application for grant of FVCI registration, SEBI will consider and evaluate, inter alia, the applicant’s track record, professional competence, financial soundness, experience, and general reputation of fairness and integrity.

Permitted Investments

· Equity or equity linked instrument or debt instrument issued by an unlisted Indian company engaged in any of the following permitted sectors:

– Biotechnology
– IT related to hardware and software development
– Nanotechnology
– Seed research and development
– Research and development of new chemical entities in pharmaceutical sector
– Dairy industry
– Poultry industry
– Production of bio-fuels
– Hotel-cum-convention centers with seating capacity of more than 3,000
– Infrastructure sector.[3]

FVCIs are also permitted under the FVCI Regulations to invest not more than 33.33% of the investible funds in listed securities, subject to compliance with certain additional conditions.

· Equity or equity linked instrument or debt instrument issued by an Indian ‘startup’[4], irrespective of the sector in which the startup is engaged.

· Units of a venture capital funds (“VCF”) or of a Category-I Alternative Investment Funds (“Cat-I AIF”) or units of a scheme or of a fund set up by such VCF or Cat-I AIF.

Key Benefits of FVCI Route v. FDI Route

1. FVCIs are exempted from pricing norms at the time of entry as well as exit. As a result, FVCIs can acquire or sell instruments at a price mutually acceptable to the buyer and the seller/issuer. This is a significant exemption as it enables FVCIs to structure a cash-out at any price and without being subject to the fair market value related hassles.

2. The open offer related provisions under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 are not applicable in case of sale of shares by FVCIs to promoters, if such transfer is effected pursuant to a pre-existing arrangement.

3. FVCIs are exempted from the one year lock-in requirement under the SEBI (Issue of Capital and Disclosure) Regulations, 2018 (“ICDR Regulations”), provided that the shares have been held by such FVCIs for at least one year. As a result, FVCIs have an opportunity to exit immediately once the investee company goes public.

4. FVCIs are classified as ‘Qualified Institutional Buyers’ under the ICDR Regulations and are therefore eligible to subscribe to securities offered at an initial public offering through the book building process.

Authors:
Pallavi Satpute, Counsel
Kaushal Prabhat, Associate

Footnotes:
[1] https://www.sebi.gov.in/statistics/investment-details-VCF-FVCI.html
[2] As per SEBI Circular SEBI/HO/IMD/DF1/CIR/P/2017/75 dated July 6, 2017.
[3] As defined under the Harmonized Master List of Infrastructure sub-sectors approved by the Government of India vide Notification F. No. 13/06/2009-INF dated March 27, 2012 as amended / updated.
[4] As defined under the Department for Promotion of Industry and Internal Trade’s Notification No. G.S.R. 364(E), dated the April 11, 2018.