Today startups are have become a lucrative alternative for carving footsteps in the world of business. In the cut throat competitive business environment startups are occupying the prime imagination of the world at present. Startups come up with innovate business ideas which require financial support during the initial phases because they have high risk element during the growth process.

Though being risky the startups bestow high growth opportunities to the investors who on having faith on the business idea of startup contribute funds during the seed phase.

The funding process for startups is lengthy and split up into phases. The amount of funding that startups receive during the initial phases majorly depends on the business idea with which they come up. Since the startups are risky ventures the possibility of failure are also substantial. Though funding at seed stage may be risky but the potential for above average returns is an attractive payoff for the investors.

In this article we will discuss in detail about the venture capital funds. Before diving directly in details about the venture capital funds it is of utmost importance to understand as to what venture capital funds are.

What are They?

Venture capital funds are investment funds that manage the money of investors who seek private equity stakes in startup and small to medium sized enterprises with strong growth potential. These investments are generally characterized as high risk or high return opportunities.

Venture capital funds are private equity investment vehicles that seek to invest in firms that have high risk/high return profile determined on the basis of company’s size, assets and various stages of economic development. These are early age investment with a long term horizon.

Many of these funds make small bets on wide variety of young startups on the belief that at least one will achieve high growth and reward the funds invested with comparatively higher payout at the end.

For Whom?

Venture capitals identify promising new technology, products or concepts and thereafter provide the funding required to move the idea conceived forward.

Venture capital is the most suitable option for funding costly capital source for companies and mostly for businesses that have huge capital requirement with no other cheaper viable alternative. With the means of venture capital funding is provided to early stage, high potential and growing companies. The intent behind financing is to generate return on investment.

Venture capital funding is mainly for essential for new companies or ventures that have limited operating history of less than two years. Of late venture capital funding had become a popular rather essential source for raising capital during initial phases when there is lack to capital market , bank loans or other debt instruments.

Venture capital Funds generally comes from well of investors, investment banks and other financial institutions.it is significant to note that venture capital fund not only takes monetary form in various scenarios it may also be provided in the shape of technical or managerial expertise.

Venture capital funds ensure that the money of the investors is used to fund project which have a potential to grow. Since these firms are usually start ups these are said to have high risk/high return profiles.

Having gained an understanding about what venture capital funds are and for whom they are viable lets head toward highlighting the features of venture capital funds.

Features of Venture Capital Funds

From the above briefing of the venture capital fund, we can say that venture capital funds have the following features:

• It is a high risk investment made with the motive of reaping high profits.
• The investment sowed is based on long term goals.
• The investment is made in startups which have lucrative idea and growth prospects.
• Money is invested by investors vide purchase of equity shares in these startup companies.
• Funding is mainly granted for innovative projects.
• Since the venture capitalist purchase the equity stake of the company and so they secure the right to participate in the management of the company.
• Venture capital funds contribute to the development of new products or services and in the acquisition of latest technology.
• The biggest advantage of the venture capital funds is that they offer network opportunities thereafter leading to achievement of growth in short time span.

Due to the above highlighted features of venture capital fund these are among the most widespread alternative especially for fast growing technology and biotechnology domains.

Pros and Cons of Venture Capital Fund

Venture capital funds as initially elaborated are the investments made by the investors looking for private equity stake holding in startups, small to medium enterprises that have a growth potential.

The investment is made on account of the sole motive of “high return for higher risk”. On this note there are numerous pros and cons of venture capital fund. A few pros and cons are as follows:

• The autonomy and control of the founder declines as the investors become part owners.
• The process of venture capital funding is lengthy and complicated thereby involving high risk element.
• The object and the profit return quotient of the investment is uncertain.
• Since funding is made for long time span and so the realization of profits commences at a quite later stage.
• Thought the benefits of venture capital funding are reaped at later stage , the returns that are generated are huge
• The entrepreneurs are in a safe zone as the ventures do not run on the obligation to repay the money invested as the investors are well versed with the uncertainty elements involved in the business.

Abhishek Jain at MUDS is of the view that “Venture capital funding is the funding provided to companies and entrepreneurs during the different phases of their evolution. Venture capital funding has evolved from root level and in today’s time plays an important role in spurring innovation.”

Structure of Venture Capital Fund

Venture capital funds are mainly structured as partnerships. The general partners of such partnership firm serve as the managers of the firm as well as they play the role of investment advisors for the venture capital fund.

The venture capital funds may also be structured as limited liability companies. In the case of limited liability companies the investors in the venture capital fund are known as limited partners.

The major contributories of the venture capital fund consist of high net worth individuals and institutions with large capital base such as state & Private Pension fund, foundations, insurance companies and pool investment vehicles.

Within the venture capital industry, the general partners and other investment professionals are of the venture capital firm are often referred to as venture capitalist (VCs). The Venture Capitalists are usually from operational or finance background.

The general partners run the venture capital firm and make the investment decisions on behalf of the fund. The venture partners are expected to source potential investment opportunities and are thereafter compensated for only those deals in which they are involved.

After the general partners and venture partners are Principals, Associates and Entrepreneurs in residence. These persons are experience holders in the domain of investment banking, management consultancy and due diligence.

Having gained an insight about the structure of the venture capital fund, leads head towards understanding the other facets related to these venture capital fund.

Life of Venture Capital Fund

Venture capital funds usually have a fixed life span of around 10 years, with the possibility of few years of extension to allow for private companies still seeking liquidity. The investment phase for most of the funds ranges between three to five years, after which the point of focus moves to management and follow on investments in existing portfolio.

In these funds, the investors have a fixed commitment to the fund that is initially unfunded and subsequently called own by the venture capital fund over a span of time once the fund commences to make investments. There are substantial penalties for limited partners or investors who fail to participate in capital call.

It may take around a month or numerous years for venture capitalists to raise money from limited partners for meeting the funding requirements. Once the required funds have been raised then the fund is closed and thereafter commences the 10 years lifetime. Some funds are partially closed when half or higher amount of the funds have been raised.

How Venture Capital Funds Operate?

Based on the maturity of the business for which the investment is done, venture capital investments can be seen as early stage capital, seed capital or expansion stage financing. However, the investment stage has no effect on how the venture capital funds operate.

To begin with, before making any investments venture capital funds have to raise funds. For meeting the funding requirement potential investors are given a prospectus of the fund after which they provide commitment to contribute to the funding process. Once commitments are received from the potential investors the fund’s operators connect with the shortlisted potential investors and thereby finalize the individual investment amount for the potential investors.

Once the investment amount are finalized then the private equity investment that have potential of generating positive returns for its investors are sorted out by the venture capital fund.

To sort out the potential investment the fund managers have to review numerous business plans to find out high growth companies. Thereafter the viable investment decisions are made by thee fund managers keeping into account the prospectus and expectations of shareholders.

In the scenario where a portfolio company exists then in such a case the investors of the venture capital fund make returns either in mergers & acquisitions or in an IPO. If the investment reaps profit then the venture capital fund keeps a certain percentage of profit

Types of Venture Capital Fund

Venture capital funds are classified on the basis of their utilization at different stages of a business. The three main types are early stage financing, expansion financing and acquisition/buyout financing.

Early Stage Financing

There are 3 further bifurcations in early stage financing. These are Seed financing, Startup financing and First stage financing.

Seed financing is a small sum of money provided to the entrepreneur to meet the initial startup loan requirement.
Startup financing is the funding round wherein company receives the funds to develop its products and services.

The last phase of early stage financing i.e. first stage financing is when company needs the capital to commence the business activities in full swing.

Expansion Financing

Expansion financing is classified into three streams. These are Second stage financing, Third stage financing and Bridge financing.

The second stage and third stage financing are given to companies with the intent that they may they may initiate their expansion phase.

Bridge financing is offered to companies during the course of Initial Public Offering (IPO).

Acquisition/Buyout Phase

Acquisition financing and leveraged buyout financing are the categories falling under acquisition/buyout financing.

Acquisition financing comes into picture during the course when a company requires fund to acquire another company or part of the company.

Leveraged buyout financing is required when group of companies seek to acquire any other company’s specific product.

Process for Venture Capital Funding

Venture capital funding is generally done by following the below mentioned steps. The funding steps are as follows:

1. Deal Origination

The primary step to attract venture capital funding is origination of deal. For making or seeking funding the investor needs to crack the deal with the appropriate party. For seeking funding one needs to enter into series of deals after which expected deal is closed. The deal may come from numerous sources depending upon the of the fund requirement.

2. Screening

This is the phase where after cracking the deal with the investor, the venture capitalist chalks out the viable projects in which making investment would be viable as well as profitable. The projects are shortlisted keeping into consideration several factors like market scope, technology, size of investment, geographical location, stage of financing, etc. During this phase the potential entrepreneurs are required to provide a brief profile of their respective venture or are invited for a face to face discussion.

3. Evaluation

Once the screening process is over thereafter the projects are evaluated via a detailed study. The evaluation process is a detailed and thorough process wherein the project capacity as well as the capacity of the entrepreneurs to meet up the claim is analyzed. The documents to be viewed during evaluation are: projected profile, track record of the investors, future turnover expectation, etc. After evaluation of the projects an extensive risk management is done after which deal negotiation is undertaken.

4. Deal Negotiation

Once the potential projects have been shortlisted by the venture capitalist then he enters the deal negotiation stage. Deal negotiation is a process wherein the terms and conditions are laid down keeping into account the mutual benefit. Some of the factors which are negotiated are : amount of investment, percentage of profit to be held by the parties, the rights of the venture capitalist and the entrepreneurs, etc.

5. Post Investment Activity

Once the deal gets finalized, the venture capitalist also becomes a part of the venture and thereafter up his part of the rights and duties. The venture capitalist participates in the enterprise via a representation in the board of directors and thereby ensures that the enterprise acts in accordance with the plan. However the capitalist do not take part in the day to day activities of the firm and have a role to play during the course of financial risks.

6. Exit Plan

The last step of venture capital funding is to lay out an exit plan based on the nature of investment, extent& type of investment stake etc. The exit plan is drafted with the aim to minimize losses and maximize profits.

Procedure for Registration of Venture Capital Fund

The registration of venture capital fund is regulated by SEBI (Venture Capital Fund) Regulations, 1996. On this note any company or trust proposing to carry on an activity as venture capitalist may make an application to SEBI for grant of certificate.

Eligibility Criteria

A company, trust and a body corporate can apply to SEBI for seeking certificate to carry on activity as venture capitalist. In light of this the eligibility criteria are as follows:

For Company

1. The Memorandum of Association (MOA) should reflect the activity of venture capital fund.
2. The company seeking certificate should be prohibited to make any invitation to public for subscribing its securities via its memorandum and articles of association
3. The directors and officers of the company should not be involved in any litigation having connection with securities market.
4. The company seeking registration should be a fit and proper person.

For Trust

1. The main object of the trust should be to carry the activity as venture capital fund.
2. The instrument of NGO registration should be in the form of deed and thereby duly registered under Indian Registration Act, 1908.
3. The directors of the trust should not be involved in any litigation connected with securities market or convicted of any offence involving moral turpitude.
4. The trust should be a fit and proper person.

For Body Corporate

1. The body corporate should be set up under the laws of the central or state legislature.
2. The applicant should be permitted to carry on the activity of venture capitalist
3. The directors of the body corporate should not be involved in any litigation connected with the securities market or convicted of any offense involving moral turpitude.
4. The applicant should not have been refused a certificate at any time by the board.
5. The applicant should be a fit and proper person.

How to Apply?

An application for grant of certificate of registration shall be made with the board in Form A which shall be accompanied with a non-refundable fee of Rs. 1 lakh.

The board may in the interest of the investors issue required directions for transfer of records, documents or securities of disposal of investments in relation to the venture capital activities.

On receipt of the intimation, the applicant shall pay to the board the registration fee of Rs. 10 lakhs. The board on receipt of the fee shall thereafter grant a certificate of registration in Form B.

Documents to be Filed

The documents to be filed for seeking a certificate of registration are as follows:

1. Information Memorandum
2. Copy of Placement Memorandum
3. Copy of Contribution or Subscription Agreement
4. Report of money actually collected from investors

The board before ordering an inspection shall not give less than 10 days’ notice to the venture capital fund. During the course of inspection, the venture capital fund shall be bound to discharge its obligations. The inspecting officer shall upon completion of inspection submit an investigation or inspection report to the board.

Fees

• Application Fee: Rs. 1, 00,000/-
• Registration Fee: Rs. 10, 00,000/-

Minimum Investment Criteria

1. A venture capital fund can raise funds from any investor whether Indian, foreign or non-resident Indians.
2. No venture capital fund be it company or trust shall accept any investment from any investor which is less than Rs. 5 lakhs.
3. The Scheme launched shall have a commitment from the investors for the contribution of an amount of atleast Rs. 5 Crore.

Investment Conditions

1. It shall disclose the investment strategy at the time of putting forth the application.
2. It shall not invest more than 25% Corpus of the fund in one venture capital undertaking.
3. It may invest in securities issued by the foreign companies subject to RBI norms specified in this behalf.
4. Shall not invest in associated companies.
5. It shall disclose the duration of life cycle of the fund.
6. No venture capital fund shall be entitled to get its units listed till the expiry of 3 years from the date of issuance of units by the venture capital fund.
7. It shall make investment in the following manner :

• Atleast 66.67% of investible funds shall be invested in unlisted equity shares.
• Not more than 33.33% of the investible funds may be invested by way of either of the following i.e. subscription to IPO of a venture capital fund whose shares are proposed to be listed; debt or debt instruments of a venture capital fund; Preferential allotment of equity shares of listed company provided that they have a lock in period of 1 year, Equity shares of a financially weak or sick company who are listed or Special purpose vehicle created by venture capital fund for the purpose of promoting investment.

Venture capital financing gained its roots in India in the year 1988 with the formation of the Technology Development
and Information Company of India Ltd. (TDICI) that was promoted by ICICI and UTI. The first venture capital fund was sponsored by Credit Capital Finance Corporation (CFC) and thereafter promoted by Bank of India, Asian Development Bank and Commonwealth Development Corporation i.e. Credit Capital Venture Fund.

At the same time Gujarat Venture Finance Ltd. and APIDC Venture Capital Fund Ltd. were started by state level financial institutions. The sources from which these funds gained momentum were financial institutions, foreign institutional investors or pension funds and high net worth individuals.

In India, the venture capital fund has played and is playing a vital role in the development and growth of innovative and budding entrepreneurs. At the onset the venture capital funding was done by only a few institutions to promote entities in private sector in their business.

At that time funds were primarily raised by public which did not prove out to be fruitful in the long run and in the interest of small entrepreneurs. Keeping into purview the need of the hour, the venture capital funds were recognized in the 7th five year plan and thereafter in the long term fiscal policies of the government of India.

The outstanding factor about venture capital funding is the cache of being associated with well-known firms, the guidance offered by veteran entrepreneurs and the most important of all the infusion of cash without the need of paying back the infused funds.

Hope this article was informative in providing detailed insight about venture capital funds.

The post Venture Capital Funds appeared first on MUDS.

Globalization has made the world shrink and easily accessible to everyone. None of the previous generations have had such opportunities, as we now have, to build a kind of economy that leaves no one behind. The field of trade and communication in our country is no different. It has led to a hike in the tide of offshore investments.

There has been an immense increment in the venture capital investments made by foreign countries in India. To encourage more of it, the government has also made favorable amendments in the rules to enhance effective trade relationships with foreign countries.

The foreign country investing in our country is referred to as Foreign Venture Capital Investors (FVCI). They invest in Indian Venture Capital Undertakings (VCU) and Venture Capital Funds under the regulation of the Foreign Exchange Management and the Securities Exchange Board of India (SEBI) regulations.

Foreign Venture Capital Investors

According to SEBI regulations, “Foreign Venture Capital Investors” can be as:

“An Investor of foreign incorporation or establishment registered under the FVCI regulations and investing in venture capital fund or venture capital undertakings in India.”

It is mandatory for a foreign investor to get itself registered with SEBI before it can invest in India.

Requirements for FVCI

There are three requirements that a foreign investor needs to satisfy before it can start making investments in the venture capital companies in India:

1. It should be incorporated or established in any country outside of India.
2. It should be registered with SEBI as a Foreign Venture Capital Investor.
3. It should work in accordance with SEBI regulations while making investments in VCFs or VCUs in India.
4. After registration with SEBI, further approval of RBI under FEMA regulations is required to make investments in India.

FVCI can be in the form of a company, a body corporate, or a trust.

Eligibility Criteria for FVCI Certificate from SEBI

For obtaining a certificate of recognition as FVCI from SEBI, a foreign investor has to satisfy certain eligibility criteria such as:

• The track record of the applicant
• The professional competence of the applicant
• Integrity and fairness of the applicant
• Its financial soundness
• Experience of market
• Necessary approvals from RBI, etc.

Once the SEBI is satisfied and assured that the applicant fulfills all conditions, it grants registration to the applicant as FVCI which allows him to make investments in the Indian market in accordance to the SEBI rules and regulations. However, SEBI can impose some terms and conditions upon the applicant which can limit its scope of investments in India.

Types of Investments by Foreign Investors

There are two types of investments that a foreign investor can engage in India:

Indian Venture Capital Undertaking (VCU)

VCU is a company incorporated in India but the shares are not listed on India’s recognized stock exchange. But the company should not be engaged in any activity specified under the negative list given by the SEBI. VCUs are generally a newborn private company that is still not established and needs funds, advice and support.

Venture Capital Fund (VCF)

VCF is a fund established as a trust or a company registered with the SEBI. It has a dedicated pool of capital and invests in accordance with the regulations.

A Foreign Venture Capital Investor that is registered with SEBI and has permission from RBI can make investments in both VCU or VCF. Investment can be made by purchasing equity, equity-linked instruments (instruments that are convertible into equity shares or share warrants like convertible preference shares or debentures), debt instruments or debentures.

Investment Limits

A Foreign Venture Capital Investor is permitted to make investments in the following manner:

• An FVCI can invest its 100% funds in a VCF registered under SEBI.
• It is mandatory for it to invest at least 66.67% of its funds in unlisted equity shares or equity-linked instruments of VCUs.

It can invest only 33.33% of the funds by:

• Subscribing to initial public offer of an adventure capital undertaking which has proposed listing for its shares.
• Investing in debt or debt instruments of VCU if it has already invested in the equity of such a VCU.
• Investment in equity shares of a listed company
• Investment in the equity of a financially weak listed company.
• Investment in special purpose vehicles.

In India, an FVCI has a fixed life cycle that has to be mandatorily be disclosed before making any investment. All the investment strategies are also needed to be disclosed prior to making any investments in India.

Obligations and Responsibilities of FVCI

The FVCI needs to follow some general obligations and responsibilities when investing in India. Some of them are:

• They need to maintain books of accounts, records, and documents for a period of eight years which gives a true and fair view of the state of affairs.
• The SEBI needs to be informed in writing about the place where the books, records, and documents will be maintained.
• The SEBI has the power to call for any information regarding any of its activities.
• The query of SEBI should be answered within the time specified by the board.
• The investor needs to enter into an agreement with a domestic custodian for the security of investments made by him.
• A non-resident rupee account or a foreign currency denominated accounts need to be opened in a bank approved by the RBI.

Top 3 Benefits for FVCI

FVCI enjoys some regulatory relaxations from SEBI and RBI if they register under the FVCI regulations (optional). Some of them are:

• Benefit #1: Exemption from the entry as well as the exit pricing norms.
• Benefit #2: Exemption from the lock-in period required when the company becomes public. In other words, FVCIs are allowed to exit the investment immediately after the investee company is listed.
• Benefit #3: Exemption from take-over code in respect of the shares sold by the FVCI to the promoters of the company after it has gone public. This code mandates acquirer to make an open offer on the acquisition of shares beyond prescribed threshold limits.

Procedure for Registration as FVCI

For registering with SEBI as an FVCI, the applicant needs to file an application through Form A and deposit the prescribed fees. In the form details of the sponsor should be filled along with its group, details of registration, website details, etc. Details of the custodian and the bank are also to be filled in. Copy of income tax return and the certificate of incorporation in the home country are to be submitted along with the form.

In addition, some supporting documents are also required:

• Contact details like name, address, email address, etc.
• Details of the directors
• Copy of the Articles of Association and Memorandum of Association
• Proof that any director is not restricted by SEBI
• Documents supporting registration with SEBI or any other regulatory body in India
• Declaration about work experience, educational qualifications, etc of the major players of FVCI
• Detailed investment plan
• Declaration on compliance with SEBI regulations 2000
• A Declaration to prove that you are a fit and proper person

Taxation on FVCI

According to the Income Tax Act, a non-resident assessee can choose to be taxed either under the Indian Income Tax Act or under the Double Taxation Avoidance Agreement(DTAA), whichever is more beneficial.

According to the Income Tax Act, even the non-residents are taxable for the income received or deemed to be received in India, accrued or deemed to be accrued in India or arisen in India. This includes income generated whether directly or indirectly in India from any business connection.

The taxability of FVCI is determined under Section 10 and Section 115U of the Income Tax Act. But both the sections have to be considered simultaneously. FVCI is given the status of a pass-through entity under the Act. The aim of these sections of the Act is to make companies’ taxes and venture capital funds exempt and to provide taxation of the income of the investors when distributed to them.

In simple words, the taxation scheme is to exempt the income while providing for taxation in the hands of the investors. The venture capital company or fund is not taxed on any income that is earned from these investments. But when this income is distributed, it becomes taxable in the hands of the investors.

But this status of “pass-through” for the purpose of the tax treatment of the income depends on the nature of the income. The income in the form of a dividend is tax-free in the hands of shareholders. But, it is subject to a dividend distribution tax of 16.99% that is payable by the company distributing the dividend. Else, a capital gain tax is charged when the shares of the investee companies are sold. Thus, there is no specific tax redemption for FVCI technically.

However, the benefits of DTAA can be availed by the FVCI. With the help of its favorable tax treaty, Mauritius has become the most popular country investing in India. The India-Mauritius DTAA exempts tax in India on the capital gains earned by a Mauritius resident. According to the treaty signed between both companies, when a Mauritius resident transfers an Indian capital asset, such gains are considered taxable only in Mauritius.

Mauritius does not impose any tax on capital gains, thus the taxpayer is in an overall beneficial position. Using treaties like these, many investors have chosen this route to make investments in India as the tax is only payable in their country of residence. According to the rule, if the taxpayer has legitimately reduced his tax liability by taking advantage of such a treaty, the benefit cannot be denied to him on the ground of revenue loss.

Advantages of Foreign Venture Capital Investments

FVCI is important in our country for the promotion of innovation and the conversion of scientific technology and knowledge into commercial production. The recent improvement that has been seen in the area of information technology itself speaks for the potential for growth in knowledge-based industries.

This potential is not limited to information technology but is also applicable to fields like biotechnology, pharmaceuticals, agriculture, drugs, food processing, services, telecommunication, etc.

India has inherent strength by the way of its technology, cost-competitive labor, skilled manpower, environment, and policy support. With funds, it can use these strengths to achieve greater heights in the world economy. Foreign investments can fill this gap between the capital requirements and the funds available from traditional lenders like banks.

Along with the finances, FVCI also brings smart advice, hands-on management support, and skills that help entrepreneurial visions that make up promising marketable products.

Sectors Allowed for Investments

Foreign Venture Capital Investors are allowed to invest in the following sectors:

• IT (Software and hardware)
• Biotechnology
• Nanotechnology
• Seed Research and Development
• Research in pharmaceuticals
• Dairy Industries
• Poultry Industries
• Production of Biofuel
• Hospitality
• Infrastructure

Exit Strategy

The exit strategy is the process through which a foreign venture capital investor gets out of an investment that has been made in the past.

An FVCI can acquire or sell its Indian shares, convertible debt, convertible debentures, convertible preference shares or any other investments at a price that is mutually acceptable to both parties.

This implies that there is no entry or exit price restriction applicable to the FVCI. This is a very important benefit for them when they intend to cash out of the investments.

Conclusion

Foreign Venture Capital Investment is a high-risk activity but the rewards are worth the risk. The investments made yield high returns. The investors do not involve themselves in everyday management and they are generally managed by professionals. The funds used for investments are for a limited life and returns are distributed among the investors.

The growth that India’s economy has seen in recent years and the scope it reflects for future growth have made it a harbor for world-class foreign investors. The change in government policies in favor of global investors, increasing urbanization and rising spending capacity of people in the country also invite foreign investments.

“The trading environment in India attracts the foreign venture capital investors and this will keep getting better in the times to come.”
– Shweta Gupta (CEO, Muds Management Pvt Ltd)

The post Foreign Venture Capital Investors in India – A Study Report by MUDS appeared first on MUDS.

Venture Capital Fund (VCF) is a form of fund established in the form of a trust or a company including a body corporate registered with SEBI that provides capital to early-stage or high-growth companies (start-ups). While VCF offers high level of risk associated with the investments, returns offered are also exponential in nature.

So how does Venture Capital Registration practically happens?

Shweta Gupta, a renowned company secretary who also serves MUDS Management Pvt. Ltd as its CEO will share her insight on the detailed process of Venture Capital Registration in a simplified manner below:-

Step #1: Check the Eligibility Criteria

Following are some points that helps in identifying the eligibility criteria. Unless the following stated conditions are met, Board may not grant the certificate to the applicant

• Check whether the company registration document permits to carry the activity of ‘Alternative Investment Fund’ or ‘Venture Capital Fund’

(a) MoA in case of a company
(b) Trust Deed in case of a Trust
(c) Partnership Deed in case of a LLP

• Check whether the following compliance are followed in each of the following company types:-

(a) Trust: Instrument of trust – Deed, has been duly registered under the provisions of the Registration Act 1908
(b) LLP: Partnership Deed – Duly filed with the Registrar under the Provisions of Limited Liability Partnership Act 2008 and Partnership duly incorporated.
(c) Body Corporate: Setup or established under the laws of the Central or State Legislature and is permitted to carry on the activities of VC Fund

• Check whether the following criteria are met by people behind it:-

1. Applicant or Sponsor or Manager

(a) Are fit and proper persons based on the criteria specified in Schedule II of SEBI Regulations 2008 or not ?
(b) Have necessary infrastructure and manpower to effectively discharge its activities or not ?
(c) Have clearly described at the time of registration the investment objective, the targeted investors, proposed corpus, investment style or strategy and proposed tenure of the fund or scheme
(d) Have earlier been refused registration by the Board (including other entities of the Sponsor or Manager)  or not?

Key Investment Team of the Manager of the Fund
(a) Have adequate experience with at least one key personnel have not less than five year experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualification

Step #2: Apply to SEBI

Apply to SEBI in Form A as provided in the SEBI (Alternative Investment Funds) Regulations, 2012 along with all the necessary documents. Pls note:-

• Attach a covering letter with the following checklist:-

(a) Current status of registration with SEBI as VCF. (If yes, provide details)
(b) History of undertaking activities of VC prior to this application (If yes, provide details)
(c) Whether applying for registration of a new fund or not ?

• Form A should be appropriately filled, numbered, duly signed and stamped
• Submit an application fees of Rs.1,00,000/- by way of bank draft in favour
• The applicant shall also make an online application in terms of the guidelines as prescribed by SEBI from time to time.

Divya Gupta who serves as a Market Analyst with MUDS Management Pvt Ltd shares her experience that- “Reply from SEBI is generally received within 21 days. Make sure requirements are complied without delay”

Step #3: Check Application Status

If applicant fulfils the requirements as specified in the Regulations, SEBI shall approve the application and inform the applicant – simple !

Step #4: Pay Registration Fee

On receipt of approval from SEBI, applicant must pay registration fee of Rs.5,00,000/- (If applicant is not registered with SEBI as a Venture Capital Fund) / Re-registration fees of Rs. 1,00,000/- (If applicant is registered with SEBI as a Venture Capital Fund) by way of bank draft in favour of “The Securities and Exchange Board of India”, payable at Mumbai.

Step #5: Collect Certificate of Registration from SEBI

On receipt of registration/ re-registration fees, SEBI will grant the applicant the certificate of registration as an ‘Alternative Investment Fund’.

Step #6: Follow Compliance Post the Registration

• Comply with SEBI’s reporting requirements from time to time
• Check SEBI website regularly for updation/circulars/guidelines issued with respect to AIF activity
• Intimate SEBI in any material change in the details already furnished to SEBI within a reasonable period of time

Divya Gupta from MUDS Management Pvt Ltd shares her experience- “At MUDS, we offer 360-degree services of VC Registration and have served top corporates. From my exhaustive experience in this industry I can confidently say- While the process is simple, it may become extremely complicated and time consuming if the company secretary hired is not competent and experienced. Make sure you choose the right partner !“

Want Free Consultation on Venture Capital Registration ?

Call VC Registration Consultant at MUDS at 9599653306 Now !

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Definition as per SEBI―Alternative  Investment  Fund, AIF Regulations 2012, means  any  fund  established  or  incorporated  in India in the form of a trust or a company or a limited  liability  partnership  or  a body corporate which, is a privately   pooled investment vehicle which collects funds from investors, whether  Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and (ii) is not covered under the  Securities and Exchange Board of  India (Mutual Funds)   Regulations,   1996,   Securities and Exchange Board of India (Collective   Investment   Schemes)   Regulations,   1999   or   any   other regulations of the Board to regulate fund management activities:

Provided that the following shall not be considered as Alternative  Investment Fund for the purpose of these regulations –

1. Family  trusts  set  up  for  the  benefit  of   relatives‘  as  defined  under Companies Act, 1956;
2. ESOP  Trusts  set  up  under  the  Securities  and  Exchange  Board  of  India (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999 or as permitted under Companies Act, 1956;
3. Employee  welfare  trusts  or  gratuity  trusts  set  up  for  the  benefit  of employees;
4. Holding  companies‘  within  the  meaning  of  Section  4  of  the  Companies Act, 1956;
5. Other special purpose vehicles not established by fund managers, including securitization trusts, regulated under a specific regulatory framework;
6. Funds  managed  by  securitization  company  or  reconstruction  company which is registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and
7. Any such pool of funds  which is directly regulated by  any other regulator in India;

Registration Compulsory after commencement of the Act:

Within the period of six months from the commencement of the Act all the existing fund failing within this definition required to get apply for the registration of the same. This period can be extended for the further period up to a maximum of twelve months from the date of commencement of the act provided that existing schemes will be allowed to complete their agreed tenure, such funds shall not raise any fresh monies other than commitments already made till registration is granted.

Exemption to the Investment firms:

1. Existing funds, which do not propose to accept any fresh commitments after commencement of these regulations shall not be required to obtain registration under these regulations subject to submission of information on their activities to the Board in the manner as may be specified.
2. If such existing funds are not able to comply with conditions specified, they may apply for exemption to the SEBI from strict compliance with these regulations and the SEBI upon examination may provide such exemptions or issue such instructions as may be deemed appropriate.
3. Venture Capital Fund (VC) registered with SEBI Act shall continue to be regulated by the said regulation till the existing fund wound up and not launch any new scheme after notification. The existing fund will not increase target corpus of the fund or Scheme. The VC may seek re-registration subject to the approval of 2/3 of the investor’s value of their investments. See how to register as a venture capital fund.

No entity or person will act as an Alternative Investment Fund unless it has obtained a certificate of registration from the Board, any person or entity fails to make application
for grant of a certificate within the period specified therein shall cease to carry on any activity as an Alternative Investment Fund.

CATEGORIES UNDER AIF

The person or entity can seek registration under following categories:

A. Category I Alternative Investment Fund, which invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified;

Explanation
─ For the purpose of this clause, Alternative Investment Funds which are generally perceived to have positive spillover effects on economy and for which the Board or Government of India or other regulators in India might consider providing incentives or concessions shall be included and such funds which are formed as trusts or companies shall be construed as ―venture capital company or ―venture capital fund as specified under sub-section (23FB) of Section 10 of the Income Tax Act, 1961

B. Category II Alternative Investment Fund‖ which does not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in these regulations

Explanation
─ For the purpose of this clause, Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator shall be included.

C. Category III Alternative Investment Fund‖ which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

Explanation
─ For the purpose of this clause, Alternative Investment Funds such as hedge funds or funds which trade with a view to make short-term returns or such other funds which are open-ended and for which no specific incentives or concessions are given by the government or any other Regulator shall be included.

How to get registered as an Alternative Investment Fund

1. The Applicant for grant of registration as an Alternative Investment Fund under SEBI (Alternative Investment Funds) Regulations, 2012 should make an application to SEBI in Form A as provided in the Regulations along with all the necessary documents.
2. Generally on receipt of Application, the applicant will receive a reply from SEBI within 21 working days. The time taken for registration however, depends on how fast the requirements are complied with by the applicant.
3. The applicant is advised to go through the SEBI (Alternative Investment Funds) Regulations, 2012 for checking the eligibility criteria and such other details which may help expedite the registration process.
4. The applicant must mention in the covering letter as to whether:
   1. It is registered with SEBI as a Venture Capital Fund. If yes, provide details.
   2. It has been undertaking the activities of an AIF prior to such application. If yes, provide details.
   3. It is applying for registration of a new fund.
5. As an integral part of the registration process, the applicant will submit the following
   1. Form An appropriately filled, numbered, duly signed and stamped.
   2. Application fees of Rs.1,00,000/- by way of bank draft in favour of “The Securities and Exchange Board of India”, payable at Mumbai.
6. The applicant shall also make an online application in terms of the guidelines as prescribed by SEBI from time to time.

Grant of Certificate of Registration

1. SEBI shall take into account requirements as specified in the Regulations for the purpose of considering grant of registration. If satisfied that the applicant fulfills the requirements as specified in the Regulations, SEBI shall approve the application and inform the applicant of the same.
2. On receipt of approval from SEBI, the applicant must pay registration fee of Rs.5,00,000/- (If applicant is not registered with SEBI as a Venture Capital Fund) / Re- registration fees (If applicant is registered with SEBI as a Venture Capital Fund) of Rs. 1,00,000/- to SEBI by way of bank draft in favour of “The Securities and Exchange Board of India”, payable at Mumbai.
3. On receipt of registration/ re-registration fees, SEBI will grant the applicant the certificate of registration as an Alternative Investment Fund.

Post- Registration compliance

1. Once registered, the AIF must comply with the reporting requirements as specified by SEBI from time to time.
2. The AIF must regularly check the SEBI website for any updation/ circulars/ guidelines issued from SEBI from time to time with respect to the AIF activity.
3. The AIF must intimate to SEBI any material change in the details already furnished to SEBI within a reasonable period of time.

Post- Registration compliance

1. “The applicant” means the entity seeking registration as an Alternative Investment Fund
2. Application which is incomplete or without the necessary documents/ information/declarations would not be accepted and would be treated as not filed. However, intimation to this effect will be provided to the applicant within a reasonable period of time.
3. Applications involving policy decisions or other considerations might get delayed in processing and in getting registration approvals.Venture capital fund registration gives your aspirations & ideas wings to make your venture work. Venture Capital is a kind of private equity capital offered by outside investors to new businesses. Thus, to foster this process, Muds Management is there to assist you through the in’s & out’s of venture capital fund registration. Contact us for more details
4. Documents/annexure submitted along with the application need to be numbered and duly signed.
5. In case of an Authorized signatory, please submit an authorization letter from the Directors/Trustees/Designated Partners of the Fund.
6. The application in Form A, application fees along with all the necessary information as enumerated above will be addressed to

The Deputy General Manager,

Division of Funds-1,

Investment Management Department, Securities and Exchange Board of India (SEBI), SEBI Bhavan,

Plot No. C4-A, “G’ Block,

Bandra Kurla Complex, Bandra (East), Mumbai – 400051

RECENT AMENDMENT IN THE AIF FUND:

Securities Exchange Board of India (“SEBI”) in its Board Meeting on 23rd November 2016 has approved the following amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 with respect to ‘Angel Funds’. Broadly the proposed amendments are as follows:

1. The upper limit for number of angel investors in a scheme is increased from 49 to 200.
2. The definition of start-up for Angel Funds investments will be similar to the DIPP definition as given in the DIPP start-up policy. Accordingly, Angel Funds will be allowed to invest in start-ups incorporated within five years.
3. The requirements of minimum investment amount by an Angel Fund in any venture capital undertaking is reduced from 50 lakhs to 25 lakhs.
4. The lock-in requirements of investment made by Angel Funds in the venture capital undertaking is reduced from 3 years to 1 year.
5. Angel Funds are allowed to invest in overseas venture capital undertakings upto 25% of their investible corpus in line with other AIFs.

The above proposed amendments will come into effect upon necessary amendments in the SEBI (Alternative Investment Funds) Regulations, 2012.

It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.

Shweta Gupta from MUDS Management is recognized among the most-respected, knowledgeable and yes, pocket-friendly as well.

Why not give a call right now at +919599653306  and start a conversation immediately.

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