There has been an increase in the trend of offshore investments in the present day global system of trade and communication. To increase efficient trade and commerce relationship, many countries are now engaged in trade and business investments in other countries with the aim of improving own’s economy. Following the amendments made to the rules governing foreign venture capital investments in India, there has been a hike in the volume of investments from this sector.
The recent economic growth in India has attracted foreign capital investments in large amounts. Foreign Capital Venture Investor (FVCI) is not only routed through the stock markets but is linked directly with companies.
The amended rules have generated an effective trade relationship between other foreign countries and India.
Foreign Exchange Management regulations and Securities Exchange Board of India (SEBI) regulations serve as a guide for foreign investors with interest in Indian Venture Capital Undertakings (VCU) and Venture Capital Funds (VCF).
The country that invests in the VCU in India is referred to as the Foreign Venture Capital Investor (FVCI).
WHAT IS THE MEANING OF FOREIGN VENTURE CAPITAL INVESTOR (FVCI)?
The term FVCI refers to an investor established outside the country of India with interest in making investments in Venture Capital Funds or Venture Capital Undertakings in India and has been registered based on the regulations of the FVCI.
The SEBI must register any foreign investor before he proceeds to invest in the country in accordance with the SEBI 2000 regulations on FVCI.
As cited in the above definition, we will provide more information on Venture Capital Undertakings and Venture Capital Fund in India.
VENTURE CAPITAL UNDERTAKING: This refers to a company established in India with shares not listed on any authorized stock exchange; and is not liable to participate in activities specified under the SEBI negative list.
VENTURE CAPITAL FUND: This means funds incorporated in the form of company or trust and includes a corporate body which has been registered under the SEBI Venture Capital Fund Regulations of 1996. It must have a capital which is raised after the SEBI regulations guidelines. The two ways a foreign venture capitalist can invest directly in India are through Foreign Direct Investment (FDI) and Venture Capital (VC).
ELIGIBILITY CRITERIA FOR REGISTRATION OF FOREIGN VENTURE CAPITAL INVESTOR
To be eligible to register for Foreign Venture Capital Investor in India, the applicant shall have soundtrack record, financial soundness, reputation, experience, professional competence, and integrity.
The investing entity or applicant must be granted the required approval by the Reserve Bank of India (RBI) and must be established or incorporated outside the shores of India as a company, trust, investment partnership, endowment fund, charitable organization etc.
As an applicant for FVCI registration, you must be an asset management company, investment management company or an investment manager but is established outside India.
Being an income taxpayer is a prerequisite for registration and must be regulated by a recognized international regulatory agency.
In a situation that the applicant is not an entity with an oversight nor is a taxpayer, it is demanded that he submit a certificate from his bank or from his promoters.
The applicant should receive the authorization to invest in venture capital fund before being permitted to register and must not be a person or entity who has been rejected by the board.
SECTORS ALLOWED FOR INVESTMENTS IN FVCI
A Foreign Venture Capital Investor that has been duly registered under SEBI may purchase securities that are rolled out by start-ups or units of Venture Capital Fund (VCF).
Another sector allowed for FVCI investment is the purchase of securities that is issued by companies that is registered with a recognized stock exchange and is engaged in IT (software and hardware), Biotechnology, Nanotechnology, Seed research and development, research in pharmaceuticals, dairy industry, poultry industry, production of bio-fuel, hospitality and infrastructure.
ADVANTAGES OF VENTURE CAPITAL INVESTMENT
Besides Foreign Direct Investment, a Venture Capital Investment has two advantages. These are:
- Being exempted from the pricing guidelines of RBI and
- Exemption from Lock-in when the Capital does not equate with a promoter.
PROCEDURE FOR APPLICATION FOR REGISTRATION
- The applicant is to file an application in Form A with the prescribed application fees.
- Details of the sponsor should be specified along with the group it belongs, details of registration, website information etc in Form A.
- Details of custodian and bank.
- Copies of the certificate of registration and copy of income tax return filed in the home country.
In addition to the files listed above; other supporting documents include:
- Contact details with name, address, and email ID
- Names and address of the directors.
- Documents of a memorandum of association
- Organogram of the applicant
- Proof that the any of the directors or applicant had not been refused registration by SEBI.
- Documents supporting applicant’s registration with SEBI or another regulatory agency in India.
- Information about the major players of the FVCI which includes work experience, educational qualifications and much more.
- Detail information on the investment plan.
- Declaration on compliance with SEBI 2000 regulations on FVCI
- Declaration on “fit and proper person”
ISSUANCE OF CERTIFICATE OF REGISTRATION
On meeting the necessary requirements in the manner prescribed by the SEBI Regulations on FVCI 2000, a certificate of registration in Form B as a Foreign Venture Capital investor will be issued by SEBI to the foreign investor after the payment of a fee as contained in the second schedule regulation.
CONDITIONS FOR REFUSAL TO GRANT THE CERTIFICATE
On considering the application and the board discovers that the certificate should not be granted, such application will be rejected after a hearing must have been granted to the applicant.
In this case, the notice of rejection shall be issued to the applicant by the board and such applicant shall not proceed with further registration processes for Foreign Venture Capital Investment.
CONDITIONS TO COMPLY ON RECEIPT OF THE CERTIFICATE
After successfully obtaining the certificate of registration of FVCI; these are the rules to observe:
- adherence to the regulations of this Act
- inauguration of a local custodian to take charge of securities
- Shall sign an MOU with a designated bank to operate both local and foreign currency accounts.
- Shall notify the board of any discrepancy in the information previously submitted.
MORE INFORMATION ON VENTURE CAPITAL
Venture Capital (VC) is a major source of funding for start-up investments and research-driven projects. Venture Capital is a form of funding that is different from the traditional methods of financing which come with potentials for increased growth but with an unpredictable future.
Venture Capital funds can be described as professional finance managers who donate money for high-risk investments. It is a fact that venture capital is an investment with high risk and high returns; however, it is provided by an outside investor to fund a new or unstable business.
Although the investor is aware of the huge risk that is involved with the investment, he still goes ahead to provide the funding. The fund is provided in exchange for an equity share in the business rather than issued as a loan with the hope of getting a significant profit in return.
This has been a source of capital to companies and businesses with limited funding and access to markets. In many instances, a venture capital firm sights emerging businesses and companies with prospects of yielding expected payouts to investors.
Thus, venture capitalist exists mostly in the form of limited partnership with resources pooled from the partners to invest in some companies. Venture Capitalist vary in size, they can be a small group of risk takers or a subsidiary of a large commercial or investment bank or outside investors.
The aim of Venture Capitalist is to use the experience and knowledge it has in business investments to provide resources in form of funds and human resources for the growth of companies with potentials of yielding good profits on their investments.
REASONS IT IS IMPORTANT TO HAVE FVCI
The government of India is determined to promote knowledge-based ideas that can improve commercial production, innovation, conversion of scientific technology and entrepreneurship through Foreign Venture Capital Investors.
The technological sector has witnessed huge success which is an indicator that there is enough opportunity for growth and investment. The sectors that can be invested in include biotechnology, food processing, agriculture, telecommunication, pharmaceuticals and drugs, services and much more; each of which with the potential of yielding valuable returns to the investors and to the Indian economy.
With the sustenance of this policy, India can achieve huge economic growths much quicker than anticipated.
A thriving capital industry will reduce the dependency of emerging businesses on traditional lending institutions for funds and technological support. In many instances, these businesses could not meet the requirements of these financial institutions for funding assistance to be offered because they have limited assets which may not attract these funding bodies.
The tech giants today like Yahoo, Apple, Hotmail and Exodus to mention but a few; during their days of humble beginnings unsuccessful in their attempts to get funding from the banks because their technology was either from the universities or government research institutions and was not based on a physical asset.
Independently managed capital ventures are quick to offer financial assistance to such a start-up business as indicated in the success stories of the tech giants of the world today. In addition to the finance is good management, advice, and skills that enhanced the visions of the emerging tigers to become the best in a competitive market.
LIST OF TOP CAPITAL VENTURE FIRMS IN INDIA
- Helion Venture Partners
- Accel Partners
- Blume Ventures
- Sequoia Capital India
- Nexus Venture Partners
- Inventus Capital Partners
- IDG Ventures
- Fidelity Growth Partners
- Steadview Capital
The growth of the Indian economy and its potential to increase onward in growth has made it a destination for world-class investors. Many factors like favorable government policies, human capital, increasing urbanization, openness to trade and rising consumer spending have made India one of the best places in the world for investors.
The government has increasing introduced reforms that will attract global investors into the country. Almost all the sectors in India is open for Foreign Venture Capital Investors apart from a few areas in the prohibited list.
The environment of India is conducive for Foreign Venture Capital Investors and will keep getting better in future.