Venture Capital Investment in India

What is Venture Capital?
Venture capital (VC) is a fund invested or available for investment in funding invested, in enterprises that are too risky for the standard capital markets or bank loans. The investment contains within itself the probability of both profit and loss. Though the investment involves risk, but the venture capitalist don’t like to use this term as they don’t want to see both term that is risk and capital together. Managerial and technical expertise can also be included in venture capital. The major source of venture capital is wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This capital is important for new companies who want s to innovate and make break through in technology for production but has no capital.

Indian Scenario
The policy regarding Venture capital fund is regulated and controlled by RBI in India in regard to foreign exchange management act. Venture capitalist is required to be registered with SEBI (securities exchange board of India). The registered venture capital fund investor can invest into Venture Capital Fund or Indian venture capital undertakings, with the general permission of the RBI and according to the rules and regulations as specified by RBI notifications from time to time.

Government Policies and Regulations
Realizing the importance of venture capital investment, as an important source of finance for Indian industry, particularly for the smaller unlisted companies, the Government has announced a policy governing the establishment of domestic Venture Capital Funds/Companies. To streamline and simplify the procedure, government has also affected an amendment in the SEBI Act which empowers the SEBI (Securities and Exchange Board of India) to register and regulate Venture Capital Funds (VCFs) and Venture Capital Companies (VCCs) through specific regulations.

Major guidelines for Venture capital fund are as follows:

• Foreign companies can invest in domestic entire Capital Funds/Companies set up under the new policy after obtaining FIPB approval for the investment. The foreign companies can invest 100% of the capital of domestic venture capital fund, and is also allowed to establish domestic asset Management Company to manage the Fund.
• Foreign investment for establishing an asset management company would require FIPB approval and would be subject to the existing norms for foreign investment in non-bank financial services companies
• Once the company has obtained FIPB approval it does not require taking FIPB approval again if it is making subsequent investment in Indian companies. Such investments will be limited only by the general restriction applicable to venture capital companies viz.-
  
  1> For all such investments, a minimum lock-in period of three years will apply.
  2> VCFs and VCCs are allowed to invest only in unlisted companies and their investment shall not exceed the limit of 40% of the paid up capital of the company. The ceiling will be subject to relevant equity investment limits that may be in force from time to time in relation to areas reserved for the Small Scale Sector. Investment in any single company by a VCF/VCC shall not exceed 20% of the paid-up corpus of the domestic VCF/VCC.
  
• The tax exemption provided to domestic VCFs and VCCs under Section 10(23F) of the Income Tax Act, 1961, will also be applicable to those domestic VCFs and VCCs that attract overseas venture capital investments. However these VCFs/VCCs must conform to the guidelines applicable for domestic VCFs/VCCs. If VCF/VCC does not want to avail the tax exemptions benefit available under Section 10(23F) of the Income Tax Act, it would be within its rights to invest in any sector.
• Income generated by the foreign investors from Indian VCFs/VCCs will be subject to tax as per the normal rates applicable to foreign investors.
• Offshore investors can by pass the route of VCF/VCC and can invest directly in the equity of unlisted Indian companies. In this case every investment would be considered as a separate act of foreign investment that will require separate approval as required under the general policy for foreign investment proposals.