|
Introduction:
Venture capital is a type of
private equity capital typically provided
by outside investors to new businesses. Generally made as cash in
exchange for shares in the investee company, venture capital
investments
are usually high risk, but offer the potential for above-average
returns. A venture capitalist is a person who makes such
investments. A
venture capital fund is a pooled investment scheme that primarily
invests the financial capital of third-party investors in
enterprises
that are too risky for the standard capital markets or bank loans.
Venture capital can also include managerial and technical
expertise.
Most venture capital comes from a group of wealthy investors,
investment
banks and other financial institutions that pool such investments
or
partnerships. This form of raising capital is popular among new
companies, or ventures, with limited operating history, who cannot
raise
funds through a debt issue. The drawback of this form of
entrepreneurship is that the investors get a say in the management
of
the company apart from the equity holding.
Laws relating to venture capital funds in India
SEBI (Venture capital funds) Regulations 1996.
The venture capital fund regulations by the Securities and
Exchange
Board of India are a comprehensive set of laws to be followed by
the
venture capital funds in India. From the registration of venture
capital
funds to the action to be taken in case of default, the regulation
has
been divided in VI chapters.
Registration Of Venture Capital Funds
A Venture capital fund can either be a fund established as a trust
under
the Indian trust act or a company as defined under companies act
1956.
The regulations provided for the registration of a
company or a trust which either was functioning as a venture
capital
fund before the commencement of this act or proposed to do so
after the
commencement of this act.
A company or trust (which functioned as a venture capital fund
before
the commencement of these regulations) shall cease to function as
a
venture capital fund if it does not apply to SEBI for registration
within 3 months from the commencement of the regulations.
Procedure to be followed for registration:
i) An application for grant of certificate to be made to SEBI in
Form A
along with a fee of Rs 25,000.The fee shall be paid through a
draft.
ii) There are certain conditions which must be fulfilled before
the
certificate of registration is granted by SEBI:
a) In case of a company, the MOA of the company shall have the
business
of venture capital fund as its main object, and invitation to
public
shall be expressly barred by the MOA and AOA, in addition to this,
any
officer of the company shall be involved in any litigation
connected to
the security market or should not have been convicted of an
economic
offence.
b) In case of a trust, the trust is in form of a deed and has been
duly
registered under the Indian registration act. Carrying the
business of
venture capital fund is its primary objective. Any trustee of the
trust
is not involved in a litigation connected to security market and
has not
been convicted of any economic offence.
c) In case of a body corporate, it should be formed under the laws
of
central or state legislature and it is permitted to venture in the
field
of venture capital funds.
iii) The application for registration shall be complete in all
respect.
If SEBI discovers any thing in the application that renders it
incomplete, it shall give the applicant a time of thirty days to
remove
the loophole, failing which the application can be rejected by the
board.
iv) SEBI after finding the applicant to be eligible, shall inform
the
applicant about it, after receiving the information the applicant
shall
tender to SEBI the registration fee which is Rs 5 lacs, after
receiving
which SEBI shall issue the Certificate of registration.
Conditions And Restrictions On Investments
The regulation has applied a lot of condition and
restriction to the amount of investment to be made in and by the
venture
capital fund in India.
An investment in the venture capital fund can be made by any
person
whether Indian, Foreigner or NRI, but no investment which is less
than
Rs five lacs can be allowed in the venture capital fund. this
however
does not apply to investment made by the employees, directors or
the
principal officers of the company or by the trustee where the
venture
capital fund is a trust.
The investment strategy at the time of registration
shall be disclosed by the venture capital fund. The venture
capital fund
shall also disclose the duration of its life cycle. Not more than
25% of
the fund shall be invested in a single venture capital
undertaking .Investment to be made in the following manner:
i) At least 66.67% of the fund to be invested shall be invested in
unlisted equity shares or other instruments linked to equity
shares of
the venture capital undertaking.
ii) Not more than 33.33% of the investible fund shall be invested
by the
way of IPO of a venture capital undertaking whose shares are
proposed to
be listed, the debt instrument of the venture capital undertaking
in
which the venture capital fund has already invested , preferential
allotment of equity shares of a listed company, equity shares or
equity
linked instrument of a financially weak company and SPV's which
have
been created by the venture capital fund..
No venture capital fund shall get its units listed on any
recognized
stock exchange till the expiry of thee years from the date when
they
were issued to the investors by the venture capital fund. The
venture
capital funds shall also not invite any member of the public by
way of
advertisement to subscribe to its units. The venture capital fund
may
receive investments only through private placements of its units.
Placement Memorandum or Subscription Agreement
Every venture capital fund shall issue a placement memorandum
which
contains all the terms and conditions relating to the scheme
through
which money is proposed to be raised from the investors. The
venture
capital fund may also enter into a subscription agreement with the
investors which would specify the terms and conditions of the
scheme
through which money is proposed to be raised. The venture capital
fund
shall submit a copy of such placement memorandum or subscription
agreement with SEBI along with the report of the money actually
raised
through such agreement or memorandum.
The placement memorandum or the subscription agreement shall have
the following essential:
It shall contain the details of the trustee and the trust as well
as the details of the directors and the principal officers of the
venture capital fund. It shall also stae the minimum amount of
money to be raised to start the venture capital fund and the
minimum share to be invested in every scheme of the venture
capital funds. Tax implications which would be applied to the
investors shall also be stated. The manner of subscription to the
units of the fund, the period of maturity of the fund if any and
the manner in which the fund would be wound up shall also be
stated.
Every venture capital fund
shall maintain a book of record for a period of eight years which
would generate the true picture of the venture capital fund. SEBI
at any time can call for information regarding the working of the
venture capital fund, the information shall be submitted to SEBI
in the specified time period.
Investigation
SEBI on receiving a complaint from the investors or suo motu
appoint one or more person as investigating officer, who would
undertake investigation in relation to the maintenance of the
account books of the venture capital fund, compliance of the
regulation and the affairs of venture capital funds. A notice of
at least ten days shall be given before the investigation is
carried on though if SEBI deems it to be in interest of the
investors it may not serve a notice at all. It shall be the duty
of every officer of the venture capital fund to cooperate with the
investigation officers, they shall be provided with all the
documents, books etc which are in the custody of the officers of
the venture capital fund. The investigation officer shall also be
furnished with any statement he demands for. After the completion
of investigation the investigation officer shall submit his report
to SEBI. The board after considering the investigation and giving
the venture capital fund to be heard may direct the venture
capital fund not to launch new schemes or prohibiting the
concerned person from disposing off the property of the venture
capital fund or to refund to any investor any amount of money or
asset.
Action In Case Of Default
Any venture capital fund that fails to act in accordance with the
regulations, or fails to furnish reports of the affairs of the
venture capital fund to SEBI or furnishes report that is not true,
does not cooperate in any enquiry instituted by SEBI or fails to
act on the complaints made by the investors or does not give a
satisfactory reply in this regard to SEBI, shall be dealt with in
manner provided in SEBI (procedures for holding enquiry by enquiry
officers and imposing penalty) regulations, 2002
|
Venture Capital Fund
More
Articles:
The
author can be reached at: abnv_singh@legalserviceindia.com /
