Venture Capital plays a vital role in the development and growth of innovative entrepreneurship in India. In the past, Venture Capital Funding was provided by financial institutions. These financial institutions supported private sector companies using debt as a funding mechanism. The call for venture capital was recognized in the 7th Five-Year Plan and the long-term fiscal policy of the Government of India. Venture capital finance originated in India in 1988 with the establishment of the Technology Development and Information Company of India Ltd. (TDICI), which was funded by ICICI and UTI. The first private venture capital fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India, Asian Development Bank and Commonwealth Development Corporation, namely the Credit Capital Venture Fund.
Regulatory framework of Venture Capital in India
Venture Capital in India is governed by the SEBI Act of 1992 and the SEBI (Venture Capital Fund) Regulations of 1996. Under this regulation, any company or trust that offers to operate a fund Venture capital must obtain a license for a certificate from SEBI However, registration of Foreign Venture Capital Investors (FVCI) is not required under FVCI regulations. Venture Capital Funds and Foreign Venture Capital Investors are also covered by the Securities Contracts (Regulation) Act, 1956, SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997, SEBI (Disclosure of Investor Protection) Guidelines, 2000.
The current scenario
Under various laws, the Securities and Exchange Board of India (SEBI) regulates domestic as well as offshore funds. Domestic venture capital funds are subject to the SEBI (Alternative Investment Funds) Regulations, while offshore venture capital funds are subject to the SEBI (FVCI) Regulations of 2000.
Venture capital fund eligibility and investment criteria
The main objective of the memorandum of association or trust deed for venture capital funds must be to carry on the business of the venture capital fund, which includes prohibiting the memorandum of association and articles of association from making an invitation to the public to subscribe to its securities.
Furthermore, a Director, Principal Officer, Employee, or Trustee must not be involved in any securities-related litigation and must not have been convicted of any crime involving moral turpitude or economic crime at any time. Also, in the event of a body corporate, it must have been formed under federal or state laws, and the applicant must not have been denied a certificate by SEBI (Rule-4, SEBI (Venture Capital Funds) Regulations 1996)
By issuing units, a venture capital fund can attract investment from any investor (Indian, foreign, or non-resident Indian), and no venture capital fund will accept an investment of less than five lakhs. Only the VCF’s staff, principal officers, directors, and trustees, as well as the fund manager and asset management company (AMC) personnel, are exempt. VCF must also have a clear commitment of at least five crores from investors before it can begin performing its functions. Before registering a fund, it must disclose its investment plan to SEBI, make no investments in connected companies, and keep track of the fund’s life cycle. It will not invest more than 25% of its capital in a single venture capital undertaking. A minimum of 66.67 percent of the investible funds must be used in venture capital undertaking unlisted equity shares or equity linked securities.
Tax Matters related to Venture Capital Funds
Indian Venture Capital Funds are eligible to collect capital reclaim tax under Section 10 (23FB) of the Income Tax Act 1961. Funds for investing in venture capital are exempt from tax. It will also be extended to domestic VCFs and VCCs that attract foreign venture capital investment as long as these VCFs / VCCs comply with the relevant guidelines for domestic VCFs / VCCs. If the Venture Capital Fund were willing to waive the tax exemptions under Section 10 (23F) of the Income Tax Act, it would be eligible to invest in any sector.
The Indian legal system and industrial jurisprudence have evolved venture capital finance as a “sanjivni” for business ideas. The positioning of the legal framework is to facilitate more and more calls for new and dynamic ideas. In addition, tax burdens have also been reduced to invite the participation of young people in national progress. In the near future, venture capital would be the main funding opportunity for the next entrepreneurial fraternity.