Securities and Exchange Board of India
4.1At present, the Venture Capital activity in India comes under the purview of different sets of regulations namely :
The SEBI (Venture Capital Funds) Regulation, 1996[Regulations] lays down the overall regulatory framework for registration and operations of venture capital funds in India.
Overseas venture capital investments are subject to the Government of India Guidelines for Overseas Venture Capital Investment in India dated September 20, 1995.
For tax exemptions purposes venture capital funds also needs to comply with the Income Tax Rules made under Section 10(23FA) of the Income Tax Act.
4.2In addition to the above, offshore funds also require FIPB/RBI approval for investment in domestic funds as well as in Venture Capital Undertakings(VCU). Domestic funds with offshore contributions also require RBI approval for the pricing of securities to be purchased in VCU likewise, at the time of disinvestment, RBI approval is required for the pricing of the securities.
4.3The multiple set of Guidelines and other requirements have created inconsistencies and detract from the overall objectives of development of Venture Capital industry in India. All the three set of regulations prescribe different investment criteria for VCFs as under :
SEBI regulations permit investment by venture capital funds in equity or equity related instruments of unlisted companies and also in financially weak and sick industries whose shares are listed or unlisted. The Government of India Guidelines and the Income Tax Rules restrict the investment by venture capital funds only in the equity of unlisted companies.
SEBI Regulations provide that atleast 80% of the funds should be invested in venture capital companies and no other limits are prescribed. The Income Tax Rule until now provided that VCF shall invest only upto 40% of the paid-up capital of VCU and also not beyond 20% of the corpus of the VCF. The Government of India guidelines also prescribe similar restriction. Now the Income Tax Rules have been amended and provides that VCF shall invest only upto 25% of the corpus of the venture capital fund in a single company.
SEBI Regulations do not provide for any sectoral restrictions for investment except investment in companies engaged in financial services. The Government of India Guidelines also do not provide for any sectoral restriction, however, there are
Report of K B Chandrasekhar Committee on Venture Capital18