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               Securities and Exchange Board of India

sectoral restrictions under the Income Tax Guidelines which provide that a VCF can make investment only in companies engaged in the business of software, information technology, production of basic drugs in pharmaceutical sector, bio-technology, agriculture and allied sector and such other sectors as notified by the Central Government in India and for production or manufacture of articles or substance for which patent has been granted by National Research Laboratory or any other scientific research institution approved by the Department of Science and Technology, if the VCF intends to claim Income Tax exemption.  Infact, erstwhile Section 10(23F) of Income Tax Act was much wider in its scope and permitted VCFs to invest in VCUs engaged in various manufacture and production activities also. It was only after SEBI recommended to CBDT that atleast in certain sectors as specified in SEBI’s recommendations, the need for dual registration / approval of VCF should be dispensed with, CBDT instead of dispensing with the dual requirement, restricted investment to these sectors only. This has further curtailed the investment flexibility.

4.4The Income Tax Act provides tax exemptions to the VCFs under Section 10(23FA) subject to compliance with Income Tax Rules. The Income Tax Rules inter alia provide that to avail the exemption under Section 10(23FA), VCFs need to make an application to the Director of Income Tax (Exemptions) for approval. One of the conditions of approval is that the fund should be registered with SEBI. Rule 2D also lays down conditions for investments and section 10(23FA) lays down sectors in which VCF can make investment in order to avail tax exemptions. Once a VCF is registered with SEBI, there should be no separate requirement of approval under the Income Tax Act for availing tax exemptions. This is already in practice in the case of mutual funds.

4.5The concurrent prevalence of multiple sets of guidelines / requirements of different organisations has created inconsistencies and also the negative perception about the regulatory environment in India. Since SEBI is responsible for overall regulation and registration of venture capital funds, the need is to harmonise and consolidate  within the framework  of SEBI Regulation to provide for uniform, hassle free, one window clearance. A functional and successful pattern is already available in this regard in the case of mutual funds which are regulated through one set of regulations under SEBI Mutual Fund Regulations. Once a mutual fund is registered with SEBI, it automatically enjoys  tax exemption entitlement. Similarly, in the case of FIIs tax benefits and foreign inflow/ outflow are automatically available once these entities are registered with SEBI.

4.6It is therefore necessary that there is a single regulatory framework under SEBI Act for registration and regulation of VCFs in India. It may be mentioned that Government of India Guidelines were framed on September 20, 1995 and SEBI regulations were framed in 1996 pursuant to the amendment in the SEBI Act in

Report of K B Chandrasekhar Committee on Venture Capital19

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