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               Securities and Exchange Board of India

II.Critical factors for success of venture capital industry:

While making the recommendations the Committee felt that the following factors are critical for the success of the VC industry in India:

(A)The regulatory, tax and legal environment should play an enabling role.  Internationally, venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability.

(B) Resource raising, investment, management and exit should be as simple and  flexible as needed and driven by global trends  

(C) Venture capital should become an institutionalized industry that protects investors and investee firms, operating in an environment suitable for raising the large amounts of risk capital needed and for spurring innovation through startup firms in a wide range of high growth areas.

(D) In view of increasing global  integration and mobility of capital it is important that Indian venture capital funds as well as venture finance enterprises are able to have global exposure and investment opportunities.

(E)  Infrastructure in the form of incubators and R&D need to be promoted using Government support and private management as has successfully been done by countries such as the US, Israel and Taiwan. This is necessary for faster conversion of R & D and technological innovation into commercial products.

Recommendations:

1.

Multiplicity of regulations – need for harmonisation and nodal Regulator:

Presently there are three set of  Regulations dealing with venture capital activity i.e. SEBI (Venture Capital Regulations) 1996, Guidelines for Overseas Venture Capital Investments issued by Department of Economic Affairs in the MOF in the year 1995 and CBDT Guidelines for Venture Capital Companies in 1995 which was modified in 1999. The need is to consolidate and substitute all these with one single regulation of SEBI to provide for uniformity, hassle free single window clearance. There is already a pattern available in this regard; the mutual funds have only one set of regulations and once a mutual fund is registered with SEBI, the tax exemption by CBDT and inflow of funds from abroad is available automatically.  Similarly, in the case of FIIs, tax benefits and foreign inflows/outflows are automatically available once these entities are registered with SEBI. Therefore, SEBI should be the nodal regulator for VCFs to provide uniform, hassle free, single window regulatory framework. On the pattern of FIIs, Foreign Ventue Capital Investors (FVCIs) also need to  be registered with SEBI.

2. Tax pass through for Venture Capital Funds:

Report of K B Chandrasekhar Committee on Venture Capital2

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