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               Securities and Exchange Board of India


7.1Allowing Flexible Structure

7.1.1The venture capital fund is a high risk and reward activity. The investments are made by high networth individuals and institutions to reap high returns. The investor in venture capital funds does not involve himself in day-to-day management of the fund and the activities of the funds are managed by professionals. The investor therefore likes to keep their liability limited to the contribution committed by them to the fund and are not willing to take on any other liability. The venture capital funds are set up for a limited life and on maturity, the returns are distributed amongst the investors. The structure of venture capital funds should therefore protect the interest of investors and the liquidation process should be simple. Limited Partnership(LP), Limited Liability Partnership(LLP) and the Limited Liability Company(LLC) are commonly used and widely accepted structures internationally especially in USA which has an active venture capital industry. These structures limit the liability of investors to the extent of funds committed, at the same time they can be structured to become pass through vehicles for the purpose of income tax. The legal structure of LP, LLP and LLC is enclosed as Annexure to the Report.

7.1.2For venture capital funds which deal in high risk investments structuring flexibility is very important to meet their business strategies. In India, such structures like LP, LLP and LLC are not recognised under the Indian Partnership Act and the Indian Companies Act. For development of VC industry in India on global lines and also to facilitate and attract the foreign investment in venture capital industry, such alternative structures need to be provided by bringing appropriate changes in legislation.

7.1.3Under the SEBI Regulations a VCF can be registered in the form of a Trust, a Company or a Body Corporate(with a recent amendment dated November 17, 1999 under the Regulations). A company or a body corporate registered with SEBI may float multiple schemes for investment in different categories of companies and the fund set up as trust may also establish one or more funds under it. SEBI Regulations however, do not specifically provide for registration of a scheme floated by a body corporate or a company, as like mutual fund schemes and multiple funds set up by a venture capital fund incorporated as a trust. At present, the LP, LLP and LLC structure are also not permitted under the statutes ie. the Indian Partnership Act and the Indian Companies Act However, as and when permitted, these should be eligible to be registered under the SEBI Regulations. The SEBI regulation therefore needs to be amended to provide for registration of other entities such as LP, LLP, LLC, etc as well as the scheme floated by or the fund setup by a Trust, Body Corporate, Company and other

Report of K B Chandrasekhar Committee on Venture Capital26

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