Securities and Exchange Board of India
business, manufacturing or services. The function of VCFs is to provide risk capital and support idea based enterprises. All over the world, specially in countries like USA, Israel, Taiwan, Malaysia, Australia, etc venture capital funding has gone to business, service as well as manufacturing and helped the growth in all these sectors. Selectivity comes in the very nature of VC funding which comes from high networth, sophisticated individual and institutional investors who know where to put their money to its best use. It is therefore strongly believed that sectoral restrictions crate unnecessary obstacles and hamper the growth of VC activity. However, certain restrictions could be put by specifying a negative list which could include areas like real estate, finance companies, activities not legally permitted and any other sectors which could be notified with SEBI in consultation with the Government. Infact, the present SEBI regulations as well as Government of India Guidelines do not have any such restrictions and restrictions have been put under the Income Tax Act for tax exemption purposes only. However in view of the discussion in the earlier chapter and the proposed recommendation therein that as in the case of mutual funds, once registered with SEBI, VCF could be automatically entitled to tax exemption and no separate rules under the Income Tax Act would be required.
7.2.3The investment criteria under the SEBI regulations prescribe that at least 80% of the funds raised by VCF should be invested in unlisted or financially weak sick companies. The Income Tax Rules and the Government of India Guidelines for overseas venture capital investment until recently prescribe a ceiling of 40% of paid up capital of an investee company and not beyond 20% of the corpus of the fund. These investment restrictions can seriously affect the flexibility in operation of venture capital fund. The venture funds may engineer a turnabout by increasing their stake in an investee firm and restructuring the management. During these times, the restriction of investing only upto 40% of the paid up capital of the company will be a major constraint. Similarly, if the performance of investee companies are below expectation, the VCF may choose to withhold further release of funds into the investee companies which may violate the minimum 80% investment limit under SEBI Regulation. It is therefore felt that VCFs should have flexibility of investment depending upon the business requirement in start up companies. Further, the ceiling of investment of not more than 25% of the corpus of the VCF in one single investee company would meet the requirement of diversification of risk of VCFs. Here it may be noted that globally VCFs invest in sufficient number of investments which is part of the investment strategy. However in the Indian context and since VC industry is still in the evolutionary stage, it would be desirable to keep the ceiling of 25% of the corpus for investment in single VCU. Further, VCF should not be permitted to invest in associated companies. No other investment ceilings including 80% limit for investment as provided in SEBI Regulations are appropriate in VC operations. Manner and nature of investments should be disclosed by VCFs as a part of their investment strategy statement.
Report of K B Chandrasekhar Committee on Venture Capital28