Securities and Exchange Board of India
7.2.4The SEBI Regulation restricts the investment by VCF in unlisted equity or equity related instruments and listed securities of financially weak or sick companies. The Government of India Guidelines and the Income Tax Rules restrict the investment only in unlisted equity of the investee company. The venture capital fund need to enter into structured deals and the deals may also include the options for venture capital funds to buy or sell the equity of the investee company on occurrence of particular event. Sometimes, the VCFs require to invest partly in debt also. Such flexibilities of investment instruments are not available to VCF in India in view of the Government of India Guidelines and CBDT Guidelines as well as to some extent under SEBI Regulations also. Therefore, while primarily the VCFs should be investing in unlisted equity only, there should be flexibility to invest in listed equity though with a reasonable ceiling. Further, the investment in listed equity should be restricted through the initial public offer of a company whose shares are proposed to be listed or through a preferential offer in the case of a company which is already listed. Similarly, in certain situations, VCFs are required to provide debt also to the undertakings where they have already made VC investment. Thus the investment other than unlisted equity may be permitted within the overall ceiling of 30% of the investible fund and atleast 70% should be invested in unlisted equity, equity related instruments or other instruments convertible into equity. This is keeping in tune with the funding patterns of VCFs globally.
7.2.5In USA, the investment by VCFs are done as subscription to preferred stock (similar to preference share in terms of dividend and liquidation) with preferential voting /veto rights in respect of key decisions like modification in the Memorandum and Article of Association, expansion or sale of whole or part of business, merger or acquisition, etc. The preferred stock is convertible into equity shares at the option of venture capital investors. In order to facilitate investment by VCF in new enterprises, the Companies Act may be amended so as to permit issue of shares by unlisted public companies with a differential right in regard to voting and dividend. Such a flexibility already exists under the Indian Companies Act in the case of private companies which are not subsidiaries of public limited companies.
7.2.6The venture capitalists invest into long term high risk portfolios to create wealth. FIIs invest money with a shorter outlook and time frame which may add to speculation and volatility in the capital market. On the other hand, investment by venture capitalists are long term investments and contribute to the building of enterprises and promotion of industrial and business activity. The venture capital investors therefore in no way should be put to more restrictions as compared to FIIs. On the contrary, such investment should be encouraged and facilitated through regulatory support. The FVCI needs to obtain approval for pricing from RBI at the time of investment as well as disinvestment. However, when FIIs invest
Report of K B Chandrasekhar Committee on Venture Capital29