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               Securities and Exchange Board of India

in unlisted equity stocks, they are not required to obtain such approvals. In addition to this, the formula applied for arriving at the prices of unlisted securities  based on book value and PE multiples of BSE National Index are extremely restrictive and not in tune with the valuations relevant to the new generation enterprises which typically obtain VC funding like in infotech, bio-tech, service industries, etc. Such enterprises especially start up enterprises do not have tangible assets but the stock of the same may obtain high valuations due to their intangible assets  like human resources, growth prospects, etc. Therefore, once foreign venture capital investor either coming through 100% funding in a domestic VCF or otherwise registered with SEBI  should not be subjected to such requirements.


In the above background, the following recommendations are proposed:


Investments by VCFs in VCUs should not be subject to any sectoral restrictions except those to be specified as a negative list by SEBI in consultation with the Government which may include areas like real estate, finance companies and activities prohibited by Law.


There is no need for any ceiling of investment in equity of a company. It is understood that the investment ceiling of 40% of paid up capital of VCU under the Income tax Act has already been removed. As a prudential norm, the investment in one VCU should not exceed 25% of the corpus of VCF..


The investment criteria needs to be amended to provide for investment criteria whereby VCF invest primarily in unlisted equity and partly in listed equity, structured instruments or debts also. The investment in listed equity shall be through IPO or preferential offer and not through the secondary market route. The VCF shall invest atleast 70% of the investible funds in unlisted equity of VCU and 30%of investible funds may be used for investment through IPO, preferential offer, debt, etc. The investible funds would be net of expenditure incurred for administration and management of the funds. The present requirement of investment of atleast 80% of the funds raised by the VCF under the SEBI Regulations needs to be replaced by the criteria as under:


The VCF will disclose the investment strategy at the time of application for registration.


The VCF shall not invest more than 25% of the corpus in one VCU and shall not invest in an associated concern.


The VCF will make investment in the venture capital  

Report of K B Chandrasekhar Committee on Venture Capital30

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