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               Securities and Exchange Board of India

7.3Flexibility in Exit

7.3.1Venture capital funds are set up to make investment in venture capital undertakings for a defined timeframe say 8-12 years. As and when investment matures, the investors are paid back the returns and on expiry of the timeframe, the funds are liquidated. The structure of VCF therefore should be such that its liquidation is simpler. In India, a VCF can be incorporated as a trust, a company or a body corporate. The liquidation of trust is comparatively easier as compared to that of a company or a body corporate. The guidelines for buyback of shares by the company are not adequate to facilitate the liquidation process and distribution of capital among the shareholders. Because of cumbersome liquidation procedure to be followed in the case of a company, most of the funds in India had been set up as a trust. Structures such as LP, LLP and LLC (which have been discussed in the Report earlier) are popular amongst international venture capitalists because of their easy liquidation procedure. This is one of the main reasons the Committee has recommended necessary amendments in the statutes to permit incorporation of LP, LLP and LLC in India.

7.3.2In the case of a VCF constituted as a company, the existing guidelines for buyback of shares should be relaxed to permit them to buyback the shares out of the sale proceeds of investments and assets instead of reserves, share premiums and fresh issue proceeds. The buyback relaxation should also be extended to a VCU which proposes to buyback the equity from the VCF. This would provide an exit opportunity to the VCF. The existing conditions for buyback of equity shares by an unlisted company prohibit the company from making a fresh issue of capital for a period of 24 months. This has been a major constraining factor for growth oriented companies, to buyback their shares, even if they have a cash surplus. The prohibition period for fresh issue of capital may be reduced to a period of six months as VCUs are typically growing companies and they may need financing and should not be debarred from making fresh issue of capital for a longer period of time. The existing guidelines also do not permit the negotiated deal even in unlisted equity. The provision may be suitably relaxed in the case of transaction where VCF is one of the parties.

7.3.3A VCF gets an opportunity to exit from the investment when VCU shares are listed on a recognised stock exchange. The present IPO guidelines of SEBI requires a three years track record of profit for a company to float a public issue. However, some of the companies operating in emerging areas such as internet and e-commerce may not be in a position to generate profits yet they have adequate market share in business to justify a significant market capitalisation. Also these type of companies are at present seeking listing outside country. This deprives domestic venture capital funds of an exit on listing of stock of VCU. The IPO norms and listing requirements need to be reviewed in the cases of companies funded by VCFs to facilitate early exit for them. The present benefit of

Report of K B Chandrasekhar Committee on Venture Capital32

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