Bringing investment as a foreign venture capital investor (FVCI) fund, registered under the Sebi (FVCI) regulations, has been a preferred option for foreign investors seeking to invest in India. This is because registered FVCIs enjoy a favourable investment climate like: exemption from entry and exit pricing restrictions that otherwise apply to foreign investors; easy exit option on account of no lock-in on pre-issue share capital of a company in case of a subsequent IPO; qualified institutional buyer status and the resultant ability to participate in an IPO through the book-building process; exemption from open offer requirements under the takeover code in case of a sale to promoters; and the non-applicability of the existing joint venture/tie-up condition under the FDI policy, which mandates prior governmental approval when making future investments in certain cases.

However, lately, the RBI, while granting its approval, has sought to restrict investments by an FVCI to nine specified segments, apparently borrowing from the Income Tax Act (ITA). The specified segments are: operation and maintenance of certain ?infrastructural facilities?; nanotechnology; information technology relating to hardware and software development; biotechnology; seed research & development; research & development of new chemical entities in the pharmaceutical sector; production of bio-fuels; building and operating of hotel- cum -convention centres with more than 3,000 seats; and dairy and poultry industry. Under section 10(23FB) of the ITA, a domestic venture capital fund (DVCF) may enjoy a tax pass through status if its investments are in the sectors as specified therein.

The RBI’s rationale seems to be aimed at creating a more level-playing field between FVCIs and DVCFs. But the effect of that rationale is quite the opposite. Because unlike FVCIs, DVCFs are not precluded from investing in sectors other than the nine specified sectors under the ITA, and these sector restrictions on DVCFs apply only for the purposes of DVCFs availing of a tax pass-through status.

Assuming this to be the current position, without necessarily agreeing with the rationale for mandating such a restricted portfolio for FVCIs, a few questions linger on. A key issue is the definition of ?infrastructural facility?(the same being a permissible sector for FVCI investment). Would the term gather its colour from the limited definition under the ITA or it to be construed liberally, taking cue from the broader definition of the infrastructure sector under the external commercial borrowings (ECB) policy?

The question is relevant for any foreign investor seeking to route an investment under the FVCI regime. For instance, sectors such as power, telecommunications, mining and cold storage facility are permitted end uses under the ECB policy by virtue of them falling under the definition of the term ?infrastructure sector? (infrastructure is a permissible end use under the ECB policy); however, these same sectors would fall foul of the more restricted definition of ?infrastructure facility? provided under the ITA.

The RBI could take the broader definition of ?infrastructure? according to the ECB policy, while clearing FVCI proposals on at least two grounds. First, given that the RBI itself regulates the ECB policy, prima facie, the ECB definition of infrastructure sector could be the point of reference for it while addressing the question of the meaning of ?infrastructure?—-the same also being the only available definition of infrastructure under the gamut of Indian exchange control laws.

Secondly, denying the benefits of FVCI investment to those ?infrastructure sectors? not listed under the ITA, though being listed under the ECB norms, is not found on strong reasoning. As things stand, the exact contours of the definition of infrastructural facility should be clarified by the RBI, and it is suggested that the RBI should look to the more investor-friendly ECB definition in this regard.

The writers are students at the National Law University, Jodphur