No foreign investor other than foreign venture capital investors (FVCIs) can invest in domestic venture capital funds.
According to a new norm of the department of industrial policy and promotion (DIPP), only FVCIs registered with market regulator Sebi would be allowed to make investments in domestic VCFs by subscribing to their units.
Officials said DIPP was of the view that units should not be issued by VCFs to foreign investors in case the sectors they operate in are subject to caps on foreign direct investment or any other kind of entry restrictions.
The DIPP reckons that VCFs are largely unregulated and many of them are registered as trusts. The foreign investment promotion board (FIPB) has been clearing issue of units to foreign investors only in the case of sebi-registered VCFs. In terms of ownership rights, these units are not different from equity shares, according to the DIPP.
Recently, the FIPB rejected Bangalore-based domestic VCF, Azure Capital?s proposal to issue its units to foreign investors and NRIs.
While rejecting the proposal, the board ruled that domestic VCFs can only issue units to their foreign counterparts and no other entity.
Under the FDI policy, ownership of an entity is counted before deciding if it can accept FDI. Since trusts have only beneficiaries, rather than owners, it is hard to determine who owns a venture capital trust, especially if it has non-resident ?beneficiaries.?
There are certain advantages to investing into India through VC funds. VC funds get tax pass-through for investments in nine specified sectors ? that is, the income accruing to them is not taxed before being passed on to those who have provided the corpus.
Further, VCs are exempt from making open offers to buy shares from the public after acquiring shares in excess of 15% of a company?s total equity. To take advantage of these features and avoid the discipline of normal investment routes, some investors have been camouflaging their investment into India as VC investment.
All such investors have to register as a trust in India and register the trust as a VC fund with Sebi.
