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Venture capital is a type of private equity capital typically provided by outside investors to new businesses. Generally made as cash in exchange for shares in the investee company, venture capital investments are usually high risk, but offer the potential for above-average returns. A venture capitalist is a person who makes such investments. A venture capital fund is a pooled investment scheme that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies, or ventures, with limited operating history, who cannot raise funds through a debt issue. The drawback of this form of entrepreneurship is that the investors get a say in the management of the company apart from the equity holding. Laws relating to venture capital funds in India
SEBI (Venture capital funds) Regulations 1996.
The venture capital fund regulations by the Securities and Exchange Board of India are a comprehensive set of laws to be followed by the venture capital funds in India. From the registration of venture capital funds to the action to be taken in case of default, the regulation has been divided in VI chapters.
Registration of Venture Capital FundsA Venture capital fund can either be a fund established as a trust under the Indian trust act or a company as defined under companies act 1956.
The regulations provided for the registration of a company or a trust which either was functioning as a venture capital fund before the commencement of this act or proposed to do so after the commencement of this act.
A company or trust (which functioned as a venture capital fund before the commencement of these regulations) shall cease to function as a venture capital fund if it does not apply to SEBI for registration within 3 months from the commencement of the regulations.
Procedure to be followed for registration:
i) An application for grant of certificate to be made to SEBI in Form A along with a fee of Rs 25,000.The fee shall be paid through a draft.
ii) There are certain conditions which must be fulfilled before the certificate of registration is granted by SEBI:
a) In case of a company, the MOA of the company shall have the business of venture capital fund as its main object, and invitation to public shall be expressly barred by the MOA and AOA, in addition to this, any officer of the company shall be involved in any litigation connected to the security market or should not have been convicted of an economic offence.
b) In case of a trust, the trust is in form of a deed and has been duly registered under the Indian registration act. Carrying the business of venture capital fund is its primary objective. Any trustee of the trust is not involved in a litigation connected to security market and has not been convicted of any economic offence.
c) In case of a body corporate, it should be formed under the laws of central or state legislature and it is permitted to venture in the field of venture capital funds.
iii) The application for registration shall be complete in all respect. If SEBI discovers any thing in the application that renders it incomplete, it shall give the applicant a time of thirty days to remove the loophole, failing which the application can be rejected by the board.
iv) SEBI after finding the applicant to be eligible, shall inform the applicant about it, after receiving the information the applicant shall tender to SEBI the registration fee which is Rs 5 lacs, after receiving which SEBI shall issue the Certificate of registration.
Conditions and Restrictions on Investments
The regulation has applied a lot of condition and restriction to the amount of investment to be made in and by the venture capital fund in India.
An investment in the venture capital fund can be made by any person whether Indian, Foreigner or NRI, but no investment which is less than Rs five lacs can be allowed in the venture capital fund. this however does not apply to investment made by the employees, directors or the principal officers of the company or by the trustee where the venture capital fund is a trust.
The investment strategy at the time of registration shall be disclosed by the venture capital fund. The venture capital fund shall also disclose the duration of its life cycle. Not more than 25% of the fund shall be invested in a single venture capital undertaking .Investment to be made in the following manner:
i) At least 66.67% of the fund to be invested shall be invested in unlisted equity shares or other instruments linked to equity shares of the venture capital undertaking.
ii) Not more than 33.33% of the investible fund shall be invested by the way of IPO of a venture capital undertaking whose shares are proposed to be listed, the debt instrument of the venture capital undertaking in which the venture capital fund has already invested , preferential allotment of equity shares of a listed company, equity shares or equity linked instrument of a financially weak company and SPV's which have been created by the venture capital fund..
No venture capital fund shall get its units listed on any recognized stock exchange till the expiry of thee years from the date when they were issued to the investors by the venture capital fund. The venture capital funds shall also not invite any member of the public by way of advertisement to subscribe to its units. The venture capital fund may receive investments only through private placements of its units.
Placement Memorandum or Subscription AgreementEvery venture capital fund shall issue a placement memorandum which contains all the terms and conditions relating to the scheme through which money is proposed to be raised from the investors. The venture capital fund may also enter into a subscription agreement with the investors which would specify the terms and conditions of the scheme through which money is proposed to be raised. The venture capital fund shall submit a copy of such placement memorandum or subscription agreement with SEBI along with the report of the money actually raised through such agreement or memorandum.
The placement memorandum or the subscription agreement shall have the following essential:
It shall contain the details of the trustee and the trust as well as the details of the directors and the principal officers of the venture capital fund. It shall also stae the minimum amount of money to be raised to start the venture capital fund and the minimum share to be invested in every scheme of the venture capital funds. Tax implications which would be applied to the investors shall also be stated. The manner of subscription to the units of the fund, the period of maturity of the fund if any and the manner in which the fund would be wound up shall also be stated.
Every venture capital fund shall maintain a book of record for a period of eight years which would generate the true picture of the venture capital fund. SEBI at any time can call for information regarding the working of the venture capital fund, the information shall be submitted to SEBI in the specified time period.
SEBI on receiving a complaint from the investors or suo motu appoint one or more person as investigating officer, who would undertake investigation in relation to the maintenance of the account books of the venture capital fund, compliance of the regulation and the affairs of venture capital funds. A notice of at least ten days shall be given before the investigation is carried on though if SEBI deems it to be in interest of the investors it may not serve a notice at all. It shall be the duty of every officer of the venture capital fund to cooperate with the investigation officers, they shall be provided with all the documents, books etc which are in the custody of the officers of the venture capital fund. The investigation officer shall also be furnished with any statement he demands for. After the completion of investigation the investigation officer shall submit his report to SEBI. The board after considering the investigation and giving the venture capital fund to be heard may direct the venture capital fund not to launch new schemes or prohibiting the concerned person from disposing off the property of the venture capital fund or to refund to any investor any amount of money or asset.
Action In Case of Default
Any venture capital fund that fails to act in accordance with the regulations, or fails to furnish reports of the affairs of the venture capital fund to SEBI or furnishes report that is not true, does not cooperate in any enquiry instituted by SEBI or fails to act on the complaints made by the investors or does not give a satisfactory reply in this regard to SEBI, shall be dealt with in manner provided in SEBI (procedures for holding enquiry by enquiry officers and imposing penalty) regulations, 2002
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