Venture Capital                                                  Back To Home
Business opportunities in India

Offshore Ven¬ture Capital Funds/companies are allowed to invest in domestic venture capital undertaking as well as other companies through the automatic route, sub¬ject only to SEBI regulation and sector specific caps on FDI.

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FDI or VC – Which is the better choice?

A foreigner looking to invest directly into India, who is a venture capitalist has two ways to invest in India – Foreign Direct Investment (FDI ) and Venture Capital( VC).

A venture capitalist would, of course, choose the route that is most profitable. Profitability is determined by the rate of taxation on the returns of the VC, the freedom which the VC has to choose its investing policies, and the limits (if any) imposed by law on the prices at which a VC can invest into and exit out of a company. This write-up compares the VC and the FDI routes on these aspects.

A venture capital investment has two advantages vis-à-vis an FDI investment:

1. Exemption from Pricing Guidelines of RBI

RBI has issued certain guidelines stipulating the minimum price a foreigner must pay when purchasing the shares of an Indian company from a resident and the maximum price a person can receive when he sells to a non-resident.

A foreigner investing through the FDI route is bound by these pricing guidelines.

For listed companies, this price is determined based on a relation to the listed price. For unlisted and private companies, this price is largely determined by the discounted cash flow method.

However, a Foreign Venture Capital Investor is not bound by the guidelines, and can sell or buy the shares at a mutually acceptable price.

2. Exemption from Lock-in if VC is not a promoter

In the event the company goes for a listing, case of an initial public offer, the law imposes a lock-in on the pre-issue capital. For non-promoters, the lock-in is of 1 year. However, shares held by a foreign venture capital investor or a domestic venture capital fund (if they are held for a period of at least one year prior to the date of filing the draft prospectus with SEBI) will not have such a lock-in.

This gives an option to the VC to exit from the company even after a short time pursuant to completion of the IPO.

This gives an option to the VC to exit from the company even after a short time pursuant to completion of the IPO.

In case the VC had held convertible securities for some period of time within that one year, which it had then converted into equity shares, it can still avail of the exemption from lock-in, if:

• The securities, i.e. debentures or preference shares were compulsorily convertible;

• The securities were fully convertible, that is, the entire consideration payable on them was paid and no further consideration was payable upon conversion

Note, however, that if a VC is a promoter of the company, then this exception will not apply.

All promoters, including VCs will be subject to the post-issue lock-in. Lock-in on Promoter’s contribution is of two kinds:

1. On minimum promoter’s contribution (twenty percent for IPO), the lock-in is for 3 years.

2. On contribution in excess of minimum promoter’s contribution, it is of 1 year.

All investments to be made by a foreign venture capital investors shall be subject to the following conditions: -

(a) it shall disclose to SEBI its investment strategy.

(b) while it can invest its total funds committed in one venture capital fund it shall however not invest more than 25% of the funds committed for investments to India in one Venture Capital Undertaking.

(c) it shall make investments in the Venture Capital Undertaking as enumerated below:

(i) atleast 66.37% of the investible funds shall be invested in unlisted equity shares or equity linked instruments.

(ii) not more than 33.33% of the investible funds may be invested by way of:

(a) subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed subject to lock-in period of one year;

(b) debt or debt instrument of a venture capital undertaking in which the foreign venture capital investor] has already made an investment by way of equity

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