The Article has been authored by Suman Kumar Jha (Founder & Managing Partner), Afnaan Siddiqui (Co-Founder & Partner) & Visakha Raghuram (Associate) and Akshita Varshney
Introduction
SEBI, vide Notification dated July 11, 2024, has amended the SEBI (Alternative Investment Funds) Regulations, 2012, whereby a new Chapter III-D regarding ‘Migrated Venture Capital Funds’ has been introduced.
A ‘Migrated Venture Capital Fund‘ refers to a fund previously registered under the SEBI (Venture Capital Funds) Regulations, 1996, which has subsequently re-registered under the current regulations as a sub-category of Venture Capital Fund within Category I – Alternative Investment Fund. The introduction of these regulations aims to facilitate and encourage Venture Capital Funds, previously registered under the SEBI (Venture Capital Funds) Regulations, 1996, to transition and be governed by the new regulations, thereby being classified as a sub-category of Venture Capital Fund under Category I – Alternative Investment Fund.
The key provisions in this new Chapter III-D include (a) defining the term ‘migrated venture capital fund’, (b) outlining its eligibility criteria, (c) establishing the procedure for granting a certificate of registration, (d) specifying investment conditions and criteria, (e) tenure, (f) listing requirements and (g) record maintenance obligations.
Eligibility criteria for granting a certificate as a Migrated Venture Capital Fund
The Board must consider the following eligibility conditions for the grant of certificate as ‘Migrated Venture Capital Fund’:
- The applicant has a certificate of registration as a Venture Capital Fund under SEBI (VCF) Regulations;
- The applicant is a fit and proper person;
- The applicant has furnished the required information as specified by the Board;
- The applicant has no pending investor complaints about non-receipt of funds or securities for any of its schemes whose assets are not liquidated on the date of application;
- No scheme launched by the applicant has an investment from an investor of less than Rs 5 lakh.
- Each scheme launched by the applicant has a firm commitment from the investors for a contribution of an amount not below Rs 5 crores before the start of operations by the applicant.
Restrictions on public offers and private placement requirements for Migrated Venture Capital Fund
A migrated venture capital fund is prohibited from issuing any document or making an advertisement that invites offers from the public for the subscription or purchase of any of its units. It can receive monies for investment only through the private placement of its units. Further, the migrated venture capital fund must:
- issue a placement memorandum containing details of the terms and conditions under which funds are proposed to be raised from investors or
- enter into a contribution or subscription agreement with investors specifying the terms and conditions for raising funds.
Also, the migrated venture capital fund must file a copy of the placement memorandum, or a copy of the contribution or subscription agreement entered into with investors with the Board, along with a report of money collected from the investors, for informational purposes.
Investment conditions for Migrated Venture Capital Fund
The investments by the migrated venture capital fund must be subject to the following conditions –
- the migrated venture capital fund must not invest more than 25% corpus of the fund in a single venture capital undertaking.
- the migrated venture capital fund may invest in securities of companies incorporated outside India subject to such conditions or guidelines that may be issued by RBI and the Board from time to time.
- The migrated venture capital fund must not invest in the associated companies and must invest according to the prescribed criteria.
Investment criteria for Migrated Venture Capital Fund
The migrated venture capital fund must invest as below –
- at least 2/3rdof the investable funds must be invested in unlisted equity shares or equity-linked instruments of venture capital undertaking
- not more than 1/3rdof the investable funds may be invested by way of
- subscription to the IPO of a venture capital undertaking whose shares are proposed to be listed
- investment in debt or debt instrument of a venture capital undertaking in which venture capital fund has already invested by way of equity
- preferential allotment of equity shares of a listed company subject to a lock-in-period of one year,
- investment in equity shares or equity-linked instruments of a financially weak company or a sick industrial company whose shares are listed
- Investment in special purpose vehicles (SPV) created by a venture capital fund for the purpose of facilitating or promoting investment.
Tenure of a migrated venture capital fund
The tenure of a migrated venture capital fund must be calculated according to the Board’s specifications. An extension of up to 2 years may be allowed with the approval of 2/3rds of the unit-holders by investment value. If unit-holder consent is not obtained or the extended tenure expires, the migrated venture capital fund or scheme must be wound up.
Listing Requirements and Record Maintenance for migrated venture capital fund
No migrated venture capital fund must be entitled to get its units listed on any recognised stock exchange till the expiry of 3 years from the date of issuance of units by the migrated venture capital fund. Further, the migrated venture capital fund must maintain its records for a period of 8 years after the winding up of the fund.
Conclusion
These amendments mark a significant step towards providing flexibility and regulatory clarity for migrated venture capital funds. They facilitate a smooth and cost-effective migration from VCF to AIF Regulations, ensuring that certain flexibilities under VCF regulations continue to apply to migrated VCFs to avoid any adverse impact on investment activities. In case, existing venture capital funds do not get re-registered under these new Regulations, they shall face increased scrutiny and reporting requirements. Further, no regulatory costs in the form of re-registration or migration fees will be levied on the VCFs for this migration. However, the application fee may still be leviable.