Venture Capital Fund: means a fund established in the form of a trust or a company including a body corporate and registered under these regulations which-

1. has a dedicated pool of capital,

2. raised in a manner specified in the regulations, and

3. invests in accordance with the regulations.

Venture Capital Undertaking; means a domestic company :-

1. whose shares are not listed on a recognized stock exchange in India;

2. which is engaged in the business for providing services, production or manufacture of article or things or does not include such activities or sectors which are specified in the negative list by the Board with the approval of the Central Government by notification in the Official Gazette in this behalf.

Negative List

1. Non-banking financial services excluding those Non-Banking Financial companies which are registered with Reserve Bank of India and have been categorized as Equipment Leasing or Hire Purchase companies

2. Gold Financing excluding those companies which are engaged in gold financing for jewellery

3. Activities not permitted under industrial policy of Government of India.

4. Any other activity which may be specified by the Board in consultation with Government of India from time to time."

Associate Company: means a company in which a director or trustee or sponsor or settlor of the venture capital fund or asset management company holds either individually or collectively, equity shares in excess of 15% of its paid-up equity share capital of venture capital undertaking".

Equity Linked Instruments: includes instruments convertible into equity shares or share warrants, preference shares, debentures compulsorily or optionally convertible into equity

Investible Funds: means corpus of the fund net of expenditure for administration and management of the fund.

Unit : means beneficial interest of the investors in the scheme or fund floated by trust or shares issued by a company including a body corporate

Application for Grant of Certificate: Any company or trust or body corporate proposing to carry on any activity as a venture capital fund must apply to SEBI for grant of a certificate of carrying out venture capital activity in India. An application for grant of certificate must be made in Form A and must be accompanied by a non-refundable application fee of Rs 25,000/- payable by bank draft in favor of the Securities and Exchange Board of India at Mumbai. Registration fee for grant of certificate is Rs 500,000.

For the purpose of grant of certificate by SEBI, the following conditions must be satisfied :-

1. If the application is made by a company

   1. The main object of the company as per its Memorandum of Association must be the carrying on of the activity of venture capital fund.

   2. It is prohibited by its Memorandum and Articles of Association from making an invitation to the public subscribe to its securities.

   3. None of its directors or its principal officer or employee is involved in any litigation concerned with the securities market which may have an adverse bearing on the business of the applicant. The directors or the principal officer or employee must not have been at anytime convicted for an offense involving moral turpitude or any economic offense and is a fit and proper person to act as director or principal officer or employee of the company

   4. it is a fit and proper person.

2. If the application is made by a trust

   1. The instrument of trust (Trust Deed) is in the form of a deed and has been duly registered under the provisions of the Indian Registration Act, 1908.

   2. The main object of the trust is to carry on the activity of a venture capital fund

   3. None of its trustees or directors of the trustee company, if any, is involved in any litigation connected with the securities market which may have an adverse bearing in the business of the venture capital fund.

   4. The directors of its trustee company or the trustees have not at anytime being convicted of an offense involving moral turpitude or any economic offense.

   5. the applicant is a fit and proper person

3. if the application is made by a body corporate

   1. it is set up or established under the laws of the Central or State Legislature.

   2. the applicant is permitted to carry on the activities of a venture capital fund.

   3. the applicant is a fit and proper person.

   4. the directors or the trustees, as the case may be, of such body corporate have not been convicted of any offence involving moral turpitude or of any economic offense.

   5. the directors or the trustees, as the case may be, of such body corporate, if any, is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant.

Procedure for Grant of Certificate: If SEBI is satisfied that the applicant is eligible for grant of certificate, it shall send intimation to the applicant of its eligibility. On receipt of intimation, the applicant must pay to SEBI, registration fee of Rs 500,000 and on the receipt of such fees, SEBI shall grant a certificate of registration in Form B

Conditions for the Grant of Certificate

1. The venture capital fund shall abide by the provisions of the SEBI Act and these regulations.

2. The venture capital fund shall not carry on any other activity other than that of a venture capital fund.

3. The venture capital fund shall inform SEBI in writing of any information or details previously submitted to SEBI which have changed after grant of the certificate.

4. If the information or details submitted are found to be false or are misleading in any particular manner, suitable penal action can be taken

A venture capital fund may raise money from any source, whether Indian, foreign or non resident Indian by way of issue of units. No venture capital fund shall accept any investment from any investor less than Rs500,000. However this condition is not applicable to :-

1. employees or the principal officer or directors of the venture capital fund, or directors of the trustee company or trustees where the venture capital fund has been established as a trust

2. the employees of the fund manager or asset management company

3. Each scheme launched or fund set up by a venture capital fund shall have firm commitment from the investors for contribution of an amount of at least Rupees five crores before the start of operations by the venture capital fund.

All investment made or to be made by a venture capital fund shall be subject to the following conditions, namely:-

1. venture capital fund shall disclose the investment strategy at the time of application for registration;

2. venture capital fund shall not invest more than 25% corpus of the fund in one venture capital undertaking;

3. shall not invest in the associated companies; and

4. venture capital fund shall make investment as enumerated below: -

   1. at least 66.67% of the investible funds shall be invested in unlisted equity shares or equity linked instruments of venture capital undertaking .

   2. Not more than 33.33% of the investible funds may be invested by way of:

      1. subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed ;

      2. debt or debt instrument of a venture capital undertaking in which the venture capital fund has already made an investment by way of equity

      3. preferential allotment of equity shares of a listed company subject to lock in period of one year.

      4. the equity shares or equity linked instruments of a financially weak company or a sick industrial company whose shares are listed.

      Explanation 1 - For the purpose of these regulations, a "financially weak company" means a company, which has at the end of the previous financial year accumulated losses, which has resulted in erosion of more than 50% but less than 100% of its networth as at the beginning of the previous financial year.

      5. Special Purpose Vehicles which are created by a venture capital fund for the purpose of facilitating or promoting investment in accordance with these Regulations

         Explanation - The investment conditions and restrictions stipulated in clause (d) of regulation 12 shall be achieved by the venture capital fund by the end of its life cycle."

5. venture capital fund shall disclose the duration of life cycle of the fund."

Prohibition on Listing

No venture capital fund shall be entitled to get its securities or units listed on any recognized stock exchange upto the expiry of three years from the date of issue of securities or units by the venture capital fund.

No venture capital fund shall issue any documents or advertisement inviting offers from the public for the subscription of the purchase of any of its securities or units.

Private placement

A venture capital fund may raise money only through private placement of its securities or units. The venture capital fund before issuing any securities or units must file with SEBI a placement memorandum.

Placement Memorandum or Subscription Agreement: The venture capital fund must :-

1. issue a placement memorandum which shall contain details of the terms and conditions subject to which monies are proposed to be raised from investors; or

2. enter into contribution or subscription agreement with the investors which shall specify the terms and conditions subject to which monies are proposed to be raised.

The Venture Capital Fund must file with the Board for information, the copy of the placement memorandum or the copy of the contribution or subscription agreement entered with the investors along with a report of money actually collected from the investor

The placement memorandum and /or subscription agreement must give the following details:

1. Details of the trustee or the trustee company and the directors or chief executives of the venture capital fund.

2. the proposed corpus of the fund and the minimum amount to be raised for the fund to be operational.

3. the minimum amount to be raised for each scheme and the provision for refund of monies to investor in the event of non receipt of minimum amount

4. details of entitlements units of venture capital fund for which subscription is being sought

5. Tax implications that are likely to apply to the investors.

6. Manner of subscription to the units or securities of the Venture Capital Fund

7. Period of maturity of the Fund.

8. Manner in which the fund is to be wound up.

9. Manner in which the benefits accruing to the investors in the units of the trust are to be distributed.

10. Details of the fund manager or asset management company if any, and the fees to be paid to such manager

11. The details about performance of the fund, if any, managed by the Fund Manager

12. investment strategy of the fund.

13. any other information specified by the Board.

Maintenance of Books and Records: Every venture capital fund must maintain for a period of 8 years books of accounts, records and documents which must give a true and fair picture of state of affairs of the venture capital fund.

Power to Call for Information: SEBI may at anytime call for any information from the venture capital fund in respect to any matter relating to its activity as a venture capital fund. Such information must be submitted within the time specified by days to SEBI.

Submission of reports to SEBI: SEBI may at anytime call upon the venture capital fund to file such report as it deems fit with regards to the activity carried out by venture capital fund.

Winding -up: A scheme of venture capital fund setup as a trust shall be wound up:

1. When the period of the scheme as mentioned in the placement memorandum is over ; or

2. If, in the opinion of the trustees or the trustee company, it is in the interest of the investors that be wound-up ; or

3. If 75 % of the investors in the scheme pass a resolution at a meeting of unit holders of the scheme that the scheme be wound up ; or

4. If SEBI so directs, in the interest of investors.

The venture capital fund setup as a company shall be wound up according to provision of the Companies Act, 1956.

A venture capital fund set up as a body corporate shall be wound up in accordance with the provisions of the statute under which it is constituted.

The trustees or trustee company of the venture capital fund set up as a trust or the Board of Directors in the case of the venture capital fund is set up as a company (including body corporate) shall intimate the Board and investors of the circumstances leading to the winding up of the Fund or Scheme.

Effect of winding up

1. On and from the date of intimation of the winding up, no further investments shall be made on behalf of the scheme to be wound up.

2. Within three months from the date of intimation, the assets of the scheme shall be liquidated and the proceeds accruing to the investors in the scheme distributed to them after satisfying all liabilities.

Notwithstanding anything contained in sub-regulation (2) and subject to the conditions, if any, contained in the placement memorandum or contribution agreement or subscription agreement, as the case may be, in-specie distribution of assets of the scheme, shall be made by the venture capital fund at any time, including on winding up of the scheme, as per the preference of investors, after obtaining approval of at least 75% of the investors of the scheme.

Powers of SEBI for Inspection & Investigation: Details covered under Chapter -V of the Regulations

Procedure for Action in Case of Default - Offences & Penalties: Details covered under Chapter -VI of the Regulations

Venture capital funds which desire to claim exemption from income tax are required to follow rules given hereunder:

• Registration with SEBI

• Claiming Income tax exemption in respect of dividend and capital gains income.

• Not more than 40 percent of equity in a venture

• 80 percent of monies raised for investment are required to be invested in equity shares of domestic companies whose shares are not listed on recognised stock exchange

• Shares of investee companies are required to be held for a period of at least 3 years. However, these shares can be sold either if they are listed on recognised stock exchange in India

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