1. Allowing Multiple Flexible Structures: Eligibility for registration as venture capital funds should be neutral to firm structure. The government should consider creating new structures, such as limited partnerships, limited liability partnerships and limited liability corporations. At present, venture capital funds can be structured as trusts or companies in order to be eligible for registration with SEBI. Internationally, limited partnerships, Limited Liability Partnership and limited liability corporations have provided the necessary flexibility in risk-sharing, compensation arrangements amongst investors and tax pass through. Therefore, these structures are commonly used and widely accepted globally specially in USA. Hence, it is necessary to provide for alternative eligible structures.

2. Flexibility in the Matter of Investment Ceiling and Sectoral Restrictions: 70% of a venture capital fund's investible funds must be invested in unlisted equity or equity-linked instruments, while the rest may be invested in other instruments. Though sectoral restrictions for investment by VCFs are not consistent with the very concept of venture funding, certain restrictions could be put by specifying a negative list which could include areas such as finance companies, real estate, gold-finance, activities not legally permitted and any other sectors which could be notified by SEBI in consultation with the Government. Investments by VCFs in associated companies should also not be permitted. Further, not more than 25% of a fund's corpus may be invested in a single firm. The investment ceiling has been recommended in order to increase focus on equity or equity-linked instruments of unlisted startup companies. As the venture capital industry matures, investors in venture capital funds will set their own prudential restrictions.

3. Changes in Buy Back Requirements for Unlisted Securities : A venture capital fund incorporated as a company/ venture capital undertaking should be allowed to buyback upto 100% of its paid up capital out of the sale proceeds of investments and assets and not necessarily out of its free reserves and share premium account or proceeds of fresh issue. Such purchases will be exempt from the SEBI takeover code. A venture-financed undertaking will be allowed to make an issue of capital within 6 months of buying back its own shares instead of 24 months as at present. Further, negotiated deals may be permitted in Unlisted securities where one of the parties to the transaction is VCF.

4. Relaxation in IPO Norms: The IPO norms of 3 year track record or the project being funded by the banks or financial institutions should be relaxed to include the companies funded by the registered VCFs also. The issuer company may float IPO without having three years track record if the project cost to the extent of 10% is funded by the registered VCF. Venture capital holding however shall be subject to lock in period of one year. Further, when shares are acquired by VCF in a preferential allotment after listing or as part of firm allotment in an IPO, the same shall be subject to lock in for a period of one year. Those companies which are funded by Venture capitalists and their securities are listed on the stock exchanges outside the country, these companies should be permitted to list their shares on the Indian stock exchanges.

5. E. Relaxation in Takeover Code: The venture capital fund while exercising its call or put option as per the terms of agreement should be exempt from applicability of takeover code and 1969 circular under section 16 of SC(R)A issued by the Government of India.

6. Issue of Shares with Differential Right with regard to voting and dividend: In order to facilitate investment by VCF in new enterprises, the Companies Act may be amended so as to permit issue of shares by unlisted public companies with a differential right in regard to voting and dividend. Such a flexibility already exists under the Indian Companies Act in the case of private companies which are not subsidiaries of public limited companies.

7. QIB Market for Unlisted Securities: A market for trading in unlisted securities by QIBs be developed.

8. NOC Requirement: In the case of transfer of securities by FVCI to any other person, the RBI requirement of obtaining NOC from joint venture partner or other shareholders should be dispensed with.

9. RBI Pricing Norms: At present, investment/disinvestment by FVCI is subject to approval of pricing by RBI which curtails operational flexibility and needs to be dispensed with

1. Incentives for Employees: The limits for overseas investment by Indian Resident Employees under the Employee Stock Option Scheme in a foreign company should be raised from present ceilings of US$10,000 over 5 years, and US$50,000 over 5 years for employees of software companies in their ADRs/GDRs, to a common ceiling of US$100,000 over 5 years. Foreign employees of an Indian company may invest in the Indian company to a ceiling of US$100,000 over 5 years.

2. Incentives for Shareholders: The shareholders of an Indian company that has venture capital funding and is desirous of swapping its shares with that of a foreign company should be permitted to do so. Similarly, if an Indian company having venture funding and is desirous of issuing an ADR/GDR, venture capital shareholders (holding saleable stock) of the domestic company and desirous of disinvesting their shares through the ADR/GDR should be permitted to do so. Internationally, 70% of successful startups are acquired through a stock-swap transaction rather than being purchased for cash or going public through an IPO. Such flexibility should be available for Indian startups as well. Similarly, shareholders can take advantage of the higher valuations in overseas markets while divesting their holdings.

3. Global Investment Opportunity for Domestic Venture Capital Funds (DVCF): DVCFs should be permitted to invest higher of 25% of the fund's corpus or US $10 million or to the extent of foreign contribution in the fund's corpus in unlisted equity or equity-linked investments of a foreign company. Such investments will fall within the overall ceiling of 70% of the fund's corpus. This will allow DVCFs to invest in synergistic startups offshore and also provide them with global management exposure.

Infrastructure development needs to be prioritized using government support and private management of capital through programmes similar to the Small Business Investment Companies in the United States, promoting incubators and increasing university and research laboratory linkages with venture-financed startup firms. This would spur technological innovation and faster conversion of research into commercial products.

A strong SRO should be encouraged for evolution of standard practices, code of conduct, creating awareness by dissemination of information about the industry.

Implementation of these recommendations would lead to creation of an enabling regulatory and institutional environment to facilitate faster growth of venture capital industry in the country. Apart from increasing the domestic pool of venture capital, around US$ 10 billion are expected to be brought in by offshore investors over 3/5 years on conservative estimates. This would in turn lead to increase in the value of products and services adding upto US$100 billion to GDP by 2005. Venture supported enterprises would convert into quality IPOs providing over all benefit and protection to the investors.

Additionally, judging from the global experience, this will result into substantial and sustainable employment generation of around 3 million jobs in skilled sector alone over next five years. Spin off effect of such activity would create other support services and further employment. This can put India on a path of rapid economic growth and a position of strength in global economy.

SEBI had set up K B Chandrasekhar Committee to identify the impediments in the development of venture capital industry in India and to suggest suitable measures for its rapid growth. The report of the Committee was submitted to the SEBI Board in January 2000. The recommendations of the Committee were widely discussed. The recommendations were accepted in-principle by the Government also and pursuant to the same, the Finance Minister in the Budget 2000 speech announced that SEBI would be the single point nodal agency for registration and regulation of both domestic and overseas venture capital funds and the SEBI registered Venture Capital Funds would be given total tax pass-through.

In the light of the recommendations of the SEBI Committee on Venture Capital and the Budget announcements, the Board of SEBI in its meeting held on September 14, 2000 approved the SEBI (Venture Capital Funds) (Amendment) Regulations, 2000 and also the SEBI (Foreign Venture Capital Investors) Regulations, 2000.

The SEBI (Substantial Acquisition of Shares and Takeover) Regulations were amended whereby the acquisition of shares from venture capital funds/foreign venture capital investors either by company or by any promoter/s (on the same footing as that of acquisition from the state level financial institutions) would be exempt from making an open offer to other shareholders. The venture capital funds/foreign venture capital investors are eligible to participate in the IPO through book building route as Qualified Institutional Buyer subject to compliance with the SEBI (Venture Capital Fund) Regulations. Board also approved the amendment in the SEBI (Mutual Fund) Regulations permitting mutual funds to invest in venture capital funds. SEBI notified the Foreign Venture Capital Investors, Regulations, 2000 on September 15, 2000. The SEBI submitted a proposal to the Government to reconsider the condition of exit from investment within one year from the date of listing of shares of venture capital undertaking to seek tax pass-through, Government agreed to remove such condition. Accordingly, the Board at its meeting held on December 22, 2000 amended the regulations removing the clause requiring mandatory exit.

The SEBI advised all the registered venture capital funds vide circular no. Cir-1-2001 dated February 12, 2001 to report every quarter about their resource mobilisation and investments.

1. The following are the salient features of SEBI (Venture Capital Funds) (Amendment) Regulations, 2000:

   1. Definition of Venture Capital Fund : The Venture Capital Fund is now defined as a fund established in the form of a trust, or a company including a body corporate and registered with SEBI which:

      1. has a dedicated pool of capital;

      2. raised in the manner specified under the Regulations; and

      3. to invest in Venture Capital Undertakings in accordance with the Regulations.

   2. Definition of Venture Capital Undertaking: venture capital undertaking means a domestic company :-

      1. Whose shares are not listed on a recognised stock exchange in India

      2. Which is engaged in business including providing services, production or manufacture of articles or things, but 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. The negative list includes real estate, non-banking financial services, gold financing, activities not permitted under the Industrial Policy of the Government of India.

   3. Minimum Contribution and Fund Size: The minimum investment in a Venture Capital Fund from any investor shall not be less than Rs. 5 lakh and the minimum firm commitment of the fund before the fund can start activities shall be atleast Rs. 5 crores

   4. Investment Criteria : The earlier investment criteria has been substituted by a new investment criteria which has the following requirements :

      _ disclosure of investment strategy;
      _ maximum investment in single venture capital undertaking not to exceed 25 per cent of the corpus of the fund;
      _ Investment in the associated companies not permitted;
      _ atleast 75 per cent of the investible funds to be invested in unlisted equity shares or equity linked instruments.
      _ Not more than 25 per cent 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 subject to lock-in period of one year;

      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.

   5. Disclosure and Information to Investors: In order to simplify and expedite the process of fund raising, the requirement of filing the Placement memorandum with SEBI is dispensed with and instead the fund will be required to submit a copy of Placement Memorandum/ copy of contribution agreement entered with the investors along with the details of the fund raised for information to SEBI. Further, the contents of the Placement Memorandum are strengthened to provide adequate disclosure and information to investors. The SEBI will also prescribe suitable reporting requirements for the funds on their investment activity.

2. Government of India Guidelines

   The Government of India (MOF) Guidelines for Overseas Venture Capital Investment in India dated September 20, 1995 have been repealed by the MOF after notification of SEBI Venture Capital Fund Regulations.

3. The following are the salient features of SEBI (Foreign Venture Capital Investors) Regulations, 2000 :

   1. Definition of Foreign Venture Capital Investor: any entity incorporated and established outside India which proposes to make investment in Venture Capital Fund or Venture Capital Undertaking and registered with SEBI.

   2. Eligibility Criteria:entity incorporated and established outside India in the form of investment company, trust, partnership, pension fund, mutual fund, university fund, endowment fund, asset management company, investment manager, investment management company or other investment vehicle incorporated outside India would be eligible for seeking registration from SEBI. The SEBI for the purpose of registration shall consider whether the applicant is regulated by an appropriate foreign regulatory authority; or is an income tax payer; or submits a certificate from its banker or its promoters' track record where the applicant is neither a regulated entity nor an income tax payer.

   3. Investment Criteria: the same conditions as applicable in case of domestic Venture Capital funds.

   4. Hassle Free Entry and Exit: The foreign venture capital investors proposing to make venture capital investment under the Regulations would be granted registration by the SEBI. SEBI registered Foreign Venture Capital Investors shall be permitted to make investment on an automatic route within the overall sectoral ceiling of foreign investment under Annexure III of Statement of Industrial Policy without any approval from FIPB. Further, SEBI registered FVCIs shall be granted a general permission from the exchange control angle for inflow and outflow of funds and no prior approval of RBI would be required for pricing. However, there would be ex-post reporting requirement for the amount transacted.