Sebi board clears VCF norms sans tax sops

Federation of Indian Chambers of Commerce and Industry (FICCI) termed as "retrograde" the stipulation of a one-year time frame for venture capital funds to off-load their stakes in portfolio companies. "Indian stock markets are illiquid and traded volumes in most listed stocks are insignificant. Hence, the VCs who hold significant stakes in portfolio companies would not be in a position to dispose off their entire holdings in a year," FICCI said.

The Sebi board which met here today cleared the Sebi (Venture Capital Funds) (Amendment) Regulations, 2000 and the Sebi (Foreign Venture Capital Investors) Regulations, 2000. The government of India guidelines (MoF) guidelines for overseas venture capital investment in India dated September 20, 1999 will be repealed on notification of Sebi guidelines.

Mehta said the objective of the whole exercise was to create an environment for the healthy growth of venture capital funds in the country. He said there was clear evidence that as an industry it was gaining momentum with the number of Sebi-registered VCFs growing from 8 in April 1999 to 26 registered till date and the committed funds during the period rising from Rs 250 crore to around Rs 1700 crore.

The regulations also take care of an important recommendation of the KB Chandrasekhar committee which called for providing foreign venture capitalists the facility of registering with Sebi like FIIs which would enable them to make investments in India automatically and within sectoral limits prescribed under the industrial policy statement of government of India. In addition, the regulations ensure that foreign venture capitalists get "hassle free" exit without requiring pricing approval from RBI based on the old CCI formula.

Now Sebi registered foreign venture capital investors (FVCIs) will be permitted to make investment on an automatic route within the overall ceiling of foreign investment under Annexure II of Statement of Industrial Policy without any approval from FIPB.

Further, Sebi registered FVCIs will 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.

Besides, another important distinction made with regard to FVCIs is that the exit clause (requiring domestic VCFs to offload their investment within one year from the listing of the venture capital undertaking) does not apply to FVCIs as they are not entitled to the tax benefit extended to domestic VCFs, Mehta explained. He added that even the domestic VCFs were under no compulsion to exit but would have to forego the tax concession in the bargain.

Besides, the new norms qualify VC funds as Qualified Institutional Investors (QIBs) for the purpose of participation in initial public offers (IPOs) through book-building route and permitted open-ended mutual funds and close-ended ones to invest up to five per cent and 10 per cent respectively, he said.

Some of the members of the regulatory board felt that the mandated post listing exit time frame of one year for availing tax pass through by a domestic venture capital fund could be reconsidered by the government in the light of international experience and the need to avoid operational restrictions and optimize inflow of venture capital in the country.

“The proposed move would make stocks options (ESOPs) of several unlisted companies unattractive and force sub-optimal exit realisation on VCs. The step will dampen investor sentiments and severely lower the prospects for a thriving VC industry at a time when the country is targeting investments to the tune of $ 10 billion,” FICCI said.

Trading in unlisted stocks allowed

MUMBAI: The SEBI board also approved a proposal to permit the Over-The-Counter Exchange of India to develop a trading window for unlisted securities, where qualified institutional buyers would be permitted to participate.

Initially trading, in the unlisted securities will be allowed only on OTCEI and Sebi may consider it on other exchanges after some time, Sebi chairman D R Mehta said.

Though the proposal was approved earlier, constraints in the form of too many regulations did not permit OTCEI to launch such a product, he added. Though an entity incorporated or set up outside India in any of the various permitted forms were eligible for seeking SEBI’s registration, the regulator would consider level of regulation in the country of origin, tax assessment status, bankers certificate on the firm’s or its promoter’s track record, he said.