SEBI Regulations on Venture Capital Institutions

The main reason for the lack of development of venture capital industry in our country pertains to restrictive legal and financial framework. The recommendations made by SEBI (Chandrasekaran Committee) in the year 2000 are as follows:-

Sebi Regularizing various conditions into uniform measures:

At present, we have various conditions imposed on venture capital investments. Instead of such measures, we can make venture capital as a single window clearance. The Income Tax Act under Section 10 (23FA) must provide automatic tax exemptions to venture capital fund.

Structure of Venture Capital Fund:

Limited partnership firms and limited liability companies can also be created by amending the existing Partnership Act and Companies Act.

Foreign venture capital investor, registered with SEBI should not have any ceiling for investment in India and there is no need for approval from Foreign Investment Promotion Board and Reserve Bank of India.

Resource Mobilization:

Mutual funds, Banks and Insurance companies should be allowed to invest in venture capital funds.

Investments by Venture capital institutions:

There should not be any restrictions with regard to investment by venture capital institutions

Investments can be allowed even in real estates and other finance companies. At present, there is a ceiling of 40% in the paid up capital of the borrowing company. This should be removed.

The Venture capital institutions must be allowed freely to invest in equity or equity related investments and also subscribe in Initial Public Offer (IPO).

Domestic Venture Capital institutions must be allowed to invest in securities of companies registered outside India. There may be a ceiling for such investments.

Exits:

Under the Companies Act, buy back of securities needs amendment to the Act. There is a prohibition of fresh issue of capital for a period of 2 years which can be reduced to 6 months for unregistered companies. The venture capital institutions should also be exempted from SEBI takeover code.

SEBI Regulations:

The present SEBI guidelines on Initial Public Offer (IPO), applicable to companies earning profits for 3 years should be reduced.

Transfer of securities: The practice of obtaining no objection certificate should be dispensed with.

The definition of SEBI with regard to venture capital institutions should undergo a change. It should include funds set-up and other legal entities. Venture capital institutions must be permitted to invest in equity related instruments or in IPO. Investment in listed securities of sick companies may be given up. Financial assistance to companies obtaining Venture Capital Funds needs relaxation.

Company Law:

Suitable amendments should be made for buy back facility.

Other issues:

Other related issues consist of employees stock option plans, investment in foreign companies and tax issues.

The above recommendations of Chandrasekaran Committee have been accepted by the Government.

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