Foreign Venture Capital Investor

Foreign Venture Capital Investor

A Foreign Venture Capital Investor (FVCI) is an investor incorporated or established outside India who can invest either in a Domestic Venture Capital Fund or a Venture Capital Undertaking (Domestic Unlisted Company). Foreign equity player or Foreign Venture can also invest in India directly under FDI Scheme. SEBI has given certain benefits to the investors who are registered as an FVCI.

Certain restrictions are also imposed on use of funds for those who register as an FVCI.

Any company seeking registration under SEBI as FVCI shall make an application to the SEBI with the prescribed application fee. (USD 2500)

While considering an FVCI application, SEBI does review the applicant’s track record, professional competence, financial soundness, experience, general reputation, whether the applicant is regulated by an appropriate foreign regulatory authority or is an income tax payer, amongst other factors. SEBI then forwards its approval to the RBI, which then grants its approval.

The board after reviewing the application, if satisfied that the applicant is eligible for grant of certificate, sends the intimation to the applicant for registration. (Registration Fee – USD 10,000)

Benefits of Registering under the FVCI Regulations

  • The FVCI may acquire by purchase or otherwise or sell shares/convertible debentures/units or any other investment held by it in the VCUs or VCFs or schemes/funds set up by the VCFs at a price that is mutually acceptable to the buyer and the seller/issuer.

By this exemption, FVCI instead of paying a price based on the net asset value of the investee company could pay by negotiable price.

  • The provisions of the SEBI (Substantial Acquisitions of Shares and Takeover) Regulations, 1997 (Takeover Code) do not apply to shares transferred from an FVCI to the promoters of the company or to the company itself, if effected in accordance with a pre-existing agreement between the FVCI and the promoters of the company.

This means in case the promoters decide to buy back the shares from the FVCI, they will not be required to comply with the public offering requirements of the Takeover Code.

  • The shares acquired by FVCI in an unlisted company are not subject to the one year lock-up period upon the Initial Public Offering (IPO) of the shares of the company.
  • FVCIs registered with the SEBI are ‘Qualified Institutional Buyers’ in the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (‘DIP Guidelines’). Thus they are eligible for subscribing for the securities in an IPO under the typical book-building process.
  • In case of Non resident investment, there is a condition that subsequent investments require the Government approval, where the non resident has an existing joint venture, technology transfer agreement or trade mark agreement in the same area in India. But this condition is not applicable in case of FVCI.

FDI Norms

In case registered with SEBI

Venture Capital Fund (VCF) and Venture Capital Company – Offshore Venture Capital Fund / Companies are allowed to invest in domestic venture capital undertaking as well as any other company through automatic route, subject only to SEBI Regulation and sector specific caps on Foreign Direct Investment.

In case not registered with SEBI

Non Banking Financial Company

Foreign Venture Companies are allowed to invest in domestic company through automatic route, subject to the conditions.

Venture Capital Fund - Taxation

Domestic VCFs

Indian VCFs are entitled to tax benefit under Section 10(23FB) of the Income Tax Act. Any income earned by a SEBI registered VCF (established in the form of trust or company) set up to raise funds for investment in a VCU is exempt from tax.

venture capital undertaking” means such domestic company whose shares are not listed in a recognized stock exchange in India and which is engaged in the business of dairy/ poultry, nanotechnology, IT, biotechnology, pharmaceuticals, etc.

Foreign Venture Capital Investor

There is no specific exemption. Section 10(23FB) applies to venture capital company registered with the SEBI. The definition of company under Section 2(17) includes any corporate body incorporated under the law of a country other than India.

Section 10(23FB) read with Section 115 U of the Income Tax Act, which provides notwithstanding anything contained in any provisions of the Act, any income received by a person out of investments made in FVCI will be subject to tax in the same manner as if were the income received by the investor had made the investment directly in Indian investee company. This means income earned by a VCF by way of dividend, interest or capital gains, upon distribution would continue to retain its original character in the hand of the investors.

The provisions of Tax on Distributed Profit of Domestic Company, Tax on Distributed Income and Collection and Recovery of tax – Deduction at source shall not apply to the income paid by a venture capital company or venture capital fund.

Double Taxation Avoidance Agreement (DTAA)

Although Section 115 U begins with the words ‘Notwithstanding anything contained in any other provisions of this Act', it overrides the normal provisions relating to taxability of individual items of income, it cannot override Section 90(2) relating to DTAA provisions.

A non resident investor from the country with which India has a tax treaty has an option of being taxed under DTAA or Income Tax Act, whichever is more beneficial. Therefore, a non resident investor may opt the DTAA if the treaty is more favorable, in which case the provisions under Section 10(23FB) and 115U would not be applicable. In case FVCI opts to be taxed under the DTAA and it has a permanent establishment in India, its Indian income would not be tax free.

Compliance under Income Tax – other than normal returns

The statement of distributed income shall be furnished by the 30th November of the financial year following the previous year during which such income is distributed, to the Chief Commissioner or Commissioner of Income-tax, within whose jurisdiction, the principal office of the Venture Capital Company or the Venture Capital Fund, as the case may be, is situated.

Other Compliances

Foreign Venture Capital Fund is required to submit a quarterly statement in the prescribed format.

Every venture capital fund shall maintain, for a period of eight years, books of account, records and documents. It shall intimate the Board, in writing, the place where these books, records and documents are being maintained.

Statistical Figures

Particulars
as on March 31, 2010 (Rs. in Crore)
as on Dec 31, 2010 (Rs. in Crore)
 
 
Sectors of Economy
VCF
FVCI
Total *
VCF
FVCI
Total*
 
Information technology
563
2787
3103
533
3016
3319
 
Telecommunications
777
6199
6532
858
7145
7469
 
Pharmaceuticals
568
1089
1442
460
985
1325
 
Biotechnology
228
188
329
187
140
289
 
Media/ Entertainment
584
763
883
802
701
1006
 
Services Sector
902
2157
2327
1215
2039
2677
 
Industrial Products
875
1451
1672
783
886
1355
 
Real Estate
5584
3397
7473
8155
3107
9783
 
Others
8192
10863
15288
10029
15223
20637
 
Total
18273
28894
39051
23022.66
33241.34
47859
 
 
*excludes Rs.8116 crore of FVCI investments through VCFs
*excludes Rs.8405 crore of FVCI investments through VCFs
 
 

 

Author: Mr. Abhishek Hans

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