Tuesday, January 31, 2012

Venture Capital Funds: Minimum Investment Norms

(The following post is contributed by Ravi Shankar Jha, a final year student at the Dr. RML National Law University, Lucknow. It points to a lacuna in SEBI’s Venture Capital Funds Regulations)
Venture capital funds (VCFs) have been envisaged to provide easy capital to start-up firms. In India, VCFs are regulated by SEBI (Venture Capital Funds) Regulations, 1996. Through these regulations, SEBI has sought to lay down conditions within which a VCF must restrict its investments.

The regulations provide for setting up of a venture capital fund by a company, trust or a body corporate. The regulation further provides different eligibility criteria for these forms of vehicles for the purpose of grant of certificate under clause 4 of these regulations. It is further to be pointed that the expression “body corporate” was inserted by an amendment in the year 2000 in clause 3(1) of these regulations.

Clause 11 of these regulations lays down minimum investment in a venture capital fund. To that effect, clause 11(2) provides that no venture capital fund set up either as a company or any scheme of a venture capital fund set up as a trust shall accept any investment from any investor which is less than five lakh rupees (Rs. 500,000). This is where the regulators seem to have left a lacuna in the law. Gathering from the intention of the regulators, it seems that they want to ensure financial soundness of a VCF by providing for such minimum investment norms. But these regulations have failed to cover venture capital funds set up as a body corporate. A bare reading of the provision suggests that this norm of minimum investment of 5 lakh rupees applies only to funds set up either as a trust or a company. There is also no definition of the term given in this regulation. Clause 2(c) defines company as a company incorporated under the Companies Act, 1956 which obviously does not include a body corporate as body corporate under the Companies Act is a much wider concept which subsumes within it companies as well. Also, since the word, “body corporate” was introduced in clause 3 by an amendment in the year 2000, it can be argued that SEBI could have amended clause 11(2) accordingly and provided for such minimum investment norms for venture capital funds set up as body corporate as well. But such prominent absence only strengthens the argument that funds set up as body corporate (not being companies or trusts) are not subject to this minimum investment condition which at best is counter intuitive as there seems to be no logic or rationale in exempting such funds from this minimum investment norms.

This lacuna in the law must be filled as it could potentially be called in question in case a VCF were to be set up in the form of a body corporate that is neither a company nor trust (which is permissible under the Regulations), particularly if the intention is to circumvent the minimum investment norms by contending that clause 11(2) does not apply to investment funds set up as a body corporate under the Venture Capital Regulations.

- Ravi Shankar Jha

1 comment:

Anonymous said...

This is such a juvenile understanding of the VCF Regulations and the way the SEBI registration process works.

While on paper the point made in the post is sound (not going into what a body corporate is, and whether you'd ever be able to set up a body corporate to function as a VCF), it ignores the fact that a completed application under the VCF Regulations has to go through a rigorous application scrutiny process. The SEBI has begun to ask for minimum commitment letters far over the prescribed norms, with informal waivers only available for Funds looking to invest in certain socially sensitive sectors.

There are several notifications asking for minimum commitments prior to registration which the author should look at.