Meaning of Venture Capital fund.. sailent features of the regulation prescribed by SEBI regarding venture capital funds..

In recognition of the growing important of Venture Capital as one of the sources of finance for Indian industry, particularly for the smaller unlisted company, overseas venture capital investments are allowed with effect from September 1995. Consequently the SEBI has made the number of regulations on 4th Dec, 1996. These regulations were subsequently amended in September 2000. 

                    A venture capital fund has been defined to mean a fund established in the form of a trust or a company including a body corporate and registered under these regulations,which:

(i) Had a dedicated pool of capital.

(ii) Raised in a manner specified in the regulations. 

(iii) Invest in venture capital undertaking in accordance with these regulations.

         A venture capital undertakings means a domestic company:

(i) Whose shares are not listed on a recognised stock exchange in India.

(ii) Which is engaged in the business for providing services, production or manufacture of articles or things and does not include such activities or sectors which have been included in the negative list by the board.

         Negative list include real estate,non- banking financial services,good financing activities not permitted under government industrial policy and any other activity specified by SEBI.

  Salient features of the regulations prescribed by SEBI regarding venture capital funds.

1. Registration of Venture Capital funds:

A venture capital fund may be set up either by company or a trust, after a certificate of registration is granted by SEBI on an application made to it. The applicant company or trust must fulfill a particular the following conditions:

(i) The memorandum of association of the company must specify as it's main objective of the carrying on of the activity of a venture capital fund.

(ii) It is prohibited by its memorandum and articles of association from making an invitation to the public to subscribed to its securities.

(iii) It's director or principale officer or employee is not involved in any litigation connected with the securities market.

(iv) Its director principal officer or employee has not at anytime been convicted of any offence involving moral turpitude or any economic offence.

(v) The applicant is a fit and proper person.

            On receipt of the certificate of registration,it shall be binding under venture capital fund to aboide by the provisions of the SEBI act and these regulations venture capital funds shall not carry on any other activity than that of a venture capital fund.

2. Minimum investments in a venture capital funds: 

A venture capital fund may raise money from any investor Indian, foreign or non resident Indian by way of issue of units provided the money accepted from any investor is not less that Rs 500000. The restriction will exclude employees, principle officer or director of the venture capital funds or non resident Indians or persons or institution of foreign origins. Venture capital funds shall not issue any document or advertisement inviting offers from public for subscription of its securities. Before a venture capital funds start it's operation each scheme launched or fund set up by a venture capital fund shall have firm commitment from the investors for the contribution of atleast Rs 500000.

3. Investment conditions and restrictions:

All investment made or to be made by venture capital fund shall be subject to the following conditions.

1. (a) A venture capital fund shall disclose the investment strategy at the time of application for registration.

(b) A venture capital fund shall not invest more than 25% of the fund is one venture capital undertakings.

(c) It shall not issue on the associated companies .

(d) A venture capital funds shall not make investment in the venture capital undertaking as enumerated below:

(i) Atleast 75% of the investable funds shall be investable funds shall be invested in unlisted equity shares or equity linked instruments.

2. Not more than 25% of the investable funds may be invested by way of :

(i) Subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed subject to a luck in period of one year.

(ii) Debt or debt instruments of a venture capital undertakings in which the venture capital funds has already made an investment by way of equity.

4. Prohibitions of listing: 

The securities are units issued by venture capital fund shall not be listed on any recognised stock exchange till the expiry of 3 years. Such securities of units.

5. Private placements:

A venture capital funds may receive money from investment made in the venture capital fund only though private placement of its securities or units. Before issuing any units or making an offer inviting any subscription to its securities, the venture capital fund or company shall issue a placement memorandum which shall give details of the terms subject to which money are proposed to be raised from investors are intered into contribution or subscription agreement with the investors which shall specify the terms and conditions for raising money. The venture capital funds shall file with SEBI a copy of the above along with the report of money actually collected from investors.

6. Winding up:

A scheme of venture capital fund set up as a trust shall be wound up:

(a) When the period of scheme, if any, is ever or

(b) If the trustee are of the opinion that the winding up shall be in the interest of the investors or 

(c) 75% of the investors in the scheme pass a resolution for winding up or

(d) If SEBI so directs in the interest of the investors.

A venture capital shall be wound up in accordance with the provisions of companies act.

7. Powers of the securities and exchange board of India powers:

The board has the following:

(a) To appoint inspecting or investigating officers to undertake inspection or investigation of the books of accounts, recorda and documents of Venture Capital fund.

(b) To suspend the certificate granted to a venture capital fund if it contravenes any provision of the SEBI act or these guidelines or fails to default in submitting any information as required by board or submitts false or misleading information etc.

(c) To cancel the certificate in the following cases:

(i) Venture Capital fund is guilty of fraud or have been convicted of an offence involving moral turpitude.

(ii) Venture capital fund has been guilty of repeated default mentioned in (b) above

(iii) Venture Capital fund contravenes any of the provisions of the act or the regulations.