SEBI (VENTURE CAPITAL FUND)REGULATIONS

Dr.Kajal Puri

Asstt. Prof in PG Deptt of Commerce and Management

Introduction

• SEBI has been a regulatory body for venture capital companies or funds with effect from January 25, 1995.
• It issued certain guidelines on 4^th ,1996 which defines venture capital fund as “fund established in the form of a company or trust which raises moneys through loans, donations, issue of securities or units as the case may be, and makes or proposes to make investments in accordance with these regulations”.

Guidelines

1. Registration of venture capital funds.
2. Investment conditions and restrictions.
3. General obligations and responsibilities.
4. Inspection and investigation
5. Procedure for action in case of default

1. Registration of venture capital funds �(A) Application for Grant of Certificate

• Any company or trust [or a body corporate] proposing to carry on any activity as a venture capital fund on or after the commencement of these regulations shall make an application to the Board for grant of a certificate.
• Any or trust [or a body cocompany rporate], who on the date of commencement of these regulations is carrying any activity as a venture capital fund without a certificate shall make an application to the Board for grant of a certificate within a period of three months from the date of such commencement:Provided that the Board, in special cases, may extend the said period upto a maximum of six months from the date of such commencement
• An application for grant of certificate under sub-regulation (1) or sub- regulation (2) shall be made to the Board in Form A and shall be accompanied by a nonrefundable application fee of ₹ 25,000 by way of bank draft issued in favour of SEBI at Mumbai.
• Any company or trust [or a body corporate] referred to in sub-regulation (2) who fails to make an application for grant of a certificate within the period specified therein shall cease to carry on any activity as a venture capital fund
• TheBoard may in the interest of the investors issue directions with regard to the transfer of records, documents or securities or disposal of investments relating to its activities as a venture capital fund.

​

(B) Eligibility Criteria

If the application is made by a company

If the application is made by a trust

1. the instrument of trust is in the form of a deed and has been duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908);
2. the main object of the trust is to carry on the activity of a venture capital fund; I
3. the directors of its trustee company, if any or any trustee is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant;
4. the directors of its trustee company, if any, or a trustee has not at any time, been convicted of any offence involving moral turpitude or of any economic offence;
5. the applicant is a fit and proper person;]

1. memorandum of association as has its main objective, the carrying on of the activity of a venture capital fund
2. it is prohibited by its memorandum and articles of association from making an invitation to the public to subscribe to its securities;
3. its director or principal officer or employee is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant
4. its director, principal officer or employee has not at any time been convicted of any offence involving moral turpitude or any economic offence
5. It is a fit and proper person

If the application is made by a body corporate

• it is set up or established under the laws of the Central or StateLegislature,
• the applicant is permitted to carry on the activities of a venture capital fund,
• the applicant is a fit and proper person,
• )the directors or the trustees, as the case may be, of such body corporate have not been convicted of any offence involving moral turpitude or of any economic offence,
• the directors or the trustees, as the case may be, of such body corporate, if any, are not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant .

• [the applicant] has not been refused a certificate by the Board or its certificate has 5[not] been suspended under regulation 30 or cancelled under regulation 31.

(C) Procedure for grant of certificate

• If the Board is satisfied that the applicant is eligible for the grant of certificate, it shall send an intimation to the applicant.
• On receipt of intimation, the applicant shall pay to the Board, the registration fee of ₹ 500,000 payable by way of bank draft in the favour of SEBI at Mumbai.
• The Board shall on receipt of the registration fee grant a certificate of registration in Form B.

(D) Conditions of certificate

The certificate granted under regulation 7 shall be inter alia, subject to the following conditions, namely:—

(a) the venture capital fund shall abide by the provisions of the Act and these regulations;

b) the venture capital fund shall not carry on any other activity other than that of a venture capital fund;

(c) the venture capital fund shall forthwith inform the Board in writing if any information or particulars previously submitted to the Board are found to be false or misleading in any material particular or if there is any change in the information already submitted.

(E) Effect of refusal to grant certificate

• Any applicant whose application has been rejected under regulation 9 shall not carry on any activity as a venture capital fund.
• Any company or trust or a body corporate referred to in sub-regulation (2) of regulation 3, whose application for grant of certificate has been rejected under regulation 9 by the Board shall, on and from the date of the receipt of the communication under sub-regulation (2) of regulation 9, cease to carry on any activity as a venture capital fund.
• The Board may in the interest of the investors issue directions with regard to the transfer of records, documents or securities or disposal of investments relating to its activities as a venture capital fund.(4
• The Board may in order to protect the interests of the investors appoint any person to take charge of records, documents, securities and for this purpose also determine the terms and conditions of such an appointment.

2. Investment conditions and restrictions �(A) Minimum investment in venture capital fund

• A venture capital fund may raise monies from any investor whether Indian, Foreign or non-resident Indian 1[by way of issue of units].
• No venture capital fund set up 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.
• Each scheme launched or fund set up by a venture capital fund shall have firm commitment from the investors for contribution of an amount of at least rupees five crores before the start of operations by the venture capital fund.]

(B) Prohibition on listing

No venture capital fund shall be entitled to get its units listed on any recognised stock exchange till the expiry of three years from the date of the issuance of units by the venture capital fund.

3. General obligations and responsibilities�

(A) Prohibition on inviting subscription from the public

No venture capital fund shall issue any document or advertisement inviting offers from the public for the subscription or purchase of any of its units

(B) Private placement

A venture capital fund may receive monies for investment in the venture capital fund [only] through private placement of its units

(C) Maintenance of books and records

• Every venture capital fund shall maintain for a period of eight years books of account, records and documents which shall give a true and fair picture of the state of affairs of the venture capital fund.
• Every venture capital fund shall intimate the Board, in writing, the place where the books, records and documents referred to in sub-regulation (1) are being maintained.

(D) Winding-up

(1) A scheme of a venture capital fund set up as a trust shall be wound up,

(a) when the period of the scheme, if any, mentioned in the placement memorandum is over;

(b) if it is the opinion of the trustees or the trustee company, as the case may be, that the scheme shall be wound up in the interests of investors in the units;

(c) if seventy-five per cent of the investors in the scheme pass a resolution at a meeting of unit holders that the scheme be wound up; or(d) if the Board so directs in the interests of investors.

​

(2) A venture capital fund set up as a company shall be wound up in accordance with the provisions of the Companies Act, 1956 (1 of 1956).

(3) The trustees or trustee company of the venture capital fund set up as a trust or the Board of Directors in the case of the venture capital fund is set up as a company (including body corporate) shall intimate the Board and investors of the circumstances leading to the winding up of the Fund or Scheme under sub- regulation (1).]

(E) Effect of winding-up

1. On and from the date of intimation under sub-regulation (3) of regulation 23, no further investments shall be made on behalf of the scheme so wound up.
2. Within three months from the date of intimation under sub-regulation (3) of regulation 23, the assets of the scheme shall be liquidated, and the proceeds accruing to investors in the scheme distributed to them after satisfying all liabilities.
3. Notwithstanding anything contained in sub-regulation (2) and subject to the conditions, if any, contained in the placement memorandum or contribution agreement or subscription agreement, as the case may be, in specie distribution of assets of the scheme, shall be made by the venture capital fund at any time, including on winding up of the scheme, as per the preference of investors, after obtaining approval of at least 75% of the investors of the scheme.]

5. Inspection and investigation �(A) Board’s right to inspect or investigate�

The Board may 2[suo motu or upon receipt of information or complaint] appoint one or more persons as inspecting or investigating officer to undertake inspection or investigation of the books of account, records and documents relating to a venture capital fund for any of the following reasons, namely:—

1. to ensure that the books of account, records and documents are being maintained by the venture capital fund in the manner specified in these regulations;
2. to inspect or investigate into complaints received from investors, clients or any other person, on any matter having a bearing on the activities of the venture capital fund;
3. to ascertain whether the provisions of the Act and these regulations are being complied with by the venture capital fund; and
4. to inspect or investigate suo motu into the affairs of a venture capital fund, in the interest of the securities market or in the interest of investors.

(B) Notice before inspection or investigation

• Before ordering an inspection or investigation under regulation 25, the Board shall give not less than ten days notice to the venture capital fund.
• Notwithstanding anything contained in sub-regulation (1) where the Board is satisfied that in the interest of the investors no such notice should be given, it may by an order in writing direct that the inspection or investigation of the affairs of the venture capital fund be taken up without such notice.
• During the course of an inspection or investigation, the venture capital fund against whom the inspection or investigation is being carried out shall be bound to discharge its obligations as provided in regulation 27.

(C) Communication of findings etc., to the venture capital fund

The Board may after consideration of the investigation or inspection report and after giving reasonable opportunity of hearing to the venture capital fund or its trustees, directors issue such direction as it deems fit in the interest of securities market or the investors including directions in the nature of:—

1. Requiring a venture capital fund not to launch new schemes or raise money from investors for a particular period;
2. Prohibiting the person concerned from disposing of any of the properties of the fund or scheme acquired in violation of these regulations;
3. Requiring the person connected to dispose of the assets of the fund or scheme in a manner as may be specified in the directions;
4. Requiring the person concerned to refund any money or the assets to the concerned investors along with the requisite interest or otherwise, collected under the scheme;
5. Prohibiting the person concerned from operating in the capital market or from accessing the capital market for a specified period.

6. PROCEDURE FOR ACTION IN CASE OF DEFAULT�Liability for action in case of default

Without prejudice to the issue of directions or measure under regulation 29, a venture capital fund which—

1. contravenes any of the provisions of the Act or these regulations;
2. fails to furnish any information relating to its activity as a venture capital fund as required by the board
3. furnishes to the Board information which is false or misleading in any material particular;
4. does not submit periodic returns or reports as required by the Board;
5. does not co-operate in any enquiry, inspection or investigation conducted by the Board;(
6. fails to resolve the complaints of investors or fails to give a satisfactory reply to the Board in this behalf shall be dealt with in the manner provided in 2[Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.]

Thank you