In today's globalized economy, foreign venture capital investors play a crucial role in fostering innovation and driving economic growth. These investors bring not only capital but also expertise and international networks to startups and emerging companies. For those looking to tap into India's burgeoning startup ecosystem, understanding how to register as a foreign venture capital investor (FVCI) is essential. This process, overseen by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India, opens doors to exciting investment opportunities in one of the world's fastest-growing economies.

This guide aims to walk you through the steps to register as an FVCI in India. We'll explore the legal framework governing FVCIs, eligibility criteria, and permitted investment sectors. You'll learn about the key documents required, the application process through the SEBI Intermediary Portal, and the appointment of custodians and designated banks. We'll also delve into investment conditions and restrictions, as well as the advantages of choosing the FVCI route over Foreign Direct Investment (FDI). By the end, you'll have a clear roadmap to navigate the registration process and begin your venture capital journey in India.

Overview of Foreign Investment in India

Foreign investment plays a crucial role in India's economic growth, fostering technological advancements and job creation. Despite challenges posed by global events like COVID-19, India has emerged as an attractive destination for overseas investment. The country received foreign direct investment (FDI) inflows of USD 82.274 billion in the financial year 2021-22 and USD 54.934 billion in the first three quarters of 2022-23, according to data from the Ministry of Commerce and Industry.

The Indian government has been actively working to liberalize FDI norms and reduce regulatory complexities to attract more foreign capital. Initiatives like the 'Make in India' program have significantly boosted foreign investment. The FDI policy undergoes periodic reviews and updates to encourage investments and promote ease of doing business in India.

Foreign investment in India can be made through various routes, including automatic and government routes. The FDI policy specifies sectors where foreign investment is allowed under the automatic route, along with conditions and limits. For certain sectors, the government route requires prior approval from Indian authorities.

FDI vs FVCI

There are three main entry routes for foreign investment in India: Foreign Portfolio Investor (FPI), Foreign Venture Capital Investor (FVCI), and Foreign Direct Investment (FDI).

FDI involves investments through capital instruments by a non-resident in an unlisted Indian company or 10% or more of the paid-up equity capital of a listed Indian company. Unlike FPI and FVCI routes, the FDI route does not require registration, and any eligible investor can make investments through this route.

FVCI, on the other hand, requires registration with the Securities and Exchange Board of India (SEBI) under the SEBI (Foreign Venture Capital Investors) Regulations, 2000. FVCIs must invest at least two-thirds of their investible funds in equity or equity-linked instruments of venture capital undertakings. The remaining one-third can be invested in debt or debt instruments of venture capital undertakings where the FVCI already has equity investment.

The FVCI route offers key benefits such as exemptions from pricing guidelines stipulated under FEMA Regulations and pre-issue capital lock-in requirements prescribed under regulations governing the issue of securities.

Regulatory framework for foreign investments

The regulatory framework for foreign investments in India is primarily governed by the Foreign Exchange Management Act, 1999 (FEMA), along with rules and regulations framed under it. These include the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

Key regulators overseeing foreign investment in India include:

  1. The Department for Promotion of Industry and Internal Trade (DPIIT) in the Ministry of Commerce and Industry
  2. The Reserve Bank of India (RBI)
  3. The Securities and Exchange Board of India (SEBI)

The Foreign Investment Facilitation Portal (FIFP), managed by DPIIT, serves as a one-stop digital interface for investors to obtain information, apply for approvals, and access various services related to foreign investment.

The regulatory framework aims to strike a balance between protecting national interests and promoting a conducive environment for foreign investors. It plays a significant role in formulating policies, issuing guidelines, granting approvals, and ensuring compliance with regulations, thereby fostering growth of the Indian economy in a regulated manner.

Understanding FVCI Regulations

The regulatory framework for Foreign Venture Capital Investors (FVCIs) in India is primarily governed by the Securities and Exchange Board of India (SEBI). These regulations aim to facilitate and monitor foreign investment in the country's venture capital sector.

SEBI (Foreign Venture Capital Investors) Regulations, 2000

The SEBI (Foreign Venture Capital Investor) Regulations, 2000 define an FVCI as an investor incorporated and established outside India, who is registered under these regulations and proposes to make investments in accordance with them. These regulations set forth the following key provisions:

  1. Investment Requirements: FVCIs are required to invest at least 66.67% of their investable funds in unlisted equity shares or equity-linked instruments of venture capital undertakings (VCUs) or investee companies. The remaining 33.33% may be invested in specified securities as detailed in Regulation 11 of the FVCI Regulations.
  2. Venture Capital Undertakings: A VCU refers to a domestic company not listed on a recognized stock exchange in India at the time of investment. It must be engaged in business activities such as providing services, production, or manufacture of articles or things. Certain sectors are excluded from this definition, including non-banking financial companies (with some exceptions), gold financing, and activities not permitted under the industrial policy of the Government of India.
  3. Custodian Appointment: FVCIs are required to enter into an agreement with a domestic custodian. The custodian's responsibilities include monitoring the FVCI's investments in India, furnishing periodic reports to SEBI, and providing any information requested by SEBI.
  4. Reporting Requirements: All FVCIs must submit periodical reports on their investment activity to SEBI. These reports are to be uploaded online on the SEBI Intermediary Portal within 7 days from the end of each calendar quarter. The domestic custodian is responsible for ensuring timely submission of these reports.

Amendments and Updates

SEBI regularly reviews and updates the FVCI Regulations to ensure they remain relevant and effective. The most recent amendment to these regulations was made on February 7, 2023. Some key updates and proposed changes include:

  1. Registration Process: SEBI has proposed delegating the due diligence for registration and post-registration processes to Designated Depository Participants (DDPs), aligning the FVCI registration process with that of Foreign Portfolio Investors (FPIs).
  2. Eligibility Criteria: Proposed revisions to the eligibility criteria aim to align them with the FPI Regulations. This includes allowing Resident Indians, Non-Resident Indians, and Overseas Citizens of India to be constituents of the applicant, subject to certain conditions.
  3. Application Form: SEBI has proposed modifying the application form (Form A) to align it with the Common Application Form used for FPI registration.
  4. Dematerialization of Assets: A proposal has been made to mandate FVCIs to hold securities and instruments of their investments in dematerialized form, with certain exemptions.
  5. Registration Renewal: SEBI has proposed introducing a renewal fee for FVCI registration, similar to the requirement for FPIs.

These regulations and proposed changes demonstrate SEBI's ongoing efforts to streamline the FVCI registration process and align it with other foreign investment frameworks, while maintaining necessary oversight and control.

The Role of FVCIs in Indian Economy

Foreign Venture Capital Investors (FVCIs) play a crucial role in fostering innovation, enterprise, and the conversion of scientific technology and knowledge-based ideas into commercial production in India. Their significance has become increasingly apparent, especially in light of India's recent success in the information technology sector, which has demonstrated the tremendous potential for growth in knowledge-based industries.

Boosting venture capital investments

FVCIs represent international investors or funds looking to invest in high-growth potential companies in India. By leveraging their global network and expertise, these investors bring in capital from overseas sources, significantly expanding the pool of investment available to Indian startups. This influx of foreign capital is particularly important for sectors such as technology, biotechnology, pharmaceuticals, agriculture, food processing, and telecommunications.

The presence of FVCIs helps to fill a critical gap in the Indian financial ecosystem. Traditional institutional lenders, such as banks, often hesitate to fund technology and knowledge-based startup enterprises due to their reliance on intangible assets and innovative, yet potentially risky, business models. FVCIs, on the other hand, focus on equity or equity-linked investments in privately held, high-growth companies, providing the necessary capital for these startups to thrive.

Supporting startups and innovation

FVCIs contribute significantly to supporting startups and driving innovation in India. They primarily focus on investing in early-stage companies and startups, which often face challenges in accessing capital from traditional sources. These investments provide crucial funding for companies in their initial phases, allowing them to develop and grow their businesses.

Beyond financial support, FVCIs bring valuable expertise and guidance to the table. They often specialize in specific sectors, allowing them to identify promising investment opportunities and provide valuable insights to the invested companies. This support can be instrumental in helping startups scale their operations and achieve success.

The impact of FVCIs extends beyond individual companies. Their investments lead to job creation as startups scale up their operations and hire additional talent. This contributes to the growth of employment opportunities and overall economic development in India. Furthermore, FVCIs foster collaborations between Indian companies and international entities, creating opportunities for knowledge transfer, technology adoption, and market expansion.

Legal Framework Governing FVCIs

The legal framework governing Foreign Venture Capital Investors (FVCIs) in India is primarily regulated by three key authorities: the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Foreign Exchange Management Act (FEMA). These regulatory bodies work in tandem to ensure a structured and transparent environment for foreign investments in the Indian venture capital sector.

SEBI Regulations

The Securities and Exchange Board of India (Foreign Venture Capital Investor) Regulations, 2000, last amended on February 7, 2023, form the cornerstone of FVCI regulations in India. These regulations define an FVCI as an investor incorporated and established outside India, who is registered under the Regulations and proposes to make investments in accordance with them.

Key aspects of SEBI regulations include:

  1. Investment Requirements: FVCIs must invest at least 66.67% of their investable funds in unlisted equity shares or equity-linked instruments of venture capital undertakings (VCUs) or investee companies. The remaining 33.33% may be invested in specified securities as detailed in Regulation 11 of FVCI Regulations.
  2. Venture Capital Undertaking (VCU): A VCU refers to a domestic company not listed on a recognized stock exchange in India at the time of investment. It must be engaged in business activities such as providing services, production, or manufacture of articles or things. Certain sectors are excluded from this definition, including non-banking financial companies (with some exceptions), gold financing, and activities not permitted under the industrial policy of the Government of India.
  3. Custodian Appointment: FVCIs are required to enter into an agreement with a domestic custodian to act as a custodian of securities. The custodian's responsibilities include monitoring the FVCI's investments in India, furnishing periodic reports to SEBI, and providing any information requested by SEBI.
  4. Reporting Requirements: All FVCIs must submit periodical reports on their investment activity to SEBI. These reports are to be uploaded online on the SEBI Intermediary Portal within 7 days from the end of each calendar quarter.

  5. RBI Guidelines

The Reserve Bank of India plays a crucial role in regulating FVCIs through its guidelines and regulations. Some key aspects of RBI's involvement include:

  1. Approval Process: FVCIs need to obtain necessary approval from the RBI for making investments in India.
  2. Foreign Exchange Regulations: RBI oversees the implementation of foreign exchange regulations related to FVCI investments.
  3. External Commercial Borrowings (ECB): RBI provides guidelines on ECB policies, which may have implications for FVCIs investing in certain sectors or companies.

FEMA Provisions

The Foreign Exchange Management Act (FEMA) provides the overarching framework for foreign investments in India, including those made by FVCIs. Key FEMA provisions relevant to FVCIs include:

  1. Capital Account Transactions: Foreign investment by non-residents in resident entities through transfer or issue of security is classified as a 'Capital account transaction' under FEMA.
  2. FEMA Regulations: The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, notified under FEMA, govern the specifics of such transactions.
  3. SEBI-RBI Coordination: A SEBI-registered FVCI with specific approval from RBI under FEMA Regulations can invest in Indian Venture Capital Undertakings (IVCUs) or Indian Venture Capital Funds (IVCFs), subject to certain conditions.

This multi-layered regulatory framework ensures that FVCIs operate within a well-defined structure, promoting transparency and safeguarding the interests of both investors and the Indian economy.

Eligibility

The Securities and Exchange Board of India (SEBI) has established specific criteria for entities seeking registration as Foreign Venture Capital Investors (FVCIs) in India. These eligibility requirements aim to ensure that only qualified and reputable investors participate in the Indian venture capital ecosystem.

Who can apply for FVCI registration

As per the current eligibility criteria, the following entities incorporated outside India may apply for registration as an FVCI:

  1. Investment companies
  2. Investment trusts
  3. Pension funds
  4. Investment partnerships
  5. Mutual funds
  6. Endowment funds
  7. Charitable institutions
  8. University funds
  9. Asset management companies
  10. Investment management companies
  11. Investment managers
  12. Other investment vehicles

SEBI has proposed revisions to align the eligibility criteria for FVCIs with the Foreign Portfolio Investor (FPI) Regulations. These proposed changes include:

  1. Allowing Resident Indians (RIs), Non-Resident Indians (NRIs), and Overseas Citizens of India (OCIs) to be constituents of the applicant, subject to certain conditions:
  • A single NRI/OCI/RI's contribution must be below 25% of the total corpus
  • The aggregate contribution by RIs, NRIs, and OCIs must be below 50% of the total corpus
  • RIs, NRIs, and OCIs must not be in control of the applicant
  1. Permitting resident Indian entities, other than individuals, to be constituents of the applicant if:
  • The entity is an eligible fund manager of the applicant under section 9A of the Income Tax Act, 1961
  • The applicant is an eligible investment fund under the same section and has approval under the Income Tax Rules, 1962
  1. Requiring the applicant to be a resident of a country whose securities market regulator is a signatory to the International Organization of Securities Commission's Multilateral Memorandum of Understanding or has a bilateral Memorandum of Understanding with SEBI
  2. Considering government or government-related investors eligible if they are residents of countries approved by the Government of India
  3. Stipulating that bank applicants must be residents of countries whose central banks are members of the Bank for International Settlements (central bank applicants are exempt from this requirement)
  4. Ensuring that the applicant or its underlying investors contributing 25% or more to the corpus are not on the United Nations Security Council Sanctions List or residents of countries identified by the Financial Action Task Force as having strategic deficiencies in anti-money laundering or combating the financing of terrorism
  5. Requiring the applicant to be a fit and proper person based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008

These proposed changes aim to enhance the regulatory framework for FVCIs and ensure alignment with other foreign investment regulations in India.

Permitted Investment Sectors for FVCIs

Foreign Venture Capital Investors (FVCIs) play a crucial role in fostering innovation and growth in specific sectors of the Indian economy. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) have outlined guidelines for FVCIs, specifying the sectors and types of companies they can invest in.

List of approved sectors

FVCIs have the opportunity to invest in Indian companies engaged in various high-growth potential sectors. As per the regulations, FVCIs can invest in the following approved sectors:

  1. Information Technology
  2. Biotechnology
  3. Nanotechnology
  4. Pharmaceuticals
  5. Agriculture
  6. Telecommunications
  7. Media and Entertainment
  8. Services Sector
  9. Industrial Products

These sectors have been identified as areas with significant growth potential and the ability to contribute to India's economic development. The focus on these sectors aims to channel foreign investment into areas that can drive innovation and technological advancement.

To provide a clearer picture of the investment landscape, here's a breakdown of cumulative investments made by SEBI Registered Venture Capital Funds (VCF) and Foreign Venture Capital Investors (FVCI) in various sectors:

Sectors of Economy VCF (in millions) FVCI (in millions) Total (in millions) Information technology 318 2,040 2,357 Telecommunications 34 494 529 Pharmaceuticals 24 658 682 Biotechnology 70 - 70 Media/ Entertainment 49 219 268 Services Sector 687 1,649 2,336 Industrial Products 329 188 517 Others 2,307 48,673 50,980 Total 3,818 53,922 57,739 This data highlights the significant role FVCIs play in sectors such as information technology, telecommunications, and pharmaceuticals.

Investment in startups

In a move to further liberalize and rationalize the investment regime for FVCIs, the RBI amended regulations on October 20, 2016. These amendments have expanded the investment opportunities for FVCIs, particularly in the startup ecosystem. Key points of these amendments include:

  1. FVCIs can now invest in equity, equity-linked instruments, or debt instruments issued by an Indian 'start-up', irrespective of the sector in which the startup is engaged, without requiring any approval from the RBI.
  2. FVCIs can invest in equity, equity-linked instruments, or debt instruments issued by an Indian company in ten specified sectors whose shares are not listed, without requiring RBI approval.
  3. FVCIs do not need approval for investing in units of venture capital funds.

These changes have significantly streamlined the investment process for FVCIs, especially when it comes to investing in startups. This has opened up opportunities for FVCIs to support innovative and high-potential startups across various sectors, beyond the traditionally approved list.

FVCIs are required to invest at least 66.67% of their investable funds in unlisted equity shares or equity-linked instruments of venture capital undertakings (VCUs) or investee companies. The remaining 33.33% may be invested in specified securities as detailed in FVCI Regulations.

Key Documents Required

The process of registering as a Foreign Venture Capital Investor (FVCI) in India requires the submission of various documents to the Securities and Exchange Board of India (SEBI). These documents serve to verify the applicant's eligibility, financial standing, and commitment to comply with Indian regulations. The required documents can be categorized into three main groups: incorporation certificates, financial documents, and declarations and undertakings.

Incorporation Certificates

Applicants must provide self-attested copies of the following documents:

  1. Certificate of incorporation
  2. Constitution document
  3. Memorandum of Association

These documents establish the legal status of the entity seeking FVCI registration and provide essential information about its structure and purpose.

Financial Documents

To demonstrate financial capability and commitment, applicants need to submit:

  1. A commitment letter from the investor pledging to invest at least USD 1 Million
  2. Net-worth certificate or audited financial statement of both the applicant and the investor who made the commitment

These financial documents help SEBI assess the applicant's financial soundness and ability to fulfill the investment requirements for FVCIs.

Declarations and Undertakings

Applicants must provide several declarations and undertakings to ensure compliance with Indian regulations and SEBI requirements:

  1. A fit and proper declaration in accordance with the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. This declaration should cover the applicant, promoters, persons holding controlling interest (directly and indirectly), and persons exercising control over the applicant (directly and indirectly).
  2. An undertaking that the applicant has the authorization to invest in venture capital funds or carry on investment as a foreign venture capital investor.
  3. An undertaking to enter into an arrangement with a custodian for the purpose of operating a special non-resident rupee account or a foreign currency account.
  4. An undertaking to comply with the applicable guidelines prescribed by the Reserve Bank of India for foreign investment in India, including the provisions of the Foreign Exchange Management Act (FEMA).

It's important to note that SEBI has proposed modifications to the application process. These proposed changes include:

  • Aligning Form A with the Common Application Form (CAF) to streamline the application process and make it more specific to the revised eligibility criteria for FVCI registration.
  • Making PAN and demat account of the applicant prerequisites for FVCI registration.
  • Mandating FVCIs to hold securities and instruments of their investments in dematerialized form, with certain exemptions for securities where dematerialization is not available.

For existing investments where FVCIs have a controlling interest, a six-month period would be provided from the date of notification of such amendment for dematerialization of the investments.

These proposed changes aim to enhance the efficiency of the registration process and align FVCI regulations with other foreign investment frameworks in India.

Application Process for FVCI Registration

The process of registering as a Foreign Venture Capital Investor (FVCI) in India involves several steps and requires careful attention to detail. Applicants must navigate through the SEBI Intermediary Portal, submit the necessary documents, and pay the required fees. Here's a comprehensive guide to the application process:

SEBI Intermediary Portal

The SEBI Intermediary Portal (www.siportal.sebi.gov.in http://www.siportal.sebi.gov.in) serves as the primary platform for FVCI registration. Upon submitting an initial application, the system generates a unique login ID for the applicant. This login ID, along with a password, is automatically sent to the applicant via email.

Once the applicant receives these credentials, they should:

  1. Access the SEBI portal using the provided login ID and password.
  2. Click on "Fresh Registration" under the "Foreign Venture Capital Investor" tab.
  3. Fill in all required details across various tabs on the portal.
  4. Save the information entered in each tab by clicking the "Save Draft" button.
  5. Review all instructions carefully before filling out the online form by clicking the "Blue Question Mark" icon in the top right corner of each page.

  6. Application Form Submission

The application form, known as Form A, must be submitted along with several supporting documents. Here's what applicants need to know:

  1. Form A should be filled out as specified in the First Schedule of SEBI (Foreign Venture Capital Investors) Regulations, 2000.
  2. The application and supporting documents must be submitted in duplicate, as one set is forwarded to the Reserve Bank of India (RBI) for approval.
  3. Key documents to be submitted include:
  4. Details about the sponsor/group to which the applicant belongs
  • Information about the designated bank branch and custodian
  • Copy of certificate of registration with home regulator or income tax return
  • Memorandum and Articles of Association
  • Structure diagram of the applicant
  • Write-up on directors/key personnel
  • Investment strategy disclosure
  • Various declarations, including "Fit and Proper Person" criteria
  1. Once all details are filled and documents uploaded, click the "Final Submit" button to complete the online application process.

Fee Structure

The fee structure for FVCI registration is as follows:

  1. Application Fee: USD 2,100 + 18% GST
  2. Registration Fee: USD 20,000 (payable after SEBI approval)

Payment methods:

  • Direct credit to SEBI's bank account through NEFT/RTGS/IMPS
  • Bank draft in favor of "The Securities and Exchange Board of India" payable in Mumbai

Applicants are encouraged to use online payment modes for the application fee. After SEBI approval, applicants will receive an email with a link to "Enter Fee Details" under "My Worklist" on the SEBI portal home page. They must enter the fee details, save them, and adjust them against the outstanding amount as per the instructions provided.

Once the fees are adjusted and submitted, SEBI will conduct a final review before granting the FVCI registration certificate.

Appointment of Custodian and Designated Bank

Foreign Venture Capital Investors (FVCIs) are required to appoint both a domestic custodian and a designated bank as part of their registration process in India. These appointments play a crucial role in ensuring compliance with regulatory requirements and facilitating smooth operations for FVCIs.

Role of custodian

FVCIs must enter into an agreement with a domestic custodian to act as a custodian of securities. The custodian's responsibilities include:

  1. Monitoring the investments of FVCIs in India
  2. Furnishing periodic reports to the Securities and Exchange Board of India (SEBI)
  3. Providing any information requested by SEBI

The FVCI has the responsibility to ensure that the domestic custodian fulfills these obligations. This arrangement helps maintain transparency and allows regulatory authorities to oversee FVCI activities effectively.

In case an FVCI wishes to change its domestic custodian, it must submit an application through the SEBI Intermediary Portal. This application should include all necessary supporting documents to update the custodian details in SEBI records.

Special non-resident rupee account

FVCIs are required to appoint a branch of a bank approved by the Reserve Bank of India (RBI) as their designated bank. This bank is responsible for opening foreign currency denominated accounts or special non-resident rupee (SNRR) accounts for the FVCI.

Key features of the SNRR account include:

  1. It is a non-interest bearing current account denominated in Indian Rupees (INR).
  2. The account balances are eligible for repatriation.
  3. All transactions in the SNRR account are subject to applicable taxes in India.
  4. The account's tenure is concurrent with the FVCI's period of operation and should not exceed seven years without RBI approval.

It's important to note that SNRR accounts have specific restrictions:

  • Transfers from any Non-Resident Ordinary (NRO) account to the SNRR account are prohibited.
  • Transactions under the Liberalized Remittance Scheme (LRS) are not permitted through the SNRR account.
  • The account holder cannot make foreign exchange available to any person resident in India against reimbursement in rupees or in any other manner.

While SNRR accounts are generally not allowed to be operated by a Power of Attorney holder, an exception is made for FVCIs. Their SNRR accounts can be operated by a custodian, providing additional flexibility in managing their investments and financial transactions in India.

Investment Conditions and Restrictions

Foreign Venture Capital Investors (FVCIs) in India are subject to specific investment conditions and restrictions designed to regulate their activities and promote targeted investments in key sectors. These regulations aim to strike a balance between attracting foreign capital and safeguarding the interests of the Indian economy.

Minimum investment requirement

FVCIs are required to adhere to a strict investment allocation strategy. They must invest at least 66.67% of their investable funds in unlisted equity shares or equity-linked instruments of venture capital undertakings (VCUs) or investee companies. This requirement ensures that a significant portion of FVCI funds is directed towards supporting emerging businesses and startups.

The remaining 33.33% of investable funds may be invested in specified securities as detailed in Regulation 11 of FVCI Regulations. These may include listed securities, subject to compliance with certain additional conditions. It's important to note that these investment conditions and restrictions must be achieved by the FVCI by the end of its life cycle.

Sector-specific limitations

The FVCI route is available only for investors looking to invest in specific sectors. These sectors have been identified as key areas for growth and innovation in the Indian economy. The permitted sectors for FVCI investment include:

  1. Biotechnology
  2. Information Technology related to hardware and software development
  3. Nanotechnology
  4. Seed research and development
  5. Research and development of new chemical entities in the pharmaceutical sector
  6. Dairy industry
  7. Poultry industry
  8. Production of bio-fuels
  9. Hotel-cum-convention centers with seating capacity of more than 3,000
  10. Infrastructure sector

It's worth noting that FVCIs can invest in 'startups' irrespective of the sector in which the startup is engaged. This provision offers greater flexibility for FVCIs to support innovative new businesses across various industries.

FVCIs are prohibited from investing in certain areas as specified under clause (m) of regulation 2 of SEBI (FVCI) Regulations, 2000. These exclusions typically include activities not permitted under the industrial policy of the Government of India, such as:

  • Non-banking financial companies (with some exceptions like Core Investment Companies in the infrastructure sector, Asset Finance Companies, and Infrastructure Finance Companies registered with the Reserve Bank of India)
  • Gold financing
  • Any other activity specified by SEBI in consultation with the Government of India

These sector-specific limitations ensure that FVCI investments are channeled into areas deemed crucial for India's economic development and technological advancement. However, it's important to note that this sector-specific approach may limit the options for sector-agnostic investors, who may view the FVCI route with some skepticism due to these restrictions.

Conclusion

To wrap up, the process of registering as a Foreign Venture Capital Investor in India involves navigating through a complex regulatory landscape. From meeting eligibility criteria to appointing custodians and designated banks, FVCIs must adhere to strict guidelines set by SEBI and RBI. This framework aims to strike a balance between attracting foreign capital and safeguarding the interests of the Indian economy.

The FVCI route has an impact on India's venture capital ecosystem, offering unique advantages for investors looking to tap into specific high-growth sectors. While sector-specific limitations may pose challenges for some investors, the ability to invest in startups across various industries provides flexibility. As India continues to evolve as an attractive destination for foreign investment, understanding and navigating the FVCI registration process becomes crucial to leverage opportunities in this dynamic market.

Advantages of FVCI Route over FDI

The Foreign Venture Capital Investor (FVCI) route offers several advantages over the Foreign Direct Investment (FDI) route for investors looking to enter the Indian market. These benefits make the FVCI route an attractive option for those seeking greater flexibility and fewer restrictions in their investment strategies.

Pricing norm exemptions

One of the most significant advantages of the FVCI route is the exemption from pricing norms. Unlike investments made through the FDI route, FVCIs have the freedom to acquire or sell instruments at a price mutually acceptable to the buyer and the seller/issuer. This exemption applies both at the time of entry and exit, providing FVCIs with greater flexibility in structuring their investments.

For non-resident investors using the FDI route, investments into compulsorily convertible debentures (CCDs) are subject to strict pricing norms. These norms dictate that the investment cannot be made at a price lower than the prevailing fair market value, determined using internationally accepted pricing methods. Similarly, at the time of exit, the valuation cannot exceed the then-prevailing fair market value. These restrictions can limit the potential returns for FDI investors.

In contrast, FVCIs can structure their investments and exits without being constrained by these pricing norms. This flexibility allows FVCIs to negotiate more favorable terms and potentially achieve higher returns on their investments.

Exit flexibility

The FVCI route offers enhanced exit flexibility compared to the FDI route. One notable advantage is the exemption from open offer provisions under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This exemption applies when FVCIs sell shares to promoters, provided the transfer is effected pursuant to a pre-existing arrangement.

This provision has an impact on the exit strategy for FVCIs. If the portfolio company gets listed on a stock exchange after the initial investment, FVCIs can transfer shares to promoters without triggering the public offer requirement. This exemption ensures that promoters buying back shares from FVCIs are not burdened with the obligation to make an offer to other shareholders for up to 20% of the company's paid-up capital.

Additionally, FVCIs have the ability to structure deals that include options to buy or sell the equity of the investee company upon the occurrence of particular events. This flexibility allows FVCIs to negotiate more favorable exit terms and protect their interests in various scenarios.

IPO-related benefits

FVCIs enjoy several advantages related to Initial Public Offerings (IPOs), which can significantly enhance their investment strategies:

  1. Lock-in exemption: FVCIs are exempted from the one-year lock-in requirement under the SEBI (Issue of Capital and Disclosure) Regulations, 2018, provided they have held the shares for at least one year. This exemption allows FVCIs to exit immediately once the investee company goes public, offering greater liquidity compared to other investors subject to the lock-in period.
  2. Qualified Institutional Buyer status: FVCIs are classified as 'Qualified Institutional Buyers' under the ICDR Regulations. This classification makes them eligible to subscribe to securities offered at an IPO through the book-building process, potentially providing access to attractive investment opportunities.
  3. Pre-IPO lock-in consideration: Unlike other investors, the pre-listing holding period of FVCIs is considered when computing the one-year lock-in period. This means that if an FVCI has held shares for a significant period before the IPO, it may be able to sell its shares sooner after the listing compared to other investors.

These IPO-related benefits provide FVCIs with greater flexibility in managing their investments and capitalizing on exit opportunities in the public markets.

FAQs

1. What industries are eligible for investment by a Foreign Venture Capital Investor (FVCI)?An FVCI can invest in various sectors within India including Biotechnology, IT (both hardware and software development), Nanotechnology, Seed research and development, Research and development of new chemical entities in the pharmaceutical sector, Dairy industry, Poultry industry, Production of bio-fuels, and Hotel-cum-convention centers.

2. What is a Foreign Venture Capital Investor (FVCI)?A Foreign Venture Capital Investor (FVCI) is defined under the SEBI (FOREIGN VENTURE CAPITAL INVESTOR) REGULATIONS, 2000 as an investor that is incorporated or established outside India and plans to make investments in Indian venture capital funds or venture capital undertakings.

3. How can one register as a venture capitalist in India?To register as a venture capitalist in India, one must adhere to the SEBI (Venture Capital Funds) Regulations, 1996. The process includes submitting a Form A, along with the necessary paperwork and a fee of Rs. 1,00,000. This submission should include a summary of the Memorandum and Articles of Association and the Investment Management Agreement, if applicable.

4. What does the FVCI route entail in India?The FVCI route in India allows foreign venture capital investors to invest in Indian startups and early-stage companies, offering certain advantages and opportunities for these investors.