Indian Equity – Private Funding – Corporate Funding and Listings in Stock Exchanges Important Questions
Explain the investment criteria for a foreign venture capital fund in India.
Comment on the following: “The investment criteria for a foreign venture capital investor.”
Following are the investment criteria for a foreign venture capital fund as per SEBI (Foreign Venture Capital Investors) Regulations, 2000:
- It should disclose to SEBI its investment strategy.
- It can invest its total funds committed in one venture capital fund or alternative investment fund.
It should make investment in venture capital undertaking as mentioned below:
- at least 66.6796 of the investible funds should be invested in unlisted equity shares or equity linked instruments of venture capital undertaking or investee company.
Not more than 33.3396 of the investible funds may be invested by way of:
- subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed
- debt or debt instrument of a venture capital undertaking in which the foreign venture capital investor has already made an investment by way of equity.
- preferential allotment of equity shares of a listed company subj ect to lock-in period of one year.
- It shall disclose the duration of life cycle of the fund.
- special purpose vehicles which are created for facilitating or promoting investment.
Note: The investment conditions and restrictions stipulated above shall be achieved by the Foreign Venture Capital Investor by the end of its life cycle.
What are the obligations of foreign venture capital investor?
Following are the obligations of foreign venture capital investor:
- Foreign Venture Capital Investor or a global custodian acting on behalf of the foreign venture capital investor should enter into an agreement with the domestic custodian to act as a custodian of securities for Foreign Venture Capital Investor.
- Foreign Venture Capital Investor is required to appoint a branch of a bank approved by Reserve Bank of India as designated bank for opening of foreign currency denominated accounts or special non-resident rupee account.
Foreign Venture Capital Investor should ensure that domestic custodian takes steps for:
- monitoring of investment of Foreign Venture Capital Investors in India.
- furnishing of periodic reports to SEBI.
- furnishing such information as may be called for by SEBI.
Comment briefly on the following statement: “Venture capital fund invest in all type of securities”.
Explain the following: “Venture capital funds invest in all type of securities”.
“Venture Capital Fund invest in all type of securities”: Different venture groups prefer different types of investments. Some specialize in seed capital and early expansion while others focus on exit financing. Venture capital firms finance both early and later stage investments to maintain a balance between risk and profitability. A venture capitalist is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments.
Venture Capital shall not invest more than 25% corpus of the fund in one venture capital undertaking. Venture Capital Fund may invest in securities of foreign companies subject to such conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and the Board from time to time. Venture Capital Fund regulations also provide that funds shall not be invested in the associated companies.
Write a short note on the following: “Venture Capital Funds”.
“Venture Capital Funds”: ‘Venture capital fund’ under SEBI (Venture Capital Funds) Regulations, 1996, means a fund established in the form of a trust or a company including a body corporate and registered under these regulations which:
- Has a dedicated pool of capital.
- Raised in a manner specified in the regulations and
- Invests in venture capital undertaking in accordance with the regulations.
Comment briefly on the following: “Social Venture Funds”.
“Social Venture Funds”: 2
- “Social Venture Funds” means those funds which will invest in securities or units of social ventures and which satisfy social performance norms laid by the fund and whose investors may agree to receive restricted or muted returns.
- “Social Venture Fund” means an Alternative Investment Fund which invests primarily in securities or units of social ventures and which satisfies social performance norms laid down by the fund and whose investors may agree to receive restricted or muted returns.
Following are some features of “Social Venture Funds”:
- primary investment of corpus in the securities or units of social ventures.
- investors who give money to ‘Social Venture Funds’ are not much interested in return or they are happy with limited return.
An individual cannot start a venture capital fund but a trust or company can. In the light of this statement, list down the eligibility criteria for getting registered with SEBI as venture capital fund.
Eligibility criteria for getting registered with SEBI as venture capital fund: SEBI (Alternative Investment Funds) Regulations, 2012, lays down the following eligibility criteria to be registered as Venture Capital Fund under Category I Alternative Investment Fund (AIF), namely
- The memorandum of association in case of a company; or the Trust Deed in case of a Trust or the Partnership deed in case of a limited liability partnership permits it to carry on the activity of an Alternative Investment Fund.
- The applicant is prohibited by its memorandum and articles of association or trust deed or partnership deed from making an invitation to the public to subscribe to its securities.
- In case the applicant is a Trust, the instrument of trust is in the form of a deed and has been duly registered under the provisions of the Registration Act, 1908.
- In case the applicant is a limited liability partnership, the partnership is duly incorporated and the partnership deed has been duly filed with the Registrar under the provisions of the Limited Liability Partnership Act, 2008.
- In case the applicant is a body corporate, it is set up or established under the laws of the Central or State Legislature and is permitted to carry on the activities of an Alternative Investment Fund.
- The applicant, sponsor and manager are fit and proper persons based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
- The key investment team of the Manager of Alternative Investment Fund has adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualification.
- The Manager or Sponsor has the necessary infrastructure and manpower to effectively discharge its activities.
- The applicant has clearly described at the time of registration the investment objective, the targeted investors, proposed corpus, investment style or strategy and proposed tenure of the fund or scheme.
- Whether the applicant or any entity established by the Sponsor or Manager has earlier been refused registration by the Board.
As per SEBI (Alternative Investment Funds) Regulations, 2012 it can be concluded that it is only a Company, Trust or a Partnership Firm which can be registered as a Venture Capital Fund and not an Individual.
Explain the following: “Venture Capital Undertaking”.
“Venture Capital Undertaking”: It means a domestic company:
which is not listed on a recognised stock exchange in India at the time of making investment;
which is engaged in the business of providing services, production or manufacture of article or things and does not include following activities or sectors:
- Non-banking financial companies.
- Gold financing.
- Activities not permitted under industrial policy of Government of India.
- Any other activity which may be specified by SEBI in consultation
- with Government of India from time to time.
Write a short note on the following: “Private equity funds.”
“Private equity funds”:
- A private equity fund, like a hedge fund, is an unregistered investment vehicle in which investors’ pool money to invest. Private equity funds concentrate their investments in unregistered (and typically illiquid) securities. Like hedge funds, private equity funds also rely on the exemption from registration of the offer and sale of their securities.
- The investors in private equity funds and hedge funds typically include high net worth individuals and families, pension funds, endowments, banks and insurance companies. However, private equity funds differ from hedge funds in terms of the manner in which contribution to the investment pool is made by the investors.
- Private equity investors typically commit to invest a certain amount of money with the fund over the life of the fund, and make their contributions in response to “capital calls” from the fund’s general partner.
- Private equity funds are long term investments, provide for liquidation at the end of the term specified in the fund’s governing documents and offer little, if any, opportunities for investors to redeem their investments.
- Private equity fund may distribute cash to its investors when it sells its portfolio investment or it may distribute the securities of a portfolio company.
Private equity fund is an unregistered investment vehicle in which investor’s pool money to invest. Explain the concept of private equity fund and distinguish it from hedge fund. [(June 2015) (5 Marks)]
Concept of Private Equity:
- Private Equity Fund is an unregistered investment vehicle in which investor’s pool money to invest.
- Private Equity Funds concentrate their investments in unregistered (and typically illiquid) securities.
- Private Equity Fund may distribute cash to its investors when it sells its portfolio investment, or it may distribute the securities of a portfolio company.
Distinguish private equity fund from hedge fund:
- Private Equity Funds differ from hedge funds in terms of the manner in which contribution to the investment pool is made by the investors. Private Equity investors typically commit to invest a certain amount of money with the fund over the life of the fund, and make their contributions in response to “capital calls” from the fund’s general partner.
- Hedge funds focused on short-term profits whereas private equity funds are long term investments provide for liquidation at the end of the term specified in the fund’s governing documents and offer little, if any opportunities for investors to redeem their investments.
- Also, a substantial difference in risk level between hedge funds and private equity funds while both practice risk management by combining higher-risk investments with safer investments, the focus of hedge funds on achieving maximum short-term profits necessarily involves accepting a higher level of risk.
Explain the categories of Private Equity Investment.
Categories of “Private Equity Investment”:
The private equity investments can be divided into the following categories:
Leveraged Buyout (LBO): This refers to a strategy of making equity* investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these type of transactions that are typically more mature and generate operating cash flows.
Venture Capital: It is a broad sub-category of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business.
Growth Capital: This refers to equity investments, mostly minority investments, in the companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.
Write a short note on the following: “Alternative Investment Fund.” [(June 2013) (4 Marks)]
“Alternative Investment Fund”:
SEBI (Alternative Investment Funds) Regulations, 2012 provides that an Alternative investment fund (AIF) means any fund established in India in the form of a trust, company, limited liability partnership or a body corporate which:
- is a privately pooled investment vehicle that collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.
- is not covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of SEBI, which aims to regulate fund management activities.
However, SEBI (Alternative Investment Funds) Regulations, 2012, provides the list of funds which are excluded from the definition subject to certain conditions.
Discuss briefly the various categories of Alternative Investment Fund (AIF). [(Dec. 2013) (5 Marks)]
SEBI has classified Alternative Investment Fund (AIF) into three broad , categories i.e. Category I, Category II and Category III. Discuss key features of AIF categories.
Various categories of Alternative Investment Fund (AIF):
Securities and Exchange Board of India has classified Alternative Invest-ment Fund (AIF) into three broad categories as follows:
Category I: Funds that invest in start – up or early stage ventures or social ventures or Small Medium Enterprises (SMEs) or infrastructure or other sectors which the government or regulators consider as socially or economically desirable which Include VCF, SME Funds, Social Venture Funds (SVFs), Infra Funds as such other AIFs as may be specified in the AIF Regulations.
Category II: Funds that do not fall in Category I and III AIF and those do not undertake leverage or borrowing other than to meet the permitted day to day operational requirement including Private Equity Funds or Debt Funds.
Category III: Funds that may employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Example: Hedge Funds.
“Investment in all categories of Alternative Investment Funds shall be subject to certain conditions.” Comment.
Investments by all categories of Alternative Investment Funds shall be subject to the following conditions:
- Alternative Investment Fund (AIF) may invest in securities of companies incorporated outside India subject to such conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and the SEBI from time to time.
- Alternative Investment Fund may act as Nominated Investor to SME IPOs.
- Co-investment in an investee company by a Manager or Sponsor shall not be on terms more favourable than those offered to the Alternative Investment Fund.
- Category I and II Alternative Investment Funds shall invest not more than twenty-five percent of the investable funds in one Investee Company. Category III Alternative Investment Fund shall invest not more than ten percent of the investable funds in one Investee Company.
- Alternative Investment Fund (AIF) shall not invest in associates except with the approval of seventy five percent of investors by value of their investment in the Alternative Investment Fund.
- Un-invested portion of the investable funds may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality such as Treasury bills, CBLOs, Commercial Papers, Certificates of Deposits, etc. till deployment of funds as per the investment objective.
- Investment by Category I and Category II Alternative Investment Funds in the shares of entities listed on institutional trading platform after the commencement of SEBI (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2015 shall be deemed to be investment in unlisted securities for the purpose of the AIF Regulations.
“All Alternative Investment Funds shall ensure transparency and disclosure of information to investors.” Comment
All alternative investment funds shall ensure transparency and disclo-sure of information to the investors as per the following details:
- Financial, risk management, operational portfolio, transactional infor-mation regarding fund investments shall be disclosed periodically.
- Any fees prescribed to the Manager or Sponsor; and any fees charged to the Alternative Investment Fund or any Investor Company by an associate of the Manager or Sponsor shall be disclosed periodically.
- Any enquiries, legal actions by legal or regulatory bodies in any juris-diction, as and when occurred shall be disclosed.
- Any material liability arising during the Alternative Investment Fund’s tenure shall be disclosed, as and when occurred.
- Any breach of a provision of the placement memorandum or agree-ment made with the investor or any other fund documents, if any as and when occurred shall be disclosed.
Category EH Alternative Investment Fund shall provide quarterly reports to investors within 60 days of end of quarter. Alternative Investment Fund (AIF) shall provide at least on an annual basis, within 180 days from the year end, reports to investors including the following information as may be applicable to the Alternative Investment Fund:
- Financial information of investee companies.
- Material risks and how they are managed.
Distinguish between the following: ‘Venture capital fund’ and ‘Social Venture Fund’.
Difference between ‘Venture Capital Fund’ and ‘Social Venture Fund’ are as follows:
‘Venture Capital Fund’ means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and shall include an angel fund.
‘Social Venture Fund’: Social Venture Fund will invest in securities or units of social ventures and which satisfy social performance norms laid down by the fund and whose investors may agree to receive restricted or muted returns.
In case of Social Venture Fund, the following additional conditions shall apply:
- At least seventy -five percent of the investable funds shall be invested in unlisted securities or partnership interest of social ventures.
- Such funds may accept grants, provided that such utilization of such grants shall be restricted to investing in unlisted securities or partnership interest of social ventures. However, the amount of grant that may be accepted by the fund from any person shall not be less than twenty-five lakh rupees.
- No profits or gains shall accrue to the provider of such grants.
- Such funds may give grants to social ventures, provided that appropriate disclosure is made in the placement memorandum.
- Such funds may accept muted returns for their investors i.e. they may accept returns on their investments which may be lower than prevailing returns for similar investments
Explain briefly the following: “Investible Fund”.
- As per SEBI (Alternative Investment Funds) Regulations, 2012: “Investible Fund” means “corpus of the Alternative Investment Fund net of estimated expenditure for administration and management of the fund”.
- General conditions and restrictions on investment of “Investible Funds”:
An Alternative Investment Fund can invest its investible fund subject to following conditions:
- It can invest in securities of companies incorporated outside India, subject to such conditions or guidelines specified by the RBI and SEBI from time to time.
- Co-investment in an investee company by a manager or sponsor shall not be on terms more favourable than those offered to the AIF.
- Category I and II AIF shall not invest more than 20% of the investible funds in one Investee Company.
- Category IH AIF shall not invest more than 10% of the investible funds in one Investee Company.
Write short note on: “Angel Investor”.
“Angel Investor”: ‘Angel Investor’ means any person who proposes to invest in an angel fund and satisfies one of the following conditions, namely:
- An individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who:
- has early stage investment experience, or
- has experience as a serial entrepreneur, or
- Is a senior management professional with at least ten years of experience.
- A body corporate with a net worth of at least ten crore rupees or
- An Alternative Investment Fund registered under SEBI AIF Regulations or a Venture Capital Fund registered under the SEBI (Venture Capital Funds) Regulations, 1996.
Write short note on: “Seed Funding”.
- Seed funding is taken from the word “seed” is the capital needed to start or expand your business.
- Seed funding is obtained in exchange for an equity stake in the enterprise although with less formal contractual overhead than standard equity financing.
- Seed capital is a risky investment by the promoters of a new venture which represents a meaningful and tangible commitment on their part to making the business a success.
- Amount of money involved in seed funding is relatively small because the business is still in the idea/conceptual stage.