SEBI Questions Old VC Funds On Term Extensions

The Securities and Exchange Board of India (SEBI) has reportedly questioned old venture capital funds (VC funds) about their term extensions beyond their lifespan.

SEBI asked these funds to share information about the number of extensions taken for various schemes, the tenure of the said schemes as stated in the private placement memorandum and the deadline for exiting all investments, ET reported. The market regulator sent an email to the old VC funds on Tuesday (December 13).

The market watchdog has also asked old VC funds to share information about the date of their ‘first close’, the date of ‘final close’ and the date from which the tenure of a scheme is calculated. Typically, the first close for a VC fund comes a year after they are registered, while the final close comes two years after the first close.

While AIFs may extend life by two years with investors’ consent, there are no binding deadlines for old VCFs (under 1996 regulations). 

About two weeks ago, SEBI asked for similar information as VC funds from all AIFs.

It is prudent to mention that the lifespan of a VC fund is 10 years, with there being 185 old VC funds and schemes registered under the former SEBI VCF Regulations of 1996.

Old VC funds have to share the information under the market regulator’s supervision, enforcement and compliance division for AIFs and foreign portfolio investments. However, pooled vehicles such as VC, private equity, infra and debt funds launched after 2011 are governed under SEBI (Alternative Investment Funds) Regulations, which came into effect in 2012.

According to the publication, the funds which have breached the end date (the deadline for exit) or have extended their terms repeatedly might be pulled up by SEBI. The industry is also hopeful that SEBI would permit an extension with a higher threshold of investor approval so that an old VC fund does not have to resort to a distress sale and write-offs.

Because of the pressure from the market regulator, many VCs have delayed their close, to attract more investment and, as a result, extend their tenures organically and wait for profitable exits.

Interestingly, SEBI has also been thinking about extending the lifespan of all near-end AIFs. In August, media reports suggested that such AIFs would be given an extension of two years, taking their total lifespan to 14 years.