Alok PatniaAlok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.
A very important decision or step for a startup is funding its operations. A startup is a bundle of exuberant energy and uninhibited ideas. But the sad part is- ideas do not fetch money. A final product or service is what that is required to survive. Converting an idea into something saleable requires big bucks, which most startups do not possess. This is where the role of venture capitalists or venture capital funding comes.
Venture capital Funds are basically investment funds. These funds seek private equity stakes in high growth potential startups and thereby invest their money into it. Such investments are highly risky and illiquid. However, they are backed by well- calculated prospects of high return and growth in future. Hence, setting up a Venture Capital Fund has its own perqs.
Many a times, we have come across queries wherein an individual or a group of individuals have expressed their interest in investing their funds in the startup sector, without entering in the field directly. Setting up VCF is the apt solution for such kind of investors. You can invest your funds in any sector and in any startup. There is no restriction on it. You can also exercise a considerable degree of control as well. These investments are mostly rewarding in the long-run.Hence, we are bringing this article as a guide to setting up a `VCF in India.
How to set up a Venture Capital Fund (VCF)?
What do we do before applying for a job? We inquire about the position and verify that we are eligible for it or not. Similarly, for setting up a VCF, you first need to verify that you are eligible or not. Securities and Exchange Board of India (SEBI) is the sole and supreme authority for granting the license to operate as a VCF. Following are the main eligibility criteria for setting up a VCF under SEBI (Venture Capital Funds) Regulations, 1996:
For Company
- memorandum of association should have carrying on of its activity as a venture capital fund;
- it is prohibited by its memorandum and articles of association from making an invitation to the public to subscribe to its securities;
- 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;
- its director, principal officer or employee has not at any time been convicted of any offence involving moral turpitude or any economic offence;
- it is a fit and proper person.
For Trust
- 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);
- the main object of the trust is to carry on the activity of a venture capital fund;
- 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;
- 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;
- the applicant is a fit and proper person.
For Body Corporate
- it is set up or established under the laws of the Central or State Legislature
- 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, is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant.
An applicant has to apply vide Form A under First Schedule of SEBI (Venture Capital Funds) Regulations 1996 along with requisite fees. All documents should be enclosed as specified in the form.
Documents to be enclosed alongwith
- Copy of Memorandum and Articles of Association in case of a company.
- Copy of Registered Trust Deed in case the applicant is set up in the form of a trust
- Copy of Main objective of constitution in case the applicant is set up in the form of a body corporate.
- Copy of Investment Management Agreement (only if applicable)
Details of the Sponsor/Settlor
- Write up on the activities of the Sponsor/Settlor, its shareholding pattern/profile of the directors. Incase of an individual, please state whether the individual is a director/employee of any entity registered with SEBI.
- State whether, the Sponsor/Settlor has floated venture capital funds previously which are registered with SEBI. If so details. Also state whether they (Sponsor or their directors) were refused a certificate by the Board or its certificate has been suspended under regulation 30 or cancelled under regulation 31)
- State whether the Sponsor/Settlor is registered with SEBI, RBI or any other regulatory authority in any capacity along with the details of its registration.
- State whether any of its group companies are registered with SEBI, RBI or any regulatory authority along with the details of its registration.
- State whether Sponsor/Settlor or its holding company is listed on any of the recognized stock exchanges in India. If so details thereof.
- State whether the Sponsor/Settlor or its directors are involved in any litigation connected with the securities market and any order passed against them for violation of securities laws. If so, details.
Details of the Trustees/Trustee Company
- Write up on the activities of the Trustee Company/ Profile of Trustees.
- Shareholding pattern and the write up on profile of the Directors
- State whether the Trustee Company is registered with SEBI, RBI or any other regulatory authority in any capacity along with the details of its registration.
Details of the Investment Manager/Investment Advisor/Asset Management Company (AMC)
- Write up on the activities of the Investment Manager/Investment Advisor/AMC
- Shareholding pattern along with the profile of the Directors.
- State whether the Investment Manager/Advisor/AMC is registered with SEBI, RBI or any other regulatory authority in any capacity, along with the details.
- Details of Key Personnel/Management Team. Also state whether they are also the employees of any SEBI registered entity. If so details.
- State whether, the applicant is registered with SEBI in any capacity or has applied for registration in any other capacity with SEBI.
- List of all the associates registered with SEBI along with their Registration No. Please, refer to Reg. 2(aa) of SEBI (Venture Capital Funds) Regulations, 1996 for the definition of the “associate company”.
Investment Strategy
Disclose in detail the investment strategy of the fund (Reg. 12 (a)).
Read: Startup Funding Sources – Venture Capital
Declarations to be submitted by the applicant
- An undertaking under Regulation 11(3) of SEBI (Venture Capital Funds) Regulations, 1996.
- Undertaking under Third Schedule to SEBI (Venture Capital Funds) Regulations, 1996.
- Declaration in respect of “Fit and Proper Person” criteria as per regulation 4 A of the SEBI (Venture Capital Funds) Regulation. 1996 and as specified under Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulation 2008.
After all the compliances are met, SEBI will issue an intimation for payment of registration fees of Rs. 5, 00,000, within 21 days of application. If all the compliances are met properly, then SEBI will issue a Certificate of Registration.
