Venture Capital is a source of financing for companies wish to enter into new or turnaround ventures. Venture capital means more risky money i.e. money used in risky enterprises. For instance, innovative, high-tech ideas are risky and so is the money invested in these ideas. As such projects have high mortality rates, risk averse bankers and private sector financiers avoid providing capital for such ventures. But it is venture capitalists who provide necessary funds often alongwith management and marketing assistance. After some years, when assisted company reaches a certain stage of profitability, the venture capitalists sells its shares at substantial premium. The venture capitalist thus makes profits and gets back the locked up funds for re-deployment in some other venture. Some of the important definitions relevant to understand venture capital financing are given below:

Some of the important definitions relevant to understand venture capital financing are given below:

Venture Capital Company-Such company as has made investments by way of acquiring equity shares of venture capital undertakings which require funds/capital. The term ‘venture capital company’ as defined in clause 23(FB) of section 10 of Income -tax Act is reproduced below:

‘Venture Capital Company’ means such company-

Venture Capital Fund- means a fund established in the form of a trust or a company including a body corporate and registered under the regulations which –

The above definition has been provided under SEBI (Venture Capital Funds) Regulations, 1996.

Under Income-tax Act, this term has been defined to mean a fund operating under a trust deed registered under the provisions of the Registration Act, 1908 and which has obtained a certificate of registration under SEBI, 1992 and regulations made thereunder and which fulfils the conditions as may be specified, with the approval of the Central Government, by SEBI, by a notification in the Official Gazette in this regard.

Venture Capital undertaking - as defined in SEBI (Venture Capital Funds) Regulations, 1996 means a domestic company-

The negative list includes real estate, non-banking financial services, gold financing, activities not permitted under industrial policy of Government of India and any other activity that SEBI may specify.

Generally there are three types of organised or institutional venture capital funds: venture capital funds set up by angel investors, that is, high net worth individual investors; venture capital subsidiaries of corporations and private venture capital firms/ funds. Venture capital subsidiaries are established by major corporations, commercial bank holding companies and other financial institutions.

Venture funds in India can be classified on the basis of the type of promoters, viz. Financial institutions, Private venture funds, Regional funds dedicated to India, Offshore funds, Corporate ventures, Angels- high net worth individual investors, Merchant bankers and NBFCs.

The need for harmonization of policy and regulations governing venture capital funds/venture capital companies including investment by overseas investors was felt and the Government had made SEBI as the single point nodal agency for registration and regulation of both domestic and overseas venture capital funds.

SEBI had issued regulations governing domestic and overseas venture capital funds/companies.

The domestic venture capital funds/companies have to obtain registration under these regulations. These regulations also provide for investment conditions and restrictions, general obligations/responsibilities, etc.

• A venture capital fund may raise monies from any investor whether Indian, foreign or NRI by way of issue of units (having beneficial interest in fund/company).
• No venture capital fund set up as a company or any scheme of venture capital fund set up as a trust shall accept any investment from any investor which is less than rupees five lakhs (this limit is not applicable for employees or directors or trustees of venture capital fund).
• 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 up of operations by the venture capital fund.

All investment made or to be made by venture capital fund shall be subject to the following conditions, namely:-

• venture capital fund shall disclose the investment strategy at the time of application for registration;
• venture capital fund shall not invest more than 25% corpus of the fund in one venture capital undertaking;
• shall not invest in the associated companies; and
• venture capital fund shall make investment in the venture capital undertaking as given below:

• at least 75% of the investible funds shall be invested in unlisted equity shares or equity linked instruments.
• Not more than 25% of the investible funds may be invested by way of -

• subscription to initial offer of a venture capital undertaking whose shares are proposed to be listed subject to lock-in period of one year;
• debt or debt instrument of a venture capital undertaking in which the venture capital fund has already made an investment by way of equity.

• No venture capital fund shall be entitled to get its units listed on any recognized stock exchange till the expiry of three years from the date of the issuance of units by the venture capital fund.
• No venture capital fund shall issue any document or advertisement inviting offers from the public offer for the subscription or purchase of any of its units.
• No venture capital undertaking shall be engaged in any activity as specified in negative list.

The foreign venture capital funds/companies (FVCIs) have to obtain registration under these regulations. These regulations also provide for investment conditions and restrictions, general obligations/responsibilities, etc. While granting registration, SEBI takes into account the FVCIs track record, reputation of the group and financial soundness.

A registered FVCI through SEBI, apply to the Reserve Bank for permission to invest in Indian venture capital undertaking.

The Regulations require an FVCI to appoint a domestic custodian as well as to open a non-resident rupee or foreign currency account with a designated bank.

There is no minimum capitalization requirement for being registered as an FVCI.

It can invest either in a domestic fund or in a domestic company whose shares are not listed in recognized stock exchange in India (it does not matter if shares are listed on a stock exchange outside India like NYSE or Nasdaq) and is engaged in any activity except as specified in negative list.

All investment made or to be made by venture capital fund shall be subject to the following conditions, namely:-

• It shall disclose the investment strategy;
• It shall not invest more than 25% corpus of the fund in one venture capital undertaking;
• It shall make investments in the venture capital under-taking as enumerated below:

• o at least 75% of the investible funds shall be invested in unlisted equity shares or equity linked instruments
• Not more than 25% of the investible funds may be invested by way of

• subscription to initial offer of a venture capital undertaking whose shares are proposed to be listed subject to lock-in period of one year;
• 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.

Offshore Venture Capital Funds/Companies are allowed to invest in domestic venture capital fund (VCF) and undertaking as well as other companies through the automatic route, subject to SEBI (VCC) regulations and sector Venture Capital specific caps on Foreign Direct Investment.

Income of Venture capital fund or Venture capital company:
Any income of a venture capital fund or a venture capital company set up to raise funds for investments in a venture capital undertaking is exempt from income tax in pursuance to section 10(23FB) of Income-tax Act.

This exemption is also available to foreign venture capital company. FVCI can carry on business in India through a permanent establishment in India and yet its entire income would be tax free. However if it opts to be taxed under Double Taxation Avoidance Treaty and it has a permanent establishment in India, its Indian income will not be tax free. Under section 90(2) of the Income-tax Act, a non-resident assessee based in a country with which India has a double taxation avoidance agreement (DTAA) may opt to be taxed either under the Income-tax Act or under DTAA, whichever is more beneficial to it

.Income from Venture capital fund or Venture capital company:
Section 115U of Income-tax Act provides that any income received by a person out of investments made in a venture capital company or a venture capital fund shall be chargeable to income-tax as it were the income received by such a person from investments made directly in the venture capital undertaking.

No tax shall be payable as tax on dividend and no tax deduction at source shall be made from income paid by a venture capital company or a venture capital fund to an investor.

In addition to providing capital fund by venture capital fund/company to venture capital undertaking, it may also be providing management, marketing, networking or any other services. Such services may fall under any category of taxable services under service tax regulations, viz. management consultancy services.

In case of FVCI, having no office in India, provides taxable services, the recipient of such services in India i.e. venture capital undertaking shall be liable to service tax.

The author is a member of the Institute. The views expressed herein are his personal views and do no necessarily represent the views of the Regional Council