RBI relaxes FVCI norms

RBI relaxes Foreign Venture Capital Investor (FVCI) norms for Startup investment

One more announcement to the stay-in-India check list has come from RBI with respect to registered under SEBI (FVCI) Regulations, 2000.

RBI has announced amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time (Principal Regulations).

Sanjay Khan Nagra, iSPIRT volunteer talks about this announcement in the video embedded. Below. Also the main provisions and text is described in this blog below. Those interested in the original regulation may visit this page here.

As per the amendment notification referred to above, any FVCI which has obtained registration under the Securities and Exchange Board of India (FVCI) Regulations, 2000, will not require any approval from Reserve Bank of India and can invest in:

1. Equity or equity linked instrument or debt instrument issued by an Indian company whose shares are not listed on a recognised stock exchange at the time of issue of the said securities/instruments and engaged in any of the following sectors:

(i) Biotechnology

(ii) IT related to hardware and software development

(iii) Nanotechnology

(iv) Seed research and development

(v) Research and development of new chemical entities in pharmaceutical sector

(vi) Dairy industry

(vii) Poultry industry

(viii) Production of bio-fuels

(ix) Hotel-cum-convention centres with seating capacity of more than three thousand

(x) Infrastructure sector (This will include activities included within the scope of the definition of infrastructure under the External Commercial Borrowing guidelines / policies notified under the extant FEMA Regulations as amended from time to time).

2. Equity or equity linked instrument or debt instrument issued by an Indian ‘startup’ irrespective of the sector in which the startup is engaged. A startup will mean an entity (private limited company or a registered partnership firm or a limited liability partnership) incorporated or registered in India not prior to five years, with an annual turnover not exceeding INR 25 Crores in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property and satisfying certain conditions given in the Regulations.

3. Units of a Venture Capital Fund (VCF) or of a Category I Alternative Investment Fund (Cat-I AIF) (registered under the SEBI (AIF) Regulations, 2012) or units of a Scheme or of a fund set up by a VCF or by a Cat-I AIF.

iSPIRT believes these announcements have made Govt. Recognize the importance of opening up investment to promote innovative startups. Right now these announcements are limited to Startups recognized by DIPP. However, we hope in future they may be opened for all startups and an easy investment regime in Indian from foreign funding source.

Domestic venture debt

In this session on Domestic venture  debt, we talk about a recent announcement by Government of India, that relaxed the provision on raising debt from domestic non-banking sources of funds. Sanjay Khan speaks on the subject in below embedded video.

What is the problem, that this new announcement on domestic venture debt solves?

Private companies can raise debt funds in a restricted manner only. They could raise debt from some allowed sources. These could be like company directors, their relatives and other companies etc. But, not from sources like angel funds, domestic VCs who are not companies. A debt raised from such sources fell under deposits category.

To accept ‘deposits’, companies need to follow number of conditions, which are quite tedious.

What is the new announcement?

As per sub-clause (iii) of Clause 68 of Section 2 of Companies Act, 2013 definition of Private Company, “means a Company which by its articles prohibits any invitation to the public to subscribe for any securities of the Company”.

The new announcements open up some new avenues of raising debt funds from domestic markets.

These new sources of funds, added to this non-public funds category are funds registered and operating under SEBI’s regulated regime. Following are these three new sources

1. Alternative Investment Funds (AIFs)

2. Domestic Venture Capital funds

3. Mutual Funds

Prior to this announcements funding from these sources was treated as deposits and not loan.

What are the limits of announcements?

Whereas this announcement opens up these three highly potential sources of domestic debt funding, it is limited to Rs. 25 Lakhs only.

So the announcement is likely to benefit startups in their early phase.

The other good part is that, this is not limited to recognised Startups or startups registered under StartupIndia with DIPP. It is open to any private company hence it can apply to any startup.

The announcement adds up to efforts made by Government of India in creating better environment for funding. It is a step forward in the direction.

iSPIRT believes and is further taking up with the Government to not limit this provision to Rs. 25 lakhs.

The video below covers this topic with Sanjay Khan, the expert who was instrumental in building up the stay-in-india checklist of iSPIRT.