Decision Point – Encourage Indian fund manager to float and manage Venture Capital Funds (VCFs) or Alternative Investment Funds (AIFs) from within India by allowing automatic route for NRI/PIO investment in these funds from the NRE/NRO account in the SEBI approved VCF/AIF on repatriation basis.

Supporting Points – The proceeds from NRE / NRO account could be used to invest in mutual funds, whereas investments into VCF/AIFs are not explicitly permitted. Similarly if a VCF is set-up as a company the automatic route is allowed, whereas if VCF is set-up as a Trust NRI/PIO investment is subject to FIPB approval.

Additional Recommendation – To enable greater access to offshore capital, all non-resident investors meeting specified Know Your Client (KYC) requirements ought to be permitted to invest from the overseas bank account (Non NRE/NRO) into early stage venture capital funds set up as trusts and registered with the Securities and Exchange Board of India (SEBI) under the automatic route. Also, all repatriations by such funds to offshore investors especially in respect of capital must be permitted without prior approval from the Reserve Bank of India. Approvals at entry and exit create a regulatory risk for investors and therefore liberalisation on the above lines will greatly incentivise offshore investors to invest into domestic funds.

Amendment Required – In the Clause 3.2.3 under “3.2 ENTITIES INTO WHICH FDI CAN BE MADE” of the CONSOLIDATED FDI POLICY (EFFECTIVE FROM APRIL 10, 2012), Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

Current Clause – “3.2.3 FDI in Venture Capital Fund (VCF): FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other companies, as stated in paragraph 3.1.6 of this Circular. If a domestic VCF is set up as a trust, a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF subject to approval of the FIPB. However, if a domestic VCF is set-up as an incorporated company under the Companies Act, 1956, then a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF under the automatic route of FDI Scheme, subject to the pricing guidelines, reporting requirements, mode of payment, minimum capitalization norms, etc.”

Desired Clause – “3.2.3 FDI in Venture Capital Fund (VCF) or Alternative Investment Fund (AIF): FVCIs are allowed to invest in Indian Venture Capital Undertakings (IVCUs) /Venture Capital Funds (VCFs) /other companies, as stated in paragraph 3.1.6 of this Circular. If a domestic VCF or AIF either is set up as a trust or as an incorporated company under the Companies Act, 1956 a NRI or PIO person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF or AIF, on repatriation basis, subject to approval of the FIPB. However, if a domestic VCF is set-up as an incorporated company under the Companies Act, 1956, then a person resident outside India (non-resident entity/individual including an NRI) can invest in such domestic VCF under the automatic route of FDI Scheme, subject to the pricing guidelines, reporting requirements, and mode of payment, minimum capitalization norms, etc.

However, a person resident outside India (non-resident entity/individual excluding an NRI or PIO) can invest in such domestic VCF or AIF can invest in such domestic VCF under the automatic route of FDI Scheme, subject to the pricing guidelines, reporting requirements, mode of payment, minimum capitalization norms, etc.

For computation of sectorial cap in areas where FDI is restricted the proportionate shareholding of only the persons resident outside India be considered to be FDI in the VCU. For example, if a domestic VCF/AIF has 40% contribution coming from person resident outside India and it holds 30% stake in a VCU the FDI should be counted as 12% (40% of 30%).”