A third of VC funds inactive

Many funds haven’t made any investments in the last 4-5 years.

At a time when 69 VC (venture capital) applications are waiting for Sebi approval, there are a clutch of private equity and venture capital funds who are sitting idle even after getting registrations from the market regulator long back. A host of funds such as Labradorite Finance, Renoir and SONG Investment company have not made any investments in the last four-five years. Experts said at least one-third of the total Sebi-registered VCs are currently inactive.

It is not just foreign venture capital funds. Among the domestic VCs, there are funds such as Sourabh Venture Capital and Spice Capital fund, which have not done deals in the recent past.

The domestic VC route was opened by Sebi to nurture growth of startups and SMEs. However, that motive remains unfulfilled as almost half of the funds are not active investors.

Currently, there are 132 Sebi-registered domestic venture capital funds and 129 foreign venture capital funds. Among them, there are only a handful who are active investors. A large number of government-sponsored venture funds such as Kerala venture capital fund and Orissa venture capital fund have either become dormant or do deals which are not important in scale and size.

Corporate lawyers who work with private equity funds say there are several benefits available to registered FVCI or domestic venture capital. The first being a pass through status for VCs who invest in 9 sectors as prescribed by I-T authorities. Secondly, they get a QIB status, meaning these funds can participate in preferential allotments and initial share sales of companies.

Other advantages being pricing flexibility available to registered FVCI. For a foreign entity to buy shares in a company one has to go by the minimum floor price as per RBI, however registered FVCIs are free to negotiate the price with companies.

At the time of exit when there is a transfer of shares from the funds to promoter, there is a exemption in the takeover code for foreign venture funds. In such cases promoter does not need to come up with an open offer.

Abizer Diwanji, Executive Director-Advisory, KPMG said, " While some of the funds have registered here, they might not be having enough capital to invest. In some cases, they would have just met the Sebi criteria and have not been able to raise funds or deploy asset managers after that."

He further added, " There is clearly an opportunity for consolidation but we have not seen even early signs of that happening." According to Venture Intelligence, top PE investors in 2008 were Sequoia Capital which sealed 18 deals followed by IFC, ICICI Venture, Nalanda Capital and NEA-Indo US Ventures.

Apart from them, there are large private equity funds such as KKR, Blackstone and Providence who do one or two deals in a year.