Sebi planning to align foreign VC investment rules with those of FPIs

Changes in eligibility requirements to ensure due-diligence of money coming from this route to India

The Securities and Exchange Board of India (Sebi) is planning to align the registration process and eligibility criteria for Foreign Venture Capital Investors (FVCIs) with those of Foreign Portfolio Investors (FPIs).

The proposals are aimed at ensuring adequate due diligence and regulation of money coming through this route in India and ensuring that the funds are sourced from bona fide investors and meet the Prevention of Money Laundering Act (PMLA) requirement, and other applicable law.

FVCIs invest in early-stage startups, sunrise sectors, unlisted companies, Category-I alternative investment funds (AIFs), and also in companies with weaker financial health.

FVCIs are provided with certain benefits under the regulations to incentivise investments in these sectors. These benefits include exemption from lock-in requirements, provisions related to open offers, tax reliefs, and classification as qualified institutional buyers (QIBs).

Sebi noted that it is necessary to ensure safeguards similar to those prescribed for other routes of foreign investment.

Under the proposed framework, designated depository participants (DDPs) will be entrusted with the registration and post-registration process for FVCIs—a process akin to that followed by FPIs.

Further, the requirement of approval from the Reserve Bank of India (RBI) is proposed to be removed along with the minimum commitment requirement of $1 million.

However, many provisions applicable on FPIs are proposed to be extended to FVCIs. These include norms specifying that the FVCIs or the controlling investors are only from the permitted foreign jurisdictions and from countries that have strategic anti-money laundering measures.

The new norms also prescribe limits on investments by NRIs or OCIs along with the introduction of ‘fit and proper’ criteria for FVCIs.

Sebi has also proposed to mandate FVCIs to hold their investments only in dematerialised form apart from those types of instruments where dematerialisation is not available.

Further, to remove inactive FVCIs from the ecosystem and ensure periodic review, Sebi also plans to introduce a renewal fee of $2,500 for continuing the registration for five years. At present, the registrations remain valid unless they are surrendered or cancelled.  

According to Sebi data, a total of 269 FVCIs were registered with cumulative investments at Rs 48,286 crore, as on March 31.