Company Law Related Issues
In India, most VCFs are organised as trusts, mainly due to the lack of an alternative pass through structure for taxation in the hands of the contributors investors in funds. Moreover, there is the problem of extent of liability on the trustees who manage the funds.
With the changes recommended earlier in the Income Tax Act to provide for VCFs to all pass through vehicles, following changes in the Companies Act, are recommended to enable VCFs to be organised with limited liability to the sponsors fund managers as a company. Further there are certain limitations on the extent of investments and loans that a normal company make to other corporate. These may also be dispensed with as the only activity of VC companies would be in making equity or equity related investments in the other VCUs.
(a) To incorporate provisions for issue of preferred stocks, with voting, redemption and conversion rights.
(b) To incorporate provisions for a buyback or redemption of issued securities out of the sales proceeds of investments for VCFs incorporated as companies. The provision under the Companies Act for a buyback of securities needs to be amended as under twenty four months probation period for fresh issue of capital to be reduced six months for unlisted companies, permuted in unlisted companies: permitted VCCs VCs redeem their equity to the extent of 100 per cent of their paid up capital out of sale proceeds of investment and assets and nor necessarily out free reserves, securities premium account or the proceeds of a fresh issue should apply to them.
(c) To make, provisions that all provisions relating to sections 370 and 372 on inter corporate investment and loan are not applicable to VCFs incorporated as companies.