It is recommended that mutual fund, banks and insurance companies should be permitted to invest in SEBI registered VCFs.
Investment Related Issues
(a) Investments by VCFs in VCUs should not be subject to any sect oral restrictions except those to be specified as a negative list by SEBI in consultation with the Government. These may include areas like real estate, finance companies and activities prohibited by law. This will also be a measure for investor protection as the quality of IPOs would be improved by the venture capitalist. Besides, it would result in high industrial growth.
(b) The investment ceiling of 40 percent of the paid up capital of an invested company under CBDT and Government of India guidelines needs to be removed. However, by way of prudential requirement of risk diversification, investment in one single undertaking by VCF should not exceed 20 per cent of its invest able fund.
(c) The investment criteria needs to be redefined to permit Investment by a VCF, primarily in equity or equity related instruments or securities convertible into equity of VCUs and also by way of subscription to an IPO and preferential offer in case of companies to be listed or already listed.
The present requirement of investment of at least 80 per cent of funds raised by the VCF under the SEBI regulations needs to be replaced by the criteria as tinder:
(a) The VCF will disclose the investment strategy at the time of application for registration,
(b) The VCF will make investment in venture capital undertakings as enumerated below:
(1) At least 70 per cent of the funds invested in venture capital undertakings should be invested in unlisted equity shares or equity related instruments or other instruments convertible into equity.
(2) Not more than 30 per cent of investment may be made by the VCF by way of subscription to the initial public offer (IPO) of a company whose shares are proposed to be listed and or by way of preferential allotment of equity of a company whose shares are listed or proposed to be listed on a recognized stock exchange and or by way of debt, debt instrument to a VCU in which a VCF has already made investments by way of equity. The provisions for investment in listed securities of financially weak or sick companies may be dispensed with as such investments would get covered under (2) above, The provision permitting financial assistance in any other manner to companies in whose equity shares a VCF has invested, needs to be dispensed with as this also gets covered in (2) above.
(c) The FVCI should be permitted to invest in and exit from any investment as is permitted to FIIs without needing approval of pricing by the RBI.
(d) Domestic VCFs should be permitted to invest in securities of companies incorporated outside India. Such investment may be subject to a ceiling of higher of (i) 25 per cent of the funds corpus, or (ii) US $ 10 million per VCF or, to the extent of foreign investment in the corpus of the VCF.
(e) The provisions should be made in the Companies Act for issue of preferred stock as operational in the USA.