MUMBAI: The days of one-dollar companies floated by foreign venture capital (VC) funds to enter India are over. For the first time Reserve Bank of India has spelt out that these funds will get the registration to invest in India only if they chip in a part of the investment upfront.
Till now, the regulator has been insisting on end-use restrictions, which meant foreign funds have to give undertakings that they will not invest in the Indian property market. The condition, which is now being laid down, relates to some credible capital commitment before a formal registration can be obtained.
Typically, a new foreign venture capital fund first forms an investment holding company in Mauritius with rudimentary capital, often not more than a few dollars. The investment company then files for registration with Indian regulators, and once it gets the approval overseas investors are gradually roped in.
While filing for registration they do dislcose their investment strategy, possible investment corpus and the period over which the money will come in. But no foreign investor actually signs a cheque till the Mauritius company gets officially recognised by Indian authorities as a VC fund in India.
“RBI is asking us to disclose the capital base, something which it has never done in the past. Perhaps, it wants some credible investment commitment, in the sense that a part of the proposed investment should lie in a Mauritius bank before registration is granted,” said an advisor to several foreign funds.
The central bank, which has the final say on all cross-border flows, may be driven by the urgency to curb inflows; however, it’s equally possible that RBI may have had some bad experience with new funds and is keen to ensure that the commitment is genuine and credible. More so, because a registration once granted can be used indefinitely and no periodic renewals are required. Any fund is required to first apply to the capital market regulator Sebi, which then refers the application to RBI.
However, the new condition being insisted by RBI may discourage many foreign investors who are unwilling to park money unless the investment vehicle gets regulatory approval, said Punit Shah, who heads the financial services group of global consultancy firm PricewaterhouseCoopers (PwC).
Several foreign investors find VC funds comparatively more attractive than the customary foreign direct investment (FDI) channel (either through the automatic route or via the Foreign Investment Promotion Board). Among other things, a foreign VC fund buying a stake in an unlisted company can pay below the fair value of the shares; besides, the lock-in norm is diluted for a foreign VC fund which is already holding shares in a local firm for a year. A normal investment vehicle set up in Mauritius to make FDI in India don’t have these flexibilities.
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