Wednesday, August 6, 2008

New Norms for VC's

Government is likely to revisit norms for venture capital funds and talks have been held with the market regulator SEBI in this regard.Norms governing domestic and foreign venture capital (VC) funds in India are set for an overhaul. The new guidelines, being drafted by the finance ministry and the capital market regulator SEBI, may not allow VCs to invest in listed companies and restrict them only to startups. The guidelines will also seek to remove the differences in the treatment of foreign and domestic VC funds. One of the aspects being reviewed is the minimum capital required for VCs to set up shop in India. Currently, domestic VCs need to have a minimum capital of Rs 5 crore to operate, while foreign VCs don’t have any such requirement. The new guidelines will attempt to provide a level playing field for domestic and foreign funds. The government is studying norms in other countries, where mere commitments to provide capital to a VC fund would be sufficient. VCs, who are currently exempt from SEBI’s takeover code or lock-in period for shares held would be allowed to enjoy this exemption only if they invested in “genuine new ventures.” The government feels that VCs should provide capital to new ventures and not invest in established listed companies. Speaking earlier at the launch of the Venture Capital Association of India, joint secretary in the finance ministry KP Krishnan said, “It is time to revisit the regulatory regime of venture funds. Now, they are not required to register with the regulator. It is important for us to know how many of them operate in India as well as the volume of business that they do.” On another count, while domestic VCs can get a tax exemption only if they invest in high-risk areas like biotechnology or nanotechnology, foreign VCs escape taxes altogether as they normally operate from offices established abroad. Most foreign VCs do not have to pay any tax, as they have no permanent establishment in India. The differences in tax treatment between domestic and foreign VCs is also under review, the official said. The government is also understood to be looking at redefining the investments that are more risky instead of categorising certain sectors such as biotechnology as risky. The government’s intention is to have a new classification of risky areas of funding irrespective of the sectors.

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