Venture Capital Fund & Angel Fund Under SEBI (Alternate Investment Fund) Regulations 2012 Explained


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Venture Capital Fund & Angel Fund Under SEBI (Alternate Investment Fund) Regulations 2012 Explained

  1. 1. May 2014 Subject to copyright of Corporate Professionals, Advisors & Advocates Page 1 of 7 Venture Capital Fund & Angel Fund Under SEBI (Alternate Investment Fund) Regulations 2012 Explained As per SEBI (Alternative Investment Funds) Regulations, 2012, 3 broad categories of funds have been classified to be registered under said regulations namely Category I, II, & III. Under Category I, there are further classification namely: (a) Venture Capital Fund (b) SME Fund (c) Social Venture Fund (d) Angel Fund Amongst the above categories, Angel Funds is recently introduced by SEBI. Though the purpose of AF and VCF both are to promote Venture Capital Undertakings, though there are several difference between the both with respect to category of Investors, Investee Company, Limits of Investments etc. which are discussed in detail hereunder.
  2. 2. May 2014 Subject to copyright of Corporate Professionals, Advisors & Advocates Page 2 of 7 Basic Structure & Definitions So far as basic structure of Angel Funds in comparison to that of Venture Capital Funds are concerned, the prime difference lies in the Investor and Investee criteria or standards defining them. Investors Firstly w.r.t. to Investors, in case of VCF, any person/investor can pool in fund with minimum investment amount of Rs. 1 Cr. Alternatively in case of Angel Funds, only Angel investors can pool in fund. The Regulations have further provided that which entities can be termed as Angel Investors which broadly to include individuals having net tangible asset value of Rs. 2 Cr. or a body corporate with net worth of Rs. 10 Cr. Investee Companies Further w.r.t. to Investee Company, though both VCF or Angel Fund are required to invest in Venture Capital Undertakings (VCU) (as described hereunder), though herein too in case of Angel Fund, the VCU must be such which are not more than 3 years old and must have maximum turnover of Rs. 25 Cr. etc. though a VCF can invest in any VCU irrespective to years or networth. The same is detailed herein below: Alternative Investment Fund Category III Category II Category I Venture Capital Fund Angel Fund Start ups  Unlisted securities Venture Capital Undertaking  All Emerging or early stage Venture Capital Undertaking  Incorporated min. 3 yrs  Turnover less than Rs. 25 Cr.  Not related to industrial group- turnover exceeds Rs. 300 Cr.  Not companies having family connection with any Angel Investors of fund Venture Capital Undertaking:  Domestic Company  Not listed at time of investment,  Not NBFC, Gold Financing,  Business not permitted under Industrial policy of GOI or such as notified by SEBI Invests In: AIF that raises funds from Angel Investors Individual  Net tangible assets min. Rs. 2 Cr. (excluding 1 residence)  Experience  early stage investment; or  serial entrepreneur; or  10 yrs. senior mgt professional OR : Body Corporate  Net worth min. Rs. 10 Cr. OR : Registered AIF or VCF
  3. 3. May 2014 Subject to copyright of Corporate Professionals, Advisors & Advocates Page 3 of 7 Creation of Fund Fund Corpus of either VCF or AF constitute of two components, one the contribution of the Sponsor (creator of fund) or Fund Manager and another that is collected from Investors at large. For each category and nature of funds, SEBI has prescribed a minimum corpus as well as contribution by the Sponsor or the Manager in the corpus. The corpus is to be maintained for each scheme to be launched by the Fund. The major differences w.r.t. VCF and AF are discussed herein below: Fund Corpus (for each scheme) Investor Total Rs. 10 Cr. Any Investor Min. Contribution: Rs. 1 Crore (Rs. 25 Lakhs employee/ director of the AIF or its Manager)(Max 1000) Only Angel Investor Min. Contribution: Rs. 25 Lakhs (for maximum period of 3 years) (max 49 investors) Venture Capital Fund Angel Fund Sponsor / Manager Total Rs. 20 Cr. Not less than 2.5 % of the corpus OR Rs. 5 Crores Whichever is lower At all times Not less than 2.5 % of the corpus OR Rs. 50 Lakhs Whichever is lower At all times Venture Capital Fund Angel Fund Investor may be Indian, Foreign or NRI Each schemeEach scheme
  4. 4. May 2014 Subject to copyright of Corporate Professionals, Advisors & Advocates Page 4 of 7 Investments Criteria and Limits Though VCF and AF both belong to the same category I of AIF, the requirement of investment by these funds differ. Mainly in case of AF the entire investment is to be made in VCU whereas in case of VCF the requirement is that of minimum 66%. Also the nature of VCU wherein an AF is required to make investment also differs from VCU for VCF (as explained at Pg.1). The differences as well as common points are listed in brief herein below:  Min 66% of corpus  Unlisted Equity or equity linked instrument of VCU  Companies listed or proposed to be listed on SME Exchange or SME segment  Max 33% of Corpus  Subscription to IPO of VCU  Debt instrument of VCU where already it has invested by way of Equity  Preferential allotment of equity or linked instruments of listed Co. with 1 yr lock-in  Listed equity or linked instruments of financially weak or Sick Company  SPV to promote investment in accordance to these Regulations  May invest in units of other registered VCF.  Not more than 25% of the Investible Fund in one Investee Company  Not invest in associate Companies except with approval of 75% of investor by value  May invest in securities of Companies outside India subject to RBI norms (in applicability of above provisions). Venture Capital Fund  Un-invested portion may be invested in liquid mutual fund; bank deposits, treasury bills, commercial papers and such other liquid assets.  Shall not borrow funds or engage in leverage except for meeting temporary funding requirements subject to: For Max 30 Days; Max 4 times a Year; Max 10% of Investible funds. Both VCF & AF Angel Fund  100% investment to be in VCU (as specified for AF)  Not more than 25% of the total investments under all schemes in one Investee Company  Not invest in associate Companies  Investment in VCU to be locked in for period of 3 years  Min. Investment in a VCU to be of Rs. 50 Lacs  Max investment in a VCU to be Rs. 50 Cr.  May not invest in securities of companies outside India
  5. 5. May 2014 Subject to copyright of Corporate Professionals, Advisors & Advocates Page 5 of 7 Fund Manager Structure of Fund Provisions for Funding through Foreign Nationals As per Regulation 15 of SEBI Regulations, 2012 the companies incorporated outside India can make investment in securities but subject to the conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and the Board from time to time.  Every AIF including a VCF & AF shall be managed by a Fund Manager.  The key investment team of Fund Manager to be appointed should have relevant professional qualification and adequate experience in the following field, and also one key personnel should have atleast 5 years experience in:  Advising or managing pool of Capital or Funds or assets or wealth  Portfolio management  Business of buying, selling or dealing in securities or Financial assistance  The Manager to have necessary infrastructure and manpower to effectively discharge its activities.  The Manager must be a Fit & Proper person in terms of schedule II of SEBI (Intermediaries) Regulations, 2008 including but not limited to, the principal officer and the key management persons by whatever name called –  integrity, reputation and character;  absence of convictions and restraint orders;  Competence including financial solvency and networth.  The fund may be in any of the following structure:  Body Corporate  LLP  Trust  The Trust form of structure is most prevalent  In case of Body Corporate, how units to be issued to investors remain unclear since the same will attract the provisions of Deposits under Companies Act.
  6. 6. May 2014 Subject to copyright of Corporate Professionals, Advisors & Advocates Page 6 of 7 Tax Provisions STATUS FOR FUND The SEBI Regulations, 2012 specifically provide that Category I AIFs formed as trusts or companies shall be construed as “Venture Capital Company” or “Venture Capital Fund”. Such venture capital groups are exempted from tax in accordance with Section 10 (23FB) of the Income Tax Act, 1961 (“IT Act”). Furthermore, Category I AIFs that do not fall under the sub category of VCFs shall not eligible for a tax pass through. Hence, it can be argued that only those Category I AIFs that invest primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model i.e. are VCFs are eligible for a tax pass through. It is pertinent to mention here that a whole gamut of Category I AIFs which are setup as SME funds, social venture funds, infrastructure funds does not enjoy exemption u/s 10(23FB) of the Income Tax Act, even though these funds would in all likelihood have “positive spillover effects on the economy”. TAX PASS THROUGH In addition to what is stated above the Income from funds other than VCFs & AF under Category I, and for other categories of funds too, which are not exempted under Section 10(23FB) of the IT Act, taxation of the same may be structured on the basis of type of entity incorporated. It is worthy to note that other funds to achieve a tax pass through status, the industry has resorted to the taxation principles of trust since majority of these investment funds are started as trusts. The income of a trust is subject to tax under Section 161 to 164 of the IT Act. As per section 164 of the IT Act, the trust shall be considered as ‘determinate trust’ i.e. where the beneficiaries and their individual shares are ascertainable in the trust deed, such type of trust are believed to be eligible to achieve a tax pass through status. However on the other hand if the trust is not determinate then the income of the trust would be chargeable to Maximum Marginal Rate (MMR) in accordance with section 164(1) IT Act. STATUS FOR INVESTOR INVESTING IN FUND It is very important to mention that the above mentioned tax pass through ensures that the income is exempted at the fund level and is only taxable in the hands of the investors. According to Section 115U of the IT Act any amount of income distributed by a venture capital company or venture capital fund to the investors shall be chargeable to tax and such company or fund shall be liable to pay income-tax on such distributed income at the rate as prescribed. Hence it can be construed from this Section ensures that the income of a VCF earned from its investment in any VCU shall be exempted from tax in the hands of the fund and shall only be taxable in the hands of the investors of the fund.
  7. 7. May 2014 Subject to copyright of Corporate Professionals, Advisors & Advocates Page 7 of 7 Liquidation  A fund can be wound-up at any of the following instance:  The tenure mentioned in the PPM (for all the schemes) is over; or  The trustees intends to wound up the fund in the interests of investors; or  75% of the investors by value of their investment pass a resolution to wound up the fund; or  SEBI directs in the interests of investors.  Assets of the fund to be liquidated within 1year from date of intimation of liquidation and proceeds accruing to the investors to be distributed after satisfying all liabilities.  The process of winding up shall otherwise be in accordance to the structure of the fund i.e. whether Trust, LLP, Company or body corporate and shall be required to follow the process as prescribed under the specific statute. For Queries, Contact: Ms. Deepika Vijay Sawhney Partner Corporate Professionals, Advisors & Advocates Mobile: + 91 9818316936 Tel: +91.11.40622229 Email: Ms. Aarti Sharma Associate Corporate Professionals, Advisors & Advocates Mobile: + 91 9650100622 Tel: +91.11.40622253 Email: DISCLAIMER This Document is on the analysis of the provisions contained in respective governing laws and our understanding and interpretation of the same and should not be constituted as an advice. Also this is only a abridged document giving brief about the AIF regulations and cannot be deemed to have detailed coverage regarding the points covered and other conditions and provisions stipulated in the Regulations. For any further query, reference should be drawn to the Regulations and circulars as issued from time to time or a detailed opinion may also be sought from us. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this opinion.