How to Structure a Venture Capital Fund by Himanshu Mandavia

4,805 views
4,454 views

Published on

StartupCentral Venture Capital Masterclass, July 2012

Published in: Economy & Finance, Business
1 Comment
4 Likes
Statistics
Notes
No Downloads
Views
Total views
4,805
On SlideShare
0
From Embeds
0
Number of Embeds
6
Actions
Shares
0
Downloads
329
Comments
1
Likes
4
Embeds 0
No embeds

No notes for slide

How to Structure a Venture Capital Fund by Himanshu Mandavia

  1. 1. Structuring a VentureCapital Fund - Tax andRegulatory AspectsJuly 2012
  2. 2. Contents for discussion Domestic Pooling – Aspects to be Considered Typical Fund Structure AIF Regulations – Key Aspects Foreign Investment in Domestic Pooling Vehicle Unified vs. Co-invest© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 2 2Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  3. 3. Domestic pooling – Aspects to be considered Category of investors Taxation issues Number of investors Aspects to be considered Target Period of sectors investments© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 3Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  4. 4. Typical Fund Structure
  5. 5. Typical Fund Structure Investors Management fee + carry AMC Pooling vehicle Management agreement Target© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 5Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  6. 6. Alternative Domestic Pooling Structures NBFC VCF PMS AIF LLP Unregistered trust© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 6Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  7. 7. Typical Fund Structure - Key issues• Need for flexibility in making investments• Overseas presence for management activities• Costs involved in set-up and time lines for set-up (including approvals etc.)• Characterization of income on sale of investments• Deductibility of carried interest / management fee against exit gains• Taxation of AMC o LLP structure o Carry taxation - Capital gains v. Business income - Service tax issue• Tax compliance o Tax payments, credit distribution, etc© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 7Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  8. 8. AIF Regulations – KeyAspects
  9. 9. AIF Regulations – Categories of AIF SEBI released AIF Regulations on May 21, 2012 to regulate all funds established in India, raising funds from Indian or foreign investors CATEGORY I CATEGORY II CATEGORY III • AIFs with positive spillover effects • No incentives given by SEBI, GOI, • AIFs which trade for making short on the economy or other regulators in India term returns • Incentives given by SEBI, GOI, or • Employs diverse or complex other regulators in India trading strategies Private equity funds, VCF, Debt funds, SME Funds, Hedge funds Other funds not classified under Social Venture funds, Category I or III Infrastructure funds© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 9Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  10. 10. AIF Regulations – Key conditions applicable to all AIFs… Registration • Any fund established or incorporated in India (excludes offshore funds) Form of AIF • Trust or a Company or a LLP or a body corporate • Family trusts, • ESOP trusts, • Employee welfare trusts, Exclusions from • Gratuity trusts, AIF Regulations • Holding companies, • SPVs not managed by fund managers and regulated by other regulators, • Securitization / reconstruction companies registered with RBI, • Funds regulated by SEBI /any other regulator in India Minimum corpus • INR 20 crores Maximum investors • 1,000 investors© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 10Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  11. 11. …AIF Regulations – Key conditions applicable to all AIFs Minimum contribution per • INR 1 crore from investor (INR 25 lakhs from employees or directors) investor Sponsor • Continuing minimum Sponsor contribution - at least 2.5% of the corpus or contribution INR 5 crore, whichever is lower • Possible for closed ended AIFs with minimum tradable lot of INR 1 crore, Listing however funds are not to be raised through the stock exchange mechanism Foreign • May invest in securities of companies incorporated outside India (subject to Investments conditions of RBI / SEBI)© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 11Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  12. 12. Foreign Investment inDomestic Pooling Vehicle
  13. 13. Foreign Investment in Domestic Pooling Vehicle • FIPB approval not required for investment in a company registered with Set up as a SEBI as an VCC. Only Category I AIFs can be VCC. Company • FIPB approval required for AIFs under categories II and III. • Prior FIPB approval required for making foreign investment in Trust. Set up as a Trust • On repatriation RBI approval would be required. • Prior FIPB approval required for making foreign investment in LLP. Set up as a LLP • FVCI not allowed to make any investment into LLP.© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 13Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  14. 14. Unified Vs. Co-invest
  15. 15. Unified vs. Co-investment structure Unified Co-investment Investors Investors Co-investment arrangement Fund management Offshore agreement FDI / FVCI FDI / FVCI AMCOffshore Offshore IndiaIndia Domestic Investment Domestic investors advisory investors agreement Investment ManagementDomestic DVCF/ Domestic Agreement AMC Management AMC agreement AIF DVCF/ AIF Investee Investee companies companies© 2012 KPMG, an Indian Partnership and a member firm of the KOMG network of independent member firm affiliated with KPMGInternational Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 15
  16. 16. Glossary of Terms VCF Venture Capital Fund DVCF Domestic Venture Capital Fund SEBI Securities and Exchange Board of India AIF Alternative Investment Funds AIF Regulations SEBI (Alternative Investment Funds) Regulations, 2012 SEBI VCF Regulations SEBI (Venture Capital Funds) Regulations, 1996 FVCI Foreign Venture Capital Investor GOI Government of India SME Small and Medium Enterprise LLP Limited Liability Partnership SPV Special Purpose Vehicle VCC Venture Capital Company FIPB Foreign Investment Promotion Board FDI Foreign Direct Investment© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 16Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  17. 17. Thank YouThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after athorough examination of the particular situation.
  18. 18. Annexure 1Alternate Domestic Fund Structures Structure Key Benefits Key Concerns • Regulated Entity • Tax inefficient • No restrictions on Advisory fee • RBI Prudential norms to be adhered toNBFC • Carried interest, if any, could be in the form of • RBI registration fees • Can invest across listed and unlisted securities • Investment to be held directly in the name of investors • Regulated by SEBI and not through pooled account • Pass through treatment for tax purpose • Liquidity - Listing of PMS scheme not possiblePMS - PMS scheme to mandatorily provide for an exit option to investors • Fees to be linked to drawdown and not commitment • Applicability of AIF regulations in case of pooling of funds? • Pass-through treatment for tax purposes • Low on investor comfort - Tax is applicable at the LLP level and distributions • Liquidity to investors - No mechanism for listing of are not taxed ensuring one-level taxation LLPLLP • Limited liability of partners • Characterization of income (Business Income v/s • No restrictions on management fee Capital gains) • RBI approval • Applicability of AIF regulations • Pass-through treatment for tax purposes • Registration under AIF regulationsUnregister- • No restrictions on Advisory fee • Post AIF regulations should be on same footing ased Trust • No restrictions on investment in group companies DVCF© 2012 KPMG, an Indian Partnership and a member firm of the KOMG network of independent member firm affiliated with KPMGInternational Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 18

×