The Securities and Exchange Board of India (SEBI) vide the SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2024 (Amendment Regulations) notified on July 11, 2024, introduced a new chapter providing for migration of Venture Capital Funds (VCFs) registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996 (VCF Regulations) to SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) by registering as Migrated Venture Capital Funds (MVCFs), a sub-category of VCFs under Category-I Alternative Investment Fund (AIF) under the AIF Regulations.
Registration as MVCFs under the AIF Regulations may be sought within 12 months from the date of publication of the Amendment Regulations in the official gazette (i.e. 12 months from July 18, 2024). The Amendment Regulations stipulate certain eligibility criteria that will be considered by SEBI for grant of registration as a MVCF which inter-alia include the applicant VCF to have: (a) a certificate of registration in terms of the former VCF Regulations; and (b) no pending investor complaint(s) with respect to non-receipt of funds or securities for its unliquidated schemes as on the date of application, all schemes of the applicant VCFs to have a minimum investment commitment of at least INR 5 lakhs from all investors (excluding investors who are employees, principal officers or directors of the applicant VCF or directors of the trustee company or trustees where VCF is established as a trust or employees of the manager or asset management company of the MVCF) and each scheme of the applicant VCF to have a firm commitment from investors for contribution of at least INR 5 crores before start of its operations.
In terms of the Amendment Regulations, MVCFs are prohibited from inviting offers for subscription or purchase of units from the public and launching any new schemes, however, MVCFs are permitted to raise capital through private placement memorandum (PPM) or pursuant to subscription agreements executed with investors (these documents and details related to funding raised to be reported to SEBI).
The PPM or the subscription agreement is required to contain information inter-alia including the corpus, the minimum amount required to be raised for the MVCF to be operational and the minimum amount required to be raised for each scheme of the MVCF, investment strategy of the MVCF, provisions for refund of monies in the event of non-receipt of minimum amount, details of entitlements on units, period of maturity (if any) of the MVCF, procedures of subscription to units, distribution of benefits having accrued to investors, manner of winding-up of the MCVF and details of the trustees or trustee company or fund manager or asset management company including directors and chief executives of the MVCF.
In terms of the Amendment Regulations, units of a MVCF cannot be listed on any recognized stock exchange(s) until expiry of three years from the date of issuance of such units.
MVCFs are not permitted to invest more than 25% of their corpus in a single venture capital undertaking (VC Undertaking). Investment in associate companies is prohibited. Unlike Category-I VCFs, MVCFs are mandatorily required to invest approximately 67% of their investible funds (instead of 75% of investible funds in case of Category-I VCFs) in unlisted equity shares or equity-linked instruments of VC Undertakings and not more than 33% of their investible funds:
- by subscription to initial public offers of VCF Undertakings proposing to list their securities; or
- in debt or debt instruments of VCF Undertakings where investment in equity has already been made by the MVCF; or
- by preferential allotment of equity shares of a listed company (subject to lock in period of one year); or
- equity shares or equity-linked instruments of a financially distressed company or a sick industrial company listed on exchanges; or
- special purpose vehicles created by VCFs for facilitating investment in accordance with AIF Regulations.
MVCFs must achieve the aforesaid investment restriction by the end of their life cycle.
The Amendment Regulations in line with the provisions applicable to AIFs, permit extension of tenure of a MVCF up to two years subject to approval of two-thirds unitholders (by value of their investment) of such MVCF. In the event the unitholders decline extension of tenure or following expiry of the extended tenure, the MVCF will have to be wound up as per Regulation 29 (Winding up) of AIF Regulations. Schemes of VCFs which have not been liquidated under provisions of the VCF Regulations by the end of their tenure may be granted an additional liquidation period in terms of AIF Regulations on registration of such VCF as a MVCF subject to conditions and procedures prescribed by SEBI.
In its circular dated August 19, 2024, SEBI has set forth modalities of migration of VCFs to AIF Regulations based on the tenure of schemes of such VCFs and the procedure for determination of tenure of schemes of MVCFs. Some of the key aspects of conditions of migration of VCFs include:
- The deadline for migration of VCFs having active schemes (i.e. schemes whose liquidation period has not expired or that have not been wound up) as on the date of application for registration as MVCF is set as July 19, 2025.
- Schemes of VCFs having a definite tenure in the PPM under the VCF Regulations would continue to have the same tenure upon migration to AIF Regulations. In case of schemes not having a defined tenure, the residual tenure of such schemes is required to be ascertained before making an application for migration with approval of 75% of investors by value of their investment in such schemes.
- Schemes of MVCFs that have not been wound up following expiry of their liquidation period (under VCF Regulations) have been granted a one-time additional liquidation period of one year from the date of publication of the Amendment Regulations in the official gazette i.e. the period from July 18, 2024 to July 19, 2025.
- VCFs that decide against migrating to AIF Regulations in accordance with the Amendment Regulations would be subject to more stringent regulatory reporting requirements at par with those applicable to AIFs (in case a particular VCF has schemes whose liquidation period has not expired) and / or could face regulatory action from SEBI (in case a particular VCF has at least one scheme whose liquidation period has expired).
- The option of migration to AIF Regulations is not available to VCFs in the instance where all schemes of such VCFs have been wound up and/or where no investments have been made by schemes of VCFs that have not been wound up. Such VCFs are required to file an application for surrender of their registration with SEBI on or before March 31, 2025, failing which SEBI will initiate cancellation of registration of such VCFs.
- Upon migration of VCFs in terms of the Amendment Regulations, all investors, investments held and units issued by such VCFs under the VCF Regulations are deemed to be those of the MCVF under AIF Regulations.
Conclusion
This move is intended to incentivize VCFs to switch to a streamlined AIF regime consequent to repeal of the VCF Regulations.