April 24, 2012
The Reserve Bank of India ("RBI") recently issued a circular permitting foreign venture capital investors registered with the Securities and Exchange Board of India[1] ("FVCI") to participate in secondary market transactions, with effect from March 19, 2012[2]. The RBI circular has broadened the reach of FVCIs in India and will also facilitate transactions between FVCIs and other investors.
The Indian FVCI Regime
FVCI regulations promulgated by the SEBI in 2000 permit FVCIs to invest in two types of entities:
(a) Indian venture capital undertakings ("IVCU") — private or public unlisted companies incorporated in India; and
(b) Venture Capital Funds ("VCF") — funds established in the form of a trust or a company and registered with the SEBI and using its pool of capital for investments in IVCUs.
The FVCI route is a preferred route for foreign investors investing in Indian securities as it provides certain advantages when compared to investment through the foreign institutional investor ("FII") route. Unlike FIIs, FVCIs:
(a) are not subject to the maximum ownership limit of 10 per cent in an Indian company (though they are otherwise subject to the applicable foreign direct investment limits for the relevant industry sector, if any);
(b) may purchase and dispose any investment held by it at a privately negotiated price and are not subject to entry and exit pricing restrictions prescribed by RBI regulations; and
(c) may dispose their shares in any investee company soon after its initial public offering, without being subject to the normal one-year lock up period.
Erstwhile Restrictions on FVCIs
Until recently, FVCIs were not permitted to purchase securities of IVCUs by way of purchase from third parties as they could only purchase such securities through a fresh issue of securities or an initial public offering by such IVCUs. Secondary market transactions had to be approved by the Indian Foreign Investment Promotion Board on a case-by-case basis.
Further, there was ambiguity on whether FVCIs could purchase securities listed on an Indian stock exchange. While the RBI had not expressly permitted purchases of listed securities, SEBI regulations permitted FVCIs to use a third of its funds to purchase certain types of listed securities. These included:
(a) equity shares purchased by an FVCI through a private placement (subject to the normal lock-in period of one year); and
(b) listed equity shares or equity linked instruments of a financially weak company or a "sick industrial company".
Effect of the RBI Circular
Pursuant to the RBI circular, FVCIs are now authorized to purchase various types of securities (including equity, equity linked instruments, debt instruments, debentures) of IVCUs through private arrangements and secondary transactions with third parties. Consequently, FVCIs can now tap third parties such as existing investors who are seeking to exit their investments. The RBI has also permitted purchases by FVCIs of listed securities, subject to SEBI’s FVCI regulations.
[1] The Securities and Exchange Board of India ("SEBI") is the Indian securities and capital markets regulatory agency.
[2] RBI/2011-12/452, A.P. (DIR Series) Circular No. 93.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you work or the following lawyers in the firm’s Singapore office:
Jai S. Pathak (+65 6507 3683, [email protected])
Priya Mehra (+65 6507 3671, [email protected])
Karthik A. Thiagarajan (+65 6507 3636, [email protected])
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