Venture Capitals
Venture Capital (VC) is an asset class of private equity investments in companies, typically defined as small to medium-sized businesses that are not listed on the public stock exchange and have a high growth potential. Institutional investors and high-net-worth individuals often provide it to bring substantial returns and diversification benefits with low correlations with other asset classes.
VC firms usually manage multiple funds over several years, which require illiquidity but generate returns when portfolio companies are sold or go public. The returns are typically divided into 40% complete losses, 30% “living dead”, and 30% substantial returns on the initial investment, with big winners yielding ten or more times the initial investment.
In India, the SEBI (Securities and Exchange Board of India) Act, 1992 and SEBI (Venture Capital Fund) Regulations, 1996, regulate the venture capital sector. Foreign Venture Capital Investors (FVCI) are not required to register under the FVCI regulations. Venture Capital Funds and FVCIs are also covered by other laws such as the Securities Contract (Regulation) Act, 1956; SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997; and SEBI (Disclosure of Investor Protection) Guidelines, 2000.
Venture Capital Funds in India can be divided based on the type of promoters, such as central and state government-controlled development finance institutions, public sector banks, foreign banks, and private sector companies and financial institutions. Eligibility and investment criteria for Venture Capital Funds require a Memorandum of Association or Trust Deed that specifies the main VC objectives, no investment of fewer than five lakhs, the commitment of at least five crores from investors, disclosure of investment strategy, and restrictions such as not investing more than 25% of the funds in one Venture Capital Undertaking (VCU). The VCU must invest at least 66.67% of its funds in unlisted equity shares or equity-linked instruments and not more than 33.33% in IPOs, debt or debt instruments of a VCU, preferential allotment of equity shares, and equity shares or equity-linked instruments of a financially weak or sick industrial company.
Foreign Venture Capital Investors must register with SEBI and comply with investment guidelines, such as disclosing the investment strategy and life cycle, investing at least 66.67% of the investible funds in unlisted equity shares or equity-linked instruments, and not more than 33.33% in IPOs, debt or debt instruments, preferential allotment of equity shares, and equity shares or equity-linked instruments.
VC Funds in India are eligible for tax exemptions under Section 10(23FB) of the Income Tax Act, 1961, for income earned by a SEBI-registered VC Fund. These regulations and guidelines ensure that investors are protected and that Venture Capital Funds are used responsibly and beneficially to support companies with high growth potential.
Our team of experienced venture capital lawyers can help guide you through the complex legal issues that arise in the venture capital industry. We have represented investors and companies in all stages of the venture capital process, from seed funding to initial public offerings.
We offer a wide range of legal services to our clients, including:
- Due Diligence – Before investing in a company, it’s essential to conduct a thorough investigation to identify any legal, financial, or operational issues that may affect the investment. Our lawyers can help conduct due diligence and advise on potential risks.
- Structuring Investments – We can help structure investments to meet the unique needs of both investors and companies. Our lawyers can advise on the appropriate investment vehicle, negotiate the terms of the investment, and draft the necessary legal documents.
- Securities Law Compliance – Venture capital investments are subject to various securities laws and regulations. Our lawyers can help ensure compliance with these laws and regulations to minimise the risk of legal issues arising in the future.
- Exit Strategies – Our lawyers can advise on exit strategies for investors, including mergers and acquisitions, initial public offerings, and other liquidity events.
- General Counsel – We can act as general counsel to venture capital firms and provide ongoing legal advice on various issues, including fund formation, investor relations, and regulatory compliance.