Mumbai: At least 43 foreign venture capital investors have been unable to begin investing in Indian start-ups because the requisite permissions from the Reserve Bank of India (RBI) have been delayed. Ten applications have been pending since 2005 and 11 more since 2006.
Among the venture capital investors knocking at the door are Google Holdings Pte Ltd, DE Shaw Composite Investments, Sabre Abraaj Infrastructure Co. Pvt. Ltd and Kotak India Venture Ltd.
Capital markets regulator Securities and Exchange Board of India (Sebi) is the regulator for venture capital investors but it typically routes applications from foreign funds through RBI and clears them only after the central bank gives its nod. RBI gets involved because capital flows across national borders are involved.
Currently, there are 129 foreign venture funds and 132 domestic funds operating in India.
According to Sebi’s website, 59 applications from foreign venture capital firms were pending with it on 31 May; 43 of them have been awaiting RBI’s clearance. “Sebi endeavours to process registrations within 21 working days” after the applications are submitted with all relevant documents, the capital markets regulator’s website says. This time frame, however, is not applicable to those applications that are required to be cleared by other regulators, including RBI.
In order to start investments in India, a foreign fund is also required to tie up with a bank branch, approved by RBI, to open foreign currency-denominated accounts.
An RBI source responding to Mint’s queries said that 15 of the 43 applications were for investments in real estate and have been put on hold in consultation with the government and Sebi. Another 18 applications have been referred back to Sebi for rechecking the fit and proper status and 10 applications are being processed.
A Delhi-based economist who did not want to be named said RBI should deal with such applications transparently and clear them fast if it finds them suitable. “What prevents the banking regulator from rejecting them? That’s better than taking so long to process these applications,” he said.
Mint sought comments from several venture funds, but none was willing to talk on regulatory issues.
Investments by foreign venture funds were substantially lower than that of domestic funds till December 2008 but surpassed the local funds in the first three months of 2009 between January and March.
As on 31 March, outstanding foreign venture fund investments were Rs23,047 crore compared with Rs22,771 crore by domestic funds, taking the total investment by venture funds in India to Rs37,578 crore, according to Sebi data. Overall, venture capital investment in India grew by 8% between September and March 2009.
Real estate, information technology and services sector have been the favourite investment destinations of venture capitalists. Investments in these three areas stood at Rs6,673 crore, Rs2,642 crore, and Rs3,063 crore, respectively, at the end of March 2009.
While investments in telecommunications have risen, venture funds seem to have lost their appetite for biotechnology. While investments in telecommunications grew three-fold to Rs3,003 crore in January-March 2009, investments in biotechnology firms have declined to Rs365 crore, from Rs634 crore in the previous quarter, according to Sebi data.
Going by Sebi norms, venture funds—both foreign and domestic—cannot invest directly in real estate, non-banking financial services, and gold financing. In other words, they can invest in companies engaged in such businesses but cannot take direct exposure to projects in these segments.
While domestic venture funds find it relatively easy to start business as Sebi is their sole regulatory authority, foreign venture funds wanting to set shop in India need RBI approval, too. Moreover, they are required to be regulated by a foreign regulatory authority or have to be an income-tax payer. Besides, they also need to submit certificates from their bankers on their promoters’ track record.
Following various committee recommendations, Sebi relaxed the investment norms for venture capital investors in 2006 by reducing the minimum limit of investment in unlisted companies to 66.67% from 75% earlier. The remaining 33.33% was permitted to be invested in listed securities.
Sebi also removed the one-year lock-in clause for shares bought at the time of initial public offering or in debt or debt instruments of a firm in which the venture capital has already invested by way of equity.
Along with these relaxations, Sebi also raised the application and registration fees for foreign funds to $5,000 (Rs2.44 lakh) and $20,000, respectively, from $1,000 and $10,000.
Continuing with its liberalization drive, in 2007 Sebi permitted domestic venture funds to invest in securities of foreign companies. They can now invest in equity and equity-linked instruments of off-shore venture capital undertakings, subject to an overall limit of $500 million. Such investments, however, can be made only in those companies which have an Indian connection.
Early this month, Sebi specified certain firm commitments for entities seeking venture capital registration in India. Each scheme launched or fund set up by a venture capital fund now requires a firm commitment of at least Rs5 crore from the investors for contribution. The foreign funds require a commitment of at least $1 million at the time of submitting their applications, seeking registrations.
Based on a World Bank study, the government took the first policy initiative and announced guidelines for venture capital funds in 1988. Seven years later, in 1995, the government relaxed registration norms for foreign venture funds.
In 1996, Sebi came out with its first set of regulations for venture capital. Regulations for foreign funds were notified for the first time in September 2000 by the capital markets regulator.