The Hindu Business Line : Issues in the FVIC route?

As per the recent approvals granted, the FVCI (foreign venture capital investment) vehicle is, inter alia, permitted to invest in the infrastructure sector. But what is the meaning of `infrastructure,' wonders Mr Punit Shah, Leader, Financial Service Tax practice, Pricewaterhouse Coopers. "The issue for consideration here is whether infrastructure should be understood generally or as defined in the exchange control regulations or as per the Income-Tax Act, 1961," Mr Shah adds, during the course of a recent email interaction with Business Line.

Another issue he mentions is the absence of a level-playing field between the FVCI and the DVCF (domestic venture capital fund). "While the regulators have been talking about providing a level-playing field between the FVCI and the DVCF, a recent move (specifying the 10 sectors for availing pass-through status by the SEBI-registered DVCFs) has, in effect, reversed the trend by placing the DVCF in an advantageous position over the FVCI since the DVCF is permitted to invest in all sectors, and the list of 10 sectors is relevant for the DVCF only to avail tax benefit," observes Mr Shah.

For starters, the foreign venture capital investor or FVCI is an offshore vehicle which is registered and regulated by the Securities Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), and is used mainly for investing in unlisted Indian securities. The FVCI registration procedure operates as a single-window clearance through SEBI (that is, the application is to be filed only with SEBI, which then forwards the same to the RBI for its clearance), and the FVCI registration certificate is finally issued by SEBI.

Excerpts from the interview, in which Mr Shah looks at the advantages of the FVCI route, and also discusses areas worth attending to.

On tax considerations.

A currently relevant question is about the impact on FVCI of the amendment in the Income-Tax Act as regards the eligible sectors for the DVCF to be eligible for pass-through status. Since the sector restriction placed on the FVCI is emanating from the terms of the FVCI approval and is not specifically linked to the Income-Tax Act (though is clearly based on it), an amendment to the latter would not automatically apply to the FVCI, unless there is an amendment to the FVCI Regulations to that effect or unless a specific clarification is obtained by the FVCI.

How about investment in a DVCF? Since the recent approvals only restrict the FVCI investment in Indian companies engaged in specified sectors and are silent regarding investment in domestic venture capital fund (DVCF), it needs to be analysed whether the FVCI entity can invest its entire corpus in a DVCF, which could be investing in diverse sectors, that is, other than the 10 specified sectors

On the recent trends in granting the FVCI licence.

Historically, SEBI used to grant blanket approvals for the FVCI, for investment across sectors. However, a couple of years back with the real-estate boom in the offing, the regulators placed a restriction on investment by the FVCI in the real estate sector. Hence, the FVCI registrations were issued for investment in sectors other than real estate.

Over the last one year or so, while SEBI has been clearing approvals and forwarding the same to the RBI for consideration, the RBI has held back its clearance, on the premise of some impending policy change. Inter alia, the RBI has voiced concerns over thin capitalisation levels of the FVCI vehicles, and has asked the applicants to show a reasonable capital base (range of $1,00,000). As a result of the above stalemate, hardly any FVCI approvals have been granted in the recent past.

The latest developments on this are, that over a fortnight back the RBI cleared a few applications, and that the FVCI approvals are now beginning to come through, albeit with a set of new conditions. As per the fresh FVCI approvals, the FVCI investment is now permitted only in the 10 specified sectors. Accordingly, the FVCI is now prohibited from investing in sectors other than the specified 10 sectors such as infrastructure, biotechnology, nanotechnology, dairy industry, IT-related to hardware and software, etc.

On the categories of FVCI approvals.

Given the fact that the investment restrictions are not incorporated by way of amendment to the FVCI regulations, and considering that the Government policy on the FVCI has evolved over time in the light of the economic scenario prevailing at that particular juncture, there are currently three categories of FVCI approvals that are available with different private equity players (depending on the point of time when they made the application):

Blanket approval (that is, no sector restriction);

Approval with prohibition on investment in real estate sector; and

Approval where investment is restricted to the specified 10 sectors.

Further, since the FVCI licence is perpetual, that is, not necessitating renewal, it would be interesting to see how the policymakers choose to regulate investments of the earlier entrants, who have a free hand to invest in real estate and other than the 10 specified sectors.

On the advantages of investing through the FVCI vehicle.

Not required to comply with the pricing guidelines prescribed by the RBI both at the time of entry and exit.

Can exit on listing (that is, no lock-in), provided such unlisted shares are held by the FVCI for a period of at least one year as on the date of filing of draft prospectus with SEBI.

Accorded the status of QIB (qualified institutional buyer).

Exempt from Government guidelines requiring prior FIPB (Foreign Investment Promotion Board) approval for non-resident having previous venture tie-up in portfolio companies in the `same' field.

SEBI Takeover Regulations are not triggered subject to fulfilment of certain conditions.

Not treated as `promoter' under the SEBI Guidelines and hence there are no obligations in terms of disclosures, lock-in period, etc.

However, an FVCI entity is subject to SEBI (Foreign Venture Capital Investors) Regulations, 2000 and accordingly is required to invest in accordance with the set limits. Hence, an FVCI entity faces some investment constraints compared to a pure FDI (foreign direct investment) vehicle.

D. MURALI

(Portrait by R. Rajesh)

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