SEBI-registered Private Equity (PE) and Venture capital (VC) funds should be allowed to purchase shares in the secondary market, the Confederation of Indian Industry (CII) has suggested.
Currently, VC funds can invest one-third of their capital in listed companies and that too only by way of “fresh issue of primary shares” or “preferential allotment”. In comparison, foreign institutional investors (FIIs), who are not necessarily long-term investors, are allowed to participate in both primary and secondary transactions in listed companies.
This has discouraged many global private equity firms from registering and participating as SEBI-registered foreign venture capital investors, the CII said in a paper on VC/PE industry.
The paper is titled ‘Reconceptualising the governance of venture capital/private equity investment: Directing domestic capital to corporates in India.' It has suggested some key policy changes that will help direct resources to small and medium-sized firms, allow for greater utilisation of existing investments and generally catalyse investments made by VC and PE funds in India.
One of the key policy change that has been suggested is allowing SEBI-registered VC/PE funds to invest in non banking finance companies (NBFCs) and core investment companies. While these funds are currently prohibited from making investments in NBFCs, the FIIs are permitted to invest in NBFCs without any restrictions.
Such restrictions prevent VC/PE funds from directing resources towards emerging and underserved businesses such as micro-finance, gold finance, micro-insurance and micro-pensions, the CII paper has said, adding that domestic VC/PE funds are in a position to help meet critical needs for large populations at the bottom of the country's social pyramid.
The CII paper has also suggested that the insurance regulator — the Insurance Regulatory & Development Authority (IRDA) should encourage allocations to VC/PE funds as an asset class. IRDA had recently amended regulations so as to restrict contributions to VC/PE funds from insurance companies to funds operating only in infrastructure.
On the pension funds front, the CII paper has suggested that the Pension Fund Regulatory & Development Authority (PFRDA) should consider progressively allowing such funds to make investment in VC/PE. Currently, pension funds are also not allowed to invest in VC/PE.