SEBI venture capital regulations have changed a lot over time. The Securities and Exchange Board of India (SEBI) used to regulate these funds under the SEBI (Venture Capital Funds) Regulations, 1996, but now they follow the SEBI (Alternative Investment Funds) Regulations, 2012. This change shows SEBI’s efforts to make the rules simpler and more up-to-date for alternative investments like venture capital, which is important for helping start-ups and early-stage companies grow. In this article, we’ll explain the regulations, their history, and recent updates in a clear and detailed way so everyone involved can understand.
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What is SEBI Venture Capital Regulations?
Venture capital funds invest in start-ups and young companies. In India, these funds are now managed under the SEBI (Alternative Investment Funds) Regulations, 2012. These rules replaced the older 1996 regulations and treat venture capital as a type of Category I AIF, which are funds that help the economy grow. Funds that were set up under the old rules can switch to this new system, especially with updates made in 2024.
The regulations say that a venture capital fund must have at least Rs. 20 crore in total funds. At least two-thirds of this money must be invested in unlisted equity shares or equity-linked instruments of venture capital undertakings (like start-ups). The rules also limit borrowing, allowing it only for short-term needs under strict conditions. Following these rules is very important. Recent changes set deadlines, like giving up registration certificates by March 31, 2025, for funds that don’t comply. Funds that keep running past their allowed time could face penalties.
In 2024, SEBI made new changes to help older funds move to a new category called Migrated Venture Capital Funds (MVCFs) under AIFs. This helps solve problems with selling off investments. These updates show SEBI’s work to keep rules modern, protect investors, and make sure the market stays fair.
Historical Context and Transition
The SEBI (Venture Capital Funds) Regulations, 1996, were the first set of rules for venture capital funds in India. Funds had to register with SEBI, paying a non-refundable application fee of Rs. 1,00,000 and a registration fee of Rs. 5,00,000 (though earlier versions mentioned Rs. 10,00,000).
The rules said that funds couldn’t invest more than 25% of their money in one company and at least 66.67% of their investable funds had to go into unlisted equity shares or equity-linked instruments of venture capital undertakings. Funds couldn’t ask the public to invest and could only raise money through private placements. They also had to keep their financial records for 8 years.
On May 21, 2012, SEBI introduced the SEBI (Alternative Investment Funds) Regulations, 2012, and canceled the 1996 rules. Funds already operating under the old rules could continue until they closed, but they couldn’t start new schemes after the new rules came out. Funds could apply to re-register under the new rules if two-thirds of their investors (by investment value) agreed. This was a big shift to the AIF system.
Current Regulatory Framework: SEBI (Alternative Investment Funds) Regulations, 2012
Under the 2012 rules, venture capital funds are a type of Category I AIF, which are seen as good for the economy and can get tax benefits under Section 10(23FB) of the Income Tax Act, 1961. Here are the main details:
Definition and Scope
A venture capital fund is an AIF that mainly invests in unlisted securities of start-ups, emerging, or early-stage companies working on new products, services, technology, intellectual property, or business models. This includes angel funds under Chapter III-A. A venture capital undertaking is a domestic company not listed on a recognized stock exchange when the investment is made. It must focus on services, production, or manufacturing but can’t be a non-banking financial company, deal in gold financing, or do activities banned by industrial policy or SEBI.
Investment Conditions
The rules say at least two-thirds of the fund’s money must be invested in unlisted equity shares or equity-linked instruments of venture capital undertakings or companies listed (or planning to list) on an SME exchange. Up to one-third can be used for things like subscribing to IPOs, investing in debt of companies the fund already has equity in, buying preferential allotments with a 1-year lock-in, purchasing equity in struggling listed companies, or setting up special purpose vehicles to help with investments. These rules must be followed by the end of the fund’s lifecycle. Borrowing is only allowed for short-term needs (up to 30 days, 4 times a year, and no more than 10% of the fund’s money).
Structural Requirements
AIFs, including venture capital funds, need at least Rs. 20 crore in total funds, with each investor putting in at least Rs. 1 crore. A fund or scheme can have up to 1,000 investors. Category I and II AIFs (including venture capital) must be close-ended and last at least 3 years, while Category III AIFs can be open-ended or close-ended. Funds need to have a continuing interest of 2.5% of the initial fund or Rs. 5 crore (whichever is lower) for Category I and II, or 5% or Rs. 10 crore for Category III, and managers can’t waive their fees.
Listing and Compliance
Fund units can be listed on a stock exchange with a minimum tradable lot of Rs. 1 crore, but funds can’t raise money through stock exchanges. Investing in associate companies is allowed if 75% of investors (by investment value) approve. All AIFs are considered Qualified Institutional Buyers (QIBs) under SEBI’s 2009 rules for issuing capital.
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Recent Developments and Amendments
In 2024, SEBI made important changes with the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2024. These changes help older venture capital funds move to the AIF system, especially when they struggle to sell off investments by the deadline. The changes created a new category called Migrated Venture Capital Funds (MVCFs), a type of Category I AIF. Here’s what’s new:
Eligibility for Migration
Funds with active schemes (where the liquidation period hasn’t ended) or expired schemes (not yet closed) can move to MVCFs. Funds with no investments or closed schemes must give up their registration certificates by March 31, 2025. MVCFs with expired schemes must finish liquidating by July 19, 2025.
Tenure Rules
If the fund’s placement memorandum lists a tenure, it stays the same. If not, 75% of investors (by investment value) can decide the tenure before moving to MVCF status.
Non-Migration Consequences
Active schemes that don’t switch to MVCFs will face stricter reporting rules from SEBI. Expired schemes still running past their liquidation period could face penalties, including losing their registration after March 2025.
As of June 30, 2023, only 49 out of 179 registered venture capital funds sent in quarterly investment reports. The rest seemed to have closed, not started, or were not following rules. Looking at data from 2008 to 2022, 89 out of 99 analyzed funds (covering 102 schemes) finished their tenure but kept operating without complying, leading to SEBI actions like fines, asset distribution, and investor repayments.
Summary
SEBI’s venture capital regulations have moved from the 1996 rules to the broader AIF Regulations of 2012, with venture capital funds now part of Category I AIFs. The 2024 updates make it easier for older funds to switch to the new system, fix past non-compliance, and modernize the rules. Those involved must follow investment rules, structural requirements, and compliance deadlines to meet SEBI’s goals of protecting investors and growing the market.
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SEBI Venture Capital Regulations: FAQs
Q1. What are the SEBI regulations for venture capital?
SEBI regulates venture capital under the SEBI (Alternative Investment Funds) Regulations, 2012, as Category I AIFs, requiring a minimum Rs. 20 crore corpus and two-thirds investment in unlisted equity.
Q2. What is Regulation 167 of SEBI ICDR 2018?
Regulation 167 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, specifies lock-in periods for pre-issue share capital of issuers, typically one year for public issues.
Q3. How is venture capital regulated in India?
Venture capital in India is regulated by SEBI under the 2012 AIF Regulations, with compliance on corpus, investment in unlisted equity, and migration options for legacy funds.
Q4. What are SEBI rules and regulations?
SEBI rules cover securities markets, including AIFs, ICDR, mutual funds, and insider trading, ensuring investor protection, market integrity, and compliance through regulations like AIF 2012 and ICDR 2018.
Q5. What is the 25% rule of SEBI?
The 25% rule under SEBI AIF Regulations limits investment in a single venture capital undertaking to 25% of the fund’s corpus to ensure diversification.
