2023

SECURITIES &
EXCHANGE BOARD
OF INDIA (VENTURE
CAPITAL FUNDS)
REGULATIONS 1996
I would like to express my sincere appreciation to my teacher, MR. KARAN RAMANI, for
their invaluable guidance and support throughout the duration of this project. Their extensive
knowledge, constructive feedback, and encouragement have been instrumental in shaping the
direction and quality of this project. I am also grateful to my classmates who have contributed
their insights and ideas, fostering a collaborative and enriching learning environment.

DATE: 23/09/2023

B.A. LLB(H) - C

1
Venture Capital Funds (VCFs) are a type of investment fund that provides capital to startups
and early-stage companies in exchange for equity ownership or convertible debt. The primary
objective of venture capital is to support and nurture companies with high growth potential,
typically in technology or innovation-driven industries. Here are some key aspects of Venture
Capital Funds:

 Investment Stage: Venture capital typically focuses on early-stage companies,

including seed-stage (idea or concept), startup-stage (product development and initial
market entry), and early-growth-stage (scaling and expansion) companies.
 Risk and Return: Venture capital investments are considered high-risk, high-reward.
VCFs invest in companies that have the potential for significant growth but also face a
higher risk of failure compared to established businesses.
 Equity Ownership: In exchange for their investment, venture capitalists usually
receive equity ownership in the company. This means they become shareholders and
have a vested interest in the company's success.
 Active Involvement: Venture capitalists often take an active role in the companies
they invest in, providing guidance, mentorship, and access to their network of
industry contacts to help the company grow and succeed.
 Exit Strategies: VCFs aim to realize returns on their investments through various exit
strategies, including initial public offerings (IPOs), mergers and acquisitions (M&A),
or secondary sales of their equity stakes.
 Diversification: Venture capital funds typically invest in a portfolio of companies to
spread the risk. Not all investments will be successful, but the hope is that the
successful ones will yield high returns to offset losses.
 Funding Rounds: Companies often raise venture capital in multiple funding rounds,
starting with seed funding and progressing through Series A, B, C, and so on as they
grow and reach different milestones.
 Investment Horizon: Venture capital investments are often illiquid and have a longer
investment horizon compared to other types of investments, such as stocks or bonds.
It can take several years for a startup to mature and reach a stage where it can be
exited profitably.

2
Regulation: In many countries, including India, venture capital funds are subject to regulatory
oversight by agencies like the Securities and Exchange Board of India (SEBI). Regulations
may dictate the types of investments VCFs can make and the reporting requirements they
must fulfill.

There are various types of venture capital funds, including early-stage venture capital, late-
stage venture capital, corporate venture capital (funds backed by corporations), and social
venture capital (funds focused on social or environmental impact).

The registration process for Venture Capital Funds (VCFs) in India typically involves
compliance with regulations set forth by the Securities and Exchange Board of India (SEBI).
Here's a general outline of the registration process for VCFs:

 Eligibility Criteria: Ensure that you meet the eligibility criteria as stipulated by
SEBI. These criteria may include minimum net worth requirements for the fund and
the fund manager, as well as adherence to the investment guidelines set by SEBI.

i) An application for grant of certificate to be made to SEBI in Form A along with a fee of Rs
25,000.The fee shall be paid through a draft.

ii) There are certain conditions which must be fulfilled before the certificate of registration is
granted:
a) In case of a company, the MOA of the company shall have the business of venture capital
fund as its main object, and invitation to public shall be expressly barred by the MOA and
AOA, in addition to this, any officer of the company shall be involved in any litigation
connected to the security market or should not have been convicted of an economic offence.
b) In case of a trust, the trust is in form of a deed and has been duly registered under the
Indian registration act. Carrying the business of venture capital fund is its primary objective.
Any trustee of the trust is not involved in a litigation connected to security market and has not
been convicted of any economic offence.
c) In case of a body corporate, it should be formed under the laws of central or state

3
legislature and it is permitted to venture in the field of venture capital funds.
iii) The application for registration shall be complete in all respect. If SEBI discovers any
thing in the application that renders it incomplete, it shall give the applicant a time of thirty
days to remove the loophole, failing which the application can be rejected by the board.
iv) SEBI after finding the applicant to be eligible, shall inform the applicant about it, after
receiving the information the applicant shall tender to SEBI the registration fee which is Rs 5
lacs, after receiving which SEBI shall issue the Certificate of registration.

 Constitution of the Fund: Determine the legal structure of your venture capital fund.
It can be set up as a trust or a company, including a body corporate. The choice of
structure may have specific regulatory and tax implications.
 Fund Manager: Appoint a fund manager who will be responsible for managing the
fund's investments and operations. The fund manager should meet SEBI's eligibility
criteria and have the necessary expertise in venture capital investing.
 Drafting the Offer Document: Prepare the offer document, which includes details
about the fund's objectives, investment strategy, fee structure, risk factors, and other
relevant information. This document will be provided to potential investors.
 Compliance with SEBI Regulations: Ensure that your venture capital fund complies
with all SEBI regulations governing VCFs, including investment restrictions,
reporting requirements, and exit strategies.
 Private Placement: Raise funds through private placement by offering units or shares
of the fund to accredited investors. SEBI may have specific requirements for the
private placement process, including minimum investment amounts.

Every venture capital fund shall issue a placement memorandum which contains all the terms
and conditions relating to the scheme through which money is proposed to be raised from the
investors. The venture capital fund may also enter into a subscription agreement with the
investors which would specify the terms and conditions of the scheme through which money
is proposed to be raised. The venture capital fund shall submit a copy of such placement
memorandum or subscription agreement with SEBI along with the report of the money
actually raised through such agreement or memorandum.

The placement memorandum or the subscription agreement shall have the following
essential:
It shall contain the details of the trustee and the trust as well as the details of the directors and

4
the principal officers of the venture capital fund. It shall also state the minimum amount of
money to be raised to start the venture capital fund and the minimum share to be invested in
every scheme of the venture capital funds. Tax implications which would be applied to the
investors shall also be stated. The manner of subscription to the units of the fund, the period
of maturity of the fund if any and the manner in which the fund would be wound up shall also
stated.

Every venture capital fund shall maintain a book of record for a period of eight years which
would generate the true picture of the venture capital fund. SEBI at any time can call for
information regarding the working of the venture capital fund, the information shall be
submitted to SEBI in the specified time period.

 Submission of Application: Prepare and submit the application for registration as a

Venture Capital Fund with SEBI. This application should include all required
documents, including the offer document, information about the fund manager, and
other relevant details.
 Review and Approval: SEBI will review the application and documents submitted.
They may seek clarifications or additional information during the review process.
 Grant of Registration: If SEBI is satisfied with the application and finds that it
complies with all relevant regulations, they will grant registration to the Venture
Capital Fund. Once registered, the fund can commence its operations.
 On-going Compliance: After registration, the Venture Capital Fund must continue to
comply with SEBI regulations, including reporting requirements, disclosure norms,
and adherence to investment guidelines.
 Periodic Reporting: VCFs are required to submit periodic reports to SEBI, including
details of investments made, fund performance, and any material changes in the fund's
structure or operations.
 Exit Strategies: Plan and execute exit strategies for your investments in accordance
with SEBI regulations. This may include IPOs, mergers and acquisitions, or other
approved exit routes. Any venture capital fund that fails to act in accordance with the
regulations, or fails to furnish reports of the affairs of the venture capital fund to SEBI
or furnishes report that is not true, does not cooperate in any enquiry instituted by
SEBI or fails to act on the complaints made by the investors or does not give a
satisfactory reply in this regard to SEBI, shall be dealt with in manner provided in

5
 SEBI (procedures for holding enquiry by enquiry officers and imposing penalty)
regulations, 2002.

In conclusion, SEBI plays a crucial role in regulating venture capital funds in India to ensure
transparency, investor protection, and the healthy development of the startup ecosystem.
Venture capital funds play a vital role in the business landscape, facilitating the growth of
innovative companies and driving economic development. Their willingness to take
calculated risks and their ability to nurture and support early-stage ventures make them a
critical component of the entrepreneurial ecosystem. However, investing in venture capital
carries inherent risks, and VCFs must carefully manage their portfolios to achieve success for
both themselves and their investors.

6
 https://www.legalservicesindia.com
 https://www.mondaq.com
 https://www.sebi.gov.in