Introduction
The Securities and Exchange Board of India (“SEBI”) has released a consultation paper[1] on May 18, 2023 suggesting changes to the regulatory framework for registration and eligibility of Foreign Venture Capital Investors (“FVCIs”). Public comments have been invited on the consultation paper.
SEBI’s proposals are broadly to align the conditions under the SEBI (Foreign Venture Capital Investor) Regulations, 2000 (“FVCI Regulations”) with certain conditions under the SEBI (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations”), and with a view to ensure adequate due-diligence and regulate the inflow of foreign capital in India through the FVCI route.
An overview of SEBI’s proposals is provided below.
SEBI Proposals
1. Registration of FVCIs by DDPs
Under the current regime, the processing of applications for the grant of registration to FVCIs and related due diligence is carried out by SEBI. With a view to align the registration/post registration activities of FVCI with that of Foreign Portfolio Investors (“FPIs”), SEBI has proposed to delegate the due diligence for the registration and post registration processes for FVCIs to Designated Depository Participants (“DDPs”) who have been carrying out the process of granting registration and post registration approvals to FPIs.
FVCIs are mandated, under the current regime, to appoint a domestic custodian to monitor the investments by the FVCI and to furnish periodic reports and other information to SEBI. SEBI has proposed that the custodian for the FVCI would also act as the DDP for the registration and post registration activities of that FVCI. The DDP and custodian for the FVCI would be the same entity, at all times.
Considering the fact that DDPs already have an ongoing mechanism in place for carrying out the process of granting registration and post registration approvals of FPIs, the delegation by SEBI to DDPs for conducting due diligence of registration and post registration activities of FVCIs will ensure faster turnaround.
2. Eligibility criteria
As per the current eligibility criteria, (i) an investment company, investment trust, pension fund, investment partnership, mutual fund, endowment fund, charitable institution, university fund or any other entity incorporated outside India; (ii) an asset management company, investment management company, investment manager or any other investment vehicle incorporated outside India, may apply for registration as an FVCI.
With a view to align the eligibility criteria for registration of FVCIs in line with updated legal provisions and applicable law requirements, SEBI has proposed to revise the current “eligibility criteria” for FVCIs in line with the FPI Regulations as under:
A. Proposed additions to the eligibility criteria for FVCIs as per the FPI Regulations are as under:
- Resident Indians (“RIs”)/ Non Resident Indians (“NRIs”)/ Overseas Citizen of India (“OCI”) may be constituent of the applicant, subject to conditions, such as (i) contribution of a single NRI/ OCI/ RI shall be below 25% of the total contribution in the corpus of the applicant; (ii) the aggregate contribution by RIs, NRIs and OCIs shall be below 50% of the total contribution in the corpus of the applicant; and (iii) RI/ NRI/ OCI shall not be in control of the applicant.
Provided that a resident Indian other than individuals, may also be constituents of the applicant, subject to the following conditions, namely –
i. such resident Indian, other than individuals, is an eligible fund manager of the applicant, as provided under sub-section (4) of section 9A of the Income Tax Act, 1961 (43 of 1961); and
ii. the applicant is an eligible investment fund as provided under sub-section (3) of section 9A of the Income Tax Act, 1961 (43 of 1961) which has been granted approval under the Income Tax Rules, 1962.
- The applicant is a resident of the country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to the bilateral Memorandum of Understanding with SEBI.
If an applicant is a Government or Government related investor, it shall be considered as eligible for registration, if such applicant is a resident in the country as may be approved by the Government of India. The applicant being a bank is a resident of a country whose central bank is a member of Bank for International Settlements. A central bank applicant is not required to be a member of Bank of International Settlements. - The applicant or its underlying investors contributing 25% or more in the corpus of the applicant or identified on the basis of control, shall not be the person(s) mentioned in the Sanctions List notified from time to time by the United Nations Security Council and is not a resident in the country identified in the public statement of Financial Action Task Force as– (i) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or (ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.
- The applicant is a fit and proper person based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
B. Proposed Relaxations:
The following relaxations are proposed to be made for FVCIs as per the consultation paper.
- The requirement of providing commitment from FVCI’s investors for contribution of an amount of at least USD 1 million at the time of submission of application for registration as FVCI is proposed to be removed.
- Requirement to obtain approval from the Reserve Bank of India for making investments in India, is proposed to be removed. This is in line with the current practice at the time of granting FVCI approvals.
- The requirement for the applicant to establish that it is regulated by an appropriate foreign regulatory authority or is an income tax payer; or provide a certificate from its banker regarding the applicants or its promoter’s track record is proposed to be removed.
Permitting GIFT Entities as FVCIs
The proposal seems to permit Alternative Investment Funds set up in the International Financial Services Centres (and regulated by the International Financial Services Centres Authority) to be registered as FVCIs and resident Indians, other than individuals, be constituents of such applicant, subject to the following conditions, namely –
(i) such resident Indian, other than individuals, is a Sponsor or Manager of the applicant; and
(ii) the contribution of such resident Indian, other than individuals, shall be up to:
(a) 2.5% of the corpus of the applicant or $7,50,000 (whichever is lower), in case the applicant is a Category I or Category II Alternative Investment Fund; or
(b) 5% of the corpus of the applicant or $1.5 million (whichever is lower), in case the applicant is a Category III Alternative Investment Fund;
This is in sync with the applicable laws and will help to ensure that the FVCI Regulations are revised to reflect the best industry practices with a clear and precise set of criteria, so as to enable DDPs to process the FVCI applications without ambiguity, thereby ensuring that the funds are sourced from bona fide investors and meet the requirements per Prevention of Money Laundering Act, 2002.
3. Application form for grant of registration
Under the current regime, Form A under the First Schedule of the FVCI Regulations is required to be filled by applicants for registration as FVCI with SEBI. Whereas, for application of registering as FPI, the Common Application Form (“CAF”) is required to be filled and submitted by the applicant to the DDP for (i) registration as FPI with SEBI, (ii) for PAN allotment and (iii) for KYC procedure for opening bank account and demat account.
SEBI has proposed, as part of its phase I implementation, to make suitable modifications to Form A to align it with information sought in the CAF. Additionally, PAN and demat account of the applicant have been proposed as “pre-requisites” for registration as FVCIs.
Under phase II, SEBI may replace Form A with a common application form for FVCIs, similar to CAF.
Until the time Form A is replaced with a single consolidated application form for FVCIs (under Phase II), the proposition by SEBI to align Form A with information sought in CAF will not only help in seeking all the necessary information in one form but will also make Form A more specific and precise, as per the revised eligibility criterion for consideration for registration as a FVCI.
4. Dematerialisation of assets
SEBI has proposed to make it mandatory for FVCIs to hold securities/ instruments of their investments in dematerialised form. Notwithstanding the foregoing, certain types of securities/ instruments for which dematerialisation is not available, would be exempted from this requirement. For existing investments by FVCIs in investee companies, where the FVCI or FVCIs have controlling interest, a period of six months would be provided from the date of notification of such amendment, for dematerialisation of the investments.
Additionally, SEBI has sought views for the following issues with respect to the existing investments by FVCIs:
(i) Whether there should be any mandatory requirement to dematerialise the existing investments within 12 months?
(ii) Whether such investments should not be subject to requirement of dematerialisation?
The above-mentioned suggestion is based on the idea of enhancing transparency and ease of monitoring and administration by stakeholders and is in line with the applicable laws and best industry practices. Although the proposal will temporarily cast a financial and administrative burden on the FVCIs, in the longer run, this reform is expected to benefit the FVCI community. Additionally, considering the various benefits of dematerialisation, the requirement to dematerialise FVCIs’ existing investments within 12 months is a step towards ensuring consistency.
5. Renewal of registration
At present, the FVCI Regulations do not specify provisions relating to the validity of registration of FVCIs. The registration is valid unless it is surrendered by FVCI or cancelled/ suspended by SEBI. SEBI has proposed to mandate a renewal fee for holding the FVCI registration, in line with the requirement mandated for FPIs, as under:
(i) FVCIs who wish to continue with their registration for the subsequent block of 5 (five) years, are required to pay renewal fees of USD 2500/- (“Renewal Fee”) to their respective DDP and inform any change in information, if any;
(ii) In case an FVCI fails to pay the Renewal Fee, then a late fee, which shall be equivalent to 2% (two percent) of the registration fee (2% of US$8500 = US$ 170) will be charged for each day of delay in payment of renewal fee, subject to maximum of two times of the registration fee (i.e. $17000). Post which, the certificate of registration of FVCI shall be liable to be suspended/ cancelled;
(iii) FVCIs shall not buy or sell any investment till the Renewal Fee is paid. The custodian of the FVCI shall monitor compliance of the FVCI with the said provision.
In the first instance, the above SEBI proposal will prevent the misuse of registration of FVCIs and reduce the regulatory costs towards inactive FVCIs. However, if SEBI plans to replicate the renewal fee requirements for holding registration, in line with the requirement mandated for FPIs, such periodic renewal fees may be burdensome on FVCIs.
Additionally, it would be beneficial if SEBI prescribes a definitive and reasonable timeline to FVCIs for the payment of renewal fees, post which late fees of a reasonable amount may be charged by SEBI. Also, we would recommend that SEBI, in case of failure of payment of the Renewal Fees, either charge a late fee or suspend/ cancel the certificate of registration.
Conclusion
There have been multiple rounds of recommendations with respect to FPIs, including the registrations being delegated to DDPs. Such changes in FPI Regulations have made the process of registration and activities for FPIs speedier and has provided clarity to the regulatory regime of FPIs. Similarly, such parallel changes in the FVCI Regulations are welcome and would be a positive step towards upgrading the FVCI regulatory framework with respect to registration and eligibility of applicants as FVCIs. However, there are certain proposals that would require further clarifications to understand their impact on stakeholders – such as payment of late fee and suspension of certificate of registration, dematerialisation of existing investments.
For further information, please contact:
Vivaik Sharma, Partner, Cyril Amarchand Mangaldas
vivaik.sharma@cyrilshroff.com
[1] Consultation paper on streamlining regulatory framework for registration of Foreign Venture Capital Investors (FVCIs)
