Background
The Securities and Exchange Board of India (“SEBI”), vide the SEBI (Foreign Venture Capital Investors) (Amendment) Regulations, 2024 (“Amendment”), has introduced numerous amendments to the SEBI (Foreign Venture Capital Investors) Regulations, 2000 (“FVCI Regulations”), which will be effective January 01, 2025 onwards.
SEBI has also issued Operational Guidelines for FVCIs (“Operational Guidelines”)[1] pursuant to the amendments. Please refer to our earlier analysis of SEBI’s Consultation Paper on the proposal to modify the FVCI Regulations in line with the Amendment notified now.
This analysis covers the key aspects of the Amendment, including the delegation of regulatory oversight to Designated Depository Participants (“DDPs”), change in the eligibility conditions for FVCIs, amendment of the application process, etc. Going forward, the administration of FVCIs, on many such counts, would be similar to how DDPs currently administer the FPIs.
Overview
Following are the salient features of the Operational Guidelines:
- Existing FVCIs shall onboard DDPs by March 31, 2025, failing which they shall not be allowed to make any further investments and shall liquidate:
- Investments in listed securities by March 31, 2026; and
- other investments by March 31, 2027.
- The DDP engaged by an existing FVCI shall carry out registration related due diligence and assess the compliance of such an FVCI with the eligibility criteria within 6 (six) months from the date of engagement.
- New FVCI aspirants shall submit a duly filled application form (i.e., Form-A) supported by requisite documents and the applicable fees to the respective DDPs (instead of SEBI). The DDPs shall take into consideration the following checks and balances to ascertain eligibility at the time of processing the FVCI application:
- country check for resident status of the FVCI;
- fit and proper person check; and
- regulatory check regarding the regulatory supervision of the entity in the home jurisdiction.
- For the continuance and renewal of registration, an existing FVCI
- registered on or before December 31, 2019, shall (i) pay the renewable fee to its DDP and (ii) intimate changes in information, if any as submitted earlier, on or before March 31, 2025;
- registered after December 31, 2019, shall (i) pay the renewable fee to its DDP and (ii) intimate changes in information, if any, as submitted earlier, at least 15 (fifteen) days before the conclusion of the 5 (five)-year period from the date of such registration to continue with their registration for the subsequent block of 5 (five) years.
- Every DDP shall submit monthly reports on the applications received from FVCI applicants to SEBI in the format specified in Annexure-1A of the Operational Guidelines.
- In case of any modifications/changes to previously submitted information, including name change, change in the DDP, and changes to material information, FCVI shall inform the DDP and/or SEBI (as applicable). Under the Operational Guidelines, the changes have been categorised as Type I material changes (including instances such as change in jurisdiction, acquisition, merger, demerger, restructuring, etc.) and Type II material changes (those material changes not specifically mentioned under Type I material changes), and in case of Type I material changes, the DDP is required to mandatorily require the FVCI to seek a new registration.
- The current requirement for FVCI applicants to procure firm commitments from their investors for a minimum amount of USD 1 million shall no longer be applicable.
- FVCIs shall provide KYC-related documents to intermediaries. Post the completion of the KYC process, the intermediary shall upload the Form and the supporting documents on the KYC Registration Agencies portal.
- If an FVCI holds different depository accounts in both NSDL and CDSL, it shall be allowed to appoint only one custodian.
- Beneficial Owners (“BOs”) are the natural persons who ultimately own or control an FVCI and shall be identified in accordance with Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.
Eligibility conditions
The eligibility criteria have been revised, requiring the DDPs to ascertain if the applicant satisfies the following: [2]
- The applicant entity is registered or constituted in the International Financial Services Centre (“IFSC”) or outside of India.
- The applicant is a resident of a nation whose securities market regulator is either a signatory to a bilateral Memorandum of Understanding with the SEBI or a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories).
- If a bank, being the applicant is a resident of a nation whose central bank is a member in the Bank for International Settlements.
- The applicant or its BOs identified in accordance with Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, shall not be a person stated in the Sanctions List notified by the United Nations Security Council and is not a resident of a nation identified in the Financial Action Task Force’s public statement as
- a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
- 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 fulfills the fit-and-proper-person criteria outlined in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
Entities based in IFSC are explicitly allowed to apply for registration as an FVCI.
Obligations and responsibilities of an FVCI
The Amendment has introduced a detailed list of obligations and responsibilities for FVCIs, expecting to improve their compliance. Following are some of the key obligations:[3]
- Inform SEBI and the DDP in writing of any material change in the information, including any direct or indirect change in its structure or ownership or control, previously furnished to SEBI or the DDP, in the manner and within the timelines as may be specified by SEBI from time to time.
- Be a fit and proper person based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
- Undertake compulsory Know Your Customer (KYC) on its investors/shareholders as per the rules applicable to it in the jurisdiction where it is organised.
- Furnish any additional information or documents, including beneficiary ownership details of underlying clients, which the DDPs or SEBI or any other enforcement agency may require to ensure compliance with the Prevention of Money Laundering Act, 2002, and the rules and regulations specified thereunder, the Financial Action Task Force standards, and circulars issued from time to time by the SEBI.
Conclusion
This delegation of the key regulatory function and oversight of FVCIs to the DDPs is expected to ease and accelerate the FVCI’s registration process and smoothen its post-registration activities. It is a welcome move to explicitly allow entities based in IFSC to apply for FVCI registration, since IFSC, GIFT-based funds should be able to avail of the benefits of the FVCI route of investment, subject to the fulfilment of eligibility conditions.
[1] For further details please refer to SEBI/HO/AFD/AFD-PoD-3/P/CIR/2024/130, SEBI circular titled “Operational Guidelines for Foreign Venture Capital investors (FVCIs) and Designated Depository Participants (DDPs)” dated September 26, 2024.
[2] VIII, Securities and Exchange Board of India (Foreign Venture Capital Investors) (Amendment) Regulations, 2024.
[3] For further details please refer to XII, Securities and Exchange Board of India (Foreign Venture Capital Investors) (Amendment) Regulations, 2024.
