Foreign VCs can now invest in unlisted firms sans RBI nod

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Foreign venture capital entities can now invest in unlisted Indian companies without Reserve Bank of India approval.

The venture capital firm will, however, have to be registered with market regulator SEBI. The investment can be made in an Indian company in 10 specific sectors or in any start-up.

The central bank on Thursday amended the regulations governing foreign venture capital investors (FVCI) in order to further liberalise and rationalise the investment regime and to give a fillip to foreign investment in start-ups.

According to the RBI, the 10 sectors in which SEBI-registered FVCIs can invest without its nod are: biotechnology, IT, nanotechnology, seed research and development, discovery of new chemical entities in pharmaceutical sector, dairy industry, poultry industry, production of bio-fuels, hotel-cum-convention centres with over 3,000 seating capacity, and infrastructure sector. FVCIs can also invest in equity, equity-linked instruments or debt instruments issued by an Indian ‘start-up’ irrespective of the sector in which it is engaged. The RBI said a start-up will mean an entity (private limited company, registered partnership firm or a limited liability partnership) incorporated or registered in India not prior to five years, with an annual turnover not exceeding Rs. 25 crore in any preceding financial year.

These start-ups should be working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property and satisfying certain conditions as given in the Foreign Exchange Management Regulations, 2016.

The RBI also said FVCIs can invest in units of a venture capital fund (VCF) or a Category-I alternative investment fund (AIF) or units of a scheme/fund set up by a VCF or by a Category-I AIF.

In a circular issued to banks authorised to deal in foreign exchange, the RBI said: “In order to further liberalise and rationalise the investment regime for FVCIs and to give a fillip to foreign investment in the start-ups, the extant regulatory provisions have been reviewed, in consultation with the Government of India.”

The consideration for all investments by an FVCI can be paid out of inward remittance from abroad through normal banking channels or out of sale/maturity proceeds of or income generated from investment already made. There will be no restriction on transfer of any security/instrument held by the FVCI to any person resident in or outside India.

Source: http://www.thehindubusinessline.com/todays-paper/foreign-vcs-can-now-invest-in-unlisted-firms-sans-rbi-nod/article9247432.ece

Alternative Investment Funds coming to India

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Markets regulator SEBI is learnt to be in process of creating a new category of Alternative Investment Funds(AIFs) to encourage long-term funds to use the AIF route to invest in the listed space.

 

Sources privy to the development said the Securities and Exchange Board of India (SEBI) will reclassify the existing category III into two groups – one comprising long-term funds like pension funds and the other consisting of hedge funds and other arbitrage funds who look to invest on a short-term basis.

 

Further, SEBI is also expected to consult the government in providing a ‘pass through’ status to the new category of AIF on par with Category I and Category II AIFs. According to legal experts, this categorisation would help the long-term overseas funds to receive a favourable tax treatment in the AIF space as currently they are taxed on par with arbitrage funds.

 

As per the current tax regulations, any investments made in listed companies which are held for more than 12 months are termed long-term investments, while others are called short-term investments. Capital gains tax is applicable only for short-term investments and investors needn’t pay any capital gains tax in case of long-term holding.

 

However, if a fund invests in the listed space through the AIF route, irrespective of the nature of holding, the investor would be taxed at uniform slab applicable for category III AIFs.

 

“Current SEBI AIF regulations are like one size fits all. Category III AIFs comprise several types of short-term and long-term funds and the purpose of each of them is different. However, the tax they are paying is the same. Long-term funds would rather take the direct route or would invest via P-notes instead of AIFs,” said a lawyer.

 

These measures are a part of efforts made by SEBI and union government to promote AIFs. During the union budget 2015, the government had provided pass-through status for Category I and Category II AIFs. Last November, the government had allowed foreign funds to invest in AIFs through the direct route.

 

In the last two years, inflows into AIFs have witnessed a significant increase. According to a SEBI data, cumulative funds raised via the AIFs as on March 31, 2016 was `22,691.18 crore — a fourfold increase compared to `5,847.5 in Q2FY15.

 

According to Jay Gandhi, Partner at Shardul Amarchand Mangaldas, the SEBI AIF regulations have found great traction in the market in a relatively short period of time. “The AIF regulations have permitted investment managers great flexibility in structuring various kind of fund structures targeted at specific segments of the investor community,” Gandhi said.

Source: http://www.financialexpress.com/markets/alternative-investment-funds-coming-india-heres-need-know/314881/

SEBI registered AIF count hits 200-mark

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Markets regulator Sebi has allowed as many as 209 entities to set AIFs, pooled-in investment vehicles for real estate, private equity and hedge funds, over a period of 42 months.

The 209 Alternative Investment Funds (AIFs) have been registered with Sebi since August 12.

Among the newly registered AIFs are Kotak India Real Estate Fund, Ideaspring Capital Fund, IDFC Private Equity Fund and Canara Bank Venture Development Trust.

AIFs are funds established or incorporated in India for the purpose of pooling in capital from Indian and foreign investors for investing as per a pre-decided policy. Under Sebi guidelines, AIFs can operate broadly in three categories.

The Securities and Exchange Board of India (Sebi) rules apply to all AIFs, including those operating as private equity funds, real estate funds and hedge funds among others.

The regulator had notified in May 2012, the guidelines or this class of market intermediaries.

The Category-I AIFs are those funds that get incentives from the government, Sebi or other regulators and include social venture funds, infrastructure funds, venture capital funds and SME funds.

The Category-III AIFs are those trading with a view to making short-term returns and includes hedge funds among others. The Category-II AIFs can invest anywhere in any combination but are prohibited from raising debt, except for meeting their day-to-day operational requirements.

These AIFs include private equity funds, debt funds or fund of funds, as also all others falling outside the ambit of above two other categories.

 

Source: http://www.business-standard.com/article/pti-stories/sebi-registered-aif-count-hits-200-mark-116042000467_1.html

Paragon Partners launches $200M India-focused mid-market PE fund

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Indian private equity investor Siddharth Parekh and entrepreneur Sumeet Nindrajog are launching a $200 million India focused fund. The duo announced today that they have raised $50 million in commitments, marking the first close of their $200 million private equity fund, Paragon Partners Growth Fund I (PPGF-I). Established in August 2015, PPGF is an Alternative Investment Fund(AIF)-Category II Private Equity fund looking to invest in high growth mid-market private companies in India.

 

The fund will focus on five core sectors, including consumer discretionary, financial services, infrastructure services (capex light), industrials and healthcare services. The fund claims to have an advanced pipeline of investment opportunities across these sectors and plan to invest in 10-15 mid-market companies in India, with an average deal size of $10-20 million.

 

In line with this, Paragon Partners plans to pursue an active investment approach, contributing to the advancement of its portfolio companies in three core areas: business development, organizational development, and operational efficiency.

 

Paragon Partners’ Advisory Board will also work hand-in-hand with its investment and operations professionals to drive value in its portfolio companies. The board includes Deepak Parekh (Chairman, HDFC Ltd.), Harsh Mariwala (Chairman, Marico Ltd. & Founder Member), Sunil Mehta, (Chairman, SPM Capital Advisors Pvt Ltd) and Jeff Serota (ex Sr. Partner at Ares Private Equity) amongst others. Siddharth, Co-Founder, Paragon Partners, commenting on the first close, said,

 

We believe the next decade in India will see a strong resurgence of growth in key sectors such as manufacturing, financial services and infrastructure.

 

With its first close, PPGF-I has invested $10 million as growth capital in Capacite Infraprojects Limited, a Mumbai based firm which is engaged in the construction of buildings (including super high rise structures) and factories, for large real estate developers, corporates and institutions  across the Mumbai, NCR and Bengaluru regions.

 

Established in August 2012, Capacite is promoted by Rahul Katyal, Rohit Katyal, and Subir Malhotra. It will look to grow and expand to more locations on a selective basis moving forward. Commenting on the investment, Rohit, Director at Capacite said,

 

Within a span of three years, Capacite has achieved significant scale with an expected top line of ~Rs 1,000 cr for the current financial year, backed by a gross order book of  Rs 5,400 cr. We are delighted to partner with Paragon Partners, as Capacite embarks on its next wave of growth.

 

PPGF-I claims to have seen interest from onshore and offshore institutions, family offices and HNI’s. Domestic investors include India Infoline, Edelweiss Group and Infina Finance Private Limited (an associate of Kotak Mahindra Bank Limited).  The fund also claims to have received a significant commitment from the Fairfax group based in Canada. With additional discussions in progress, the fund expects to close on further commitments in coming months.

 

The Indian startup ecosystem has seen an uprising in the past few years and there is now both internal and external interest in investing in early and mid-stage companies. In September 2015, Kalaari Capital had raised a $290 million India focused fund. In December 2015, Blume Ventures had raised $30 million for its Fund II to invest in 35-45 startups. In February 2016, early stage investor, Kae Capital too raised $30 million for its second fund, with an aim to allocate 10% of the fund to cater to non-tech start-ups.

 

Reports also suggest that Sequoia Capital had closed a $920 million India focussed fund in February 2016, though Sequoia is yet to confirm the same. Other marquee investors like SAIF Partners, Accel Partners, and Lightspeed India, have racked up fresh funds in the recent past.

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Foreign inflow boost for alternative investment funds

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The move by the Reserve Bank of India (RBI) to allow foreign investment into alternative investment funds (AIFs) through the automatic route is likely to boost inflows.

 

In a notification on Thursday, the central bank said those residing outside India (including a registered foreign portfolio investor or a non-resident Indian) might acquire, purchase, hold, sell or transfer units of an AIF. Downstream investment by an AIF shall not be regarded as foreign investment if the sponsor or the manager or the investment manager is ‘owned and controlled’ by Indian.

 

“The notification paves the way for foreign money to come into AIFs without the Foreign Investment Planning Board (FIPB)’s intervention and be treated as domestic capital, subject to conditions. This could lead to a fresh surge of foreign flows in Indian listed and unlisted securities,” said Tejesh Chitlangi, partner, IC Legal.

 

Earlier, every foreign investment proposal in AIFs had to be cleared by FIPB. In some cases, foreign investments would suffer due to the sectoral limits being hit.

 

Importantly, the amendment provides that downstream investments by such investment vehicles, sponsored or managed by Indian-owned and controlled entities, will be treated as domestic investment. With this, investment vehicles so sponsored or managed will be free to invest in all sectors, without any of the sectoral restrictions imposed under the Foreign Direct Investment rules.

Foreign inflow boost for alternative investment funds

 

“Overall, this is an extremely positive development and it is hoped that this is followed with suitable tweaks to the tax laws to address certain vexed issues surrounding these investment vehicles,” added Kalpesh Maroo, partner, BMR and Associates LLP.

 

However, there is one caveat that could be a hindrance. RBI has said this easing of foreign investment won’t be applicable for limited liability partnerships (LLPs), as it would be difficult to determine the Indian sponsors in such structures. And, 60 per cent of the assets in AIFs are sponsored through LLPs.

 

“There is a caveat in the regulations that the Securities and Exchange Board of India (Sebi) is the regulator to determine the sponsor of these investment pooling instruments. We will approach Sebi for checking on the Indian nationality of the sponsors,” said a legal expert, requesting anonymity. Sectoral sources say close to 200 AIFs operate out of India.

 

Source: http://www.business-standard.com/article/markets/foreign-investment-boost-for-alternate-investment-vehicles-115112000837_1.html