Sops for venture capitalists

Janaki Krishnan/Netscribes

Foreign venture capitalists will soon find investing in India a great deal easier. Fresh guidelines, to be issued shortly, will grant foreign VCs a number of incentives, including the much-needed tax pass-throughs and freedom from the Foreign Investment Promotion Board.

As part of the new guidelines, to be issued shortly, the Securities and Exchange Board of India, will become the nodal agency for registration of all VCs, including the foreign firms. Once the new norms are in place, foreign VCs can invest directly in India without having to go through the regulatory wrangles associated with the FIPB.

A number of other regulatory hurdles linked to VC funding have also been cleared. The Reserve Bank of India has decided to do away with the exit pricing mechanism, while the Central Board of Direct Taxes has issued the necessary clearances linked to granting tax pass-throughs for VC funding. This would come as a welcome relief for foreign VCs set up by large mutual fund and corporate houses. Internationally, such VCs are exempt from tax since they are considered as dedicated pools of capital.

Domestic VCs that are already registered with SEBI will have to get fresh registration under the new guidelines. Currently, there are 22 domestic VCs registered with SEBI.

Over the years, a string of issues - multiplicity of regulations, the tax pass-through issue and entry registration - have slowed down the pace for VC funding in various domestic companies. The initial set of guidelines were issued in 1996, followed by guidelines for overseas venture capital funds by the Department of Economic Affairs in 1995 and the CBDT guidelines for VCs in 1995 (which were later modified).

Already, the Indian capital market has a structure that has been well received by mutual funds and foreign institutional investors. In both cases, the FIPB has simplified tax exemption and regulatory regimes, with SEBI as the regulatory institution.

With most of the remaining hurdles removed, one can expect a surge in the funds coming into the country, though this would not necessarily improve the pace of investment. VCs still favour scientific, technological and knowledge-based industries.

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