A Primer on Foreign Venture Capital Investments in India

author Garv Sood

calender December 8, 2021

A Primer on Foreign Venture Capital Investments in India

Venture Capital

Before delving into the subject of Foreign Venture Capital Investment, it is necessary to understand what Venture Capital means. Venture Capital is a method of seed-funding where ‘capital’ is invested by an outsider in ‘ventures’ which are new, growing, small or troubled. It is different from traditional sources of funding such as banks, in the sense that the capital is not given as a loan. Instead, it is invested in exchange for an equity stake in that particular venture, in the hope that it will yield high returns. Since Venture Capitalists choose to fund companies and start-ups which have a limited operating history, but great ideas and potential for future growth, it is said to be a “high return, high risk” investment.

Foreign Venture Capital Investment in India and its Regulation

The term refers to investments made by a Non-Resident / Foreign investor in Venture Capital Undertakings (“IVCU”) and Venture Capital Funds (“VCF”). In India, such investments are governed by the Securities Exchange Board of India (“SEBI”) Regulations and the Foreign Exchange Management Regulations.

The foreign country which chooses to invest in India’s Venture Capital is known as the Foreign Venture Capital Investor (“FVCI”). The term has been defined under Regulation 2(g) of SEBI (Foreign Venture Capital Investors) Regulations, 2000 as an investor which is incorporated and established outside India, is registered under this Regulation and has proposed to invest in VCF or Venture Capital Undertakings (“VCU”s) in India.

The Foreign Direct Investment Policy, 2020 (“FDI Policy), gives a similar definition of the term FVCI by stating FVCI is an investor incorporated and established outside India, registered under the SEBI (FVCI) Regulations, 2000 (“FVCI Regulation”) which proposes to invest according to these Regulations.

Thus, from the above two definitions we can conclude that there are 3 essentials which a foreign investor must satisfy before it can start making investments in India’s venture capital enterprises:

  1. It must have been established and incorporated in a country other than India; and
  2. It must be registered with SEBI as an FVCI; and
  3. While making investments in VCFs and VCUs in India, it must act in accordance with FVCI Regulations.

Eligibility Criteria to get FVCI certificate from SEBI

In order to be recognized by SEBI as an FVCI, the applicant/ foreign investor must fulfil certain conditions which have been listed in Regulation 4 of the FVCI Regulations. These include:

  • The Applicant’s track record
  • Professional competence
  • Financial soundness
  • Experience in the field
  • Reputation with respect to fairness and integrity
  • If the applicant is an investment company, investment trust, investment partnership, pension fund, mutual fund, endowment fund, university fund, charitable institution or any other entity incorporated outside India
  • If the applicant is an asset management company, investment manager or investment management company or any other investment vehicle incorporated outside India
  • If the applicant is authorised to invest in venture capital fund or carry on the activity as a  foreign venture capital investors
  • If the applicant is regulated by an appropriate foreign regulatory authority or is an income tax payer; or submits a certificate from the banker of its or its promoter’s track record where the applicant is neither a regulated entity nor an income taxpayer
  • If the applicant has not been refused a certificate by the Board
  • Reserve Bank of India  (“RBI”) must have given approval to the Applicant for making investments in India
  • The Applicant must be a ‘fit and proper person’, according to the criteria laid down in Schedule II of the SEBI (Intermediaries) Regulations, 2008

If the application is incomplete or the necessary criteria have not been fulfilled, the Board may reject the application after giving the applicant time to remove the objections / an opportunity of being heard. Contrarily, if the Board is satisfied that the applicant satisfies the eligibility conditions, it shall grant a certificate of registration as FVCI to the applicant.

Types of Investments made by an FVCI

Once the Foreign investor has been granted an FVCI certificate by SEBI and received approval from the RBI for making investments in India, it can enter into 2 types of investments:

1. Indian Venture Capital Undertaking 

VCUs are generally newly inaugurated, private companies that are yet to establish themselves in the market and require finances and expert advice from investors. It may be defined as a company:

  • Which is incorporated in India
  • Whose shares have not been listed on a recognized Indian stock exchange
  • Which is not engaged in any activity or sector included in the ‘negative list’ by SEBI

2. Venture Capital Fund 

As the name suggests, it is a ‘fund’ that has been established as a trust or a company. It must:

  • Be registered under the SEBI (Venture Capital Fund) Regulations of 1996
  • Have a dedicated pool of capital, which was raised in the manner given in the aforementioned Regulations
  • Invest in VCUs according to the said Regulations

Restrictions on Investments

Now that it is clear what VCUs and VCFs are, it is important to understand the conditions imposed by SEBI for investing in them. The FVCI can only invest from the “investible funds”, which refers to the corpus of funds committed for making investments in India and includes the net expenditure for managing and administering the funds. The investment criteria have been detailed in Rule 11 of the FVCI Regulations. The Rule provides that an FVCI shall only invest in the following manner:

  1. A minimum of 66.67% of the investible funds must mandatorily be invested in the equity-linked instruments or the unlisted equity shares of a VCU
  2. It may invest 33.33% of the investible funds (and not more than that) in:
  • Subscribing to the initial public offer of a VCU whose shares are proposed to be listed on a stock exchange
  • The Debt or debt instrument of a VCU, if the investor has already made an investment in the VCU by equity
  • Subject to a 1-year lock-in period, in the preferential allotment of equity shares of a listed company
  • Investment in the equity shares/equity linked instruments of a company that is sick or financially weak, and whose shares have been listed
  • In special purpose vehicles, which were made for promoting investments under these Regulations

It must be noted that the Rule also permits an FVCI to invest 100% of its funds in a domestic VCF registered under SEBI. The investment strategy chosen by the Foreign Venture Capital Investor and the life cycle of the funds must be disclosed to the Board before making any investments in India. Apart from this important duty, an FVCI has many other responsibilities to pay heed to while making such investments.

Responsibilities and Obligations of an FVCI

These obligations have been given in Chapter IV of the FVCI Regulations. They are:

  1. Foreign Venture Capital Investors must maintain records, documents and books of accounts for a period of 8 years.
  2. These records must reflect a true and fair picture of the IVCI’s state of affairs
  3. The Board must be informed in writing about the location where these records, documents and books are kept.
  4. SEBI has the right to call for any information which the Board may require regarding the activities of the FVCI
  5. The Investor must supply the information sought within the time period given by SEBI
  6. The FVCI must appoint a ‘designated bank’ that is approved by the RBI for opening a special Non-Resident Rupee account or a foreign currency dominated account.
  7. The FVCI (or a global custodian on its behalf) must enter into an agreement with the domestic custodian, who shall act as the custodian of securities for the FVCI.
  8. Foreign Venture Capital Investors shall ensure that the domestic custodian is doing the following:
  • Monitoring the Foreign Venture Capital investment in India
  • Periodically furnishing reports to SEBI
  • Furnishing information as and when sought by SEBI


In India, the taxation system is governed by the Income Tax Act, 1961. However, the Indian government has also entered into Double Taxation Avoidance Agreements (“DTAA”) with many countries. The DTAA aims to restrict the authority of countries to levy tax on income received by a Non-Resident from its business activities in that particular country. While assessing the income of a Non-Resident of India, the provisions of both must be taken into consideration. Section 90(2) of the Income Tax Act provides that the assessee is to be taxed under the Income Tax Act, or the DTAA, whichever is more beneficial.

With respect to tax on Venture Capital companies, 2 provisions of the Income Tax Act are primarily relevant:

Section 10(23FB)

This section provides that while calculating the total income of any person in a previous year, any income of a venture capital fund/company in a VCU shall not be included.

Section 115(U)

This section provides that any income received by a person from the investment made in a Venture capital fund/company shall be chargeable to income tax, in the same way as if it were income received by the person directly had he made investments directly in the VCU.

Thus, the two sections when read together constitute an integrated code: The venture capital funds and companies are exempt from taxation on any income earned from the investment. However, when the income is distributed to investors, it becomes taxable. The nature of the income determines its tax treatment. In the hands of shareholders, dividend income is free, but the company distributing the dividend has to pay a 16.99% dividend distribution tax. Otherwise, capitals gain tax are when the shares of the investee companies are sold.

Thus, the FVCI ultimately does not get any tax exemption. However, it can avail of the benefits of the DTAA. Treaties with certain jurisdictions have proven to be quite favourable for investors. One such example is the India-Mauritius DTAA according to which, the capital gains earned by a resident of Mauritius will only be taxable in Mauritius and will be exempted in India. Since Mauritius does not levy a tax on capital gains, the investor reduces his tax liability and benefits from the arrangement. Such treaties have made the venture advantageous and paved the way for making investments in India.


1. What are the benefits given to Foreign Venture Capital Investors in India?

In order to facilitate such investments in India, FVCI has been granted a number of relaxations, including:

  • Exemptions from any pricing restrictions during entry and exit
  • Exemption from any lock-in period when the investee company first goes public
  • Exemption from the Takeover Code, which makes it compulsory for the acquirer to make an open offer on shares beyond a threshold limit. This applies with respect to the shares sold by the Investor to the promoters after the company goes public.

2. Which sectors are FVCI allowed to invest in?

Foreign Venture Capital Investors in India are allowed to invest only in the following sectors:

  • Dairy industry
  • Poultry industry
  • Nanotechnology
  • Biotechnology
  • Research and development of new chemical entities in the Pharmaceutical Sector.
  • IT (software and hardware)
  • Seed research and development
  • Production of biofuel
  • Hotel-cum-convention centres with a seating capacity of more than three thousand;
  • Infrastructure sector

3. What is the procedure for registering as an FVCI in India?

To be registered under SEBI, the applicant must make an application to the Board in Form A of FVCI Regulations, which is attached to the Regulations and provide all the details and supporting documents asked for. The Applicant must deposit the fee prescribed in Part A of the Second Schedule and pay it in accordance with the manner given in Part B of the same schedule of FVCI Regulations. Upon receiving the application, the Board analyses it and raises objections/grants the certificate, as the case may be.

4. What is the Exit strategy for FVCI?

Exit strategy refers to the method using which a venture capitalist can exit/get out of the investment it made in the past. It is also known as a “liquidity event’ or a ‘harvest strategy” since it is a calculated decision to harvest maximum profits while cutting back on expenditure. A special exemption has been made for FVCIs which provides that they can sell or acquire their Indian shares / convertible preference shares / convertible debt / any other unit invested at a rate that is mutually acceptable to both parties. Thus, there are no entry or exit restrictions imposed on an FVCI which makes the investment arrangement more advantageous for them.

5. Can SEBI suspend or cancel the certificate of registration of an FVCI?

Yes. Under Rule 21 of the FVCI Regulations, the Board has the right to suspend the certificate if the FVCI:

  • Contravenes the provisions of the SEBI Regulations
  • Fails to furnish the information sought by the Board
  • Furnishes false or misleading information
  • Does not cooperate in any inspection or enquiry conducted by SEBI
  • Does not submit periodic reports or returns

The Board also has the power to cancel the certificate granted if the FVCI:

  • Commits repeated defaults of any of the activities mentioned above
  • Is found guilty of fraud or an offence involving moral turpitude
  • No longer fulfils the eligibility criteria laid down


From the above discussion, one may conclude that Foreign Venture Capital Investments are a crucial method of promoting enterprise and innovation in India, while also facilitating the conversion of knowledge-based ideas and scientific technology into a means of commercial production. The policy structure of India offers a large number of exemptions to FVCI and lays down clear and detailed guidelines for the eligibility, registration, obligations and investment restrictions for an FVCI.

India possesses a number of factors that make it a favourable country for foreign investments, such as cost-competitive labour, skilled manpower, R&D, technology and policy support. Recent initiatives such as Start-up India have further boosted the entrepreneurial spirit and invited investments. It is an ardent hope of the Indian government that these steps lead to a flourishing venture capital industry, and fill the gap between the financing from banks and the capital requirements of new start-ups in the country.



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