Schemes for Fund Management: Defining Venture Capital Schemes

At the core of the finance industry, Venture Capital (VC) Schemes play a crucial role in fostering economic growth and innovation. Often, such schemes offer critical financial backing to start-ups, emerging, or early-stage venture capital undertakings. Let’s delve deeper into the specifics of these essential features of Fund Management Schemes.

Understanding Venture Capital Schemes

In essence, Venture Capital Schemes primarily invest in unlisted securities of start-ups and budding businesses. These businesses are usually involved in introducing new products, services, technology, or intellectual property-based activities. Additionally, they might be exploring a new business model. Venture Capital Schemes may also extend their support to other schemes investing in similar entities, including an Angel Fund.

Eligibility for Launching a Venture Capital Scheme

So, who can launch a Venture Capital Scheme? Fund Management Entities (FMEs) encompassing all categories—Authorised FME, Registered FME (Non-Retail), and Registered FME (Retail)—hold the eligibility to initiate a Venture Capital Scheme.

Activation of a Venture Capital Scheme

The journey to launch a Venture Capital Scheme begins with a private placement. The FME takes the initiative to file a placement memorandum with the Authority, covering the applicable fees as the Authority directs. The Venture Capital Schemes can open subscriptions for investors promptly upon filing the placement memorandum with the Authority—a process often referred to as the Green Channel.

Legal Frameworks for a Venture Capital Scheme

Venture Capital Schemes in the International Financial Services Centres Authority (IFSC) can constitute under one of three legal forms: a Company, Limited Liability Partnership (LLP), or Trust.

Nature of Venture Capital Schemes

When examining the design of a Venture Capital Scheme, note that it is exclusively close-ended. There is no provision for these schemes to be open-ended.

Venture Capital Scheme Investment Stipulations

Who can contribute to a Venture Capital Scheme’s investments? The rules allow the following types of people to invest:

1. Accredited Investors (with no investment threshold)
2. Investors making contributions exceeding USD 250,000
3. In circumstances where the investors are employees, directors, designated partners/partners of the FME, the minimum investment value is set at USD 60,000.

When it comes to the maximum number of investors, a Venture Capital Scheme should not exceed 50 investors. The scheme’s corpus size also comes with specifications—the minimum corpus is USD 5 million, while the upper limit is USD 200 million.

Recurring Themes: Investment Restrictions and Venture Capital Schemes

In terms of investment restrictions, Venture Capital Schemes must allocate at least 80% of their assets under management (AUM) to investee companies that are less than ten years old or other Venture Capital Schemes. Investing in associated entities is permissible but requires approval from 75% of the scheme’s investors by value.

Venture Capital Schemes may opt to borrow funds or engage in leveraging activities, contingent on the following terms:

1. Disclosure of the scheme’s maximum leverage and the calculation methodology in the placement memorandum
2. Strict adherence to the placement memorandum disclosures when exercising leverage. Any deviation necessitates the consent of two-thirds (2/3rd) of the investors by market value.
3. The FME must maintain a comprehensive risk management framework, accounting for the size, complexity, and scheme’s risk profile.

In the spirit of transparency, the scheme’s assets require valuation by an independent third-party service provider. Such providers may comprise a fund administrator or custodian registered with the Authority, a valuer listed with the Insolvency and Bankruptcy Board of India, or another professional appointed by the Authority.

A Venture Capital Scheme requires its Net Asset Value (NAV) computation at least on an annual basis. This calculation process must be fully documented and reviewed regularly for potential improvements.

FME’s Commitment to the Venture Capital Scheme

The FME must make a significant contribution or investment in the Venture Capital Scheme to ensure consistent operation and growth. This investment is contingent upon the following conditions:

1. The FME or its associate must invest at least 2.5% of the targeted corpus but not more than 10% in a scheme with a targeted corpus of less than USD 30 million.
2. For a scheme with a targeted corpus exceeding USD 30 million, the investment must be at least USD 750,000 but not more than 10% of the targeted corpus.

Nonetheless, the FME might be exempted from this contribution in the event of relocation of schemes initially set up outside India to the IFSC.

Moreover, a Venture Capital Scheme may have the opportunity to co-invest. This co-investment can occur through a Special Purpose Vehicle (SPV) based on a framework that the Authority specifies, or via a segregated portfolio by issuing a distinct class of units.

However, the FME should ensure equality across investments. Investments made by segregated portfolios should not receive any preferential terms compared to those offered to the general portfolio of the Venture Capital Scheme. This fairness, along with other details regarding segregated portfolio creation, should feature prominently in the placement memorandum.

In conclusion, the specifics encapsulated here offer a detailed examination of the conception and operational process of Venture Capital Schemes within the realm of Fund Management Schemes. Ensuring a comprehensive understanding of these operations facilitates smoother and more profitable financial undertakings.