Lack of clarity over foreign venture capital investments (FVCIs) in India has led to 83 applications from foreign venture capital firms piling up with the Reserve Bank of India for approval.
According to sources close to the development, policymakers and financial sector regulators are working towards harmonising the regulations related to foreign venture capital investment, foreign direct investment and domestic venture capital investment.
“RBI is looking into a broad-based policy issue with regard to the foreign venture capital investments in the country,” said Akil Hirani of law firm Majmudar & Co, who is also advising a couple of foreign venture capital funds planning to register themselves with SEBI.
Although policy makers have been wary of venture funds investing in the real-estate sector, regulators have moved on to scrutinise many other applications in order to track the investors behind these funds. Because they believe that these investors are more focused on the returns they earn.
Regulators are concerned about issues such as whether these funds are beneficial for the real economy or even for the companies they seek to invest. RBI’s concerns also relate to impact of large capital inflows into the country especially into the real estate sector, which could fuel an asset price bubble. However, according to market participants, considering that a regime is already established and operational, any policy hiccups ought to be dealt with rather than keeping the proposals of PE funds on hold.
Policymakers are also looking at creating a level-playing field between foreign and domestic venture capital funds by ensuring that same tax rule is applicable to both. Foreign private equity funds now have an edge over their domestic counterparts under the existing tax system of the country as foreign funds registered in Mauritius and Cyprus enjoy the benefits of the double tax avoidance treaty.
Some of the FVCI applications pending RBI approval under the Foreign Exchange Management Act (Fema) includes Apax Mauritius, Baring PE Asia, DE Shaw Composite Investments, Fidelity India Ventures, Goldman Sachs, JP Morgan, Sabre Abraaj Infrastructure and TPG Ventures.
According to the data compiled by SEBI, total investments by domestic and foreign venture capital investors amounted to Rs 31,682 crore as on March 31, 2008, of which Rs 16,705 crore comprises FVCI.
The real estate sector saw the highest amount of fund inflow considering it as one of the high-growth areas.
In 2004, SEBIhad removed the real estate sector from the negative list, an incentive given by the market regulator to encourage PE funds to register as FVCI.
Source: Economic Times