Options for foreign VC funds in India widen

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Bangalore: The Foreign Venture Capital Fund (FVCFs) options in India have widened beyond the select investment options that were offered till now. This decision, reflected in some of the communications between the Reserve Bank of India (RBI) and custodian banks of Venture Capital (VC) funds, could not only make life easier for foreign funds and widen the scope for their risk capital, but also boost foreign direct investment (FDI) in the country, reports The Economic Times.

Until recently, FVCFs were specifically told to stick to activities like infrastructure, bio-technology, nano-technology, biofuel, IT-related activities for hardware and software development and a few other areas outlined by the government in the list of 10 sectors identified for tax benefits to VCs. In fact, 43 venture funds are awaiting RBI approval, with 10 applications pending from 2005 and 11 applications from 2006. Currently, there are around 129 foreign venture funds operating in India.

Recently, RBI, while giving the green light to some of the FVCFs said, "If the FVC investor intends to make any private equity investments, then it may have to avail the FDI route." This implies that barring a few sensitive sectors, an FVCF registered in India is free to invest in almost any business in the country.

To buy into firms that are outside the 10 sectors, the fund will have to either approach the Foreign Investment Promotion Board for FDIs where the board approval is required, or directly invest in areas where FDI is permitted under the automatic route.

Vikram Shroff of the law firm Nishith Desai Associates said, "The regulator's intention seems to be to allow FVC entities to invest beyond what is permissible under the Sebi FVC regulations, albeit under the FDI route." Shroff, who advises several FVCFs, said, "Upon RBI clarifying, offshore VC and private equity funds may no longer need to set up separate entities for pursuing FDI in India."

However, RBI's latest stand does not pave the way for FVCF investment in the real estate space - something forbidden by the central bank. Punit Shah, Executive Director of PricewaterhouseCoopers said, "Of course, FVCs enjoy certain regulatory benefits under Sebi and Fema regulations, such as exit and entry pricing and lock-in relaxations. These will not be available for its investments under FDI route, but RBI has certainly made things convenient for the foreign funds."

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