Capital market regulator Sebi is considering another settlement scheme to resolve old cases of violations by erstwhile venture capital funds (VCF), people familiar with the development told Moneycontrol, and the regulation may be presented during the upcoming board meeting on June 18.
The settlement scheme will be for violation of failure to wind up funds post expiry of tenure. But will not include other violatiols like deviation from stated investment strategy, non-arm’s length transactions without proper disclosures, or lack of governance mechanisms in fund operations.
“The scheme has been finalized and will be placed before the board as an information memorandum in the next Sebi board meeting,” one source aware of the matter said, adding, “…based on the feedback, settlement terms have been devised in such a way that maximum persons can settle their cases.”
Another source said, “The feedback of high-powered advisory committee on settlement (HPAC) was also taken for VCF settlement scheme, and after incorporating the views, it has been finalized”.
Legal experts have said that settlement schemes are a better way for Sebi to resolve legacy issues efficiently, ensure compliance going forward, and avoid prolonged litigation, especially where the violations are acknowledged or non-contested by the fund managers or trustees.
Sebi did not replied to an email sent, seeking comments on the proposed settlement scheme.
Senior Partner at Regstreet Law Advisors and former Sebi officer Sumit Agarwal said, “Sebi may be considering settlement applications for a range of historical and procedural violations by Venture Capital Funds (VCFs), particularly those registered under the erstwhile VCF Regulations prior to the introduction of the AIF regime in 2012.”
On the nature of violations by VCFs, Sumit Agarwal said, “These could include operating without proper registration, non-compliance with investment concentration norms, failure to file periodic reports or disclosures, and investing in ineligible entities”.
Many such funds continued operations or retained legacy structures without fully aligning with updated regulatory expectations, leading to technical or substantive breaches. Sebi inspections and investor complaints have often unearthed the lapses of VCFs, which may not always involve fraud but reflect a regulatory non-compliance.
The major issue faced by VCFs registered under the erstwhile VCF Regulations is the inability to liquidate their investments within the tenure of the fund. Consequently, these funds ended up holding the unliquidated investments despite expiry of their tenure. Sebi had provided an option to such VCFs to migrate into AIF norms and avail AIF treatment, to deal with unliquidated investments. In a circular issued on August 19, 2024, Sebi fixed a timeline for such VCFs to apply to the new category of Migrated VCF under AIF regulations on or before July 19, 2025.
Industry body IVCA too has urged VCFs to opt for migration to the AIF regulations. Rajat Tandon, President of IVCA has said, “This is a critical regulatory window for legacy VCFs to realign with the current AIF framework. The migration framework introduced by Sebi not only offers operational clarity but also provides a structured path for managing residual assets and ensuring regulatory compliance.”
VCF Regulations were framed by Sebi to encourage funding in entrepreneurs’ early-stage companies, and were notified in December, 1996. Later, with a view to facilitate and regulate all types of privately-pooled investment vehicles raising funds from Indian or foreign investors - such as private equity funds, real estate funds, debt funds, hedge funds, VCFs - the AIF Regulations were framed and notified in May, 2012, and thereafter, VCF Regulations were repealed.
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