Market regulator Securities and Exchange Board of India (SEBI) in its board meeting on March 25 approved proposals that will give more flexibility to venture capital funds to invest in, and remove friction arising out of multiple definitions of startups.
SEBI said it has approved proposals to provide a definition of ‘startup’ as specified by the government, removed the list of restricted activities or sectors from the definition of Venture Capital Undertaking to provide flexibility to Venture Capital Funds registered under Category I Alternative Investment Funds (AIFs) in making investments.
It has also allowed AIFs, including funds of AIFs, to simultaneously invest in units of other AIFs and directly in the securities of investee companies subject to certain conditions.
"Rationalising the definition of a startup with the government's definition will remove the friction caused by multiple definitions. Removing the negative list will help make Category 1 AIFs more attractive and stop fund managers in startups from becoming Category II AIFs instead. .Allowing funds the flexibility to invest into other units of AIFS & companies will enable Co -investing for Fund of funds & allow larger funds to support smaller funds directly," Siddarth Pai of 3one4 Capital said.
At the same time, TVS Capital chairman Gopal Srinivasan said, "The removal of restrictions on AIF 1 in terms of NBFC companies; and the harmonisation of startup definition with DPIIT, as well as allowing Fund of Funds AIF IIs to invest into funds as well as into Securites of investee companies is an important and critical liberalisation measure. Many VC Funds were forced to register at AIF II for this reason."
An AIF or an Alternative Investment Fund is a privately pooled investment vehicle that collects money from sophisticated private sectors.
Category I AIF includes venture capital funds (including angel funds), SME funds, social venture funds and infrastructure funds. Real estate funds, private equity funds and funds for distressed assets are classified as Category II AIFs
Pai said SEBI's move to prescribe a code of conduct for AIFs will help generate more transparency and the framework for promoter entities will help give a fillip to professionally run entities who no longer have a promoter construct.
