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This article is written by Advocate Shamika Vaidya pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Here she discusses how foreign venture capital investor invest in India.


India has witnessed a considerable increase in PE and VC investments. The investments have scaled up from $8,497 million in 2016 to $16,728 million. Unlike upcoming startup hubs like Israel which look forward to the US for testing scalability of solutions, Indian diversity in geography and people is proving favorable for testing, giving it an upper hand over others. (full story here).

In the successful Walmart-Flipkart merger, strategic investors gave good exits to the then existing investors, of which most were foreign investors. This was good news for the Indian markets as it demonstrated the opportunity for growth for foreign investors in India.
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Regulations Involved

  • SEBI (Foreign Venture Capital Investor) Regulations, 2000
  • FEMA (Transfer or issue of Security by a Person Resident Outside India) Regulations, 2017
  • SEBI (ICDR) Regulations, 2009
  • SEBI (Intermediaries) Regulations, 2008
  • Income Tax Act
  • SEBI ( Substantial Acquisition of Share and Takeovers) Regulations, 2011
  • The Companies Act, 2013
  • SEBI (Alternate Investment Fund), 2012
  • Tax Treaties
  • Foreign Exchange Management (Deposit) Regulations, 2016.

Foreign Venture Capital Investors

Foreign Venture Capital Investors are defined in two regulations, SEBI (Foreign Venture Capital Investor) Regulations, 2000 and FEMA (Transfer or issue of Security by a person Resident Outside India) Regulations, 2017.

Definition of FVCI under SEBI (FVCI) Regulations, 2000

An investor looking to invest in accordance to concerned regulations incorporated and established outside India and is registered under the regulations.

Definition under FEMA (Transfer or issue of Security by a Person Resident Outside India) Regulations, 2017

An investor incorporated and established outside India and registered with SEBI under SEBI FVCI Regulations, 2000.

A qualified foreign Venture Capitalist can invest in India by pooling his investment in a Venture Capital Fund

Investment by Foreign Venture Capital Investor

  1. Investment through domestic Fund
  2. Offshore Fund

Investment through Domestic Fund

  • Regulation 2(z) of the AIF Regulation defines Venture Capital Fund as an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, services, technology or intellectual property rights based activities or new business models.

AIF Funds

As per the RBI circular (See circular here)

FVCI can invest in the Category 1 of Alternative Investment Funds or units of the fund set by it.   

Steps to Set up  AIF Fund


  1. The memorandum in case of the company, trust deed in case of trust and Partnership deed in case of LLP should permit it to carry on the activities of AIF and the entities should be registered with accordance to the laws that govern it.
  2. The applicant is prohibited by these principal documents from making an invitation to the public to subscribe to its securities.
  3. The applicant, Sponsor, and Manager are fit and proper persons based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 and should have necessary infrastructure and manpower
  4. The key investment team of the Manager of Alternative Investment Fund should have adequate experience as mentioned in the regulations.
  5. The Manager or Sponsor has the necessary infrastructure and manpower to effectively discharge its activities.
  6. The applicant has to describe the investment objective, proposed corpus and proposed tenure of the fund.


  1. Whether the applicant or any entity established by the sponsor or manager has earlier been refused registration by the Board.
  2. On receipt of approval from SEBI, the applicant must pay the registration fee of Rs.5,00,000/- (If the applicant is not registered with SEBI as a Venture Capital Fund) / Re-Registration fees (If the applicant is registered with SEBI as a Venture Capital Fund) of Rs. 1,00,000/- to SEBI.
  3. For, both VCF as well as AIF funds that have received investment from FVCI they have to comply with the provisions of Schedule 11 of the FEMA (Transfer or issue of Security by a Person Resident Outside India) Regulations, 2017.

Investment through FPI route

FVCI’s are allowed to register as Foreign Portfolio Investment, subject to some criteria. No regulation expressly prohibit the FVCI from holding a FPI account. The FVCI have to be eligible for being registered as an FPI in accordance to FPI Regulations and have to maintain separate accounts. (See circular here).

Permitted Investments

  • According to Regulation 5(7) Schedule 7 of FEMA (Transfer or Issue of Security by A Person Resident Outside India) Regulations, 2017, Foreign Venture Capitalist Investors can invest in equity and debt instruments of the following sectors whose securities are not listed on the stock exchange:
  1. Biotechnology
  2. IT related to hardware and software development
  3. Nanotechnology
  4. Seed research and development
  5. Research and development of new chemical entities in the pharmaceutical sector
  6. Dairy industry
  7. Poultry industry
  8. Production of bio-fuels
  9. Hotel-cum-convention centres with a seating capacity of more than three thousand
  10. Infrastructure sector

Qualified Institutional Buyer

Regulation 2(zd) of SEBI (ICDR) Regulations, 2009 states that Qualified Institutional Buyers (QIB) include FVCIs registered with SEBI. This considered, FVCI can participate in the Initial Public Offering through the book building process. They have to comply with guidelines SEBI (Disclosure and Investor Protection) Guidelines, 2000.

Eligibility Criteria for FVCI

  • The definition of FVCI specifically mentions that the fund has to be registered with SEBI. Eligibility criteria is stated in Regulation 4 of FVCI Regulation as follow;
  • It is of prime importance that

1) Track record

2) Financial Soundness

3) Professional Competence

4) General Reputation

shall be of fairness and integrity.

  • The determination of whether the investor is fit is mentioned in Schedule II of SEBI (Intermediaries) Regulations, 2008 (See the regulation here).
  • If the board is not convinced it may reject the application however an opportunity is given to remove the objections. If a certificate is not obtained the investor cannot carry out activities as a FVCI.
  • On acceptance a certificate is granted to the investor provided further conditions of Regulation 8  are abided, they are by as follows-
  1. Appoint domestic custodian for the purpose of custody of securities
  2. Arrangement with the designated bank for operating a special non-residential rupee or foreign currency account.

Rules regarding Investments by the FVCI

  • The investors have to atleast invest 66.67% of the investible funds in unlisted equity shares or equity linked instruments like CCPS. The investors can invest in a subscription to the IPO of investee company or for the debt or debt instruments in which it has already made an investment in the form of equity. Preferential allotment of equity shares with a lock in period of one year.
  • Mode of payment of maturity proceeds

  1. The amount has to be paid as inward remittance from abroad from either one of the following mediums

1) Funds held in foreign Currency Account

2) Banking Channels

3) Special Non-Resident Rupee (SNRR)

account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

  • The maturity or sale proceeds are remitted outside India or credited to the Foreign currency Account or Special Non-resident Rupee Account.

FVCI and startups

FVCI can invest 100% in startups as defined by Department of Industrial Policy and Promotion, irrespective of any sector, further an approval from RBI is not required for the same.

Special exemptions for FVCI from general prohibitions and restrictions

Lock in period

Regulation 17 (c) of the Issue of Capital and Disclosure Regulations states that a Foreign Venture Capital Investor is exempted from lock in the period during the pre-issue of share capital in Initial Public Offering, which is otherwise for a period of one year from the date of allotment in the public issue. However, the equity shares held by the investor are locked in for the period of one year from the date of purchase.

Exemption from Pricing Restrictions

There are no entry or exit pricing restrictions applicable to an FVCI, this means that a FVCI can acquire or sell its Indian investment at a price that is mutually agreed by both the parties. Generally, this is not the case and on the purchase of shares from an unlisted company by a non- resident, a minimum price has to be paid on the basis of the value of the shares. In case of a listed company on the value of shares in the stock exchanges, the same also applies during the exit of a non resident.

Exemption in takeover code

Regulation (10)(4)(f) of the takeover code states that in case of an acquisition of shares in a target company from a foreign venture capital investor by the promoters of the target company pursuant to an agreement between foreign venture capital investor and promoters, the promoters  will not be under the obligation to make an open offer.


There are no restrictions on the FVCI on the subscription to the equity shares, Compulsory Convertible Debentures and Compulsory Convertible Preference Shares, FVCIs can also invest into Optionally Convertible Redeemable Preference Shares, Optionally Convertible Debentures, even Non Convertible Debentures and Non-Convertible Preference Shares.

FVCI do not need permissions from the Foreign Investment Promotion Board and the RBI ones they are registered.


Section 115U (See section here) of the Income Tax Act is an special provision and does not take into account any other provision and therefore even though the FVCI’s could possibly take support of Section 10(23FB)  (See section here) which does not consider any income from a venture capital company or fund as part of the total income, they can be taxed under Section 115 U.   

How can a FVCI benefit from a DTAA

  • Double tax Avoidance Agreement is entered between two countries for the benefit of its taxpayers who otherwise would be taxed twice, one in the country where they reside and other in the country where they earn income. India has signed DTAA with more than 100 countries and FVCI from these countries can benefit from the tax treaties. Countries like Mauritius, Ireland, Cayman islands, Singapore, Netherland are
  • Section 90(2) of IT Act states that a non-resident of a country which has a Double Tax Avoidance Agreement signed with India can opt to be taxed either under the IT Act or DTAA whichever is beneficial to him. FVCI incorporated in a country that has a tax treaty with India can benefit immensely provided it does not have a permanent establishments in India.

Compliances by FVCI

  • FVCIs have to maintain books of account, records and documents for a period of eight years, and inform SEBI about their place. The records have to  present a true and clear picture of the state of affair.
  • SEBI can at any time ask any FVCI to furnish the records
  • FVCI has to enter into an agreement with the domestic custodian to act as a custodian of securities.
  • The domestic custodian has to monitor investment, furnish periodic reports as well as any information that is called for by SEBI.  
  • FVCI has to appoint a branch of a bank that is approved by the Reserve Bank of India as designated bank for opening of foreign currency denominated accounts or special non resident rupee account.

Obligations of FVCI during the investigation

SEBI is empowered to suo moto initiate an inspection or investigate the conduct and affairs of the FVCI and he is under obligation to;

  1. Furnish statement and information needed by an officer for investigation.
  2. To provide the Inspecting or investigator officer with all relevant information as required by them.


India has the third largest number of tech startups after USA and UK. However, a startup ecosystem cannot thrive without robust Venture Capital supporting these startups.

Keeping pace with the changing priorities of the government, and in order to increase the foreign investment in India by attracting Foreign Venture Capital Funds, the Indian government has created a very clear and investor friendly framework for FVC investments.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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