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VCs may breathe easy under SEBI control

Shaji Vikraman

OVER the last eight to ten months, the action on the policy front has centered substantially on foreign direct investments (FDIs). Besides raising the ceiling on FDI in several sectors, the Government is also moving towards the automat ic approval route.

After putting in place the automatic approval process for Indian companies seeking to raise capital abroad and also for those firms aiming at growth through the acquisition route, the Government is now at work to make life easy for another class of inves tors - venture capital funds (VCFs).

After the statement of the Finance Minister, Mr. Yashwant Sinha, in the Budget, that the Securities and Exchange Board of India could be the one-stop regulator for venture capital funds, the Government is now planning to do away with the need for foreign VCFs to obtain the approval of the Foreign Investment Promotion Board (FIPB).

A policy note on this is underway, say Government officials. This will mean that these venture capital funds which will be registered with the SEBI, need to report only to the Reserve Bank of India (RBI) at the time of investment and later exit.

SEBI, on its part, is now expected to come out with a negative list of areas or activities where venture capital funding will be prohibited. This was a prerogative earlier of the Revenue Department, which has also given it up reluctantly, given its intri nsic fears of misuse by entrepreneurs. The Revenue Department had, at one time, reckoned that if the list of eligible areas for investment was to be widened, even those making buckets could enter the fray.

Thankfully, the Finance Minister felt that this was better left to the capital markets regulator to exercise judgment. SEBI, which has championed the cause of venture capital funds, has indicated that it will exercise care, and add sectors such as touris m and healthcare in the list. SEBI's estimate is that VCFs can easily pump in $2 billions annually to fund many start-ups.

Interestingly, while the Government goes about dismantling the perceived road-blocks to FDI, the industry seems to lag behind in getting tuned to these changes. Finance Ministry officials say that even in cases where FIPB approval is no longer needed, ma ny corporates still seek to have the Government stamp of approval in hand for comfort.

In many cases, the Government had written to companies saying that their proposals qualify for automatic approval.

The drive towards opening up for attracting FDI flows will continue, say officials. On the reverse side, where Indian companies seek to invest abroad, the Government's policy has focussed on ensuring that strong Indian companies are not stifled in their efforts to consolidate abroad, while at the same time putting the brakes on forex outflows.As long as cash outflows are negligible and overseas investment proposals are routed mainly through the equity swap route, thereby making it forex neutral, oversea s investment proposals will be cleared swiftly. While the reforms on the FDI front continue, there is pressure, albeit, indirectly, to pilot the Bill to prevent money laundering fast. This Bill was earlier meant to be a concurrent piece of legislation al ong with the Foreign Exchange Management Act (FEMA), which has come into force.

Government officials say that they have been told informally by their counterparts from the US and Europe that this law ought to be in place fast or India could run the risk later of figuring in the rogue list of over 30 nations dubbed as tax-havens.

A select committee of Parliament is on the job of finalising the Bill to be introduced in the next session. Government officials reckon that given the divide among politicians, pushing the Bill which could perhaps have an impact on use of proceeds from a ctivities such as betting and match-fixing (if used for criminal purposes) may need several sittings.