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FVCI Investments – The Filings Conundrum!

Published on Mon, Dec 02,2013 | 20:04, Updated at Mon, Dec 02 at 20:04Source : 

By: Pallavi Puri, Partner & Shantanu Jindel, Associate, JSA

Investments by a foreign venture capital investor (FVCI) in India, being a highly regulated sector, are primarily governed by the Securities and Exchange Board of India (Foreign Venture Capital Investors)

Regulations, 2000 read with Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (“Regulations”). FVCIs can primarily invest in India under two modes specified under the Regulations: (i) the foreign direct investment route under Schedule I of the Regulations (“FDI Route”); and/ or (ii) as an FVCI under Schedule VI of the Regulations (“FVCI Route”).

FVCIs investing under the FVCI route (as against the FDI route) are entitled to certain advantages while making investments in a venture capital undertaking or exiting therefrom, such freedom being primarily in the nature of freedom to transact at a mutually agreeable transaction price, whether it be the investment price in case of a primary subscription or the sale price in case of an exit. The pricing guidelines prescribed by the RBI are not applicable in transactions of such a nature. These benefits are not available to entities investing through the FDI route as compliance with the pricing norms and other statutory requirements is an absolute must.
The foreign direct investment policy (effective as of April 5, 2013) issued by the Department of Industrial Policy and Promotion, Government of India (“FDI Policy”) read with the Master Circular on Foreign Investments in India issued by the Reserve Bank of India (“RBI”) dated July 1, 2013 (“Master Circular”) mandates certain reporting requirements for the issuance of shares to a non-resident (in Form FC-GPR) and/or the transfer of shares from a resident to a non-resident or vice-versa (in Form FC-TRS).

However, strangely enough what appears to be absent is a mention of an exemption from such filings (Form FC-GPR/ FC-TRS) in case an FVCI is involved in the sale/purchase/acquisition transaction. As a result, in a large number of cases, where FVCIs have invested in an Indian company by subscribing to its shares under the FVCI Route, the investee company has gone ahead and filed Form FC-GPR with the RBI, thereby categorizing the investment as an investment under FDI Route, and technically taking away the benefits that are available to an FVCI when it makes investments under the FVCI Route. Further, as the investment was made by an FVCI, such investment would also be appropriately reported as an investment under the FVCI Route as per the Regulations, leading to double reporting of the same investment.

The RBI issued a circular on June 12, 2013 (“Circular”) which apparently acknowledges this conundrum. The Circular captures RBI’s concern in the following words:

“It has been observed that SEBI registered FVCIs making investments in an Indian Company under FDI Scheme in terms of Schedule 1 of Notification No. FEMA.20 / 2000 - RB dated May 3, 2000, as amended from time to time, also report the same transaction under Schedule 6 of the Notification ibid, resulting in double reporting of the transaction.”

The Circular goes on to clarify that (only) where a SEBI registered FVCI acquires shares of an Indian company (whether primary or secondary acquisition) under the FDI Route, such investments have to be reported in Form FC-GPR/FC-TRS, as applicable. Where the investment/exit is under the FVCI Route, no Form FC-GPR/FC-TRS reporting is required. However, such transactions would be reported by the custodian bank in the monthly reporting format as prescribed by RBI from time to time.

Whilst this seems to take care of the dual filing issue, considering that the responsibility of filing Forms FC-GPR or FC-TRS (as the case may be) within the prescribed timelines remains on the resident entity (where it is the investee company or resident transferor), the Circular does not seems to clarify/exempt the resident entity (where it is the investee company or resident transferor) from reporting the transaction by filing Form FC-GPR or FC-TRS, as the case may be. As a result, the following questions emerge:

(a) does the fact that investment by FVCI in terms of FVCI Route need not be reported by filing Forms FC-GPR and FC-TRS, absolves the resident of its liabilities of making these filings in terms of the Master Circular; and

(b) in the event Form FC-GPR/FC-TRS was inadvertently filed when the investment was being made by the FVCI initially (prior to the Circular), should, as a matter of good order, these filings be made at the time of exit by the FVCI.

While on a combined reading of the Regulations and the Circular seem to imply that no filings are required where an FVCI is involved, it lacks the comfort required for the resident entity to decide whether it is to report sale or purchase of shares to/from a non-resident FVCI in terms of the FDI Policy and the Master Circular.


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