SEBI allays venture capital funds' fears

NetScribes/Rajiv Banerjee

The Securities and Exchange Board of India has allayed fears among venture capital funds regarding a directive that requires them to furnish details of their investment strategies at the time of registration. The market regulator has clarified that VCFs will only have to provide broader details of their investment plans and not reveal strategic investments.

"The directive is aimed at bringing more transparency and flexibility into operations. It is in line with international investment norms," L K Singhvi, senior executive director, SEBI, told NetScribes.

Singhvi said that the details entail outlining the companies' long-term plans of investments, the sectors they are investing in and their focus. "The SEBI directive does not require a company to divulge sensitive details regarding its investments," he clarified.

The directive had led to discontent among VCFs, who said they were not happy with the idea of disclosing their investment details. "Many funds are not comfortable because beyond a point, they do not want to reveal investment details, given the sensitive nature of such information," says a top IDBI official.

P D Shedde, president, Alliance Venture Capital Advisors, feels that the directive is welcome as long as only broader details are required. However, the funds should be given a free hand to conduct their businesses, he adds.

A rule requiring venture funds to exit companies funded by them within one year of their listing to avail of tax benefits has also come in for criticism. VCFs view this directive as one designed to appease the income-tax department. It is not in the larger interests of the venture business, they warn.

The Indian Venture Capital Association, a body representing Indian VCFs, is planning to meet SEBI officials to persuade them to reconsider the decision.

"The one-year exit window is unfair. Public confidence in a company will be lost if the funds exit within a year," says Vinod Angadi, managing director, ICF Ventures. Moreover, given the nature of the venture business, it is better to exit in small tranches over a long period to maximise returns. If fund is forced to withdraw completely at one stroke, the stock price could crash, affecting small investors and the returns of the fund.

Industry watchers say that the directive will prove detrimental to new companies planning to get listed as initial fund support is crucial in the long run. Moreover, venture funds are not just investors; they give strategic direction to companies and play a critical role in developing market share and branding.

Most venture funds want SEBI to do away with this directive and instead concentrate on providing an atmosphere where companies can come in, invest and move out in a seamless manner. They feel that since funds include contributions from FIIs, NRIs and banks and not public money, there is no reason for SEBI to be apprehensive.

"Venture funds make risky investments. Such policies do not give the required operational capability and also lead to problems of price discovery," counters Singhvi.

"SEBI needs to act as a policeman and not as a law maker. It should police the existing laws instead of framing policies that harm business," says Angadi.

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