INDIA BUSINESS WORLD - NOVEMBER 1^st – NOVEMBER 15^th 2008

RBI ALLOWS 10 FOREIGN VENTURE CAPITAL FUNDS

THE Reserve Bank of India, which has been holding back applications of several foreign venture capital funds for the past few years, is slowly opening the doors to these investors — a decision which could be partly driven by FII outflow.

During the last fortnight, the central bank has cleared proposals of as many as 10 foreign VCFs that are adequately capitalised. Many VCFs were setting up entities in Mauritius with only a few thousand dollars as the overseas investors in the funds were reluctant to park the money in Mauritius before the regulatory clearance. This was unacceptable to RBI. In fact, RBI had returned applications of more than 16 foreign VCFs to Sebi citing under-capitalization' as the reason.

After this, several foreign VC funds began capitalising the investment company before approaching the financial sector regulators. Sources said Sebi has already issued in-principle approval to the 10 applicants. However, while clearing the cases RBI has inserted a new clause, which restricts investments by these foreign funds to certain sectors, similar to those prescribed under the Income-Tax Act for availing a tax pass through for Sebi-registered venture capital funds. Under this, foreign VCFs will be permitted in 10 sectors including infrastructure, biotechnology, nano technology, R&D of new chemical entities in pharma sector, dairy, poultry and bio-fuels. Sources said the guidelines will be applicable to only new applicants and will not impact the existing players. Also, foreign VC investors will only be allowed to invest in those domestic VC funds that have exposure to these 10 sectors. "While the idea in the current economic scenario would have been to attract more foreign capital, such restrictions may significantly hamper the investment activities of these FVCIs," said Vikram Shroff, senior associate (funds practice), Nishith Desai Associates. These 10 foreign VC funds have committed about $4-5 billion to India, the sources said. "By restricting investments by foreign VC funds into these specific sectors, RBI is trying to promote these sectors. However, these sectors are of limited usage for us, some of the sectors don't even appeal to us considering the returns they can generate. We just hope that RBI would increase the sectors in this list," said a senior executive of a US-based private equity fund who has received the approval.

Close to 50 applications are still pending before RBI. Of these, nearly 20 applicants are keen on investing in real estate sector. At present, there are about 100 foreign VC funds in India.