- Wealth PMS (50L+)
Many investors have asked, privately, if they can set up a Venture Capital fund, because any company such funds invest in, will no longer get the startup tax.
Such VC funds have regulations from SEBI. You will want to read:
The burning questions, though are:
Any company, trust or “body corporate” (typically, institutions). No LLPs, currently. No individuals.
Comapnies or trusts need to have their “main objective” as carrying on the activity of a venture capital fund. A company can never request offers from the general public (can only get money as private placements).
The directors or trustees must not have any litigation connected with the securities market, and should not have been convicted of any offense involving mortal turpitude or fraud.
There is no “minimum paid-up capital” restriction that usually appears in SEBI regulations. Technically any company that passes muster can apply.
A VC fund can raise money from any investor, Indian or otherwise. But the minimum investment is Rs. 5 lakh per investor .
Additionally, a VC fund will create “schemes” for investment, and each such scheme will have a firm commitment for at least Rs. 5 crores before the VC fund is started.
Note here: the minimum investment may be increased to Rs. 25 lakh soon, given the way things have changed with respect to Portfolio Management Schemes (PMS).
A VC fund can’t invest more than 25% of its entire corpus in one startup. It has to invest at least 2/3rd of the corpus in equity shares or convertible debt of unlisted companies. The remaining 1/3rd can go into IPOs of startups, pure debt to an investee company, locked-in preferential shares or listed equity shares of a loss-making or sick company.
SEBI charges Rs. 100,000 (one lakh) per application. If the application is okayed, the VC Fund must pay another Rs. 5,00,000 (Five lakhs).
(This is where most angel funds will balk. Effectively, another tax.)
A VC Fund is expected to have a placement memorandum, with the fees, charges, investment philosophy, tax implications, time period etc. This has to be filed with SEBI, along with a report of all money collected from investors.
SEBI can also ask for any information on demand, and requires proper books to be maintained. It can also investigate through physical checks.
Remember, SEBI is a heavy regulator here. It can even appoint a director level person to take charge of the entire fund and the investments if it feels it needs to do so to protect the interests of investors.
Look at the list of registered funds here. You may be able to piggy-back on them if they can create a pass-through scheme charging low fees, which avoids the new startup tax.
The VC Fund regulations might be time consuming, and they are expensive. And the Five crore “firm commitment” required can stymie many of the angel networks that currently exist (though they may be able to piggyback on an existing VC).
Most early stage investments are less than 50 lakhs; sometimes as less as 5 lakhs. These will be hit by the startup tax. If there is a tacit agreement that tax-authorities won’t try to enforce this law vehemently, things will still go ahead. And I expect they will; the risk-reward equation is so high that it’s worth the change. Plus, remember, as a startup:
a) You’ll be called for scrutiny only if you get really big. (Small investments might not be worth their time)
b) If you get really big, the tax you’ll pay on that angel level investment is going to be tiny, and in all likelihood you can explain away your early “over-valuation” saying: see, we got this big today, the valuation was justified.
But this is small consolation. People like things to be straightforward. It’s not nice to have to look over your shoulder all the time. Our government doesn’t make it easy.