Veni, vidi... possible vici for VC funds?

A Securities and Exchange Board of India (Sebi) working group has suggested greater autonomy for foreign investment by Indian private equity (PE) and venture capital (VC) funds, as reported by this newspaper. Allowing PE and VC firms to proceed with outbound investment in unlisted companies without seeking prior approval from the capital markets regulator will be a welcome development because it increases the speed of decision-making and competitiveness. Indian VC has found itself disadvantaged by existing rules in efforts to invest in portfolio companies abroad. This is particularly true of technology-focused funds where the portfolio of investments is spread out over multiple markets.

Last year, Sebi doubled the overall ceiling for investment in unlisted foreign securities by the Alternative Investment Fund (AIF) vehicle to $1.5 billion in order to facilitate such activity. The working group is understood to have retained the 25% cap on an AIF's corpus that can be invested abroad. This would serve the purpose of controlling the outflow of money pooled at home. But the restriction of investments by AIFs to only foreign companies that have links to India through operations or subsidiaries works against VC's need to diversify beyond the Indian startup ecosystem.

Sebi has been streamlining regulation of the AIF industry with a raft of changes in rules, such as permitting simultaneous investments in other AIFs, harmonising the definition of startups, streamlining reporting requirements, recognising accredited investors and easier rules for the large value funds they invest in, and operationalising special situation funds that invest in distressed assets. Although the compliance burden on the AIF industry is rising, the channel is becoming more transparent as these pools of investment grow. A rapidly evolving regulatory framework must ensure these investments are efficiently routed under supervision.