Venture Capital Funds under Category – I AIFs and Private Equity Funds under Category – II AIFs

Introduction

Venture Capital Funds as the term suggests, refers to the sum of money which is controlled and allocated by various entities such as companies or organizations for investing in startups, emerging companies and other businesses having a high growth potential and profitability. These funds provide developing businesses with funds for developing new business, expanding business activities, diversifying products and services and increasing their revenue which would inturn return the venture capital investors with upside profits and returns on their investments.

Private Equity Funds are another tool of business finance which differs from venture capital funds and refers to those funds which are invested in mature and established business concerns which are not publicly traded in stock exchanges and act as a catalyst in the business growth and expansion of already matured business concerns. The fundamental difference between Private Equity Funds and Venture Capital Funds is that where venture capital funds are targeted towards the early stage of business concerns such as start – ups; private equity funds are invested in mature and developed businesses.

AIF or Alternative Investment funds refers to those privately established or incorporated funds in India which assemble monetary resources from Indian and foreign investors and invest in pre – determined investment plans for the economic benefit of the investors. Alternative Investment Funds include numerous Venture Capital and Private Equity funds but do not include various funds established under the SEBI Schemes such as ‘collective investment schemes’.

Venture Capital Funds under Category – I AIFs

Category – I Alternative Investment Funds refers to those broad categories of funds which are concerned with investments in startups, small and medium enterprises, upcoming viable projects and other developing entities and include various other funds apart from venture capital funds such as infrastructure funds, angel funds and social venture funds. Venture Capital Funds under category – I of the AIF target those newly established entrepreneurial concerns that require a huge amount of capital at their nascent stage where such venture capital funds can enable them to meet their cash inflow and capital requirements. Such funds are characterized by high risk and high return strategies due to their economic viability and socially desirable characteristics such as early-stage startups or even unlisted ventures.

The Securities and Exchange Board of India is authorized to issue various notifications pertaining to the monetary limits and investment process of Venture Capital Funds periodically. In the past, various such notifications have been issued in order to promote transparency and investor protection which are as follows:

1. The venture Capital Funds under Category – I of the Alternative Investment Funds need to be compulsorily registered with the Securities and Exchange Board of India (SEBI) which shall be authorized to monitor its activities in order to ensure investor protection and promote transparency in the financial markets.
2. No scheme of Alternative Investment Funds except ‘angel funds’ are allowed to have more than 1000 investors in its list. In the case of angel funds, such a limit shall not exceed 200 members.
3. The SCORES (SEBI Complaint Redressal System) shall act as a centralized web – based system for resolving disputes between investors and Alternative Investment Funds.

Private Equity Funds under Category – II AIFs

Category – II AIFs refer to those investment funds which do not undertake borrowing or other methods of leveraging except for fulfilling their day-to-day operational requirements. Unlike category – I of funds, these funds are not eligible to obtain the benefits of specific incentives from the governments and are characterized by moderate risk profiles.

Private Equity funds under category – II of the Alternative Investment Funds refer to funds which target established and matured unlisted business entities which are interested in further business expansions, diversifications and even undertaking initial public offers in the future. Unlike venture capital, the target investments of private equity are low – risk to moderate risk ventures with a high return on investment projects. Due to requirements of a heavy investment, the private equity firms also take an active role in the management and operations of the entity wherein investments are made along with providing them operational, strategy and financial guidance including strategies which maximize their growth potential.

The Securities and Exchange Board of India also exercises certain control over the operations and investment activities of the private equity funds under this category wherein every entity engaging in ongoing investment activities must register with the SEBI and provide disclosures pertaining to their ongoing business and investment activities, portfolio performances and other statutory details.

Conclusion

Venture Capital funds under Category – I of the Alternative Investment Funds act as a propeller to fuel the novel and innovative startups and fund emerging businesses in the country. However, Private Equity funds under Category – II of the Alternative Investment Funds act in the category of strategic partnerships for fueling the expansion of already established and successful businesses in India by providing them means to expressly increase their revenues, operations and diversify their business concern.

Lastly, both Venture Capital and Private Equity act as a catalyst to the economic growth of the country along with improving the ease of doing business and promoting innovation and diversification in the economy.

King Stubb & Kasiva,
Advocates & Attorneys

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