Transition Insights: Migrating Venture Capital Funds to SEBI’s AIF Regulations

Introduction:

Amendments to SEBI (Alternative Investment Funds) Regulations, 2012, (“AIF Regulations”) were notified by SEBI on July 20, 2024, which made it easier for a Venture Capital Fund (“VCF”) registered under SEBI (Venture Capital Funds) Regulations, 1996, (“VCF Regulations”) to migrate under the AIF Regulations so as to enable the VCFs to tackle problems of unliquidated investments upon expiry of their schemes. The new regulation also defines “Migrated Venture Capital Fund” and lays out the procedure and conditions on how VCFs shall become AIFs. The move also aims to create better regulatory control and protection for investors while ensuring smooth functioning for funds operating both expired and active schemes.

Explanation:

The Circular provides clarity on:

• Definition of Migrated Venture Capital Fund: Migrated Venture Capital Fund means a fund which was earlier registered as a VCF under the VCF Regulations and subsequently gets registered under the AIF Regulations as a sub-category of Venture Capital Fund under Category I of Alternative Investment Funds (“AIF”).

• Application Process for Migration: VCFs desirous of migration shall apply to SEBI in the prescribed form. The application should be accompanied by the original certificate of registration issued under the VCF Regulations and requisite information as per the format prescribed in Annexure I.

• Conditions for VCFs with Active Schemes:

Migration Deadline: The migration facility will be available up to July 19, 2025.

Scheme Tenure: Schemes, which have defined tenure under the VCF Regulations in their Private Placement Memorandum (“PPM”), shall continue to have the same tenure on migration. For those schemes that do not have any defined tenure, the residual tenure must be determined before the application for migration is made on approval by 75% of investors by value.

• Conditions for VCFs with Unwound Schemes: VCFs having at least one scheme that has not been wound up post-expiry of its liquidation period are permitted to apply for migration, subject to there being no pending investor complaints related to non-receipt of funds/securities. One-time additional liquidation period of one year is available for schemes that have expired but are not yet wound up. The tenure provision contained for active schemes shall apply to VCFs having both expired and non-expired schemes.

• Treatment of Investments Post-Migration: All investors, investments held and units issued by the VCF or its schemes under the VCF Regulations shall, upon migration, be construed to be the part of Migrated VCF under the AIF Regulations.

• Regulatory Reporting and Compliance: Those VCFs which do not migrate will fall under an enhanced regulatory reporting requirement more aligned to the AIF regime.
  VCFs whose schemes have expired will be subjected to regulatory action for having continued beyond their original liquidation period.

• Non-Eligible VCF for Migration: Migration is not available in respect of VCFs where all the schemes thereof have been wound up or no investment has been made by the schemes that remain unwound. Such a VCF has to necessarily file an application for the surrender of its registration on or before March 31, 2025, failing which its registration shall be cancelled.

• Related Compliance Responsibilities: The responsibility of compliances under the new provisions, in relation to VCFs or the Migrated VCFs, as the case may be, shall lie with the managers and trustees and key management personnel of the VCFs or the Migrated VCFs. The trustee or sponsor has to ensure that the ‘Compliance Test Report’ prepared by the manager comprise compliances in line with these provisions.

• Effective Date and Authority: The circular is effective immediately and was issued with the approval of the competent authority under powers delegated for protecting interest of investors in securities and to regulate the securities market, issued by SEBI.

Conclusion:

As dealt with above, the amendment to the AIF Regulations by SEBI removes the much-needed elbow room for VCFs to smoothly make a transition under the AIF regime. Such mitigation of unliquidated investment issues and ensuring regulatory compliances are in addition to investor protection and promoting a well-functioning market. The following migration process with clear guidelines and deadlines thus enables VCFs to carry on their operations as efficiently as possible while migrating under the new regulatory standards. Overall, this change in regulation shows SEBI’s commitment to strengthening the sector and its growth and laying out a strong, transparent framework for both the funds and investors.