SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2024

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Securities and Exchange Board of India (SEBI) has issued the Securities and Exchange Board of India (Alternative Investment Funds) (Third Amendment) Regulations, 2024, which amend the existing regulations for Alternative Investment Funds (AIFs). The amendment introduces a new category called “migrated venture capital fund” for funds previously registered under the Venture Capital Funds Regulations, 1996. It provides guidelines for the registration, operation, and reporting requirements for these migrated funds. Key changes include new definitions, eligibility criteria, private placement restrictions, and investment conditions. The regulations also address the procedures for fund registration and the prohibition on public solicitations for subscriptions. These amendments are effective from the date of their publication in the Official Gazette.

SECURITIES AND EXCHANGE BOARD OF INDIA

NOTIFICATION

Mumbai, the 11th July, 2024

SECURITIES AND EXCHANGE BOARD OF INDIA (ALTERNATIVE INVESTMENT FUNDS) (THIRD AMENDMENT) REGULATIONS, 2024

No. SEBI/LAD-NRO/GN/2024/194.—In exercise of the powers conferred by sub-section (1) of Section 30 read with sub-section (1) of Section 11, clause (ba) and clause (c) of sub-section (2) of Section 11 and sub-section (1) and (1B) of Section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following regulations to further amend the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, namely, –

1. These Regulations may be called the Securities and Exchange Board of India (Alternative Investment Funds) (Third Amendment) Regulations, 2024.

2. They shall come into force on the date of their publication in the Official Gazette.

3. In the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, –

I. In regulation 2, in sub-regulation (1), in clause (z), after the words and symbols “an angel fund as defined under Chapter III-A”, the words “and migrated venture capital fund as defined under Chapter III-D” shall be inserted.

II. In regulation 3, in sub-regulation (2),

i) in the second proviso, the words and symbols “re-registration under these regulations subject to approval of two-thirds of their investors by value of their investment” shall be substituted with the words and symbols “registration under these regulations as migrated venture capital funds in terms of Chapter III-D, within twelve months from the date of notification of the Securities and Exchange Board of India (Alternative Investment Funds) (Third Amendment) Regulations, 2024”.

ii) after the second proviso, the following new proviso shall be inserted, namely, –

“Provided further that the Board may specify enhanced regulatory reporting and other measures for the venture capital funds that do not seek registration as a migrated venture capital fund in terms of Chapter III-D.”

III. After Chapter III-C, the following new chapter shall be inserted, namely, –

“CHAPTER III-D

Definitions.

19V. For the purpose of this Chapter, unless the context otherwise requires, the terms defined herein shall bear the meanings assigned to them below and their cognate expressions and variations shall be construed accordingly,-

(1) “migrated venture capital fund” means a fund that was previously registered as a venture capital fund under the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996 and subsequently registered under these regulations as a sub-category of Venture Capital Fund under Category I – Alternative Investment Fund in accordance with the provisions of this Chapter.

(2) “investable funds” means corpus of the scheme of the migrated venture capital fund net of expenditure for administration and management of the fund.

Applicability.

19W. (1) The provisions of this Chapter shall apply only to migrated venture capital funds and schemes launched by such migrated venture capital funds.

(2) All other provisions of these regulations, except the following provisions and the guidelines and circulars issued under these regulations, unless the context otherwise requires or is repugnant to the provisions of this Chapter, shall apply to the migrated venture capital fund, its trustee, trustee company, directors of the trustee company, directors of the migrated venture capital fund, as the case may be, sponsor, if any, Manager, if any, and investors:

(i) clause (p), (w), of sub-regulation (1) of regulation 2;

(ii) sub-regulation (5) of regulation 3;

(iii) regulation 4;

(iv) sub-regulation (2), (4) and (5) of regulation 6;

(v) sub-regulation (2) of regulation 7;

(vi) regulations 9, 10, 11, 12, 13, 14, 15, 16;

(vii) sub-regulation (11), (11A), (15) (17), (18) and (19) of regulation 20;

(viii) sub-regulations (2), (3), (4) and (5) of regulation 23; and

(ix) sub-regulation (2) of regulation 27.

Procedure for grant of Certificate.

19X. (1) An application for seeking registration as a migrated venture capital fund shall be made to the Board in the manner specified by Board.

(2) The certificate of registration as a Category I Alternative Investment Fund – Venture Capital Fund (Migrated Venture Capital Fund) shall be granted by the Board, if it is satisfied that the applicant fulfills all the requirements as specified in this Chapter under these regulations.

Eligibility Criteria.

19Y. For the purpose of the grant of certificate under this Chapter, the Board shall consider the following eligibility conditions, namely, —

(a) the applicant has a certificate of registration as a Venture Capital Fund under Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996;

(b) the applicant is a fit and proper person;

(d) the applicant has no pending investor complaint with regard to non-receipt of funds or securities for any of its schemes whose assets are not liquidated in terms of sub-regulation (2) of regulation 24 of Securities and Exchange Board of India (Venture Capital Funds) Regulations 1996, on the date of application under this Chapter;

(e) no scheme launched by the applicant has investment from an investor which is less than five lakh rupees:

Provided that nothing contained in clause (e) shall apply to investors who are employees or the principal officer or directors of the venture capital fund or directors of the trustee company or trustees where the venture capital fund has been established as a trust or the employees of the manager or asset management company of the migrated venture capital fund;

(f) each scheme launched by the applicant has a firm commitment from the investors for contribution of an amount not below rupees five crores before the start of operations by the applicant.

Prohibition on inviting subscription from the public.

19Z. Migrated venture capital fund shall not issue a document or an advertisement inviting offers from the public for the subscription or purchase of any of its units.

Private placement.

19AA. A migrated venture capital fund may receive monies for investment in the migrated venture capital fund only through private placement of its units.

Placement memorandum or subscription agreement.

19AB. (1) The migrated venture capital fund shall—

(a) issue a placement memorandum which shall contain details of the terms and conditions subject to which monies are proposed to be raised from investors; or

(b) enter into a contribution or subscription agreement with the investors which shall specify the terms and conditions subject to which monies are proposed to be raised.

(2) The migrated venture capital fund shall file with the Board for information, the copy of the placement memorandum or the copy of the contribution or subscription agreement entered into with the investors along with a report of money actually collected from the investor.

Contents of Placement Memorandum.

19AC. The placement memorandum or the subscription agreement with investors shall contain the following, namely –

(a) details of the trustees or trustee company and the directors or chief executives of the migrated venture capital fund;

(b) the corpus of the fund, the minimum amount to be raised for the fund to be operational, the minimum amount to be raised for each scheme and the provision for refund of monies to the investor in the event of non-receipt of minimum amount;

(d) tax implications that are likely to apply to investors;

(e) manner of subscription to the units of the migrated venture capital fund;

(f) the period of maturity, if any, of the fund;

(g) the manner, if any, in which the fund shall be wound up;

(h) the manner in which the benefits accruing to investors in the units of the trust are to be distributed;

(i) details of the fund manager or asset management company, if any, and the fees to be paid to such manager;

(j) the details about performance of the fund, if any, managed by the Fund Manager;

(k) investment strategy of the fund; and

(l) any other information specified by the Board.

Investment by migrated venture capital fund.

19AD. (1) Investments by migrated venture capital fund shall be subject to the following conditions:—

(a) the migrated venture capital fund shall not invest more than 25% corpus of the fund in a single venture capital undertaking;

(b) the migrated venture capital fund may invest in the securities of companies incorporated outside India subject to such conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and the Board from time to time;

(d) the migrated venture capital fund shall invest as enumerated below:

(i) at least 66.67% of the investable funds shall be invested in unlisted equity shares or equity linked instruments of venture capital undertaking;

(ii) not more than 33.33% of the investable funds may be invested by way of:

(a) subscription to the initial public offer of a venture capital undertaking whose shares are proposed to be listed;

(b) investment in the debt or debt instrument of a venture capital undertaking in which the venture capital fund has already made an investment by way of equity;

(d) investment in the equity shares or equity linked instruments of a financially weak company or a sick industrial company whose shares are listed.

Explanation. — For the purpose of these regulations, a “financially weak company” means a company, which has at the end of the previous financial year, accumulated losses, which has resulted in the erosion of more than 50% but less than 100% of its net worth at the beginning of the previous financial year;

(e) investment in the Special Purpose Vehicles that are created by a venture capital fund for the purpose of facilitating or promoting investment in accordance with these regulations.

Explanation. — The investment conditions and restrictions stipulated in clause (d) of sub-regulation (1) shall be achieved by the venture capital fund by the end of its life cycle.

(2) The migrated venture capital fund may enter into an agreement with the merchant banker to subscribe to the unsubscribed portion of the issue or to receive or deliver securities in the process of market making under Chapter IX of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 and the provisions of sub-regulation (1) shall not apply in case of acquisition or sale of securities pursuant to such subscription or market making.

(3) Notwithstanding the conditions as specified in sub-regulations (1) and (2), the Board may specify additional requirements or criteria for investments by the migrated venture capital funds.

Schemes.

19AE. A migrated venture capital fund shall not launch any new scheme.

Tenure.

19AF. (1) The tenure of a migrated venture capital fund shall be calculated in the manner as may be specified by the Board.

(2) Extension of the tenure of a migrated venture capital fund may be permitted up to two years subject to the approval of two-thirds of the unit holders by value of their investment in the migrated venture capital fund.

(3) In the absence of consent of the unit holders under sub-regulation (2) or upon expiry of the extended tenure, the migrated venture capital fund or the scheme of the migrated venture capital fund shall be wound up in accordance with Regulation 29 of these regulations:

Provided that sub-regulation (9A) of regulation 29 shall not be applicable to a migrated venture capital fund or the scheme of the migrated venture capital fund.

(4) If the assets of a scheme of a venture capital fund registered under the Securities and Exchange Board of India (Venture Capital Regulations) 1996, are not liquidated after the expiry of its tenure in terms of sub-regulation (2) of regulation 24 of Securities and Exchange Board of India (Venture Capital Regulations), 1996 prior to the date of application for registration under this Chapter, and the venture capital fund has been granted registration as a migrated venture capital fund under these regulations, then such schemes of the migrated venture capital fund may be granted additional liquidation period, subject to conditions and in the manner as may be specified by the Board:

Provided that the registration as migrated venture capital fund granted under regulation 19X of these regulations and the additional liquidation period granted under sub-regulation (4) of this regulation shall be without prejudice to the issuance of any direction or measures in accordance with the provision of the Act and regulations framed thereunder.

Listing.

19AG. No migrated venture capital fund shall be entitled to get its units listed on any recognised stock exchange till the expiry of three years from the date of the issuance of units by the migrated venture capital fund.

Maintenance of Records.

19AH. The migrated venture capital fund shall maintain its records under sub-regulation (1) of regulation 27 of these regulations for a period of eight years after the winding up of the fund.”

IV. In regulation 39, in sub-regulation (2), in clause (b), the following new provisos shall be inserted after the existing proviso, namely, –

“Provided further that the venture capital funds that seeks registration as a migrated venture capital fund in terms of Chapter III-D shall be governed by these regulations from the date of grant of certificate of registration:

Provided further that the Board may specify enhanced regulatory reporting and other measures for the venture capital funds that do not seek registration as a migrated venture capital fund in terms of Chapter III-D.”

V. In the Second Schedule,

i) the words and symbols “sub-regulations (2) and (5) of regulation 3” shall be substituted with the words and symbols “sub-regulation (5) of regulation 3”.

ii) in Part A, the words and symbols “Re-registration Fee: ₹ 1,00,000” shall be omitted.

BABITHA RAYUDU, EXECUTIVE DIRECTOR

[ADVT.-III/4/Exty./310/2024-25]

Footnote:

1. The Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 were published in the Gazette of India on May 21, 2012 vide No. SEBI/LAD-NRO/GN/2012-13/04/11262.

2. The Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 were subsequently amended on, –

(a) 16^th September, 2013 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2013 vide No. LAD-NRO/GN/2013-14/24/6573.

(b) 23^rd May, 2014 by the Securities and Exchange Board of India (Payment of Fees) (Amendment) Regulations, 2014 vide No. LAD-NRO/GN/2014-15/03/1089.

(c) 26^th September, 2014 by the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 vide No. LAD-NRO/GN/2014-15/11/1576.

(d) 14^th August, 2015 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2015 vide No. SEBI/LAD-NRO/GN/2015-16/011.

(e) 4^th January, 2017 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2016 vide No. SEBI/LAD/NRO/GN/2016-17/026.

(f) 6^th March, 2017 by the Securities and Exchange Board of India (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2017 vide No. SEBI/LAD/NRO/GN/2016-17/037.

(g) 1^st June, 2018 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2018 vide No. SEBI/LAD/NRO/GN/2018/19.

(h) 10^th May, 2019 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2019 vide No. SEBI/LAD/NRO/GN/2019/16.

(i) 17^th April, 2020 by the Securities and Exchange Board of India (Regulatory Sandbox) (Amendment) Regulations, 2020 vide No. SEBI/LAD-NRO/GN/2020/10.

(j) 19^th October, 2020 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2020 vide No. SEBI/LAD/NRO/GN/2020/37.

(k) 8^th January, 2021 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2021 vide No. SEBI/LAD/NRO/GN/2021/01.