General Manager

Division of Corporate Restructuring

Corporation Finance Department

Tel.No. 91 22 26449370

Fax No.:91 22 26449019 to 9022

Email: mdrao@sebi.gov.in

SEBI/CFD/DCR/01/2006

December 11, 2006

To All Registered Merchant Bankers, Venture Capital Funds and Foreign Venture Capital Investors.

Dear Sirs,

Sub. : Interpretive Circular under Regulation 5 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997

Regulation 3(1) (ia) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 reads as follows:

“3.(1) Nothing contained in regulations 10, 11 and 12 of these regulations shall apply to:

(ia) transfer of shares from venture capital funds or foreign venture capital investors registered with the Board to promoters of a venture capital undertaking or venture capital undertaking pursuant to an agreement between such venture capital fund or foreign venture capital investors with such promoters or venture capital undertaking; ***” (emphasis supplied).

2. The requirement of this clause can be broken down as under:

a) there should be a transfer of shares from a venture capital fund (VCF) or a foreign venture capital investor (FVCI, for short) to the venture capital undertaking (VCU, for short) or its promoter;

b) such transfer should be pursuant to an agreement between them.

3. In certain cases, interpretational issues have arisen as to the scope of the term ‘shares’ occurring in the above clause, that is whether the term refers to the shares of a venture capital undertaking in which the VCF/FVCI had initially invested (and which subsequently gets listed) or to the shares of any other listed company.

4. The purpose behind providing exemption under regulation 3(1)(ia) was to facilitate disinvestment by venture capital fund or foreign venture capital investors of shares held by them in a venture capital undertaking in favour of the promoter of such venture capital undertaking. However, the wordings in the definitions of ‘venture capital undertaking’ found in regulation 2(m) of the SEBI (Venture Capital Funds) Regulations, 1996 and regulation 2(n) of the SEBI (Foreign Venture Capital Investors) Regulations, 2000 excluded companies whose securities are listed in recognised stock exchanges in India and thereby caused confusion.

5. On examination of the issue and in light of the underlying purpose of regulation 3(1)(ia) of the Takeovers Regulations, it is clarified that the expression ‘venture capital undertaking’ referred to in regulation 3(1)(ia) is not restricted by the aforesaid definitions in the VCF and FVCI Regulations in so far as they require that the shares of VCU should not be listed. It is further clarified that the transfer of shares referred to in regulation 3(1)(ia) is a transfer of the shares of an unlisted venture capital undertaking held by a VCF or FVCI, which subsequently got listed, in favour of the promoter of the Venture Capital Undertaking pursuant to an agreement between them. Any transfer by a VCF or FVCI to a promoter of a venture capital undertaking of shares of some other listed company will not be entitled to exemption under regulation 3(1)(ia). This exemption is also not intended to cover transfer of shares of an unlisted venture capital undertaking by a VCF or FVCI to its promoters, as it is anyway exempted under regulation 3(1)(k).

6. This circular is issued under regulation 5 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 to remove difficulties in the interpretation of regulation 3(1)(ia) of the said regulations.

Yours faithfully,

S V Muralidhar Rao

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