Which License is Required to Start a Venture Capital Fund

A venture capital fund is an investment fund that pools money from various investors, like high-net-worth individuals (HNIs) or institutions, to invest in startups and companies at the nascent stage, typically in exchange for equity (i.e., ownership). 

In India, a venture capital fund needs to be registered with the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations 2012, and secure the AIF license. 

In this blog post, we shall discuss the key licenses and registration requirements for starting a venture capital fund in India. 

Why Start a Venture Capital Fund?

A VC fund is a type of financing for startups and early-stage companies that showcase potential for future success. In return, the fund gets equity in the company. This arrangement allows the fund to benefit from the company's growth and success. Therefore, starting a venture capitalist fund can be a wonderful opportunity for investors.

List of Top 10 Venture Capital Firms in India

The top 10 venture capital firms in India are:

1. India Quotient

2. YourNest VC

3. 3one4 Capital

4. Stellaris Venture Partners

5. Sequoia Capital India

6. Beenext

7. Kalaari Capital

8. Lightbox Ventures

9. Accel India

10.  Matrix Partners India

Eligibility to Start a Venture Capital Fund

A venture-capital fund is categorized as a Category I Alternative Investment Fund (AIF) in India. To start a VC fund in India, it is necessary to fulfill the eligibility requirements set forth by SEBI for AIFs:

• The constitution document (like memorandum of association or LLP agreement) must permit AIF investment activities as a venture-capital fund.

• This document must prohibit inviting applications from the general public for subscription to its securities.

• The constitution document must be registered with relevant regulatory authority. For instance, a company’s memorandum of association needs to be registered with the Registrar of Companies (ROC).

• The applicant, manager and sponsor must fulfill fit and proper criteria specified in schedule II of Securities and Exchange Board of India Intermediaries Regulations 2008.

• Additionally, the sponsor is required to detail the investment strategy, purpose and methodology in the placement memorandum provided to investors. Any significant changes to the strategy must receive consent from a minimum of 2/3 of the unit holders. 

• The key investment team should possess adequate experience, with at least one key member having a minimum of five years of experience in advising or managing capital pools, fund management, asset management, wealth management, or in the business of buying, selling and dealing in securities/other financial assets, along with relevant professional qualifications. 

• Furthermore, the manager or sponsor must have the necessary infrastructure and personnel in place. 

• At the time of registration, the applicant must clearly outline the investment objective, targeted investors, proposed corpus, investment style or strategy and the proposed tenure of the fund.

Entities Ineligible for Venture Capital Registration 

Under the AIF Regulations of SEBI, the following are excluded from the definition of an AIF and therefore ineligible to register as a venture-capital fund:

• Family trusts set up for benefiting the ‘relatives’.

• Holding companies as described under Section 46(2) of the Companies Act 2013.

• Employee welfare trusts or gratuity trusts for employees.

• Other pools of funds regulated by another Indian regulator (e.g. insurance, pensions, mutual funds).

• ESOP trust set up under SEBI Share Based Employee Benefits Regulations 2014 or Companies Act 2013.

• Other entities considered ineligible by SEBI.

Licenses and Registrations for Venture Capital Fund

To start a VC firm in India, the following licenses and registrations are required. Make sure to secure them in a timely manner. :

1. Business Registration

The VC funds in India can be formed as a Company, Limited Liability Partnership (LLP) or trust under the SEBI (Alternative Investment Funds) Regulations 2012. To register a VC fund as a company, you must complete the company registration process with the Registrar of Companies (ROC) as per the provisions of the Companies Act 2013. 

If you want to register the VCF as a Limited Liability Partnership, then you need to register it with ROC in accordance with the Limited Liability Partnership Act 2008. However, if you want to establish your VCF as a trust, you must register it with the relevant state authority as per the provisions of the Indian Trusts Act 1882. 

2. AIF Registration

Since a venture-capital fund is a type of alternative investment fund, it is essential to secure Alternate Investment Fund registration for it. This registration is granted by the Securities and Exchange Board of India (SEBI) in accordance with the SEBI (Alternative Investment Funds) Regulations 2012. Make sure you fulfill the eligibility requirements. If you are eligible, you can file an AIF application with SEBI. 

The AIF certificate remains valid for the lifetime of the AIF. This means this certificate doesn’t expire as long as the AIF remains in operation. The AIF registration is not subject to any renewal requirement unlike certain other financial registrations.

3. License under Shop and Establishment Act

To operate any establishment in India, it is essential for most businesses to secure a license under the Shop and Establishment Act applicable to their respective state/union territory. 

This requirement also applies to venture capitalist firms, as they are regarded as commercial establishments. Generally, the license must be secured within 30 days of commencing business operations.

Conclusion

A venture capital fund is a type of alternative investment fund (AIF). Like all AIFs, VC funds are also regulated by and registered with the Securities and Exchange Board of India (SEBI). Without SEBI’s approval, it is not possible to establish any AIF in India, including VC funds. 

Connect with AIF consultants for assistance in registering a VC fund in India! We’ll help you prepare the necessary paperwork and file an application with SEBI on your behalf!

Frequently Asked Questions (FAQs)

Q1. Who regulates VC funds in India?

A. The Securities and Exchange Board of India (SEBI) regulates the VC funds in India.

Q2. Which regulations govern VC firms in India?

A. The SEBI (Alternative Investment Funds) Regulations 2012 govern VC firms in India.

Q3. Which SEBI registration or license is required for registering a VC company?

A. The AIF Registration/License, granted by SEBI, is required for registering a VC company in India.

Q4. Can an AIF be registered as an LLP?

A. Yes, an AIF can be registered as an LLP under the LLP Act 2008. 

Q5. Can a VCF be established as a trust?

A. Yes, a VCF can be established as a trust under Indian Trusts Act 1882. However, it cannot be established as a family trust for the purpose of benefiting the relatives.

Q6. Which AIF category do VCFs fall under?

A. The VC funds fall under AIF Category-I.

Q7. Which authority grants the venture capital license in India?

A. The Securities and Exchange Board of India (SEBI) grants the venture capital license in India.

Author: Manish Kumar

I’m Manish Kumar, a content management specialist. I simplify complex financial and regulatory topics into clear, insightful content. As a regular contributor to the Registrationwala portal, I provide updates on finance, Tax, government schemes, compliance, and other incorporation information. My goal is to keep you informed about key industry developments and their impact.