INDIA Law and Practice Contributed by: Lalit Kumar, JSA Advocates and Solicitors
Domestic Funds Venture capital funds making domestic invest - ments are set up as alternative investment funds (AIFs) in terms of the SEBI (Alternative Invest - ment Funds) Regulations, 2012. AIF is a pri - vately pooled investment vehicle which raises funds from Indian and foreign investors. There are three categories of AIF: • Category I AIF (which invest in start-ups or early-stage ventures); • Category II AIF (which invest in unlisted secu - rities of mid-stage or late-stage companies, either through debt or equity); and • Category III AIF (which employ complex trad - ing strategies and leverage for their invest - ments – eg, a hedge fund). Besides getting a certificate as AIF, the AIF must comply with conditions and restrictions prescribed by SEBI for making investments in investee companies. Structure of Venture Capital Funds The venture capital funds have fund managers who take decisions on the investment and man - age the portfolio of the fund. They are governed by the investment management agreements and are responsible for managing the investment, implementing strategies and reporting to the investors; and they must comply with the appli - cable regulations. The funds have an investment committee which takes decisions on invest - ments, exits and other aspects of investment and governance, and approves the investments. Standard Documentation Generally, the documents executed are as fol - lows: • private placement memorandum – similar to an offer document and used for raising funds;
• investment management agreement – execut - ed by the fund and the manager, governing the management of the fund; and • contribution agreement – entered into between the investors and the fund, covering aspects such as the contribution made by the investor and other terms of investment. 2.2 Fund Economics The economic interest for fund managers is rewarded in the form a management fee and a carry. Thus, it is in the form of “fixed fee” and “share in the returns/profits” of the fund. The carry (carried interest) is given on the units which are held by the managers. This is given as a per - formance-based compensation, if the return on the fund exceeds a certain agreed threshold. Investor Protection and Governance The fund, its key personnel, designated partners and director must abide by a code of conduct. Fund policies and procedures are reviewed from time to time. The policies must be framed to ensure that all decisions are in conformity to applicable regulations, placement memo - randum, agreements with investors and other applicable laws. The manager is responsible for decisions made in relation to the fund. The accounts and books are subject to annual audits. There are special provisions to avoid any conflict of interest and to ensure transparency of the information shared with the investor. 2.3 Fund Regulation The applicable regulation for a venture capital fund depends on the nature of the vehicle used for setting up the fund:
• trust – the Indian Trusts Act, 1882; • company – the Companies Act, 2013;
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