The Securities and Exchange Board of India ("SEBI") has instituted significant modifications to the SEBI (Foreign Venture Capital Investors) Regulations, 2000, through the SEBI (Foreign Venture Capital Investors) (Amendment) Regulations, 2024 ("Amendment"). These amendments, accompanied by detailed Operational Guidelines for FVCIs ("Operational Guidelines"), mark a fundamental shift in the regulatory landscape, with implementation scheduled for January 1, 2025. According to the circular issued on September 26, 2024, these changes are intended to facilitate smooth transition and promote the development of, and regulate, the securities market while protecting investors' interests.
Existing FVCIs are required to engage a Designated Depository Participant (DDP) by March 31, 2025, to facilitate the continued registration process and meet enhanced due diligence requirements. FVCIs failing to engage a DDP will be mandated to liquidate their investments according to a set timeline: listed securities by March 31, 2026, and other investments by March 31, 2027. The proceeds from the sale must comply with KYC and AML/CFT requirements.
For existing FVCIs registered on or before December 31, 2019:
For FVCIs registered post-December 31, 2019:
If the FVCI fails to pay the renewal fee by the due date, SEBI mandates that the FVCI liquidate its existing investments within the specified timeline: listed securities within one year and other investments within two years from the registration block's end date
As far as DDP Assessment Parameters are concerned, the Operational Guidelines prescribe a detailed assessment for determining the eligibility of FVCIs. DDPs are required to verify the applicant's country of origin, ensuring that they are from a jurisdiction compliant with SEBI’s criteria, including being a member of IOSCO or FATF. Additionally, DDPs must ensure the applicant is 'fit and proper' as per SEBI's eligibility standards
The DDP must monitor FVCI compliance regularly, including tracking material changes in ownership or structure, and report any sanctions or regulatory actions taken against the FVCI
Primary Eligibility Requirements include:
SEBI emphasizes the need for FVCIs to maintain fit and proper status, adhere to comprehensive KYC processes, and implement regular monitoring of compliance with AML/CFT guidelines. FVCIs must notify SEBI and the DDP about any material changes in structure or control within the prescribed timelines. They must also ensure proper documentation of beneficial owners, as outlined in the Prevention of Money-laundering Rules, 2005
DDPs are tasked with processing FVCI applications, performing due diligence, and collecting fees. DDPs are also responsible for reporting to SEBI monthly, covering applications received and disposed of, compliance status, and any material changes that may affect the FVCI's registration status. The DDP must notify SEBI of any instances where an FVCI's jurisdiction becomes non-compliant with FATF or IOSCO standards and halt any new investments from such FVCIs until they regain compliance
Significant Regulatory Modifications include Elimination of the minimum commitment requirement (previously USD 1 million), the amendments specifically include eligibility for IFSC-based entities, marking a critical inclusion in the regulations, and enhanced KYC integration with the KRA (KYC Registration Agency) portal. SEBI has streamlined custodian requirements, mandating a single custodian even if an FVCI holds accounts in multiple depositories (NSDL and CDSL)
SEBI expects these amendments to improve operational efficiency by streamlining the registration process, enhancing due diligence, and enabling better monitoring of FVCIs. This also aligns Indian regulations with international best practices. The enhanced eligibility criteria and due diligence processes are likely to foster greater investor confidence, facilitating increased participation in the IFSC.
The latest FVCI Regulations represent a significant evolution in India's venture capital regulatory framework. The delegation of key regulatory functions to DDPs, coupled with enhanced compliance requirements and clearer operational guidelines, indicates SEBI's commitment to creating a more robust and efficient regulatory environment. The success of this regulatory transformation will depend on effective coordination between FVCIs, DDPs, and SEBI, with particular emphasis on meeting the prescribed timelines and compliance requirements. With the explicit inclusion of IFSC-based entities and a streamlined regulatory process, SEBI aims to foster greater participation in India's venture capital ecosystem while maintaining rigorous oversight mechanisms