The Advisory Committee on Venture Capital, established by the Securities and Exchange Board of India (SEBI) and chaired by Ashok Lahiri, Chief Economic Advisor, Ministry of Finance, Government of India, was formed to provide strategic recommendations for developing and regulating the venture capital industry. Members included A. J. Majumdar (Joint Secretary (TPL – I), Central Board of Direct Taxes); D. P. Sengupta (Joint Secretary (TPL), Central Board of Direct Taxes); Y. S. P. Thorat (Executive Director, Reserve Bank of India); Rajiv Memani (National Director - Corporate Finance, Ernst & Young); Saurabh Srivastava (Chairman, Indian Venture Capital Association); Malay Bhattacharyya (Dean (Academic Affairs), IIM Lucknow); Raja Kumar (CEO, UTI Venture Funds Management Co. Ltd.); Rakesh Rewari (CEO, SIDBI Venture Capital Ltd.); Renuka Ramnath (CEO, ICICI Venture Fund Management Company Ltd.); Muneesh Chawla (Managing Director, IL&FS Investment Managers); C. Jayaram (Executive Director, Kotak Mahindra Venture Capital); Vipin Malik (Chartered Accountant, V. Malik & Associates); and Suresh Gupta (General Manager, Investment Management Department, SEBI, Member Secretary).
The committee’s mandate included advising SEBI on issues related to foreign venture capital investors (FVCIs) and the growth of the Indian venture capital fund (VCF) industry, as well as recommending necessary changes to the legal and regulatory frameworks. This initiative was in response to a period of rapid growth in the venture capital industry, driven by increasing investments in high-potential sectors such as biotechnology, pharmaceuticals, telecommunications, and services. The committee emphasized that venture capital was essential for bridging the funding gap left by traditional financial institutions, which were often hesitant to finance high-risk, high-growth startups, especially those in high-tech sectors.
Historically, the venture capital industry in India was informal and fragmented, with individual investors and development financial institutions primarily filling the role of venture capitalists. In 1973, a committee on the development of small and medium enterprises highlighted the need for fostering venture capital as a source of funding for new entrepreneurs and technology. This led to the establishment of public sector VCFs, but the new industry did not gain momentum. In 1988, the Government of India introduced formal guidelines for venture capital funds; they were initially restrictive, allowing only banks and financial institutions to set up VCFs. In 1995, the government issued guidelines for foreign venture capital investment in India. SEBI later introduced the SEBI (Venture Capital Funds) Regulations in 1996, and by 2000 multiple guidelines had been consolidated into a single regulatory framework, following recommendations from the K. B. Chandrasekhar Committee of 2000.
The committee found that despite a global downturn, India was the third most active venture capital market in the Asia-Pacific region in 2001, with investments totaling $907.58 million across 101 companies. However, the number of companies receiving investments had declined by 62.6 percent from 2000, with a majority (65.4 percent) of these investments concentrated in the information technology and communications sectors. To address these issues, the committee recommended several key changes to the operational and regulatory frameworks governing the venture capital industry. These included removing the one-year lock-in requirement for shares after listing to enhance liquidity for VCFs and reducing the minimum investment requirement in unlisted companies from 75 to 66.67 percent of investible funds, allowing the remainder to be invested in listed securities. Additionally, the committee proposed permitting hybrid instruments, such as optionally convertible debentures, and allowing special purpose vehicles to invest up to 33.33 percent of their funds in venture capital undertakings.
Further recommendations addressed tax-related and foreign exchange issues, such as aligning the definition of “venture capital undertaking” under Section 10(23FB) of the Income Tax Act with SEBI’s definition, to ensure that VCFs retained their tax exemptions even when receiving foreign securities in lieu of domestic ones. The committee also suggested removing the 25 percent investment limit for FVCIs in single venture capital undertakings and recommended exempting wholly owned Indian subsidiaries of FVCIs from the minimum-capitalization requirement. SEBI accepted several key recommendations from the Lahiri committee, including removing the lock-in period for shares after listing, reducing the minimum investment in unlisted companies to 66.67 percent, and permitting investments in real estate and hybrid instruments. SEBI also allowed venture capital funds to invest in offshore ventures and clarified tax treatment during exits of the funds from their investments. These changes aimed to create a more flexible and supportive regulatory environment for venture capital in India.
