Mumbai: The government is set to revise regulations governing the venture capital industry but would take care not to upset the fund flow brought in by the venture capitalist.

''We have already held talks with the SEBI and catalogued the practices followed in other countries like Israel for regulation of venture capital funds,'' KP Krishnan, joint secretary in the ministry of finance said at the launch of Venture Capital Association of India (VCAI).

''Nothing in the law today mandates a venture capitalist firm to be regulated and registered. I think it's a regime we need to revisit,'' said Krishnan.

He added that a mechanism should be found for making it mandatory for VC firms to register though they should have the option to decide if they don't want to be regulated.

As per the Quarterly India Venture Capital Report published by Dow Jones 'VentureSource', Venture Capitalists have invested $928 million in 80 deals for entrepreneurial companies in India during 2007 - a 166 per cent increase over the $349 million invested in 36 deals in 2006.

The domestic players were unhappy with the present policies as the foreign venture capitalists had an edge over them as many of the policies was lopsided and favoured the foreign venture capitalists, he said.

This is precisely what the government aims to do by redefining the definition of VCs, PEs and hedge funds so that domestic PEs and VCs were not wiped out.

Currently, a foreign VC has advantage in the area of investing in any sector other than nine hi-tech sectors like biotechnology, software and nano technology.

Government gives tax sops (no capital gains tax on profit) to domestic funds only if they invest in these nine sectors but not others.

Tax exemption is applicable to the domestic VCs only if they invest in high-risk areas like biotechnology or nanotechnology, whereas a foreign VCs does not have to pay any taxes since most of them have their operating offices overseas or in tax haven countries.

This anomaly is likely to be addressed by the government under the new changes.

The government also wants to classify the risky area of funding no matter to which sector it belongs since most of them want to invest in sectors such as realty where the returns are high and fast but there was a lack in funding in sectors such as software and biotechnology. For this purpose the government wants to give tax sops to VCs who invest in these areas.

SEBI is in the process of compiling data about the investments in sectors such as real estate, ITeS and education as at present they do not have a definite clue about the exact investments of PEs and VCs particularly those that were coming from abroad.

The government is of the opinion that venture capitalist should not be allowed to make investments in listed companies and should be in the business of providing capital only to new ventures.