Mumbai: The government is considering registration of foreign venture capital funds under the automatic approval route in order to relax investment norms for long-term funds, reports quoting sources close to the development said.
Unlike in the case of foreign institutional investors (FIIs), overseas venture capital funds have to get their proposals cleared by capital market regulator SEBI before seeking separate clearance from the Reserve Bank of India.
The cumbersome procedure has led to the piling up of over 80 applications from foreign venture capital firms with the RBI under the Foreign Exchange Management Act (Fema).
The inordinate delays have only helped to negate a significant investment opportunity for venture capital amidst a meltdown in the the credit market that has left entrepreneurs with almost no other avenues to sustain their businesses.
The value of VC and private equity deals in India has fallen 28 per cent year-on-year in the September quarter, according to data from Venture Intelligence.
PE and VC firms have struck 116 deals worth $3 billion (Rs14,790 crore) between July and September, as against 115 deals worth $4.2 billion in the same period of 2007, with deals exceeding $100 million dropping by a third.
Regulators are looking at creating a level-playing field for both domestic and foreign venture capital funds by ensuring that the same tax rule is applicable to both.
While a change in the policy environment could help alter the flows of capital in the current environment marked by large outflows, the RBI has been wary of some of the proposed investments as part of it was directed towards realty.
Venture capital funds have been granted pass-through status only in respect of investments in nine sectors in the last budget.
With the drying up of the initial offer route for raising capital, venture capital funds and private equity have become an important source of capital, especially for start-ups and early stage companies.
Meanwhile, the number of exits by venture funds slumped slightly in the first half of 2008 while exits by private equity firms reached 65 in 2007.
Investments by venture capital funds and private equity reached $6.3 billion in the first six months of 2008, versus $14 billion in all of 2007, according to industry estimates.