How to Structure a Venture Capital Fund by Himanshu Mandavia
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Transcript of How to Structure a Venture Capital Fund by Himanshu Mandavia
Structuring a Venture
Capital Fund - Tax and
Regulatory Aspects
July 2012
2© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Contents for discussion
Domestic Pooling – Aspects to be Considered
Typical Fund Structure
AIF Regulations – Key Aspects
2
Foreign Investment in Domestic Pooling Vehicle
Unified vs. Co-invest
3© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Domestic pooling – Aspects to be considered
Aspects to be considered
Category of investors
Number of investors
Target sectorsPeriod of investments
Taxation issues
Typical Fund Structure
5© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Typical Fund Structure
Management fee + carry
Target
AMC
Investors
Management agreement
Pooling
vehicle
6© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Alternative Domestic Pooling Structures
NBFC
PMS
LLP
Unregistered trust
AIF
VCF
7© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Typical Fund Structure - Key issues
• Need for flexibility in making investments
• Overseas presence for management activities
• Costs involved in set-up and time lines for set-up (including approvals etc.)
• Characterization of income on sale of investments
• Deductibility of carried interest / management fee against exit gains
• Taxation of AMC
o LLP structure
o Carry taxation
- Capital gains v. Business income
- Service tax issue
• Tax compliance
o Tax payments, credit distribution, etc
AIF Regulations – Key Aspects
9© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
AIF Regulations – Categories of AIF
CATEGORY I
• AIFs with positive spillover effects on the economy
• Incentives given by SEBI, GOI, or other regulators in India
CATEGORY II
• No incentives given by SEBI, GOI, or other regulators in India
CATEGORY III
• AIFs which trade for making short term returns
• Employs diverse or complex trading strategies
VCF,SME Funds,
Social Venture funds,Infrastructure funds
Private equity funds,Debt funds,
Other funds not classified under Category I or III
Hedge funds
SEBI released AIF Regulations on May 21, 2012 to regulate all funds established in India, raising funds from Indian or foreign investors
10© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
AIF Regulations – Key conditions applicable to all AIFs…
•Any fund established or incorporated in India (excludes offshore funds)
Registration
•Trust or a Company or a LLP or a body corporate
Form of AIF
•Family trusts,
•ESOP trusts,
•Employee welfare trusts,
•Gratuity trusts,
•Holding companies,
•SPVs not managed by fund managers and regulated by other regulators,
•Securitization / reconstruction companies registered with RBI,
•Funds regulated by SEBI /any other regulator in India
Exclusions from AIF Regulations
•INR 20 crores
Minimum corpus
•1,000 investors
Maximum investors
11© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
…AIF Regulations – Key conditions applicable to all AIFs
•INR 1 crore from investor (INR 25 lakhs from employees or directors)
Minimum contribution per
investor
•Continuing minimum Sponsor contribution - at least 2.5% of the corpus or INR 5 crore, whichever is lower
Sponsor contribution
•Possible for closed ended AIFs with minimum tradable lot of INR 1 crore, however funds are not to be raised through the stock exchange mechanism
Listing
•May invest in securities of companies incorporated outside India (subject to conditions of RBI / SEBI)
Foreign Investments
Foreign Investment in Domestic Pooling Vehicle
13© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Foreign Investment in Domestic Pooling Vehicle
Set up as a Company
• FIPB approval not required for investment in a company registered with SEBI as an VCC. Only Category I AIFs can be VCC.
• FIPB approval required for AIFs under categories II and III.
Set up as a Trust• Prior FIPB approval required for making foreign investment in Trust.
• On repatriation RBI approval would be required.
Set up as a LLP• Prior FIPB approval required for making foreign investment in LLP.
• FVCI not allowed to make any investment into LLP.
Unified Vs. Co-invest
© 2012 KPMG, an Indian Partnership and a member firm of the KOMG network of independent member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Unified vs. Co-investment structure
Offshore
India
Investee companies
DVCF/AIF
Unified
Investee companies
Investors
DVCF/AIF
Co-investment
FDI / FVCI
Offshore
India
Co-investment arrangement
Offshore AMC
Domestic AMC
Fund management agreement
Investment advisory agreement
Management agreement
Domestic investors
Investment Management AgreementDomestic
AMC
Domestic investors
Investors
FDI / FVCI
15
16© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Glossary of Terms
VCF Venture Capital Fund
DVCF Domestic Venture Capital Fund
SEBI Securities and Exchange Board of India
AIF Alternative Investment Funds
AIF Regulations SEBI (Alternative Investment Funds) Regulations, 2012
SEBI VCF Regulations SEBI (Venture Capital Funds) Regulations, 1996
FVCI Foreign Venture Capital Investor
GOI Government of India
SME Small and Medium Enterprise
LLP Limited Liability Partnership
SPV Special Purpose Vehicle
VCC Venture Capital Company
FIPB Foreign Investment Promotion Board
FDI Foreign Direct Investment
Thank You
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2012 KPMG, an Indian Partnership and a member firm of the KOMG network of independent member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Alternate Domestic Fund Structures
Structure Key Benefits Key Concerns
NBFC
• Regulated Entity• No restrictions on Advisory fee• Carried interest, if any, could be in the form of
fees
• Tax inefficient• RBI Prudential norms to be adhered to• RBI registration
PMS
• Can invest across listed and unlisted securities• Regulated by SEBI• Pass through treatment for tax purpose
• Investment to be held directly in the name of investors and not through pooled account
• Liquidity
- Listing of PMS scheme not possible
- PMS scheme to mandatorily provide for an exit option to investors
•Fees to be linked to drawdown and not commitment
• Applicability of AIF regulations in case of pooling of funds?
LLP
• Pass-through treatment for tax purposes- Tax is applicable at the LLP level and distributions
are not taxed ensuring one-level taxation• Limited liability of partners • No restrictions on management fee
• Low on investor comfort• Liquidity to investors - No mechanism for listing of
LLP• Characterization of income (Business Income v/s
Capital gains)• RBI approval• Applicability of AIF regulations
Unregister-ed Trust
• Pass-through treatment for tax purposes• No restrictions on Advisory fee• No restrictions on investment in group companies
• Registration under AIF regulations• Post AIF regulations should be on same footing as
DVCF
18
Annexure 1