FVCI Route
The route for SEBI-registered off-shore funds to make venture capital investments in eligible unlisted Indian companies — in stipulated priority sectors, or start-ups in any sector — at freely agreed prices.
In plain language
An offshore venture fund that wants to back Indian start-ups has a choice of doors. It can invest under the general FDI policy. Or it can register with SEBI as a Foreign Venture Capital Investor and use the FVCI route.
The workbook describes the route as "available to off-shore funds that seek to make venture capital investments in eligible unlisted investee companies in India". FVCI funds "need to be registered with SEBI prior to commencing investment activity under the SEBI (Foreign Venture Capital Investors) Regulations 2000", and the FEMA modalities are in RBI's Master Directions and NDI Rules.
The trade-off is scope for flexibility. An FVCI can invest only in stipulated priority sectors — though start-ups can be from any sector — but the pricing of its acquisitions and transfers is not regulated.
How it works
What an FVCI can do (section 4.2.6):
- Invest in eligible unlisted investee companies in stipulated priority sectors such as bio-technology, infrastructure etc.
- Invest in start-ups from any sector — the exception to the sector limitation.
- Acquire units of a Category I AIF or any scheme of one.
- Invest in securities on a recognised stock exchange, subject to the SEBI (FVCI) Regulations, 2000.
- Receive the proceeds of liquidation of such schemes or funds.
Pricing. "The pricing for such transactions relating to acquisition/ transfer securities/ instruments is not regulated and they can be at a price that is mutually acceptable to the buyer and the seller/ issuer."
FVCI versus FDI for an offshore fund (section 5.5.2). A pure offshore fund — incorporated and managed outside India, with only an investment adviser locally to source deals and liaise with investee companies — "requires registration and compliance with the SEBI (FVCI) Regulations". "Alternatively, its investments can also be made directly subject to FDI policy requirements without being registered with SEBI." The FDI route "is subject to policy restrictions such as sectoral caps and pricing regulations". Under both, the offshore fund can be optimised using an intermediary jurisdiction with a good DTAA and/or a BIPA with India — Singapore or Mauritius, for example.
In a parallel structure (5.5.3), the offshore fund invests directly into investee companies "under the FVCI or the FDI route", alongside a separate SEBI-registered domestic AIF.
| FVCI route | FDI route | |
|---|---|---|
| SEBI registration | Required (FVCI Regulations, 2000) | Not required |
| Sectors | Stipulated priority sectors; start-ups from any sector | Per FDI policy — prohibited sectors, sectoral caps |
| Pricing | Not regulated; mutually acceptable price | Pricing regulations apply |
| Units of Category I AIF | Permitted | — |
Series XIX-C's workbook (page 140) lists four benefits of registering by this route that this paper does not spell out, and they are what make the route worth taking: flexibility in entry and exit pricing; exemption from the lock-in that would otherwise apply when the investee company lists, so an exit is possible immediately after the IPO; exemption from the Takeover Code; and QIB status. Named here as XIX-C's text, since it is the sibling paper that sets them out.
A worked example
Illustrative figures. Mauritius-based Indus Bio Ventures, an offshore fund with USD 120 million, plans three Indian investments and has to decide between registering as an FVCI and investing under the FDI policy.
| Proposed investment | Under FVCI route | Point to note |
|---|---|---|
| Rs 60 crore in an unlisted Hyderabad biotech company | Permitted — bio-technology is a stipulated priority sector | Price agreed freely with the company |
| Rs 25 crore in an unlisted Pune food-delivery start-up | Permitted — start-ups can be from any sector | Not a priority sector, but a start-up |
| Rs 40 crore in an unlisted, established Chennai textile company (not a start-up) | Not permitted — not a stipulated priority sector | Would need the FDI route instead |
| Rs 50 crore in units of a SEBI-registered Category I AIF | Permitted | FVCIs can acquire Category I AIF units |
On the biotech deal, the founders and Indus agree a price of Rs 1,150 per share. Under the FVCI route that price is not regulated. Had Indus invested in the same company under the FDI route without SEBI registration, it would have had to comply with the pricing regulations for issue of securities to non-residents, and with any sectoral cap.
Indus registers as an FVCI for the first, second and fourth investments and uses the FDI route for the textile company.
Why NISM asks about it
Chapter 4 (Regulatory Framework — Indian Context) sets out the FVCI route at 4.2.6 alongside FDI and FPI; Chapter 5 (Alternative Investment Fund Structuring) shows how a pure offshore fund or the offshore limb of a parallel structure uses either FVCI registration or the FDI route. Expect questions on the sector restriction and its start-up exception, on whether FVCIs can hold Category I AIF units, on pricing, and on FVCI versus FDI for an offshore fund.
Common exam traps
- FVCIs must register with SEBI first, under the FVCI Regulations of 2000 (FPIs register under the 2019 FPI Regulations).
- Priority sectors only — except start-ups, which can be from any sector.
- Pricing is not regulated under the FVCI route: a mutually acceptable price. Under the FDI route, pricing regulations apply.
- FVCIs can acquire units of a Category I AIF — the workbook does not extend this to Category II.
- An offshore fund does not have to register as an FVCI; it can invest directly under the FDI policy without SEBI registration, subject to sectoral caps and pricing regulations.
- The target is eligible unlisted companies, though an FVCI may also invest in securities on a recognised stock exchange subject to its regulations.
Where this is taught
- Series XIX-A · Chapter 4: Regulatory Framework - Indian Contextintroduced here
- Series XIX-D · Chapter 14: Regulatory Frameworkintroduced here
Related terms
- Double Taxation Avoidance AgreementA treaty between two or more countries that prevents the same income being fully taxed twice, either by allocating the taxing right or by the residence country giving credit for tax paid at source.
- Category I AIFThe AIF category for funds the government or a regulator treats as socially or economically desirable — venture capital, angel, SME, social impact, infrastructure, special situation and CDMDF funds.
- FDI RouteThe route for strategic foreign investment into India: at least 10% of an investee company's post-investment fully diluted paid-up capital, under the DPIIT's FDI policy and RBI's NDI Rules.
- FPI RouteThe route for non-resident portfolio investment: not more than 10% of a listed Indian company's post-investment fully diluted paid-up capital, by investors registered with SEBI under the FPI Regulations, 2019.
- Start-upA young business built on something new — a product, service, technology or business model — with high growth potential and a high failure rate; the DPIIT test is under 10 years old and turnover never above Rs 100 crore.
- Venture Capital UndertakingA domestic company that is not listed on a recognised stock exchange at the time the investment is made — the defined target that a venture capital fund must put at least 75% of its investable funds into.
- Person resident in IndiaFEMA's definition of residence under section 2(v) — broadly a person normally residing in India for more than 182 days in the preceding financial year, plus Indian-registered bodies and certain offices.
- Multilateral InstrumentAn OECD-framework multilateral treaty that lets countries swiftly modify their bilateral tax treaties to curb treaty shopping and tax avoidance; it supplements, supersedes or modifies how a DTAA applies.
- Foreign Liabilities and Assets (FLA) ReturnThe annual RBI return a Category I or II AIF must file by 15 July each year if it has received or made foreign investment, filed through the FLAIR portal.
- Pure Domestic AIFThe simplest AIF structuring template: one pool set up and registered in India under the AIF Regulations, with every investor, the manager and the sponsor all resident in India for FEMA and tax purposes.