Venture Capital Undertaking

The AIF Regulations needed a word for "the sort of company a venture fund is allowed to back", and this is it. A venture capital undertaking means a domestic company which is not listed on a recognised stock exchange at the time of making investment.

Two words carry the whole definition. Domestic — an Indian company; a foreign target is not a VCU. At the time of making investment — the test is applied once, on the day the money goes in, and is not reapplied afterwards. A VCU that later lists does not retrospectively stop having been one.

Note what the definition does not require. It says nothing about the company's age, size, sector, revenue or stage. A VCU need not be a start-up, and a start-up need not be a VCU.

The VCU is the unit of measurement for the Category I investment conditions.

• Category I AIFs may invest in investee companies, venture capital undertakings, special purpose vehicles, LLPs, units of other Category I AIFs of the same sub-category or scheme, or units of Category II AIFs.
• A venture capital fund must invest at least 75% of its investable funds in unlisted equity shares or equity-linked instruments of a VCU, or in companies listed or proposed to be listed on an SME exchange or the SME segment of an exchange.
• An SME fund must invest at least 75% of investable funds in unlisted securities or partnership interest of VCUs or investee companies that are SMEs, or in companies listed or proposed to be listed on an SME exchange or segment, or in units of Category II AIFs that invest primarily in such VCUs or investee companies.
• An infrastructure fund's 75% floor is likewise expressed in terms of VCUs, investee companies and SPVs engaged in infrastructure.

The workbook also records a separate route for offshore exposure: AIFs desirous of making investments in offshore venture capital undertakings do so subject to the conditions SEBI specifies — which is the only place the word reaches beyond a domestic company, and it is a distinct permission rather than a widening of the definition.

Related definitions sit alongside it. A start-up is a private limited company or LLP meeting the DPIIT criteria notified on 19 February 2019 or such other Central Government policy issued from time to time. A venture capital fund invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual-property-based activities or a new business model, and includes a migrated venture capital fund.

Nilgiri Venture Fund I has investable funds of Rs 400 crore and must keep Rs 300 crore (75%) in qualifying holdings.

Qualifying holdings total Rs 265 crore, or 66.25% — the fund is Rs 35 crore short of its 75% floor. The Singapore holding fails on "domestic" even though it is unlisted, and the main-board holding fails on "unlisted" even though it is Indian.

Three years later the SaaS company IPOs on the main board and the fund's stake is worth Rs 390 crore. It does not fall out of the 75% computation, because the VCU test was satisfied at the time of making the investment and is not reapplied on listing.

Chapter 1 introduces the venture capital idea, Chapter 2 gives the definition at 2.3.1 alongside the definition of a start-up, and Chapter 4 builds the Category I investment conditions on top of it at 4.1.10. Expect a direct definition question — "domestic company not listed at the time of making investment" — and computation questions that hand you a portfolio and ask whether the 75% floor for a VCF, SME fund or infrastructure fund has been met.

• A VCU is not a start-up. The start-up definition runs through the DPIIT criteria; the VCU definition runs through "domestic and unlisted at the time of investment". A large, profitable, twenty-year-old unlisted Indian company is a VCU.
• "At the time of making investment" freezes the test. Later listing does not disqualify the holding.
• Domestic means Indian. Offshore venture capital undertakings are reached by a separate permission, not by this definition.
• The 75% is of investable funds, not of corpus or of commitments.
• For a VCF the 75% must be in unlisted equity or equity-linked instruments — a pure debt holding in a VCU does not count towards a VCF's floor, even though the borrower is a VCU.
• Companies listed or proposed to be listed on an SME exchange or SME segment count towards the VCF and SME fund floors, which is the one place listed securities are inside the 75%.