SEBI Levels Playing Field for FVCIs with New Governance Norms

The Securities and Exchange Board of India (SEBI) has issued new norms that bring foreign venture capital investors (FVCIs) under the same regulatory framework as foreign portfolio investors (FPIs). This move marks a significant overhaul of the registration and governance framework for FVCIs, aiming to establish greater parity between the two investor categories.

Under the updated norms, effective from January 1, 2025, FVCIs will be required to delegate their registration and governance processes to designated depository participants (DDPs), aligning with the current requirements for FPIs. The amendments also mandate FVCIs to disclose details of beneficial ownership under the Prevention of Money Laundering Act, enhancing transparency and compliance.

Key changes include revisions to registration and eligibility criteria, application requirements, the rationalization of registration costs, and the introduction of a renewal fee. Previously, SEBI managed the registration and due diligence processes directly, but these responsibilities will now be handed over to DDPs. This change reflects SEBI’s broader strategy to reduce its direct involvement in the day-to-day operations of intermediaries, allowing the regulator to concentrate more on policy-making and regulatory oversight.

Gazal Rawal, Partner at Cyril Amarchand Mangaldas, noted that while the changes may increase compliance burdens for DDPs amid ongoing regulatory adjustments, they will ultimately enhance governance and transparency. She added that the application process for FVCIs is expected to be streamlined in the future, similar to FPIs, with registration, PAN allotment, and KYC for bank and dematerialized accounts to be managed through a common form.

Legal experts see these reforms as an effort to replicate SEBI’s success in delegating responsibilities to DDPs for FPIs. “New concepts like notifying the DDP of material changes, renewal of registration, and the imposition of late fees for renewal have been introduced for FVCIs. This move aligns SEBI’s approach to reduce its direct operational involvement with intermediaries,” said Ritul Sarraf of Nishith Desai Associates.

Interestingly, restrictions under Press Note 3 on foreign direct investment from land-bordering countries and additional disclosure requirements for FPIs do not appear to apply to FVCIs, signaling nuanced regulatory considerations.

The updated norms come after a year-long consultative process, providing stakeholders ample time to adapt. In 2023-24, 28 new FVCIs were registered, bringing the total to 279 as of March 2024, with investments increasing by 12% year-on-year to Rs 53,922 crore, predominantly in the information technology sector.

SEBI’s revamped framework is expected to streamline processes, enhance transparency, and bring FVCIs and FPIs onto an equal regulatory footing, reinforcing India’s commitment to a robust and transparent investment ecosystem.

Source: Business Standard