Budget 2012: Rules eased for Venture Capitals to invest in more sectors

Markets will look to consolidate in the week ahead after most event risks like monetary policy and budget now over.

Shinzo Nakanishi, Managing Director, Maruti Suzuki India
Shinzo Nakanishi, Managing Director, Maruti Suzuki India

The government today proposed removing the sectoral restriction on venture capital funds, a move that will allow more startups beyond the current nine sectors to get access to growth-stage capital.

Presenting the Budget 2012-13 in the Lok Sabha, Finance Minister Pranab Mukherjee said "the restriction on Venture Capital Funds to invest only in nine specified sectors is proposed to be removed."

As per section 10(23FB) of the Income Tax Act, 1961, SEBI registered venture capital funds are eligible to invest in firms engaged in only nine business activities.

The nine sectors include nanotechnology, information technology relating to hardware and software development, seed research and development, bio-technology and research and development of new chemical entities in the pharmaceutical sector.

Production of bio-fuels, building and operating composite hotel-cum-convention centre with seating capacity of more than 3000, development, operating and maintenance of any infrastructure facility and dairy or poultry industry are the other ones.

Walker Chandiok &Co Associate Director (Tax and Regulatory Services) Vaibhav Gupta said "consequent amendment has been proposed in the Income Tax Act to allow the venture capital companies or funds to invest in all sectors except for the sectors which are part of the negative list of the SEBI Regulations 1996."

The negative list sectors are non-banking financial services other than NBFC's registered with RBI and categorized as equipment leasing or hire purchase companies, gold financing (excluding companies which are engaged in gold financing for jewellery) and activities not permitted under industrial policy etc.

"This amendment would bring VC investment at par with SEBI guidelines thus allowing greater access to Indian companies looking for venture capital financing," Gupta added.

Experts feel that this move may help more companies to raise venture capital.

Ganesh Rengaswamy Partner, Lok Capital said "It is definitely a good thing for the entreprenual eco-system and VC funds as well because the past restrictions were quite limiting to the entrepreneurs across sectors. This is a good move."

However, this amendment may lead to immediate results.

"All the funds are going to evaluate the relevance of the new sectors because till now the new sectors were not even available for venture funds," said Rengaswamy.