The Securities and Exchange Board of India (“SEBI”) has issued an informal guidance on January 28, 2019 to JM Financial Limited (“JMFL”), under the SEBI (Informal Guidance) Scheme, 2003 in connection with SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations”). Please note that SEBI (Alternative Investment Fund) Regulations, 2012 (“AIF Regulations”) has repealed VCF Regulations. However, AIF Regulations provide that all venture capital funds or schemes launched by such venture capital funds prior to date of notification of the AIF Regulations shall continue to be governed by the provisions of VCF Regulations till the fund or scheme is wound up.

Facts:

JMFL provides investment management services to JM Financial India Fund (“Fund”) which is registered under the SEBI (Venture Capital Fund) Regulations, 1996. The Fund has made investments into venture capital undertakings. During the course of operations, the Fund may come across situations where there are unutilised funds lying in bank accounts for, inter alia, the following reasons:

1. Capital contribution received from investors, pending investment of such funds (uninvested portion of the investible funds).
2. Time gap between (i) receipt of proceeds on sale/transfer of investment or (ii) the returns earned from the investments (such as dividend, any other type of investment etc.) and distribution of said (i) and (ii) to the investors. In certain cases where the amounts are small, the same are accumulated at the Fund level and were distributed to the investor at a later stage. Till the time the funds are not distributed to the investors, the same remain as idle funds. 

The Fund has invested and/ or proposes to invest such unutilised funds into liquid mutual funds and similar liquid investments as they typically offer better returns than money lying in current account thereby providing a better overall return for the investors. 

Issue: 

JMFL, being investment manager of the Fund sought informal guidance on whether a venture capital fund under the VCF Regulation is in compliance with the provisions of VCF Regulations, when it invests its unutilised funds in the units of liquid mutual funds or bank deposits or other liquid assets of higher quality such as treasury bills, CBLOs, commercial papers, certificates of deposits, etc.

SEBI’s guidance:

SEBI stated that SEBI registered venture capital funds may invest unutilized funds of investable fund in the units of liquid mutual funds or bank deposits or other liquid assets of higher quality such as treasury bills, CBLOs, commercial papers, certificate of deposits, etc., during the tenure of the fund specified in the private placement memorandum.

SEBI stated that venture capital funds are required to disclose the information about aforesaid proposed transactions periodically to the investors. Further, the requirement specified in regulation 12, specifically regulation 12(b) and regulation 12(d) shall remain applicable to all funds including investible funds and unutilised funds.