The Securities and Exchange Board of India has allowed Indian venture capital companies to participate in foreign enterprises for the first time in several years, opening doors to the possibility of more capital available to African startups. According to a set of rules issued by the board responsible for regulating securities and investments, venture capital firms with offices in India are now permitted to invest in the securities of companies with incorporations outside of India, subject to any conditions or rules that may be established or issued from time to time by the Reserve Bank of India and board.
As a result, the board’s previous requirement that the overseas investee company have a connection to India has been removed, enabling India-based VC firms to invest in any startup located anywhere in the world. However, the VC firm must only invest in an overseas investee company that is incorporated in a nation whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Framework.
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The new rules which apply to venture capital funds or other alternative investment funds shall come into force with immediate effect.
What Are The New Rules?
The following rules now apply:
- The venture capital company or other alternative investment fund must submit a request for allocation of the foreign investment limit in the prescribed form to the board in order to be eligible.
- The venture capital firm must not invest in an overseas investee company that is incorporated in a nation included in the Financial Action Task Force (FATF) public statement, such as nations with weak anti-money laundering or counterterrorism financing regulations.
- If the VC firm previously liquidated investment in an overseas investee business, the sale proceeds received from such liquidation, to the amount of investment in the said overseas investee company, must be accessible for reinvestment by all VC firms (including the selling VC firm).
- The VC firm shall transfer or sell its stake in an overseas investee company only to companies that are allowed to make overseas investments under the Indian Foreign Exchange Management Act, 1999.
- Within three working days following the sale, the VC company must provide the board with the purchase information on the overseas investments in the format required in order to update the total amount of money that can be invested overseas by the VC firm.
- All foreign investments sold or transferred by venture capital companies to date must also be reported to the board in the required manner within 30 days of the date of the release of the rules, by email to the board.
- The VC firm’s Trustee, Board, or Designated Partners must make an undertaking to the board in the prescribed form on the intended foreign investment..
- While making overseas investments, the VC firm shall not invest in joint ventures or wholly owned subsidiaries.
The Effects of the New Investment Regulations on African Startups
By implication, the new guidelines will probably result in more money flowing into African startups from India. It should be noted that the majority of African startups are incorporated in other jurisdictions (such as the US, the UK, most countries in the EU, as well as in South East Asia) that are considered compliant with the rules rolled out by Securities and Exchange Board of India, even though most locally registered African startups may not qualify for the receipt of the investments due to the rules relating to Anti-Money Laundering or Combating the Financing of Terrorism.
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Until date, venture capital firms of Indian origin have actively invested through their international subsidiaries. Boleh Venture, which recently invested in Nigeria’s Norebase, has a Singapore affiliate, for example. Aavishkaar Capital, located in Mumbai, has just invested in Kenya’s Sky.garden. Other venture capital firms of Indian origin that have invested in African startups include: MyAsia VC (ImaliPay); Polygon Studios (Jambo); Old Fashion Research (Nestcoin); Pareto Capital (JABU); 100x Ventures (VALR); Horizen Ventures (WhereIsMyTransport); and Villgro Kenya, which was founded by India’s Villgro (Ilara Health; Turaco; Zuri Health).
In summary, it may be time for African startups to begin pitching to Indian venture capital firms, referencing the new guidelines.
Download the complete version of the new rules here.
India venture capital African startups India venture capital African startups
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer, who has several years of experience working in Africa’s burgeoning tech startup industry. He has closed multi-million dollar deals bordering on venture capital, private equity, intellectual property (trademark, patent or design, etc.), mergers and acquisitions, in countries such as in the Delaware, New York, UK, Singapore, British Virgin Islands, South Africa, Nigeria etc. He’s also a corporate governance and cross-border data privacy and tax expert.
As an award-winning writer and researcher, he is passionate about telling the African startup story, and is one of the continent’s pioneers in this regard. You can book a session and speak with him using the link: https://insightsbyexperts.com/view_expert/charles-rapulu-udoh