Secondary Market Purchases by Foreign Venture Capital Investors

The Reserve Bank of India (RBI) has issued a circular that expands the scope of investments that foreign venture capital investors (FVCIs) can make in Indian companies. Hitherto, FVCI investments were permitted either through initial public offerings or through private placements. Under the new regime, FVCIs may acquire shares in the secondary markets from existing shareholders. The operative portion of the RBI circular reads as follows:
It has now been decided, to allow FVCIs to invest in the eligible securities (equity, equity linked instruments, debt, debt instruments, debentures of an [Indian Venture Capital Undertaking] or [Venture Capital Fund (VCF)], units of schemes / funds set up by  a VCF) by way of private arrangement / purchase from a third party also, subject to terms and conditions as stipulated in Schedule 6 of Notification No. FEMA 20 / 2000 -RB dated May 3, 2000 as amended from time to time. It is also being clarified that SEBI registered FVCIs would also be allowed to invest in securities on a recognized stock exchange subject to the provisions of the SEBI (FVCI) Regulations, 2000, as amended from time to time, as well as the terms and conditions stipulated therein.

This appears to be aimed at deepening the markets by providing greater avenues for investments in the growth sectors, a theme that is also highlighted in some of the proposals in the Budget announced last week (such as expansion of external commercial borrowings in the infrastructure sector, allowing qualified foreign institutional investors to invest in the bond markets, etc.).

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • While the first part is clear that now FVCIs can purchase shares of VCUs from it's promoters/ investors. The second part of the amendment is ambigious, as it permitts FVCIs to purchase on stock exchanges. Does this mean that now FVCIs can invest like FIIs on the floor of the stock exchanges?

  • Yes, they can trade on exchange like FIIs. Purchase from promoters/investors will happen on exchange only.

    "Private placement" would mean preferential allotment.

  • As a category then therefore what remains to be the distinction between an FVCI and an FII?

    Also the operative part of the circular also states that this will be subject to SEBI FVCI Regulations, therefore while RBI may permit investment in securities on the stock exchanges SEBI Regulations do not allow such investments. Unless the SEBI FVCI Regulations are amended, the clarification by the RBI may have no meaning.

  • The questions posed in the comments indicate that further clarity will be required on the scope of these new types of FVCI investments and the mechanics. I guess we will have to await the amendments to the FEMA Regulations, and, as suggested above, perhaps even the SEBI FVCI Regulations.

    As for the differences between FVCI and FII investments, they will still remain. Each of them is subject to different types of restrictions, including investment caps, etc. However, given that FVCIs are entitled to certain exemptions such as from the pricing norms, IPO lock-in, certain aspects of the Takeover Code, etc., that might make FVCI the more favoured route. In that sense, this new regime will blur the distinction between FIIs and FVCIs.

    Added to these is the availability of the QFI route. Although the ultimate goal of the regulators seems to be to collapse all of these into a composite route, and this has been envisaged in discussion papers, etc., I am not certain that concrete steps are being taken towards that end.

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  • One question – In the event FVCI purchases the shares from a non-resident who had earlier made the investment under FDI route (hence subject to pricing and other restrictions), then post acquisition whether the FVCI be able to avail of the benefits specific to the FVCI regime?? More importantly in light of the fact that the FVCI would be subject to the restrictions in the event it had made the investment under the FDI route in the first place.

  • On the previous comment, offhand (subject to further research), it appears that the benefits of FVCI will flow with the nature of the investor rather than along with the shares. In other words, what is crucial is whether the FVCI has purchased and is holding the shares under that scheme. It may not matter that the shares were acquired from a non-resident who invested in the FDI scheme. In case any readers have further insights on this issue, please do feel free to comment.

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