The Hindu Business Line : RBI told to study if regulatory issues are blocking fund flows

The Ministry of Finance has asked the RBI and SEBI to examine whether regulatory issues are blocking flow of foreign venture capital investments into the country.

This follows representations made by industry associations that the new policy of restricting foreign venture capital investments (FVCI) in select sectors may hurt the growth of such investments.

“We have been receiving representations from industry associations, so we want to examine the issues in detail,” said a Ministry official.

“We also need to get some statistics on the actual volume of such investments,” he said.

The Ministry has referred the issue to the high-level coordination committee on financial markets (HLCC), represented by the RBI, SEBI and other financial market regulators. HLCC is understood to have discussed the matter at its recent meeting. Though the central bank has started clearing FVCI proposals, it has restricted their investments in ten select sectors where income-tax pass-through is allowed. These include bio-technology, nanotechnology, IT, pharmaceuticals and infrastructure.

Applications on hold

It appears that the RBI, which has been quite uncomfortable with the inflow of funds into some sectors through the venture capital route, wants to prevent foreign investors trying to avoid the FDI route and taking advantage of the flexibility of the venture capital regime.

FVCIs are entitled to certain benefits such as exemption from entry and exit pricing norms, exemption from lock-in restrictions and takeover regulations.

The RBI reportedly kept on hold many FVCI applications that were cleared by capital market regulator SEBI. It had long stopped clearing FVCI in sensitive areas, including real estate, apparently to avoid the kind of asset bubbles that had created havoc in many economies.

Such a cautious approach by regulators such as the central bank has been appreciated by economists and regulators even in other countries, in the context of India being considerably insulated from the global financial crisis, said an economist with a public sector bank.

Changed environment

However, venture capital investors say regulators must see the changed environment. Though venture capital investments have slowed following the global financial meltdown, funds with firm commitments are waiting for investments in India, said an official with the Indian Venture Capital Association. ‘Sectoral’ investment restrictions could limit flow of capital to the country at a time when it is badly in need of such capital, he said.

“There is little point in restricting the flow of capital to 10 areas at a time when the capital is badly required. Such restrictions are relevant only when the country has sufficient capital,” said Mr Saurabh Srivastava, Chairman, Indian Venture Capital Association.

In 2007, India had over $20 million venture capital investments. But, the first quarter of this year has seen inflows of hardly $1 billion, he said.