RBI nod to foreign VCs, but sectors limited to 10
23 Dec, 2008 | The Mint

The Reserve Bank of India, or RBI, recently started approving appli cations from foreign venture capital investors (FVCI) that were kept on hold for a considerable period of time. While this led to some excitement among the applicants, it was short-lived.

In what has surprised the venture capital (VC) firms, the approval letters issued by RBI to FVCIs provide for a new clause that significantly curtails the investment horizons for such entities to a narrow band of 10 investible sectors. These include infrastructure, biotechnology, information technology, nanotechnology, research in new chemical entities in the pharmaceuticals sector, dairy and poultry industry, among others.

The sectors prescribed are similar to those provided under section 10 (23FB) of the Income Tax Act, 1961, for availing tax pass-through treatment for domestic VC funds.

The intention behind introducing the FVCI regime was to provide such investors a favourable investment environment in India, in comparison with foreign direct investment (FDI), as envisaged by the KB Chandrasekhar Committee Report of January 2000. The report emphasized the importance of sectoral flexibility for FVCIs and noted sectoral restrictions for investment by VC funds are not consistent with the start-up ventures that are built on innovation and technology and can emerge in any business.

Then, the sectoral restrictions prescribed are likely to create unnecessary obstacles and hamper the growth of VC activity. Further, it seems that the regulators do not wish to promote VC investment in several other sectors, including manufacturing, media, outsourcing, among others, many of which are still in a growth phase, have dearth of capital, and have high employment generation capabilities.

If FVCI investment in the real estate sector was indeed a concern to the regulators, we believe that the same is unfounded as RBI has been disallowing applicants from investing in real estate since 2006. To our understanding, it has not cleared any real-estate-focused FVCI applications.

The regulator may have intended to bring the investment opportunities open to FVCIs on the same footing as domestic VC funds, but effectually this is not the case. In fact, this has led to the creation of more disparity between offshore and local funds since domestic VC funds are allowed to invest in all sectors, except a small negative list of sectors.

Some of the offshore funds have been sector-specific and target a few industries. Had such funds known at the time of making the application that such restrictions will be prescribed, they may not have continued with the applications, assuming they do not focus on the sectors prescribed by the regulators. However, several other funds have been sector agnostic and typically spell out broad investment horizons as their investment strategy. The intent being to invest in sectors that provide growth opportunities and the VC is able to provide a value addition through management support, and to take the investee entity to the next level. It is highly unlikely that these funds alter their sectoral focus based on the regulator's move.

Specifying sectors without any definition ascribed to them further adds to the investors' woes.

While infrastructure is recognized as a crucial input for economic development, lack of clear definition leaves it omnibus and deters investors who are unclear about what it includes and, critically, excludes.

Globally, there is a fight for capital and given the present scenario in financial markets, it is imperative that VC investors be encouraged as they bring long-term capital to portfolio companies. The new restrictions may discourage foreign investment in India by sending negative signals in terms of consistency of the regulations and the regulators' willingness to attract foreign investment. feedback@livemint.com The authors work with Nishith Desai Associates, an Indian law firm with a specific focus on the VC and PE funds industry. The firm's founder, Nishith Desai, was a member of the KB Chandrasekhar Committee on Venture Capital.

Sacred Moments' answer to your prayers - customized kits

For Prakash Mundhra, the handful of business plan competitions that came his way as a management student were indeed a blessing.

Selling branded puja (worship) kits was not his first idea.

Or his second. But the B-plan showcases gave him both a platform for shaping up the idea over time and the initial capital to start, fresh out of college.

Convinced of the need for an organized player in the religious merchandise market, Mundhra began with the idea of a line of branded items such as camphor, changed it to a national retail chain for puja items, and finally zoomed in on making customized puja kits for festive occasions.

"Working on the plans gave me a sense of the opportunity, and with each plan, my knowledge got deeper," says Mundhra.

His company, Sacred Moments, wants to provide easy access to the array of items required for worshipping. For example, a Diwali kit contains items such as incense sticks, camphor, earthen lamps, kumkum and even a Shub Labh sticker for good luck.

Diwali remains its highest selling kit, and the company begins preparations in May for the winter festival to meet with the demand. Over the past two years, it has also expanded to seven other offerings, including Holi, Grihapravesh (when you shift into a new house) and Namaaz kits.

Corporate gifting accounts for a large part of the business.

Around 70% of its revenue comes from selling to corporates and the rest from selling to retailers or exports to overseas distributors. Sacred Moments says it has not been af fected by the slowdown so far.

It sold 32,000 kits this year compared with 24,000 in 2007.

Mundhra takes religious sentiments seriously, and his obsession for detail differentiates the product in the market.

A few months ago, he wanted to include little packets of ghee along with each lamp, but could not find it among his usual contacts. After a lot of online research, he tracked down a vendor in Tiruppur who made ghee packets to go into food parcels of south Indian hotels.

Mundhra sources non-perishable mini replicas of coconuts from craftsmen in Bihar, Ganga water from Hardwar and earthen lamps from Kolkata, as they are made from the best clay.

Going forward, the company plans to offer kits for Christmas and other festivals, and also expand exports. And it will begin the New Year with preparations for Holi.

Sacred Moments is one of the nominated companies at the Tata NEN Hottest Startups competition, of which Mint is the official print media partner. Details of the competition can also be accessed at www.livemint.com/hottest startups