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A venture capital fund, for the purpose of these regulations means, unless the context otherwise requires, a fund established in the form of a company or a trust which raises money through loans, donations, issue of securities or units as the case may be and proposes to make in investments in accordance with these regulations. Therefore a venture capital fund may be structured either a company registered under the Companies Act, 1956 or as a trust under the Indian Trust Act and registered under the Indian Registration Act, 1908.
Application for grant of certificate
Any company or trust proposing to carry on any activity as a venture capital fund must apply to SEBI for grant of a certificate of carrying out venture capital activity in India. An application for grant of certificate must be made in Form A and must be accompanied by a non-refundable application fee of Rs. 25,000/- payable by bank draft in favor of the Securities and Exchange Board of India at Mumbai. Registration fee for grant of certificate is Rs. 500,000/-.
Eligibility criteria
For the purpose of grant of certificate by SEBI, the following conditions must be satisfied :- |
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| A. |
If the application is made by a company |
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The main object of the company as per its Memorandum of Association must |
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be the carrying on of the activity of venture capital fund. |
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| 2. |
It is prohibited by its Memorandum and Articles of Association from making an |
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invitation to the public subscribe to its securities. |
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| 3. |
None of its directors or its principal officer or employee is involved in any |
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litigation concerned with the securities market which may have an adverse |
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bearing on the business of the applicant. The directors or the principal officer or |
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employee must not have been at anytime convicted for an offense involving |
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moral turpitude or any economic offense and is a fit and proper person to act |
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as director or principal officer or employee of the company. |
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B. If the application is made by a trust |
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The instrument of trust (Trust Deed) is in the form of a deed and has been duly registered under the provisions of the Indian Registration Act, 1908. |
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The main object of the trust is to carry on the activity of a venture capital fund. |
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None of its trustees or directors of the trustee company, if any, is involved in |
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any litigation connected with the securities market which may have an adverse bearing in the business of the venture capital fund. |
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| 3. |
The directors of its trustee company or the trustees have not at anytime being |
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convicted of an offense involving moral turpitude or any economic offense. |
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bearing on the business of the applicant. The directors or the principal officer or |
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employee must not have been at anytime convicted for an offense involving |
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moral turpitude or any economic offense and is a fit and proper person to act |
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as director or principal officer or employee of the company |
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In both cases, the company or the trust must not have already applied for certificate from SEBI or its certificate must not have been suspended by SEBI or cancelled by SEBI and the applicant must be a fit and proper person. |
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Furnishing of information and clarification |
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SEBI may require the applicant to furnish such further information as it considers necessary for processing the application. An application, which is not complete in all respects, shall be rejected by SEBI. However, before rejecting any application, the applicant will be given an opportunity to make representation before SEBI and to remove any defect in the application within 30 days of the date of receipt of communication from SEBI regarding the defect. SEBI may extend the period of 30 days for upto another 90 days on being satisfied that it is necessary and is equitable to do so. |
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Procedure for grant of certificate |
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If SEBI is satisfied that the applicant is eligible for grant of certificate, it shall send intimation to the applicant of its eligibility. On receipt of intimation, the applicant must pay to SEBI, registration fee of Rs500,000 and on the receipt of such fees, SEBI shall grant a certificate of registration in Form B. |
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Conditions of Certificate |
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The certificate granted shall be subject to the following conditions
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| 1. |
The venture capital fund shall abide by the provisions of the SEBI Act, the |
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Government of India guidelines and these regulations. |
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| 2. |
The venture capital fund shall not carry on any other activity other than that of a |
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venture capital fund |
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| 3. |
The venture capital fund shall inform SEBI in writing of any information or |
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details previously submitted to SEBI which have changed after grant of the |
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certificate. |
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| 4. |
If the information or details submitted are found to be false or are misleading in |
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any particular manner, suitable penal action can be takeN |
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Procedure where certificate is not granted |
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After considering any application, if SEBI is of the opinion that the certificate cannot be granted under law, it may reject the application after giving the applicant a reasonable opportunity of making its representation. The decision of SEBI to reject the application shall be communicated to the applicant within 30 days. |
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Effect of refusal to grant certificate |
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Any applicant whose application is rejected cannot carry out any activity as a venture capital fund. |
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Investment conditions and restrictions |
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A venture capital fund may raise money from any source, whether Indian, foreign or non resident Indian. No venture capital fund shall accept any investment from any investor less than Rs500,000. However this condition is not applicable to employees or the principal officer or director of the venture capital fund or director of the trustee company or trustee to non resident Indians or persons or institutions of foreign origin. |
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For the purpose of these regulations, fund raised means actual money raised from investors for subscribing to the securities of the venture capital fund and includes money that is raised from the author of the trust ( in case the venture capital fund has been established as a trust ) but does not include the paid up capital of the trustee company, if any. |
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All investments made or to be made by venture capital fund will be subject to the following restriction |
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The venture capital fund shall not invest in the equity shares of any company or |
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institution providing financial services. |
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At least 80% of the fund raised by the venture capital fund shall be invested in. |
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Equity shares or equity related securities issued by a company whose securities |
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are not listed in any recognized stock exchange. However, the venture capital |
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fund may invest in equity shares or equity related securities of a company |
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whose securities are to be listed or are listed provided the venture capital fund . |
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has made the investment by way of private placement prior to the listing of |
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securities any particular manner, suitable penal action can be takeN |
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The equity shares or the equity related securities of a financially weak or sick |
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industrial company whose securities may or may not be listed in the recognized |
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stock exchange. For the purpose of these regulations, financially weak |
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company means a company, which at the end of the previous financial year has |
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accumulated losses, which resulted in erosion of more than 50 percent but less |
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than 100 percent of its net-worth. Sick industrial company means a sick |
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industrial company as defined in the Sick Industrial Companies (Special |
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Provisions) Act, 1985. |
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Providing financial assistance in any other manner to companies in whose equity |
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shares the venture capital fund has invested |
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Prohibition on listing |
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No venture capital fund shall be entitled to get its securities or units listed on any recognized stock exchange upto the expiry of three years from the date of issue of securities or units by the venture capital fund. |
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General obligations and responsibilities |
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No venture capital fund shall issue any documents or advertisement inviting offers from the public for the subscription of the purchase of any of its securities or units. |
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Private placement |
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| A |
venture capital fund may raise money through private placement of its securities or |
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units. The venture capital fund before issuing any securities or units must file with |
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SEBI a placement memorandum. The placement memorandum must give the |
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following details: |
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In case the venture capital fund is a trust |
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Details of the trustee or the trustee company of the venture capital fund. |
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Details of the entitlement on the units of the trust for which subscription has |
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been sought. |
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Details of investment that are proposed to be made. |
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Tax implications that are likely to apply to the investors. |
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Manner of subscription to the units of the trust. |
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Period of maturity of the investment. |
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Manner in which the scheme is to be wound up. |
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Manner in which the benefits accruing to the investors in the units of the trust |
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are to be distributed. |
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Details of the asset management company, if any, |
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Details of Fees payable to the asset management company. |
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| B |
In case the venture capital fund is a company |
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Details of securities that are being offered. |
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Details of investments that are proposed to be made. |
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Details of the directors of the company. |
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Tax implications that are likely to apply to investors. |
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Manner of subscription to the securities that are to be issued. |
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Manner in which benefits accruing to the investors to the securities are to be |
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distributed. |
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Details of the asset management company. |
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Details of Fees payable to the asset management company. |
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are to be distributed. |
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Circulation of placement memorandum |
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The placement memorandum may be privately circulated after the expiry of 21 days from the date of its submission to SEBI. In case SEBI communicates any amendment or modification to the placement memorandum within the aforesaid period of 21 days, these changes must be incorporated in the placement memorandum before circulation. |
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Any amendment or alteration to the placement memorandum already filed with SEBI can be made only if a copy of the placement memorandum indicating the changes is filed with SEBI and within 21 days such filing SEBI does not communicate any objections to the amendment |
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Maintenance of books and records |
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Every venture capital fund must maintain for a period of 10 years books of accounts, records and documents which must give a true and fair picture of state of affairs of the venture capital fund. |
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Power to call for information |
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SEBI may at anytime call for any information from the venture capital fund in respect to any matter relating to its activity as a venture capital fund. Such information must be submitted within 15 days to SEBI. |
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Submission of reports to SEBI |
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SEBI may at anytime call upon the venture capital fund to file such report as it deems fit with regards to the activity carried out by venture capital fund |
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Winding–up |
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A scheme of venture capital fund setup as a trust shall be wound up:- |
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When the period of the scheme as mentioned in the placement memorandum is |
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over ; or. |
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If, in the opinion of the trustees or the trustee company, it is in the interest of the |
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investors that be wound-up ; or. |
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If 75 % of the investors in the scheme pass a resolution at a meeting of unit
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holders of the scheme that the scheme be wound up ; or. |
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If SEBI so directs, in the interest of investors |
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The venture capital fund setup as a company shall be wound up according to provision of the Companies Act, 1956. |
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The venture capital fund or the trustees or the trustee company of the venture capital fund shall intimate SEBI and the investors of the circumstances leading to the winding up in the scheme. |
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Effect of winding-up |
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On and from the date of intimation of the winding up, no further investments shall be made on behalf of the scheme to be wound up. Within three months from the date of intimation, the assets of the scheme shall be liquidated and the proceeds accruing to the investors in the scheme distributed to them after satisfying all liabilities. |
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Inspection and investigation |
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SEBI may appoint one or more person as inspecting or investigating officer for inspection or investigation of the books of accounts,records and documents relating to the venture capital fund for any of the following reason. |
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To ensure that the books of accounts records and documents are being |
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maintained by the venture capital fund in the manner specified in these |
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regulations. |
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To inspect or investigate into complaints received from investors, clients or any |
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other person on any matter having a bearing on the activity of the venture |
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capital funde. |
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To ascertain that the provision of the SEBI Act and these regulations are being |
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complied with by the venture capital fund. |
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To inspect or investigate suo moto into the affairs of the venture capital fund in |
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the interest of the securities market and the interest of investors |
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Notice before inspection or investigation |
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Before ordering an inspection or investigation, SEBI shall give not less than 10 days notice to the venture capital fund. However, where SEBI is satisfied that in the interest of the investors, no such notice need be given, it may by order in writing not give such notice. |
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During the course of inspection or investigation, the venture capital fund against whom inspection or investigation is being carried out is bound to discharge the following obligations :- |
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It shall be the duty of the venture capital fund whose affairs are being inspected |
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and investigated and of every director, trustee, officer and employee. |
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To produce before inspecting or investigating officer such books, securities,
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accounts and other documents in its custody and control. |
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To furnish to him such statements and information relating to the venture capital |
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fund as the inspecting or investing officer may require within a reasonable period. |
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The venture capital fund shall allow the inspecting or investigating officer to |
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have reasonable access to the premises occupied by such venture capital fund |
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or by any other person on his behalf. |
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The venture capital fund shall allow reasonable facility for examination of any |
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books, records, documents and computer data in the possession of the venture |
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capital fund. |
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The venture capital fund shall also provide copies of documents or other |
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materials which, in the opinion of inspecting or investigating officer, are relevant |
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for the purpose of inspection or investigation. |
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The inspecting or investigating officer in the course of inspection or investigation shall be entitled to examine or record the statement of any director, trustee, officer or employee of the venture capital fund. |
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It shall be the duty of the director, trustee, officer or employee to reasonably assist the inspecting or investigating officer in connection with the inspection or investigation. |
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Submission of the report to SEBI |
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The inspecting or investigating officer shall as soon as possible on completion of the inspection submit his inspection or investigation report to SEBI. He may also submit an interim report if so required. |
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SEBI shall after consideration of inspection or investigation report or the interim report communicate the finding of the inspecting officer to the venture capital fund and give it an opportunity to make a representation. On receipt of the reply, if any, from the venture capital fund, SEBI may call upon the venture capital fund to take such measures as the board may befit in the interest of the securities market or for due compliance with the provisions of the SEBI Act. |
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Procedure for action in case of default |
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Suspension of certificate |
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SEBI may suspend the certificate granted to a venture capital fund if the venture capital fund contravenes any of the provisions of the SEBI Act or of the regulations made there under or fails to furnish any information relating to its activity as a venture capital fund as required by SEBI or furnishes to SEBI false or misleading information or does not submit periodical returns or reports as required by SEBI or does not co-operate with any enquiry inspection or investigation conducted by SEBI or fails to redress the complaints of investors or fails to give a satisfactory reply to SEBI in this behalf. |
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Cancellation of certificate |
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SEBI may cancel the certificate granted to a venture capital fund where the venture capital fund is guilty of fraud or as been convicted of an offence involving moral turpitude or where the venture capital fund has been guilty of repeated default under these regulations. |
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No order of suspension or cancellation shall be made by except after holding an enquiry in accordance with the following procedure:- |
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For the purpose of holding an enquiry, SEBI may appoint one or more enquiry officers. The enquiry officer shall issue to venture capital fund at its registered office or principal place of business a notice stating the grounds on which the action is proposed to be taken and show cause why such action need not be taken within a period of 14 days from the date of receipt of notice. |
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The venture capital fund may within 14 days from the date of receipt of such notice, furnish to the enquiry officer its reply and make its representation before him. A venture capital fund may appear through any person duly authorized by it. The enquiry officer shall after taking into account all relevant facts and circumstances, submit a report to SEBI and recommend penal action, if any, to be taken against the venture capital fund as also the grounds on which such action is justified. |
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On receipt of the report from the enquiry officer, SEBI shall consider the same and may issue to the venture capital fund a show cause notice as to why such penal action as proposed by the enquiry officer should not be taken against it. The venture capital fund, within 14 days from the date of receipt of such show cause notice, sends a reply to SEBI. After considering the reply, if any, of the venture capital fund, SEBI shall pass such an order as it deems fit. |
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On and from the date of suspension of certificate, the venture capital fund shall cease to carryon any activity as a venture capital fund during the period of suspension and shall be subject to such directions of SEBI with regards to any records, documents, securities as may be in its custody or control relating into its activity as a venture capital fund as SEBI specifies. On and from the date of cancellation of a certificate, the venture capital fund, with immediate effect, shall cease to carry on any activity of the venture capital fund and shall be subject to such direction of SEBI with regard to transfer of records, documents and securities that may be in its custody or control relating to the activities of the venture capital fund as SEBI may specify. |
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The order of suspension or cancellation of certificate may be published by SEBI in at least two newspapers. |
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