VENTURE CAPITAL FUNDS (VCF)

A Note on Types, Formation & Registration, Compliance Applicability, and Business Model
(Registered as a sub-category of Category I under the SEBI (Alternative Investment Funds) Regulations, 2012, as amended)

1. Overview
A Venture Capital Fund (VCF) is a privately pooled investment vehicle that raises capital from sophisticated
investors to invest primarily in unlisted, early-stage, high-growth companies ("venture capital undertakings") in
exchange for equity or equity-linked instruments, with the objective of generating capital appreciation on exit.

Historically, VCFs in India were registered under the standalone SEBI (Venture Capital Funds) Regulations, 1996.
That regime has since been subsumed into the SEBI (Alternative Investment Funds) Regulations, 2012, under
which a VCF is registered as a sub-category of Category I AIF. SEBI directed all legacy 1996-regime VCFs to either
migrate to the AIF framework as "Migrated VCFs" or wind up; the additional liquidation window for funds still
completing this transition has been extended to 19 July 2026. Consequently, any new VCF today is set up and
registered directly under the AIF Regulations, 2012 as a Category I AIF – VCF.

VCFs enjoy certain regulatory concessions (as a Category I AIF) because they channel capital into start-ups and
early-stage ventures that the Government/regulators consider economically desirable, and their investors
benefit from pass-through taxation under Section 10(23FB)/115UB of the Income-tax Act, 1961.

2. Types of Venture Capital Funds

VCFs can be classified along two dimensions: (a) the formal SEBI sub-categories under Category I, and (b) how
they are structured and positioned in market practice.

2.1 SEBI Sub-Categories

• Venture Capital Fund (general) — invests at least 75% of investable funds in unlisted equity shares or
equity-linked instruments of a venture capital undertaking (a domestic unlisted company, subject to
specified exclusions such as gold financing, real estate, or activities not permitted under the industrial
policy of the Government).
• Angel Fund — a specialised sub-category of VCF that pools money from "angel investors" to invest in start-
ups. Angel Funds must invest in investee companies incorporated not more than 3 years prior to the
investment, with a minimum investment of ₹25 lakh and a maximum of ₹10 crore per investee company, a
minimum fund corpus of ₹10 crore, and up to 200 angel investors per scheme in a financial year (aligned
with the Companies Act private-placement limit).

2.2 Market-Practice Typology

• Seed / Pre-Seed Funds — invest at the idea/MVP stage, ticket sizes typically ₹25 lakh–₹5 crore, high
mortality but outsized upside on winners.
• Early-Stage / Series A–B Funds — invest once product-market fit is emerging; larger cheque sizes and more
due-diligence-intensive.
 • Sector-Focused Funds — thesis-driven funds concentrated in a vertical such as fintech, healthtech,
deeptech/SaaS, climate-tech/agritech, or consumer brands.
• Corporate Venture Capital (CVC) — sponsored by a strategic corporate investor seeking both financial
returns and strategic/technology access; often structured as, or alongside, a Category I VCF.
• Micro-VC / Solo-GP Funds — smaller-corpus funds (often just above the ₹20 crore minimum) run by a lean
team or a single General Partner, focused on high-velocity seed investing.
• Growth-Stage VC — later-stage funds bridging into pre-IPO rounds; these frequently register as Category II
(PE) rather than Category I once the strategy moves beyond "venture capital undertaking" thresholds.
Only the two SEBI sub-categories above (VCF and Angel Fund) carry distinct regulatory thresholds; the market-practice
types are strategic labels layered on top of a Category I – VCF (or Angel Fund) registration and are described in the fund's
PPM rather than being separate SEBI categories.

3. How to Form and Register a VCF

3.1 Choose the Legal Structure

A VCF may be constituted as a Trust (most common, via a registered Trust Deed), a Company (under the
Companies Act, 2013), or an LLP (under the LLP Act, 2008). Trusts are preferred for VC funds owing to simpler
governance, pass-through tax treatment, and ease of multi-close fundraising.

3.2 Constitute the Key Parties

• Sponsor — establishes the fund and contributes the mandatory continuing interest (lower of 2.5% of
corpus or ₹5 crore, evidenced by a CA-certified net-worth certificate); cannot be funded through a waiver
of management fees.
• Investment Manager — a distinct company/LLP responsible for sourcing, evaluating, and managing
investments; must have at least one key investment team member holding the NISM Series-XIX-C (or
equivalent) certification with relevant venture/private-equity experience.
• Trustee (for trust structures) — an independent party unconnected with the sponsor/manager, holding
fund assets for investors' benefit.

3.3 Draft Constitutional and Offer Documents

• Trust Deed / MoA-AoA / LLP Agreement, as applicable.
• Private Placement Memorandum (PPM) — sets out the investment strategy and sector focus, stage/ticket-
size thesis, fee structure (management fee and carried interest), risk factors, key personnel, and conflict-of-
interest policy.
• Investment Management Agreement between the Trustee/AIF and the Investment Manager.
• Contribution Agreement documenting investor commitments and the drawdown mechanism.

3.4 File the Application with SEBI

Applications are filed online in Form A through SEBI's SI Portal ([Link]), together with:
• KYC, fit-and-proper declarations, and pedigree certificates for the sponsor, manager, and trustee.
• Net-worth certificate of the sponsor and track record of the proposed key investment team.
 • Draft PPM and constitutional documents.
• Non-refundable application fee and, on approval, the Category I registration fee (approximately ₹5 lakh,
per the Second Schedule to the AIF Regulations — to be verified on the SEBI website at the time of filing).

3.5 SEBI Review and Grant of Certificate

SEBI reviews the application for eligibility and fit-and-proper status of the sponsor, manager, and trustee, and
for the PPM's compliance with the AIF Regulations. On satisfaction, SEBI issues a Certificate of Registration in
Form B as a Category I AIF – Venture Capital Fund (or Angel Fund), valid until the fund is wound up. SEBI may
impose specific conditions on the registration, or reject the application after affording an opportunity to be
heard (with reasons communicated within 30 days).

3.6 Scheme Launch

Each investment scheme requires its own PPM filing, ordinarily routed through a SEBI-registered merchant
banker who issues a due-diligence certificate. Under the Fast-Track/GARUDA mechanism introduced in 2026, a
scheme may generally begin on-boarding investors within a shorter window (broadly 10–30 working days) after
PPM filing, subject to no adverse observation from SEBI; Angel Fund schemes benefit from further relaxed,
faster timelines given their smaller ticket sizes.

Stage Typical Timeline

Entity formation + Investment Manager incorporation 3–6 weeks

PPM and Form A documentation 3–5 weeks

SEBI review and query resolution 4–10 weeks

Grant of Certificate of Registration Total: approx. 4–7 months end-to-end

Scheme-level PPM filing and first close 10–30 working days post AIF registration

4. Compliance Applicability

4.1 Fund-Level Thresholds

• Minimum corpus per scheme: ₹20 crore (₹10 crore for Angel Funds).
• Sponsor/Manager continuing interest: lower of 2.5% of corpus or ₹5 crore.
• Minimum investment per investor: ₹1 crore (₹25 lakh for employees/directors of the AIF or manager);
Angel Fund investors commit ₹25 lakh–₹10 crore per investee company.
• Maximum investors per scheme: 1,000 (200 per financial year for Angel Funds, per Companies Act private-
placement limits).
• Tenure: close-ended with a minimum tenure of 3 years; extensions require investor and, in specified cases,
SEBI approval.
4.2 Investment Conditions
• At least 75% of investable funds must be deployed in unlisted equity shares or equity-linked instruments of
a venture capital undertaking.
• The balance (up to 25%) may be held in specified instruments such as subscription to initial public offers,
debt/debt instruments of investee companies in which the fund already holds equity, preferential
allotments, or units of other Category I AIFs, subject to conditions in the Regulations and PPM.
• No investment in the associates of the sponsor/manager beyond permitted limits, without appropriate
disclosure and investor approval.
• Concentration norm: not more than 25% of investable funds in a single investee company (directly or
through units of other AIFs).
• No leverage/borrowing, other than for meeting temporary funding requirements for up to 30 days, not
more than four occasions in a year, and not exceeding 10% of investable funds.

4.3 Governance and Operational Compliance

• Independent valuation of unquoted investments at prescribed intervals (typically annually, or more
frequently as required).
• Custodian appointment once the fund corpus/commitments cross the SEBI-prescribed threshold.
• Compliance officer designation and periodic compliance test reporting.
• Dematerialisation of AIF units in line with SEBI's demat mandate.
• Investor grievance redressal via SEBI's SCORES portal.

4.4 Reporting and Disclosure

• Periodic (typically quarterly) reporting to SEBI on portfolio composition, deployment status, and material
developments.
• Annual audited financial statements and disclosure of any material change to the PPM to SEBI and
investors.
• Standardised disclosure of fund performance/track record to prospective investors in line with SEBI's PPM
and benchmarking norms.

4.5 Other Applicable Laws

• Income-tax Act, 1961 — pass-through taxation for investors under Section 10(23FB)/115UB (income other
than business income is taxed directly in investors' hands, in the same manner as if they had invested
directly).
• FEMA/RBI regulations — for any foreign investors contributing to the fund and for downstream investment
by the fund into investee companies, including sectoral caps and reporting.
• PMLA — KYC/AML checks on investors and, indirectly, on investee companies during due diligence.
• Companies Act, 2013/LLP Act, 2008/Indian Trusts Act, 1882 — depending on the legal form chosen for the
fund and the Investment Manager.
Migrated VCFs (erstwhile 1996-regime funds) continue to be governed by their original investment conditions to the
extent grandfathered, alongside the AIF Regulations' reporting and operational requirements — sponsors should
 reconcile both frameworks during migration. All thresholds above should be verified against the current Second Schedule
and any 2025–2026 amendments on [Link] before filing.

5. Business Model of a VCF

A VCF's business model is built around identifying high-growth-potential early-stage companies, providing
capital plus active support, and generating outsized returns from a small proportion of portfolio winners that
offset losses from the majority — the classic "power law" return distribution characteristic of venture investing.

5.1 Key Participants and Revenue Flows

• Limited Partners (Investors) — commit capital via the Contribution Agreement; capital is drawn down in
tranches as deals are identified, rather than paid in full upfront.
• Sponsor/General Partner — sets up the fund and contributes the continuing interest, aligning its own
capital at risk alongside investors.
• Investment Manager — earns a management fee (commonly 2%–2.5% p.a. of committed capital) to cover
operating costs (deal sourcing, diligence, portfolio support), plus carried interest (commonly 15%–20% of
profits above a hurdle, often 8% p.a.) once the fund returns capital and the hurdle to investors.
• Trustee, Custodian, Valuer, Auditor, RTA — service providers ensuring fiduciary oversight, safekeeping,
valuation, and unit administration, typically compensated on a fixed/retainer basis.

5.2 Fund Lifecycle

1. Fundraising / First Close — the Sponsor and Manager market the PPM and thesis to prospective LPs,
securing commitments across a first close and subsequent closes up to a final close (often 12–18 months).
2. Investment/Deployment Period — capital is drawn down and deployed into a portfolio of early-stage
companies over roughly 3–4 years, with cheque sizes and pacing governed by the stated thesis.
3. Portfolio Support Period — the Manager actively supports portfolio companies (board/observer seats,
hiring, follow-on fundraising introductions, strategic guidance) and reserves capital for pro-rata follow-on
rounds in winners.
4. Harvesting / Exit Period — realises value through strategic M&A, secondary sales, or IPOs, typically from
year 5 onward; proceeds (net of fees/carry) are distributed to investors.
5. Wind-up — on completion of the fund's term (with permitted extensions), the fund is dissolved and its
registration surrendered/lapses.

5.3 Fee and Return Structure (Illustrative)

Component Typical Range / Basis

Management fee 2%–2.5% p.a. of committed capital (often stepping down post-
investment period)

Hurdle rate 8% p.a. preferred return to investors before carry accrues

Carried interest 15%–20% of profits above the hurdle, often with a GP catch-up

Sponsor commitment Lower of 2.5% of corpus or ₹5 crore

Target portfolio construction 20–40 companies per fund, with meaningful reserves (30–50% of
 Component Typical Range / Basis

corpus) held back for follow-on rounds in top performers

5.4 Revenue and Value-Creation Logic

Because early-stage outcomes follow a power-law distribution — a small number of investments typically drive
most of the fund's returns — the VCF business model depends on disciplined deal sourcing, rigorous selection,
adequate follow-on reserves to protect ownership in winners, and hands-on portfolio support to improve
survival and growth odds. Manager economics are driven less by any single fund's management fee (which
mainly covers operating costs) and more by carried interest on successful vintages, making a strong track record
central to raising subsequent, typically larger, fund vintages.

Disclaimer: This note is for general informational purposes and summarises the SEBI (Alternative Investment Funds) Regulations, 2012, as
amended, as applicable to Venture Capital Funds (Category I). It is not legal, tax, or investment advice. Given periodic amendments to
thresholds, fees, and migration timelines (including the 2025–2026 amendments and the Migrated VCF liquidation window), readers
should verify current requirements on [Link] or with a qualified professional before acting on this note.