StartupCentral Venture Capital Masterclass, July 2012

1. Structuring a Venture
Capital Fund - Tax and
Regulatory Aspects
July 2012

2. Contents for discussion
Domestic Pooling – Aspects to be Considered
Typical Fund Structure
AIF Regulations – Key Aspects
Foreign Investment in Domestic Pooling Vehicle
Unified vs. Co-invest
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Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

3. Domestic pooling – Aspects to be considered
Category of
investors
Taxation issues Number of
investors
Aspects to be
considered
Target
Period of
sectors
investments
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Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

4. Typical Fund Structure

5. Typical Fund Structure
Investors
Management fee + carry
AMC
Pooling
vehicle
Management
agreement
Target
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Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

6. Alternative Domestic Pooling Structures
NBFC
VCF PMS
AIF LLP
Unregistered
trust
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Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

7. Typical Fund Structure - Key issues
• Need for flexibility in making investments
• Overseas presence for management activities
• Costs involved in set-up and time lines for set-up (including approvals etc.)
• Characterization of income on sale of investments
• Deductibility of carried interest / management fee against exit gains
• Taxation of AMC
o LLP structure
o Carry taxation
- Capital gains v. Business income
- Service tax issue
• Tax compliance
o Tax payments, credit distribution, etc
© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 7
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

8. AIF Regulations – Key
Aspects

9. AIF Regulations – Categories of AIF
SEBI released AIF Regulations on May 21, 2012 to regulate all funds established in
India, raising funds from Indian or foreign investors
CATEGORY I CATEGORY II CATEGORY III
• AIFs with positive spillover effects • No incentives given by SEBI, GOI, • AIFs which trade for making short
on the economy or other regulators in India term returns
• Incentives given by SEBI, GOI, or • Employs diverse or complex
other regulators in India trading strategies
Private equity funds,
VCF,
Debt funds,
SME Funds, Hedge funds
Other funds not classified under
Social Venture funds,
Category I or III
Infrastructure funds
© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 9
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

10. AIF Regulations – Key conditions applicable to all AIFs…
Registration • Any fund established or incorporated in India (excludes offshore funds)
Form of AIF • Trust or a Company or a LLP or a body corporate
• Family trusts,
• ESOP trusts,
• Employee welfare trusts,
Exclusions from • Gratuity trusts,
AIF Regulations • Holding companies,
• SPVs not managed by fund managers and regulated by other regulators,
• Securitization / reconstruction companies registered with RBI,
• Funds regulated by SEBI /any other regulator in India
Minimum corpus • INR 20 crores
Maximum
investors • 1,000 investors
© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 10
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

11. …AIF Regulations – Key conditions applicable to all AIFs
Minimum
contribution per • INR 1 crore from investor (INR 25 lakhs from employees or directors)
investor
Sponsor • Continuing minimum Sponsor contribution - at least 2.5% of the corpus or
contribution INR 5 crore, whichever is lower
• Possible for closed ended AIFs with minimum tradable lot of INR 1 crore,
Listing
however funds are not to be raised through the stock exchange mechanism
Foreign • May invest in securities of companies incorporated outside India (subject to
Investments conditions of RBI / SEBI)
© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 11
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

12. Foreign Investment in
Domestic Pooling Vehicle

13. Foreign Investment in Domestic Pooling Vehicle
• FIPB approval not required for investment in a company registered with
Set up as a SEBI as an VCC. Only Category I AIFs can be VCC.
Company
• FIPB approval required for AIFs under categories II and III.
• Prior FIPB approval required for making foreign investment in Trust.
Set up as a Trust
• On repatriation RBI approval would be required.
• Prior FIPB approval required for making foreign investment in LLP.
Set up as a LLP
• FVCI not allowed to make any investment into LLP.
© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 13
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

14. Unified Vs. Co-invest

15. Unified vs. Co-investment structure
Unified Co-investment
Investors Investors
Co-investment
arrangement
Fund
management
Offshore agreement
FDI / FVCI FDI / FVCI
AMC
Offshore Offshore
India
India
Domestic Investment Domestic
investors advisory investors
agreement
Investment Management
Domestic DVCF/ Domestic Agreement
AMC Management AMC
agreement
AIF DVCF/
AIF
Investee Investee
companies companies
© 2012 KPMG, an Indian Partnership and a member firm of the KOMG network of independent member firm affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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16. Glossary of Terms
VCF Venture Capital Fund
DVCF Domestic Venture Capital Fund
SEBI Securities and Exchange Board of India
AIF Alternative Investment Funds
AIF Regulations SEBI (Alternative Investment Funds) Regulations, 2012
SEBI VCF Regulations SEBI (Venture Capital Funds) Regulations, 1996
FVCI Foreign Venture Capital Investor
GOI Government of India
SME Small and Medium Enterprise
LLP Limited Liability Partnership
SPV Special Purpose Vehicle
VCC Venture Capital Company
FIPB Foreign Investment Promotion Board
FDI Foreign Direct Investment
© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 16
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

17. Thank You
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a
thorough examination of the particular situation.

18. Annexure 1
Alternate Domestic Fund Structures
Structure Key Benefits Key Concerns
• Regulated Entity • Tax inefficient
• No restrictions on Advisory fee • RBI Prudential norms to be adhered to
NBFC
• Carried interest, if any, could be in the form of • RBI registration
fees
• Can invest across listed and unlisted securities • Investment to be held directly in the name of investors
• Regulated by SEBI and not through pooled account
• Pass through treatment for tax purpose • Liquidity
- Listing of PMS scheme not possible
PMS - PMS scheme to mandatorily provide for an exit
option to investors
• Fees to be linked to drawdown and not commitment
• Applicability of AIF regulations in case of pooling of
funds?
• Pass-through treatment for tax purposes • Low on investor comfort
- Tax is applicable at the LLP level and distributions • Liquidity to investors - No mechanism for listing of
are not taxed ensuring one-level taxation LLP
LLP • Limited liability of partners • Characterization of income (Business Income v/s
• No restrictions on management fee Capital gains)
• RBI approval
• Applicability of AIF regulations
• Pass-through treatment for tax purposes • Registration under AIF regulations
Unregister- • No restrictions on Advisory fee • Post AIF regulations should be on same footing as
ed Trust • No restrictions on investment in group companies DVCF
© 2012 KPMG, an Indian Partnership and a member firm of the KOMG network of independent member firm affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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