The Securities and Exchange Board of India (“SEBI”) passed an order on October 31, 2022 (“the Order”) pursuant to an inspection of Urban Venture Capital Fund (“UIVCF” or “the Fund”) for the period of April 1, 2019 to March 31, 2020. The Fund was organized as a contributory trust launched in June 2006. The Fund launched only one Scheme, i.e., Urban Infrastructure Opportunities Fund (“the Scheme”).  The Scheme was a close-ended one and was set to terminate on the expiry of a period of 7 (seven) years from the date of initial closing, which would have been June 8, 2013. The terms of the Scheme’s private placement memorandum (“PPM”) further provided that the Urban Infrastructure Trustees Limited (“the Trustee”), upon the recommendation of the Investment Manager, may elect to extend the term of the Scheme for two further periods of 1 (one) year each. This option had also been exercised and the Scheme was to come to an end on June 8, 2015. However, with the consent of 76.63% (seventy-six point sixty-three percent) of investors, the term of the Scheme was extended again and was in continuance at time of the aforementioned inspection by SEBI. 

SEBI considered the extension of the term of the Scheme in light of the SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations”). This was the focal issue raised in the Order. 

Regulation 23(1)(a) of the VCF Regulations provides that the scheme of a trust shall be wound up when the period of the scheme mentioned in the placement memorandum comes to an end. The scheme may also be wound up even before the tenure of the scheme if 75% (seventy-five percent) of the investors pass such a resolution. 

Further, Regulation 17(1) of the VCF Regulations prescribes the requisite contents of a placement memorandum, among them is the period of maturity, if any, of the fund. It is observed that the regulation uses the term “namely” when listing the requisite contents. SEBI has considered whether by using the term “namely” in this regulation, the legislative intent was to restrict the scope and ambit of the provision to rigidly prescribe the contents which can be part of a placement memorandum or whether the regulation provides an illustrative list. SEBI relied on a judgment of High Court of Andhra Pradesh in the case of Balaji General Stores v Deputy Commissioner of Commercial Taxes, to understand the import of the word “namely”. It was observed that the word “namely” implies that the list would be an exhaustive one, rather than illustrative. The VCF Regulations do not provide for making any amendment to the period of operation of the Fund, once the period of maturity has been fixed. Since the PPM of the Scheme provided for a clearly defined tenure, including an extension of period of maturity of the Fund (i.e., two extensions of one year each), it was not open for the Trustees or the Investment Manager of the Fund to further extend the period of maturity of Fund by taking the consent of the unit holders/beneficiaries. The Scheme should have been wound up as per Regulation 23(1)(a) of the VCF Regulations. 

It was also observed that in accordance with the framework prescribed under the VCF Regulations, it was the venture capital fund that had issued the PPM (regulation 16 (1)(a) of VCF Regulations) and keeping in mind the objective of the Scheme of the Fund (for which PPM was issued) and their proposed investment strategy, the Trustees and the Investment Manager had pre-decided the term of the Fund including any probable extensions to the term of the Fund that may be required for closure of the Scheme. The unit holders had agreed to the said terms and conditions of the PPM as the same suited their investment objective. Any further extension of the tenure of the Fund by taking the consent of the unit holders/ beneficiaries was not possible since according to SEBI, unit holders are not the supreme authority to decide the tenure of the Scheme. 

The noticees argued that they had held off on liquidating their investments as they were not getting a fair value in return due to the prevailing market conditions. SEBI rejected this argument stating that this was not a force majeure event, but rather an instance of economic/ financial hardship. It was held that avoidance of loss is not a justification for noncompliance of the mandatory obligations of the Scheme under VCF Regulations. 

SEBI cited Regulation 24(2) of the VCF Regulations which provides that within 3 (three) months from the date of intimation of the intention to wind up the scheme under Regulation 23(3) of the VCF Regulations, the assets of the scheme must be liquidated and the proceeds accruing to the investors shall be distributed. The Order concluded that the Scheme of the Fund should have complied with the time stipulated under Regulation 24(2). The Order granted a period of 3 (three) months from the date of the Order, i.e., January 31, 2023 to culminate the entire process of winding up of the Scheme of the Fund and providing exit to the investors. 

Please find a copy of the order here, and the VCF Regulations, here.

This update has been contributed by Vinod Joseph (Partner) and Vasavi Khatri (Associate).

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