Introducing new investment instrument in the financial market, the securities regulator has allowed startup firms and small business, having no access to the capital markets, to raise funds through venture capital.
Bangladesh Securities and Exchange Commission (BSEC) yesterday unveiled the guidelines called the “Bangladesh Securities and Exchange Commission (Alternative Investment) Rules, 2015” to govern the venture capital firms. The rules come into force immediately after publication in the official gazette.
Over the past several years, venture capital firms that are relatively new in the country have been operating their businesses in absence of such rules.
Under some excerpts from the slew of new norms, venture capital fund could be invested primarily in non-listed equity and equity-linked securities of start-ups with less than two years’ of operational history or green field companies or emerging early-stage undertakings mainly involved in new products, services, technologies or intellectual property rights based activities or new business models.
For operational eligibility, a local venture capital firm needs to have paid up capital of at least Tk50m and will have to apply for registration to the BSEC with an application fee of Tk50,000 only through a bank draft or payment order issued in favour of the commission.
For a fully-owned subsidiary foreign venture capital firm, it needs to have a paid up capital of at least Tk150m for application for registration, and for a partially-owned subsidiary foreign firm, the paid up capital will be at least Tk100m.
The applicant firm must have minimum net worth of 75% of its total paid up capital provided that if the net-worth of a fund manager, at any time, goes down below 75% of its total paid-up capital, it wants to increase it up to the required level within the next accounting year.
A chief executive officer or a chief investment officer and a compliance officer of the firm each must have a relevant academic background and at least seven years of relevant professional experience, and neither the applicant, nor any of its directors will be a loan defaulter.
After successfully receiving registration within fifteen days, the applicant must have to pay registration fee of Tk1 lakh. The registered fund manager will have to pay an annual fee of Tk50,000 within one month of the end of each financial year.
If any fund manager fails to pay the annual fee within the stipulated time, it will have to pay a penalty of Tk25,000 for each month of default.
The fund manager shall be entitled to an annual fund management fee up to 4% of NAV (net asset value) of the fund for managing an impact fund, up to 3% of NAV of the fund for managing a venture capital fund and up to 2% of NAV of the fund for managing a private equity fund. The fund manager may share up to 20% of the net annual profit of a fund.
About criteria on formation of an alternative investment fund, such fund size will be minimum Tk100m and subscription by the sponsor is not less than 10% of the fund provided that the sponsor will subscribe at least 20% of its total subscription to the fund before registration of the fund.
Minimum investment by the fund manager must be at least 2% of the fund size provided that, if the fund manager also acts as sponsor of a fund, this investment shall be made in addition to its investment as the sponsor of the fund.
Along with its connected persons, the fund manager must not hold more than 25% of the units of a fund at any point of time. The sponsor must maintain a continuous investment of not less than 2.5% of the fund size.
This fund will declare, to the unit holders, cash dividends only and will be locked in for a period of three years from the date of issuance of units.
Mohammad Al Maruf Khan, vice chairman of NDB Capital, earlier said it is really tough to operate business in the unregulated market, as there is a chance of unethical activities.
“The move will help develop the sector as foreign investment was attracted in the disciplined market,” he said. “The move should be taken earlier. However it is better late than never.”
India has more than 200 such types of companies after promulgation of rules and regulations in 1996.
A large number of venture capital companies have been formed in Pakistan after proclaiming rules in 2001. In India, venture capital financing started in 1988 with the formation of Technology Development and Information Company of India Ltd.
Grameen Fund is the pioneer of venture capital in the country. It launched its operation in mid-1990s although the organisation is no more funding the private companies as venture capital.
