SEBI Holds VCF Cannot Continue Beyond Tenure, Imposes ₹20 Lakh Penalty On Forum Synergies

The Securities and Exchange Board of India (SEBI) by an order dated February 23, imposed a monetary penalty of Rs. 20 lakhs on Forum Synergies India Trust, its Investment Manager and Trustee in connection with India Knowledge Manufacturing Fund-I, for failure to initiate winding up of the scheme upon expiry of its stipulated tenure, in violation of Regulation 23(1)(a) of the SEBI (Venture Capital Funds) Regulations, 1996.

Adjudicating Officer Jai Sebastian, held that a venture capital fund scheme must be wound up upon expiry of the tenure specified in its Private Placement Memorandum (PPM), and continuation beyond such period constitutes a regulatory violation, as the obligation to initiate winding up arises automatically and cannot be overridden by investor consent or pending exits.

He observed:

“The deadline specified in regulation 23(1)(a) of the VCF Regulations is not a mere contractual stipulation but a regulatory obligation intended to ensure certainty, discipline and investor protection within the fund framework.”

Forum Synergies India Trust is a Venture Capital Fund and India Knowledge Manufacturing Fund-I was one of its schemes. SEBI initiated adjudication proceedings against the Trust, its Investment Manager and Trustee for alleged violations of the VCF Regulations relating to continuation of the scheme beyond its stipulated tenure and failure to wind up the scheme.

SEBI observed that the PPM fixed the tenure of the scheme at seven years, including extensions, up to November 2019. However, the scheme was granted further extensions until November 2023 and was not wound up upon expiry of its tenure.

Additionally, SEBI also examined the liquidation status of the Fund's investments and noted that only two out of six investments had been exited within the prescribed timelines, while exits in respect of the remaining investments were delayed.

It was further observed that although the Trustee had advised the Fund to initiate winding up proceedings, it failed to ensure compliance with the requirement of winding up the scheme upon expiry of its tenure.

A show cause notice was issued, and replies and personal hearing were granted.

The Fund and its Investment Manager contended that extensions were undertaken after obtaining super majority consent of contributors and were necessitated due to delays in achieving exits, including disruptions caused by Covid-related restrictions.

Rejecting the defence, the Adjudicating Officer held:

“The tenure stipulated in the PPM is not a mere commercial arrangement between the investors and the Fund, but it is a condition provided under the VCF Regulations governing the lifecycle of the Scheme. Upon expiry of such tenure, the obligation to initiate winding up arises automatically and admits of no discretion. Any continuation beyond the stipulated period is ex facie contrary to the VCF Regulations.”

The Adjudicating Officer held that the obligation to wind up the scheme flows from Regulation 23(1)(a) of the VCF Regulations and is not merely derived from the terms of the PPM, and further found that the Trustee had failed to ensure timely initiation of winding up.

Accordingly, SEBI imposed a penalty of Rs. 20 lakhs on the Trust, its Investment Manager and Trustee.