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A GRAND PROJECT REPORT ON “Venture capital financing in India” In Partial fulfillment of Post Graduate Diploma in Management

(Full Time Programme) Prepared By Jadhav Kinjal (Roll No.12)

Batch (2008-2010) Parul Institute of Management PO Limda, TA:Waghodia Dist: Vadodara, Gujarat-391760
(Approved by AICTE, MHRD, Govt. Of India, New Delhi

(JANUARY 2010)

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Acknowledgement
Completing a task is never a one man effort. It is often the result a valuable contribution of a number of individuals in direct or in director indirect manner that helps in shaping and achieving an objective. I express a sense of gratitude to my guide. I would like to express my thankfulness to our Director sir N.K.Kapoor for granting me permission to carry on my project on Venture capital. And for taking deep interest in my project work ensuring at each stage that target are achieved as per schedule. Also he gives me good knowledge about the venture capital. and he provides all guidance as per requirement of my project. I sincerely hope that this project would strive to answer need of the corporate world. The project need gave a challenging. and exhilarating experience in doing research study.

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DECLARATION
We do hereby solemnly declare that this project “VENTURE CAPITAL FINANCING IN INDIA” is original and bonafied work done by us is being submitted in fulfillment of the requirement for the PGDM Program of Parul Institute of Management. This project is our own and is not submitted to any other institution or published any where before.

Place: Vadodara Date:

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Preface
In India, a revolution is ushering in a new economy, wherein major investment are being made in the knowledge based industry with substantial low investments in land, building, plant and machinery. The asset/ collateral – backed lending instruments adopted for the hard for the hard core manufacturing industries, are proving to be inadequate for the knowledge – based industries that very often start with just an idea. The only way to finance such industries is through venture capital. Venture capital is instrumental in bringing about industrial development, for it exploits the vast and untapped potentialities and promotes the growth of the knowledge – based industries worldwide. In India too, it has become popular in different parts of the country. Thus, the role of venture capitalist is very crucial , different, and distinguishable to the role of traditional finance as it deals with others money. In view of the globalization; Venture capital has turned out to be a boon to both business and industry. There is, thus an intense need to be exploit to the maximum its potential as a new means, This report deals with the concept of venture capital with particular reference to India. The report includes all facts, rules and regulations. Regarding venture capital and its written in very comprehensive manner.

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3 4.2 4.4 4.5 5 6 6.1 4.1 9 10 11 12 13 14 Title Introduction Objective Methodology Data Collation and Analysis Meaning of Venture Capital History of Venture Capital Notion of Venture Capital Feature of Venture Capital Stages of Venture Capital Business plan Process of Venture Capital Financing Methods of Venture Financing Objectives and vision for venture Capital in India SEBI Regulation Recommendation Venture Capital in Micro Finance ICICI Venture Recommendation Conclusion Bibliography Annexure Page No 5 6 7 8 9 10 11 12 13 14 18 20 31 33 34 40 44 45 46 47 5 .INDEX Serial No 1 2 3 4 4.1 7 8 8.

No economic entity can start functioning without requiring capital as this helps the entrepreneurs in acquiring machinary. rate of return normally remains disproportionate to the degree of risk associated with newly floated companies this is much more true in the case of such companies whose business feature is based on the foundation of high technology or unproved technology having no time tested foundation in the commercial world. quit uncertain Common investors hesitate to invest their saving in such companies even though they lead to high industrial growth and economic development. The companies entrepreneurs engaged in traditional line of business can easily procure necessary financial capital from conventional capital market. Hence the arises that how these type of firms shall them 6 . Particularly this is true in the arena of electronics and computer application industries. Whose vital ingredients are public issue. lease entrepreneurs. lack of finance the new entrepreneurs and technocrats from starting new venture though they may very well have innovative ideas and requisite technological knowledge. medical instruments and bio-technology application industries where the change is very fast with rapid advancement of global science and technology However.equipment and other productive facilities purely in functional terms. mutual funds. commercial banks. face great difficulty while venturing out to procure financial capital for newly floated enterprise as at the initial stages of business risk is very high and the return. Move specifically.INTRODUCTION Capital is one of the most important factors of production. Here capital refers to financial capital and not exactly produced means of production in the version of economics. because it is difficult to trade off between risk returns. financial institution. capital to company is like blood in human body.

OBJECTIVES  To understand concept of venture capital  To understand VC industry in global scenario  To study the evaluation and need of venture capital industry in India  To understand the legal framework formulated by SEBI to encourage activity in Indian economy. having a sound background of professional education.  To know the impact of political and economical factors on VC investment 7 .be financed ? under the circumstances the concept of venture capital fund was born with a fundamental objective to provide initial capital and support in building capital base to the entrepreneurs. expertise and initiative to launch the business based on fast changing technology.

books and magazines. The data used are fully guidance oriented and not mean for the coping of product. 8 .METHODOLOGY I collected data from two sources Primary source of data These data were collect from the financial institution like ICICI venture that provides venture capital for the new projects in different sectors. Secondary source of data These data‟s are collected through internet. I have also gone through the different reference book and through internet.

Venture capital firms typically comprise small teams with technology backgrounds (scientists. 9 . Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms. growing or struggling business. VENTURE CAPITALIST A venture capitalist is a person or investment firm that makes venture investments. VENTURE CAPITAL FUND Venture capital fund is a pooled investment vehicle (often a partnership) the primarily invests the financial capital of third party investors in enterprise that are too risky for the standard capital market or bank loss. Finance may be required for the startup. Venture capital is capital typically provided by outside investors for financing of new. and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. development /expansion or purchase of a company via a mechanism.VENTURE CAPITAL Venture capital is means of financing fast-growing privet companies. Such as in management buyout. Venture capital investments generally are high risk investments but offer the potential for average returns. researchers) or those with business training or deep industry experience.

The number of such specialized investment firms eventually to be called venture capital firms began to boom in the late 1950s the growth was aided in large part by the creation in 1958 of the federal of the federal small Business Investment Company program. During most its historical evolution. 10 . closed-end investment company was formed. In 1946 American research and development Corporation (ARD). the market for arranging such financing was fairly informal relying primarily on the resource of wealthy families. ARD was eventually profitable providing its original investors with 15.8 percent annual rate of return over its twenty five years an independent firm. Hundreds of SBICs were formed in the 1960s . A publicly treaded.HISTORY OF VENTURE CAPITAL USA is the place of venture capital industry as we know it today. ARD‟s best known investment startup financing it provided in 1958 for computer maker digital equipment crop. and remain in operation today.

In India. In fact venture capitalist combines the qualities of banker. Venture capital is ofetn thought of as “the early stage financing of new and young enterprise seeking to grow rapidly. Of course. The venture capitalists management approach differs significantly from that of a conventional banker or a lender. the securities and exchange board of India (SEBI) guidelines govern the operations of venture capital funds (VCFs). He plays safe. The banker does not involve directly in the operation and management of the company. The venture capitalist is also not exactly like the stock market investor who merely trades in the shares of a company without any relations with or knowledge of its management. remain passive and insist on security(collateral). It is generally considered as a synonym of risky capital. The underlying assumption is that the entrepreneur and the venture capitalist would act together in the interest of the enterprise as „partners‟. he may get his nominee appointed on the board of the company to safeguard hi interest. in fact. venture capital is the investment of long-term equity finance where the venture capitalist earns his return primarily in the form of capital gains.NOTION OF VENTURE CAPITAL Venture capital is significant innovation of the twentieth century. The venture capitalist focuses on growth. He would like to see small business growing into larger ones. when banker‟s stake is very high.” In broad terms. The true venture capital finances any risky idea. It is a commitment of capital for the formation and setting up of small-scale enterprise specializing in new ideas or new technologies. stock market investor and entrepreneur in one. 11 . keeps off management. venture capital can prove to be a powerful mechanism to institutionalize innovative entrepreneurship.

12 . planning and management skills to the new firm. it is not repayable on demand. venture capitalist gives his marketing. More than finance. It requires long-term investment attitude that necessitates the venture capital firms to wait for a long period. This hands-on management approach helps him to protect and enhance his investment by actively involving and supporting the entrepreneur. technology. say 5-10 years. options or convertible securities. the objective is to make capital gains by selling-off the investment once the enterprise becomes profitable Long-term investment Venture financing is along term illiquid investment. Participation in management Venture financing ensures continuing participation of the venture capitalist in the management of the entrepreneur‟s business.FEATURES OF VENTURE CAPITAL Following are the main attributes of venture capital:- Equity participation Venture financing is actual or potential equity participation through direct purchase of shares. to make large profits.

. Acquisition/ buyout financing growth . 13 .Management buyout financing the enabling operating group to acquire firm or part of its business.Development financing for facilitating public issue. . .Bridge financing for facilitating public issue. 2.Turnaround financing for turning around a sick unit.Start-up capital for initial production and marketing .STAGES IN VENTURE CAPITAL Following are the stages in venture financing:- 1. 3.Acquisition financing for acquiring another firm for further. Expansion financing .Second stage financing for working capital and initial expansion.R&D financing for product development.Early stage financing .First stage financing for full –scale production and marketing. .Seed financing for supporting a concept or idea. . .

BUSINESS PLAN The first step for a company (or an entrepreneur) proposing a new venture in obtaining venture capital is to prepare a business plan for the consideration of a venture capitalist. what it wants to achieve and how it is going to do it. The length of the business plan depends on the particular circumstances but. as general rule. Marketing 6. The business plan should explain the nature of the proposed venture‟s business. It should use simple language and technical details should be explained without jargons. Essential Elements of a business plan:1. Executive summary 2. Amount and use of finance required and exit opportunities 14 . Market analysis 5. Business operations 7. The venture‟s management should prepare the plan setting challenging but achievable goals. Background on the venture 3. Financial projections 9. The management team 8. The product or service 4. it should not be very long.

and VCFs generally operate with a small staff. The evaluation of ventures by VCFs in India includes the following steps:  Preliminary evaluation  Detailed evaluation 15 . VCFs carry out initial screening of all projects based on some broad criteria.deals may originate in various ways: (a) referral system (b) active search and(c) intermediaries. Due Diligence Once a proposal has passed through initial screening.PROCESS OF VENTURE CAPITAL FINANCING The venture capital activity is a sequential process involving the following six steps. It is subjected to a detailed evolution or due diligence process. Screening Venture capital is a service industry. In order to save on time and to select the best ventures. before going for an in-dept analysis. Deal origination A continuous flow of deal is essential for the venture capital business.

16 . form and the price of investment. The venture companies like deal to be structured in such a way that their interests are protected. the venture capitalist generally assumes the role of a partner and collaborator. The agreement also includes the venture capitalist‟s right to control the venture company and to change its management if needed. the venture capitalist may intervene. Earned-out arrangements specify the entrepreneur‟s equity share and the objectives to be achieved. This process is termed as deal structuring. He also gets involved in shaping the direction of the venture. and even install a new management team.VCFs in India expect the entrepreneur to have:  Integrity  Long-term vision  Urge to grow  Managerial skills  Commercial orientation Deal structuring Once the venture has been evaluated as viable. Post-investment Activities Once the deal has been structured and agreement finalized. acquisition. viz. etc. making initial public offering (IPOs). buyback arrangement. the amount. the venture capitalist and the venture company negotiable the terms of the deal. If a financial or managerial crisis occurs. Venture capitalists generally negotiate deals to ensure protection of their interests.

The play a positive role in directing the company towards particular exit routes. 17 . A venture may exit in the following ways:  Initial public offering(IPOs)  Acquisition by another company  Purchase of the venture capitalists share by the promoter  Purchase of the venture capitalists share by an outsider.Exit plan Venture capitalist typically aims at making medium to long-term capital gains.

VENTURE CAPITAL INVESTMENT PROCESS Venture Capital Investment Process Screening Market Product Entrepreneurial (managed) Product Evaluation Expected Return Expected Return Approval Decisions 18 .

No interest is paid on such loans in India. actual rate depend on other factors of the venture such as generation period. he acquires the status of an owner. VCFs charged royalty ranging between 2 and 15 percent. Funds were made available in the form of unsecured loans at a lower rate of interest during development phase and at a higher rate after 19 . Conditional loan A conditional loan is repayable in the form of a royalty after the venture is able to generates the sales. The advantage of the equity financing for the company seeking venture finance is that it does not have the burden of serving the capital.METHODS OF VENTURE FINANCING Equity All VCFs in India provide equity. when a venture capitalist contributes equity capital. Generally . as dividends will not paid if the company has no cash flow. risk and other factors of the enterprise. The entrepreneur had to pay both royalty on sales and interest. the effective control and majority ownership of the firm may remain with the entrepreneur. cost-flow patterns. Thus. Income note A unique way of venture financing in India was income note it was a hybrid security which combined the features of both conventional loan and conditional loan. but at substantially low rates. and becomes entitled to a share in the firm‟s profits as much as he is liable for losses. their contribution may not exceed 49 percent of the total equity capital.

particularly in the privet sector. royalty on sales could also be charged.development. 20 . In addition to interest charges. Other financing methods A few venture capitalist. VCFs in India provide venture finance through partially or fully convertible debenture and cumulative convertible preference shares. introducing innovative financial securities. The „participating debenture‟ is an example of innovative venture financing.

venture capital connotes risk finance as well as managerial support. technology and knowledge based ideas properly supported by venture capital can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner. venture capitalists provide networking. high return investment. In the global venture capital industry. Taiwan and the United States. Venture capitalists finance innovation and ideas which have potential for high growth but with inherent uncertainties. along with Israel. This makes it a high-risk. investors and investee firms work together closely in an enabling environment that allows entrepreneurs to focus on value creating ideas and venture capitalists to drive the industry through ownership of the levers of control in return for the provision of capital.OBJECTIVES AND VISION FOR VENTURE CAPITAL IN INDIA 1. Venture Capital funding is different from traditional sources of financing. skills. India. 2. The success India has achieved 21 . Scientific. In the broadest sense. This very blend of risk financing and hand holding of entrepreneurs by venture capitalists creates an environment particularly suitable for knowledge and technology based enterprises. Apart from finance. is recognized for its globally competitive high technology and human capital. management and marketing support as well. In various developed and developing economies venture capital has played a significant developmental role. therefore. information and complementary resources.

In Silicon Valley. They were backed by a venture capital environment in Silicon Valley and elsewhere in US which supports innovation and invention. as per NASSCOM data. India has the second largest English speaking scientific and technical manpower in the world. expensive hardware. With the inherent skills and manpower that India has. Exports grew by 67% in rupee terms and 55% in US dollar terms. the turnover of software sector in India has crossed Rs 100 billion mark during 1998. This also has a powerful grip over the nation‟s collective imagination. 3.3 billion while the domestic market accounted for Rs 35.1 billion. Given this quality and magnitude of human capital India‟s potential to create enterprises is unlimited. At least 30% of the start-up enterprises in Silicon Valley are started/backed by Indians. Back home also. The sector grew 58% on a year to year basis and exports accounted for Rs 65. restricted access to foreign resources and limited domestic demand. Many also specialize through diploma courses in computers and other technical areas.000 engineers graduate from Government and private-run engineering colleges. Some of the management (IIMs) and technology institutes (IITs) are globally known as centers of excellence. these very Indians have proved their potential and have carved out a prominent place in terms of wealth creation as well as credibility. The strength of software professionals grew by 14% in 1997 and has crossed 160000. software exports will thrive with an estimated 50% 22 . Every year over 200. The global software sector is expected to grow at 12% to 15% per annum for the next 5 to 7 years. is a pointer to the hidden potential it has in the field of knowledge and technology based industry.particularly in software and information technology of success against several odds such as inadequate infrastructure. There are success stories that are well known. Management institutes produce 40000 management graduates annually.

This is very crucial for sustainable growth and for maintaining India‟s competitive edge. As the US did in the semiconductor industry in the eighties. telecom and internet connections compared with India. telecommunications.e. venture capital industry can play a catalyst role in industrial development. China and Vietnam are moving to occupy India‟s position as the premier supplier of low end software and support services. The sequence of steps in the high technology value chain is information. ideas. 23 . it is time for India to move to a higher level in the value chain. it certainly needs policy support to move to the third stage i. low foreign investment and other transitional problems.1999. product development and marketing. ideas and towards innovation and product development. The market capitalization of the listed software companies is approximately 25% of the total market capitalization of around US$ 200 billion as of December. its leadership is on a slipping edge as other countries such as Philippines. media and entertainment. it is still a low cost developer and service provider. It is important to recognize that while India is doing well in IT and software. innovation. 4. medical and health etc.growth per annum. skilled manpower and cheap labor. Given such vast potential which is not only confined to IT and software but also in several other sectors like biotechnology. India is still at the level of „knowledge‟. Given the limited infrastructure.. Many such countries have superior supplies of power. Basically. This will not happen automatically. Though it has the advantage of English-speaking. This will need capital and other support which can be provided by venture capitalists. knowledge.There is also greater visibility of the Indian companies globally.

India has a vast pool of scientific and technical research carried out in research laboratories. 6. This will also protect smaller investors. The success of venture capital is partly reflected by these numbers since 80% of firms that receive venture capital are sold to acquiring companies rather than coming out with IPOs. Investors also get enticed into public offerings of unproven and at times dubious quality. venture capital funded companies sales have grown by 66. Development of a proper venture capital industry particularly in the Indian context is important for bringing to market high quality public offerings (IPOs).5% for non-venture backed IPOs.S. an individual investor becomes a venture capitalist of a sort by financing new enterprises and undertaking unknown risk. 24 .5% per annum on average versus 5% for Fortune 500 firms. from 1992 to 1998.6% over a typical five year holding period after listing compared with 22. where. In the present situation. A study of US markets during the period 1972 through 1992 showed that venture-backed IPOs earned 44.5. in which the return multiple vis-à-vis non-venture funded companies is much higher. All the top 10 sectors measured by asset and sales growth in USA were technology related. A conducive environment including incubation facilities can help a great deal in identifying and actualizing some of this research into commercial production. This potential can also be seen in sales growth figures for the U. defense laboratories as well as in universities and technical institutes. This situation can be corrected by venture capital backed successful enterprises accessing the capital market. The export growth by venture funded companies was 165%.

venture capital is valuable not just because it makes risk capital available at the early stages of a project but also because of the expertise of venture capitalist that leads to superior product development. it was expected that angel investment would be of the order of $90 bn. By the end of 1997. technology. Besides this huge supply from organized venture funds there is an even larger pool of "angel" funds provided by private investors. Facilities at Hsinchu include English language teaching for the children of its expatriate entrepreneurs. There are 110 venture capital firms in Taiwan.7. By contrast. of which technology firms reportedly got around 75%. mostly in high technology.839 ventures. In 1999. around $30 bn of venture capital has been invested in the U. The venture capital environment has also been a favorable factor. were begun by entrepreneurs from the United States. cumulative disbursements to date are not more than $500m. of which technology firms have received only 36%. Thus. 8. The big focus of venture capital worldwide is. whose institutes produce 50.32 billion in 1. Forty percent of the firms established in this government promoted park. Taiwan has 74 technical schools. 25 . in 1999. thus making the total "at-risk" investment in high technology ventures in a single year of $120 bn. two of which are located near Hsinchu Park. Thus. The Hsinchu experiment has benefited from the generally high quality of education in Taiwan. these firms had invested $1.000 engineers annually. in India. 36 colleges and 24 universities. which currently accommodate 3. The revenue of firms located at Hsinchu Park alone was $14 billion in 1998.S. including 38 begun in 1998.000 expatriates. The other successful experience is that of Taiwan: Hsinchu Science-based Industrial Park is the showpiece of Taiwan‟s success.

There is also an emerging trend of grouping of Taiwanese and Indian high technology talents in Silicon Valley. The technology subsequently developed at the Institute led to two very successful integrated chip firms. as well as a U. Taiwan‟s government has been particularly successful in promoting its hardware industry through tax incentives. to eighty firms with a corpus of $3 billion by 1998. and institutional environment. via facilities such as Hsinchu Park. United Micro land Corporation (UMC) and Taiwan Semiconductor Manufacturing Corporation (TSMC). owned by the government. Similarly the venture capital industry in Israel has grown from one firm with a corpus of $30 million in 1991. India can learn important lessons from the Taiwanese government‟s focus on education and encouragement of small enterprises. Taiwan has benefited from close ties with Silicon Valley. This focus has meant that new Israeli ventures are most typically 26 . Israel‟s IT speciality is developing technology rather than software or products. A transnational community of Taiwanese venture capitalists has fostered a two-way flow of capital. – style legal. Further. tax. credit at cheap rates. low tariff barriers. started with semiconductor technology purchased from RCA Records. good infrastructure facilities and establishment of research institutes. 11. skills and information between Silicon Valley and Taiwan.S. The Industrial Research Institute. which were initially promoted by the government and ultimately privatized.9. 10. regulatory.

The new Israeli framework guarantees U. Israel‟s government participates in international cooperation. tax rates. Israel restructured its legal. In 1984. markets has also been successful. The law‟s strategy is to encourage private companies to invest in R&D projects with the government sharing the business risk.S. Under the law. investors parity with U. self-reliant industry. highly diversified. accounting and regulatory framework to mimic that of the United States. In fact. the Israeli government has created twenty six technology incubators designed to allow start-ups to convert their ideas into commercially viable products.acquired by larger technology firms. a remarkable achievement for a country of 6 million persons.S. These proposals. 12. and IPO route in the U. 13. a Research Committee appointed by the Chief Scientist approves proposals for anywhere from 30 to 66 percent of given projects‟ funding (up to $250. Like Taiwan. and to share start-up risks up front with later-stage activities such a marketing. The most successful of these ventures has been the Bilateral Industrial Research and Development Foundation (BIRD). the Israeli government passed a law to encourage industrial research and development (R&D) and created the Office of the Chief Scientist to implement government policy related to this area.000). In the early 1990s. also receive tax exemptions for up to ten years.S. a joint venture with the U. Israeli companies are the second largest group of companies listed on the Nasdaq markets after American companies. when funded. seeking to match the nation‟s technical skills with global markets. The Israeli high technology industry 27 .S. government. Israel is another country in which government policy fostered a successful. As an additional incentive to entrepreneurship.

and the BIRD project provide useful object lessons for the Indian government and business alike. Examples of US. Ministry of Information and Technology. senior managers 28 . There are success stories within India also. At the same time increasing number of internationally savvy. Similarly. It is also necessary that start-up‟s have access to R&D flowing out of laboratories and universities with infrastructure support such as telecom. technology parks etc. 15. Several of Israel‟s experiences have relevance for India. Australia and Hong Kong also in development of technology growth of exports and employment. connections. the Israeli venture capital industry has strong U. India certainly needs a large pool of risk capital both from home and abroad. legal.S. 14.K. provide the indications of a growing number of young.enjoys the same kinds of transnational ties that has helped Taiwan. Venture capital has played a very important role in U. partly ignited by success stories of Indians in US and other places abroad. tax and institutional environment. Steps are being taken at the level of Government. Government policy on incubators. 16. Certain NRI organisations are taking initiatives to create a corpus of US$500m to strengthen the infrastructure of IITs. Recent phenomena. technically qualified entrepreneurs in India. and CSIR for improvement in infrastructure and R&D.. Taiwan and Israel clearly show that this can happen provided there is right regulatory. the funding of R&D projects. More focused attempts will be required in all these directions.

18. easy entry-exit and ownership patterns to suit global needs. This phenomenon is seen even in India.have been leaving established multinationals and Indian companies to start new ventures. Conversely Fortune 500 jobs shrank by 2. The atmosphere thus is ripe for creating the right regulatory and policy environment for sustaining the momentum for high-technology entrepreneurship. there are interesting possibilities. Further in 62% of the venture funded 29 . Information Technology and Internet have brought about the trend of what can be called the "death of distance" and operation across the countries can be seamlessly integrated. By bringing venture capital and other supporting infrastructure this can certainly happen at home also. 60% of the jobs created by venture funded companies were engineers/skilled jobs. In US venture funded companies have grown jobs by 40% per annum since 1992. 17. It is also to be noted that the quality and quantity of research conceptualized in startups competes favorably with research undertaken by big firms. What could all this mean in terms of employment generation within India? There is probably no industry as employment intensive in productivity and numbers as high technology. This will of course need further regulatory and policy support to provide operational flexibility. Another important area is the need for multi country integration. The quality of enterprise in India is on an ascending curve. The Indians abroad have leapfrogged the value chain of technology to its highest levels.5% per annum during the same period. In the Indian context with developing IT and internet technology coupled with close linkages of Indian technocrats and entrepreneurs located in India and abroad.

Achieving even a reasonable fraction of US scale of development in information technology and other knowledge based areas. there is going to be a big employment generation in India. 20. It also needs to be noted that with other areas of business and industry getting more and more technology oriented. Additionally.000 job requirement each year. Besides. According to available estimates there are about 3. Bangalore and Hyderabad. stock options covered 100% of the employees. in Taiwan. 19. With proper venture capital support. the potential for employment is even larger than what appears from these estimates. substantial venture 30 .000 unfilled jobs of computer scientists in the US with the growth rate of 100. large flows of risk finance and venture capital can flow into the country. there will be requirement of jobs all around. given India‟s lower labour cost.companies. about 200. Several such firms are getting located around Delhi. Indications are already emerging. as firms in India which are being outsourced by foreign organizations to provide services are recruiting hundreds of employees within one year of their existence.000 engineering graduates come out from engineering colleges in addition to the substantial number of persons doing diploma and certificate courses in technology related areas. India today produces over 60000 new computer science graduates annually and over 2 lakh more enroll annually in computer training institutes. the total number of engineering graduates is around 50000 and in US it is 30000 per annum. Apart from the foreign investment. there can be a phenomenal increase in start-up enterprises which would generate further employment potential. Given the right environment. By contrast.50.

the recycling of entrepreneurial wealth and skills within the industry will gradually lead to greater presence of domestic venture capital industry . 21. Currently. This is particularly so as some of the Indian technocrat entrepreneurs in Silicon Valley have strong Indian linkages at professional level and are enthused to invest in India. 31 . Another 1000 are believed to have wealth in the range of $ 1-5 million. With enhanced interest in India as compared to some of the other emerging and Asian markets. The net FII investment in Indian markets is around US $10 billion and the flows for the last few years have generally been positive. India along with Ireland and Taiwan is a favored destination for investments by these offshore venture funds. about 20% of their wealth is reinvested in new ventures which will rise as vesting schedules mature. There are at least 300 such entrepreneurs with individual wealth exceeding $5 million and total wealth of about $25 US billion. given the right environment good amount of money would flow as venture capital investment. Further. there is a ready pool of around $1 billion available for annual venture capital investment in India. larger venture capital firms in the United States with a combined corpus of around US$ 35 billion have reportedly set aside up to 20% of their funds for investment offshore. While the proportion of offshore to local capital which is around 80% foreign and 20% domestic. The risk capital with Indian entrepreneurs is around $6 billion and even if 15% to 20% comes to India annually. may remain same for the first few years. pharmaceuticals etc.capital is likely to come from overseas Indian community in Silicon Valley. This is more so because India has already acquired credibility particularly in the area of information technology and sectors like media.

should be avoided and one set of regulatory guidelines may be issued under the aegis of one nodal agency for interface with the venture capital investors which could be SEBI. SEBI Regulations should focus more on adequate disclosure as investors in venture capital activities are institutions or high net worth individuals who are expected to have the capability of taking an informed decision based on the disclosures.SEBI REGULATIONS As in the case of FIIs. as far as possible. As per the provisions of Indian Registration Act. The regulatory requirement of seeking approval of the placement memorandum from SEBI may be dispensed with by strengthening the disclosure requirements. SEBI Regulations should encourage more venture capital investments in a hassle free manner. The multiplicity of regulations. the registration of trust document is optional. There are operational problems in the case of existing VCFs (in existence before SEBI Regulations were notified) to register the document of trust after lapse of four months period. SEBI Regulations therefore should not curtail the flexibility of investment by a VCF. It should be left to the choice of the applicant whether to register the trust document and there should not be any compulsion for registration of documents under the Indian Registration Act under the SEBI Regulation. The SEBI Regulations also provide in the case of a VCF incorporated as a trust for compulsory registration of instrument of trust under the Indian Registration Act. The venture capital activity is in nascent stage in India as of today and many dimensions of it are still to be unfolded. 32 . SEBI‟s primary role in the venture capital fund is envisaged as of a facilitator for growth rather than that of a regulator.

financing to sick industries and there is no acute necessity for venture capital funds to invest mainly in sick industrial undertakings. There are various agencies who are engaged in restructuring. knowledge based.The present regulatory framework permits the investment by VCF in sick industrial undertaking needs a review. VCFs may also be provided flexibility to participate in the restructuring process of sick industries as and when required 33 . however. The VCF should focus on investment in green shoe high technology oriented. research oriented industries.

body corporate or other legal entities. The limit of at least 80% of the funds raised by the VCF may be dispensed with and new investment criteria as dealt under the heading Investment related issues may be incorporated.  The Regulation should make provisions for registration of Foreign Venture Capital Investors (FVCI).  The investment criteria needs to be redefined to permit investment by VCF primarily in equity or equity related instruments or securities convertible into equity of VCUs and also by way of subscription to IPO and preferential offer in case of companies to be listed or already listed.  The relaxations for venture capital undertaking/funds under SEBI Takeover Code and SEBI (Initial Public Offer) guidelines as dealt under the heading of Exit related issues may also be incorporated. 34 .RECOMMENDATIONS The following amendments are recommended under the existing SEBI Venture Capital Regulations:  The definition of VCF should be amended to include any other structures and also the funds set up. company.  The existing provisions for approval of placement memorandum by SEBI may be dispensed with but the content of placement memorandum may be strengthened to include all the significant information necessary for an investor to arrive at a fair decision. scheme floated by a trust.  The provision for investment in sick companies and financial assistance in any other manner may be dispensed with.

boosting entrepreneurial spirit and establishing socially motivated VC. CORDAID. The fund achieved its First closing in August 2007 at USD 6 mn followed by a Final closing in January 2009 at USD 14 mn. Aavishkaar‟s investments create sustainable changes by increasing economic activity at the bottom of the pyramid. The fund management team further provides active operational & strategic support in growing the businesses. These efforts were recently acknowledged when Aavishkaar received the World Business Award 2006 sponsored by the International Chambers of 35 .funding as a new financing mechanism in India. Aavishkaar has received subscriptions from both domestic and global financial and development institutions like CARE Enterprise Partners. NABARD etc.VENTURE CAPITAL IN MICRO FINANCE following is the example of venture capital in micro finance Aavishkaar India Micro Venture Capital Fund (AIMVCF) “Aavishkaar India Micro Venture Capital Fund” (“AIMVCF”) is a fund created to promote inclusive development in rural and semi-urban regions in India. small to medium sized enterprises (MSMEs) will help drive positive changes in the underserved regions of the country. Aavishkaar was incorporated in the form of a Trust in October 2001 and was registered with SEBI as a Venture Capital Fund in May 2002. The fund‟s mission is based on the premise that promising micro.000. Aavishkaar helps establishment of entrepreneurial ventures by providing equity financing in the range USD 50. The key investment criteria for the fund are scalability and the potential to make strong positive social impact on rural or semiurban India.000 and USD 500.

One of the fund‟s recent investments is in „Vortex Engineering‟ that has developed a pioneering cost-effective ATM suited to rural markets. working capital loans etc. Vortex. Investment portfolio of Aavishkaar Aavishkaar has made 16 investments across industries.P. CCPS (Compulsorily Convertible Preference Shares). Servals‟ „blockbuster‟ product is a stove burner that uses 30% less kerosene than traditionally used stove burners. Aavishkaar generally adopts innovative modes of financing – that facilitate reducing the risk of dilution in promoters‟ equity. information and communications technology. The fund‟s first investment was in 2002 .J. waste management. agrobased technology. handicrafts. Abdul Kalam. Former President of India. healthcare and rural innovations. Mezzanine funding. while protecting Aavishkaar‟s interests in the ventures. 36 . bridge loans. with its‟ tie-up with various banks will serve rural markets across India by rolling out these cash machines. Aavishkaar along with social benefit to the society aims to provide returns to its investors in the range of 12-15% IRR over 10 year investment horizon. The various instruments made use of normally are: Common equity.in a Chennai-based firm called Servals Automation that has developed innovative new products to serve the rural markets.Commerce. which include renewable energy. United Nations Development Program (UNDP) and Prince of Wales Foundation in recognition of service towards fulfillment of the Millennium Development Goals. L-Ramp Awards of Excellence 2007 presented by Dr. A. Aavishkaar‟s portfolio companies today have the potential to generate direct employment for thousands of people in addition to providing value for the endbeneficiaries.

Aavishkaar invested in to the company in 2002. Building Transparency and Efficiency Shree Kamdhenu Electronics Private Limited (SKEPL). Gujarat. the company has received many awards including the L-Ramp Award for Excellence in 2007 and the "most energy efficient burner” by the Paraffin Safety Association of South Africa (PASASA). Energy Solutions for the Poor Servals encourages rural innovations that contribute towards energy selfsufficiency. Following are the brief introduction of companies. 5 from AGIMDC. develops products and systems that help bridge the technology gap in the dairy industry and make milk-production more transparent for the farmers involved.Investee Portfolio Aavishkaar has made 22 investments – 17 of which are from AIMVCF. Aavishkaar invested into the company in 2003. India. Its flagship products include a stove burner that saves up to 27% kerosene and a straight vegetable oil stove. In recognition of its achievements. 37 . a company based in the town of Vallabh Vidyanagar.

Aavishkaar invested into the company in 2003. The bi-lingual software means that a vast population has the benefits of 38 .Tide Technocrats Private Limited Tide Technocrats operates in the energy space. Bringing India's Traditional Arts And Crafts To A Wider Market Craftsbridge is a venture focused on adding value to the informal handicrafts sector in India. which has both English and an Indian language (Hindi or Tamil). designs composting facilities for municipal solid waste management and undertakes biomass assessment for renewable energy projects. It supports Carbon Emission Reduction project development. Pioneering Language Technologies In India CK technologies develops affordable bilingual office software aimed at users who do not speak or write English. It aims to do so by introducing design & corporate merchandising to artisans/vendors and by acting as the 'bridge' between craftsmen and consumers. Aavishkaar invested into the company in 2004. Its flagship product is a Bilingual Office Suite called "Shakti Office”.

This fund has been operational since May 2002. police stations. Share Microfin Ltd.computerized systems. the fund expects to make 30-35 investments.000 . Funds Aavishkaar Venture Management Services provides investment advice and support to the following three funds: AIMVCF (Micro Equity Fund) Aavishkaar India Micro Venture Capital Fund intends to raise US$ 14 Million for investment into Micro and Small Enterprises (MSMEs) that have rural and social focus. and with the Securities and Exchange Board of India (SEBI). such as in court houses.500. Aavishkaar invested into the company in 2006. With an average ticket size of US$ 50. (SML) is a MFI that aims to grow its client base to 15 million members and its outstanding portfolio to about INR 16. banks etc. and is registered as a Private Trust under the Indian Trust Act of 1882.382 crore by 2012-13. 39 . SML also provides collateral free loans to Joint Liability Groups.000. It is the first MFI in India to obtain a Non Banking Financial Company (Non Deposit) license and also the first Indian MFI to carry out a microfinance securitization transaction. Aavishkaar Goodwell invested into the company in 2007.

000.000.AGIMDC (Micro Finance Fund) Aavishkaar Goodwell India Microfinance Development Company Ltd is a US$18 Million fund.000. raising funds and dedicated to micro finance institutions (MFIs). the company expects to make 15-20 investments.000 . With an average ticked size of US$ 500.2. The company has been operational since December 2006.250. and is registered as a Global business license company under the Laws of Mauritius. and with the Securities and Exchange Board of India (SEBI). The fund has been operational since March 2008 and is registered as a Private Trust under the Indian Trust Act of 1882. the fund expects to make 30-35 investments. With an average ticket size of US$ 10. BYST Growth Fund Growth Fund is the first fund launched in year 2007 in India to provide equity like financing for businesses run by young entrepreneurs from socially disadvantaged population.000 . 40 .

Information Technology. Amongst them are India's first leveraged buyout (Infomedia). media. textiles. Following are the different sectors where ICICI venture made investment:- Banking & financial services  Centurion bank of Punjab  Karvy stock broking ltd Consumer services  PVR  Deccan Aviation  Tops Securities 41 . manufacturing. over the years has built an enviable portfolio of companies across sectors including pharmaceuticals.ICICI VENTURE ICICI Venture is one of the largest and most successful private equity firms in India with funds under management in excess of USD 2 billion. the first real estate investment (Cyber Gateway). It has several "firsts" to its credit in the Indian Private Equity industry. the first mezzanine financing for a acquisition (Arch Pharmalabs) and the first 'royalty-based' structured deal in Pharma Research & Development (Dr Reddy's). logistics. real estate etc thereby building sustainable value. ICICI Venture.

com IT/ITES  Geogmetric software  Infowavz  Rel Q  Bill Junction/Techprocess Life Science  Arch Pharmalabs  Malladi Drugs 42 .Energy  Reliance Petroliam  Kalapataru Power Engineering Services  Nagarjuna Construction  Action Construction Equipment Hospitality  Mass restaurant Internet  Naukri.

 Bharat Biotech  I-Ven Pharma (Dr reddy‟s labs)  RFCL  Metropolis Logistics  Gateway Distri parks Manufacturing  Samtel color  Tebma Shipyards Ltd  ACE Refractories Media  Infomedia India  TV Today(Aaj tak)  Miditech Real Estate  I-Ven Reality  I-Ven Township  Integreted township at Tellpur  Jublee Hills Landmark Projects  TSI Business Parks  Corolla Ralty 43 .

Retail  Home Solution  Shopper‟s stop  Crossword  Pantaloon Retail Textiles  Welspan India  Sangam 44 .

 Government equity funds have been widely used to pump prime private venture capital and reduce imbalances in the allocation of funds across different financing stages. 45 . Because nobody is trying to come up with IPO and IPO is the exit rout for venture capitalist  High taxes on emerging sector such as biotechnology.  Most of the foreign firms are doing venturing in India so as to earn profit.  As the market is uncertain so it very risky and create problem for the venture capital firms. Due to this Indian venture capital firms had lost there identity. pharma. IT etc… pass through status means that the income earned by these firms are highly taxable. particularly in beginning the risk profile of seed and start up firms is generally too high to attract sufficient venture capital. As the interest rate charged by the venture capitalist is too high.RECOMMENDATION  As the entrepreneur want to start up there own firm so it is very difficult for the new entrepreneur for paying the interest.

It could help the rehabilitation of sick units through people with ideas and turnaround management skills. A large number of small enterprises in India become sick even before the commencement of production.VCFs can improve their effectiveness by setting up venture capital cells in R&D and other scientific organisation. they could also provide financial assistance to people coming out of the universities.CONCLUSION Venture capital can play a more innovative and developmental role in developing country like India. but involving high risk.publishing.health care etc. providing syndicated or consortium financing and acting as business incubators. It is not only the initial funding which is needed from the venture capitalist. but they should also simultaneously provide management and marketing expertise a real critical aspect of venture capital in developing countries. 46 . who wish to start their own venture with or without high-tech content. This could encourage entrepreneurial spirit. another area where VCFs play a significant role in developing countries is the services sector including tourism. Yet. technical institutes etc. Venture capitalist could also assist small ancillary units to upgrade their technologies so that they could be in line with the developments taking place in their parent companies.

BIBLIOGRAPHY Financial management by I.M.Pandy (9th Edition) Financial management by Ravi Kishor (3rd Edition) WWW.ICICI venture 47 .com WWW.Aavishkar.ICVA.com WWW.

ANNEXURES VENTURE CAPITAL INVESTMENT BY DIFFERENT INDUSTRY venture capital Investment by Industry 24% 27% IT&ITES MANUFECTURING REAL ESTATE HEALTHCARE & LIFESCIENCE BFSI SHIPPING & LOGISTICS 2% 8% 7% 1% 1% 12% 7% 12% TRAVEL & LEISUR ENG &CONSTRUCTION FOOD &BEVERAGES OTHERS 48 .