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What is Venture Capital?

The term Venture Capital is understood in many ways. In a narrow sense it refers to,
investment in new and tried enterprises that are lacking a stable record of growth. In a
broader sense, venture capital refers to the commitment of capital as shareholding for the
formulation and setting up of small firms specializing in new ideas or new technologies. The
emerging scenario of global competitiveness has put an immense pressure on the industrial
sector to improve the quality level with minimization of cost of products by making use of
latest technological skills. The implication is to obtain adequate financing along with the
necessary hi-tech equipments to produce an innovative product which can succeed and
grow in the present market condition. Venture Capital is money provided by professionals
who invest and manage young rapidly growing companies that have the potential to develop
into significant economic contributors. According to SEBI regulations, venture capital fund
means a fund established in the form of a company or trust, which raises money through
loans, donations, issue of securities or units and makes or proposes, to make investments in
accordance with these regulations. The funds so collected are available for investment in
potentially highly profitable enterprises at a high risk of loss. A Venture Capitalist is an
individual or a company who provides, Investment Capital, Management Expertise,
Networking & marketing support while funding and running highly innovative & prospective
areas of products as well as services. Thus, the investments made by Venture Capitalists
generally involves Financing new and rapidly growing companies, purchasing equity
securities, taking higher risk in expectation of higher reward,
Having a long frame of time period, generally of more than 5 - 6 years. Actively working with
management to devise strategies pertaining for overall functioning of project. Networking
and marketing of the product /service being offered
.
Venture Capital Financing:
It generally involves start up financing to help technically sound, globally competitive and
potential projects to compete in the international markets with the high quality and
reasonable cost aspects. The growth of South East Asian economies especially Hong Kong,
Singapore, South Korea, Malaysia along with India has been due to the large pool of Venture
Capital funds from domestic / offshore arenas.
- Venture Capitalists draw their investment funds from a pool of money raised from public
and private investors. These funds are
deployed generally as equity capital (ordinary and preference shares) and some times as
subordinated debt which is a semi secured investment in the company (through debenture)
ranking below the secured lenders that often requires periodic repayment. Today, a VC deal
can involve common equity, convertible preferred equity and subordinated debt in different
proportions.
- The Venture Capital funding varies across the different stages of growth of a firm. The
various stages are

1. Pre seed Stage: Here, a relatively small amount of capital is provided to an entrepreneur
to conceive and market a potential idea having good future prospects. The funded work also
involves product development to some extent
- . 2. Seed Stage: Financing is provided to complete product development and commence
initial marketing formalities. 3. Early Stage / First Stage: Finance is provided to companies to
initiate commercial manufacturing and sales. 4. Second Stage: In the Second Stage of
Financing working capital is provided for the expansion of the company in terms of growing
accounts receivable and inventory.
- 5. Third Stage: Funds provided for major expansion of a company having increasing sales
volume. This stage is met when the firm crosses the break even point.
- 6. Bridge / Mezzanine financing or Later Stage Financing: Bridge / Mezzanine Financing or
Later Stage Financing is financing a company just before its IPO (Initial Public Offer). Often,
bridge finance is structured so that it can be repaid, from the proceeds of a public offering.
- There are basically four key elements in financing of ventures which are studied in depth by
the venture capitalists. These are :
1. Management: The strength, expertise & unity of the key people on the board bring
significant credibility to the company. The members are to be mature, experienced
possessing working knowledge of business and capable of taking potentially high risks.
2. Potential for Capital Gain: An above average rate of return of about 30 - 40% is required
by venture capitalists. The rate of return also depends upon the stage of the business cycle
where funds are being deployed. Earlier the stage, higher is the risk and hence the return.
3. Realistic Financial Requirement and Projections: The venture capitalist requires a realistic
view about the present health of the organization as well as future projections regarding
scope, nature and performance of the company in terms of scale of operations, operating
profit and further costs related to product development through Research & Development.
4. Owner's Financial Stake: The financial resources owned & committed by the
entrepreneur/ owner in the business including the funds invested by family, friends and
relatives play a very important role in increasing the viability of the business. It is an

important avenue where the venture capitalist keeps an open eye.

Problems of Venture Capital Financing:


VCF is in its nascent stages in India. The emerging scenario of global competitiveness has
put an immense pressure on the industrial sector to improve the quality level with
minimization of cost of products by making use of latest technological skills. The implication
is to obtain adequate financing along with the necessary hi-tech equipments to produce an
innovative product which can succeed and grow in the present market condition.

Unfortunately, our country lacks on both fronts. The necessary capital can be obtained from
the venture capital firms who expect an above average rate of return on the investment. The
financing firms expect a sound, experienced, mature and capable management team of the
company being financed. Since the innovative project involves a higher risk, there is an
expectation of higher returns from the project. The payback period is also generally high (5 7 years). The various problems/ queries can be outlined as follows:
(i) Requirement of an experienced management team.
(ii) Requirement of an above average rate of return on investment.
(iii) Longer payback period.
(iv) Uncertainty regarding the success of the product in the market.
(v) Questions regarding the infrastructure details of production like plant location,
accessibility, relationship with the suppliers and creditors, transportation facilities, labour
availability etc.
(vi) The category of potential customers and hence the packaging and pricing details of the
product.
(vii) The size of the market.
(viii) Major competitors and their market share.
(ix) Skills and Training required and the cost of training.
(x) Financial considerations like return on capital employed (ROCE), cost of the project, the
Internal Rate of Return (IRR) of the project, total amount of funds required, ratio of owners
investment (personnel funds of the entrepreneur), borrowed capital, mortgage loans etc. in
the capital employed.
THE Indian venture capital (VC) industry has witnessed considerable turmoil in the last two
years. Consider this: At least seven VC funds (VCFs) shut shop. Many others simply ran out
of funds. A few set up high-cost Indian operations, with no funds raised or allocated for
investment. The rest of the industry appears to be busy, `restructuring' their investment
focus, making very few new investments.
After a period of hectic investing, from 1998 to 2000, the Indian VC industry appears to be
going through difficult times. This is a time for the industry to engage in some serious
reflection. Managers in the industry may possibly disagree with me. They might argue that
the developments in the Indian industry are a mere reflection of a larger global phenomenon.
After all, have the American and European VC industries not slowed down? That comparison
though, is inappropriate. The slow down and the poor performance of many funds in the
Western world are part of a cyclical phenomenon. The Indian industry, on the contrary, faces
issues of a fundamental nature. Let us examine four issues of concern.
First, there is a serious mismatch between the kind of venture capital available in India and
what the market demands. Almost all VCFs in India have been targeting their capital at
companies in the information technology, pharmaceuticals and some services industries,
looking for expansion financing of Rs 15 crores or more. Now, this is a limited market

segment. Most of the industries mentioned above are relatively young. There are very few
firms in these sectors, seeking large amounts of capital for expansion financing. At the same
time, a large number of aspiring entrepreneurs, start-ups, early- stage companies and Old
Economy firms, which are fundamentally sound businesses, are unable to attract the VC
financing that they badly need in order to grow. Apart from the relatively smaller amounts of
funding that they seek, on average start-ups require considerable post-funding support from
the investor to grow their businesses. That is painstaking work, for which Indian VCF
managers have demonstrated neither experience nor training nor temperament. Old
Economy firms do not provide the quick or glamorous exits that VCFs often desire.
Second, most VCFs in India are an extended arm or a division of global investment
institutions. International funds represent more than 95 per cent of the VC invested in India.
Two consequences follow from this near-total dependence on foreign capital. One, the
investment mandates of these VCFs are often driven by the parent institutions' global world
view, which often ignores local market needs. The homogenous investment preferences of
VCFs outlined earlier follow from the parent institutions' global investment strategies. Two, at
a portfolio level, every international VC investor in India has been a victim of the depreciation
of the rupee against the dollar. The returns produced by Indian VCFs, measured in US
dollars or other Western currencies, turn out to be considerably less attractive than that
measured in Indian currency. Many nations such as the Netherlands, Portugal, Finland,
Norway and Israel recognized the limitations of depending on foreign funds at the time of
evolving a policy for developing a local VC industry. Their first step was to kick start VCFs in
the private sector with funds from domestic institutions. Over a decade, or even less, they
succeeded in creating a local VC industry that depended less and less on government
support and international investors.
The third issue is the poor quality of corporate governance and lack of sensitivity among
entrepreneurs and investors, to each other's legitimate business aspirations. This is a
universal problem and not unique to India. What is however unique to India is the hopeless
system of legal redress of grievances when partners renege on contractual obligations.
Often,
aggrieved parties in India agree to settlements that are unfair to them, apprehending that
litigation in Indian courts could be dysfunctional. This situation may not change in the
foreseeable future. The alternative to litigation and unfair bad investments would be to invest
more effort in better identification and selection of investments and supervision of the
portfolio. Indian VCF managers need to ask themselves if they are prepared to put in that
extra effort to minimize prospects for litigation in the first place.
Last, but not the least, the industry lacks a broad-based and effective trade association. The
Indian Venture Capital Association (IVCA) does not represent a large proportion of the VCFs
who are active in India. I am not sure of the IVCA's contributions to the VC industry either, in
the ten years since it was formed. For some years initially, the IVCA used to produce a
delightfully uninformative annual report, many months after the end of the year. For the past
four years even those reports do not appear to have been published! Venture capital has
been a remarkable catalyst of entrepreneurial activity, after the Second World War, in many
developed countries. It has led to significant growth in industry and innovation. The
prospects for the Indian VC industry are no less humongous. It is up to the industry to reflect
on its current predicament and evolve a strategy to seize the opportunity.

Prospects of Venture Capital Financing:


With the advent of liberalization, India has been showing remarkable growth in the economy
in the past 10 - 12 years. The government is promoting growth in capacity utilization of
available and acquired resources and hence entrepreneurship development capital. While
only eight domestic venture capital funds were registered with SEBI during 1996-1998, 14
funds have already been registered in 1999-2000. Institutional interest is growing and foreign
venture investments are also on the rise. Many state governments have also set up venture
capital funds for the IT sector in partnership with the local state financial institutions and
SIDBI. These include Andhra Pradesh, Karnataka, Delhi, Kerala and Tamil Nadu. The other
states are to follow soon.
In the year 2000, the finance ministry announced the liberalization of tax treatment for
venture capital funds to promote them & to increase job creation. This is expected to give a
strong boost to the non resident Indians located in the Silicon Valley and elsewhere to invest
some of their capital, knowledge and enterprise in these ventures. A Bangalore based media
company, Graycell Ltd., has recently obtained VC investment totaling about $ 1.7 mn. The
company would be creating and marketing branded web based consumer products in the
near future.
The following points can be considered as the harbingers of VC financing in India:(i) Existence of a globally competitive high technology.
(ii) Globally competitive human resource capital.
(iii) Second Largest English speaking, scientific & technical manpower in the world.
(iv) Vast pool of existing and ongoing scientific and technical research carried by large
number of research laboratories.
(v) Initiatives taken by the Government in formulating policies to encourage investors and
entrepreneurs.
(vi) Initiatives of the SEBI to develop a strong and vibrant capital market giving the adequate
liquidity and flexibility for investors for entry and exit.
In a recent survey it has been shown that the VC investments in India's I.T. - Software and
services sector (including dot com companies) - have grown from US $ 150 million in 1998
to over US $ 1200 million in 2002. The credit can be given to setting up of a National Venture
Capital Fund for the Software and I.T. Industry (NFSIT) in association with various financial
institutions of Small Industries and Development Bank of India (SIDBI). The facts reveal that
VC disbursements as on September 30, 2002 made by NFSIT totalled Rs 254.36 mn.
Whopping investments of over USD 8.5 billion is expected in Indian from Venture Capitalists
(VCs) and Private Equities (PEs) in next five years in at least five identified areas such as
Biotechnology and Life Sciences, Logistics, Clean technology, Film Production and
Education,
Quoting the findings of the ASSOCHAM & Deloitte paper, president ASSOCHAM, Sajjan
Jindal said that India has large opportunities in Biotechnology and Life Sciences on lines of

retail and Real Estate. The Life Sciences sector in India has been attracting specialists
Venture Capitalists from global and local funds. According to information received by the
ASSOCHAM, US based Life Sciences Fund has recently invested approximately USD 20
million in a Hyderabad based pharmaceutical company. Devices and diagnostics are other
areas where investors are active. It is anticipated that the Biotechnology and Life Sciences
will alone attract about USD 1.5 billion investments from VCs and PEs by 2012.
Jindal said that logistics is another area in which VCs are expected to invest in excess of
USD 2 billion in Indias maritime infrastructure and logistics as it strengthens cargo handling
facilities to meet rising demand for exports and imports. The paper mentions that National
Maritime Development Programme envisages huge investment to upgrade Indias maritime
sector of which 64% is expected to come from VCs and PEs firms. These funds are also
looking at possibilities in ancillary business that supports maritime trade such as
warehousing and container freight stations.
Clean technology is still another area where VCs and PEs would grow more and more
active. In 2007, investors committed USD 290 million in 11 cleantech investment deals
compared to USD 140 million in 9 deals in 2006. The momentum is expected to continue
over the coming years given the government initiatives and policy focus on cleantech. It is
expected that PEs and VCs would be able to jointly garner an investment of USD 3.5 billion
in cleantech areas in next few years, pointed out Jindal.
The other prospective areas in which VCs and PEs would make huge investments include
Indian film production and education. The Indian film industry currently is worth 1.8 billion
and is expected to grow @of over 25% and would reach a level of USD over 5 billion by
2011. With the newly accorded status of industry and professionalism on film industry, it will
emerge as new venue for VCs. The ASSOCHAM expects USD 0.25 billion VCs investments
in this industry in next five years.
With a booming economy and concurrent talent shortage, denying for services from the
domestic education sector is slated to create a lucrative opportunities for VCs. A global
private equity firm with USD 36 billion in assets is planning approximately
USD 200 million investments in the Indian education sector by taking up strategic positions
in companies offering e-learning, distant learning, vocational training and the like.
The paper further points out that venture capital investment is undergoing some interesting
transitions. Developing economies like India and China continue to attract investments; early
stage finance is becoming increasingly globalize. Investors are backing consumer and retail
firms that benefit from the rise of the Indian middle class, as well as business services that
cater to the nations growing economic sector. The other transition is that the capital flowing
to India is designed to expand existing companies. By contrast, venture capital in the United
States, Europe and Israel is usually dedicated to backing new technologies or services.
In Asia, venture capitalists are still in the process of developing common evaluation criteria
for investment, unlike in mature markets, where a common criterion is the level of attention
paid to the entrepreneurs personality and experience. In Asia, different classes of stocks
with different voting rights are relatively uncommon. Asian investors thus have to rely mostly
on common stocks and other means to manage their portfolio risk. Traditional venture
capitalists are expected to actively assist their portfolio companies in what are termed value-

added activities. Most of the Asian venture capitalists assistance remains restricted to
providing advice on financial matters.
The dynamics in emerging venture capital markets differ from those in developed venture
capital markets. The emerging private equity markets focus primarily on growth capital
investments through minority equity participation. Emerging venture capital markets,
although not without challenges, present a host of opportunities
India story still attracts venture capital funds
Venture capitalists raising new funds dedicated to the Indian market are not finding the going
tough despite a global slowdown impacting availability of capital.
For instance, Clearstone Venture Advisors, a global venture capital fund with over $650
million of committed capital for investment globally, plans to close its fourth fund soon. The
fund, which could be over $200 million, will also have a larger share of investments in India.
The company had raised $210 million for its third fund, of which 20 to 25 per cent was
dedicated for investments in India.
Similarly, Seed Fund, which invests in early start-ups, is in the process of raising its second
fund. The fund, which will be in the range of $50-60 million, will be closed by the end of this
year. It all depends on who is raising the funds. Firms like us who invest in early- stage
companies will be least impacted as we are not looking at immediate gains," said Pravin
Gandhi, Partner, Seed Fund.
The strong India story is probably the reason why several funds are strengthening their India
focus. These include names such as Walden International and Accel India Venture Fund.
Walden International recently announced its plans to raise a $500 million global fund early
next year to step up its investment in China and India. Over the next 12-18 months, the
global VC fund will invest close to $150 million (around Rs 650 crore) in India.
Mohit Bhatnagar, operating partner at Sequoia Capital, said the firm has not seen any major
drop in either the investments or the pipeline of deals they examine. A lot of good companies
get started globally during economic downturns and India should be no different. Of course,
deals might take longer to close accounting for valuation corrections, different exit strategies,
etc., says Bhatnagar. Not everyone is bullish on the future as some VCs said the subsequent
rounds of funding will get impacted.
VCs raising follow-on funds are not facing the problem as much as those raising funds for
the first time, points out Arun Natarajan, founder and CEO, Venture Intelligence. According to
Venture Intelligence data, during the first six months of 2008, VCs invested $380 million
across 60 deals.This compares with $379 million spread across 59 investments during
corresponding period in 2007. VCs invested $760 million across 125 investments during
whole of 2007.Seed Fund's Gandhi said most investors are cautious, hence the appetite for
investment will slow down. Many also feel that India as a market was too hyped-up for
investment and many went overboard with regard to valuations. Avnish Bajaj [ Images ], cofounder and MD, Matrix India, said some of the global funds coming to India will be
impacted, especially where the fund did not have an India-dedicated team who could bring in
local expertise

CHAPTER 1: INTRODUCTION
1.1 VENTURE CAPITAL FINANCING
Business requires capital, and getting it at the right time is very important. There are several
alternativesto fund the business. A brief heading to name a few would be :

Owner or proprietors capital

Equity partner

Debt FinanceThese can be further be branched to many options giving entrepreneur several
options to choose among.In this study the focus would be more on venture capital which
comes under equity partner as well asunder debt financing.Venture capital is a risk financing
in the form of equity or quasi-euity. It gives the business funds basedon their potential and
their interest as perceived by the investor. Funds might be required for seed stagefunding,
expansion/development funding or for acquisition financing. Venture capital is
establishedamong developed countries and is developing in third world countries because of
its impact onencouraging entrepreneurial activities within a nation. Venture Capital firms
invest funds on anybusiness with a professional outlook, they focus on their primary
segment which vary among differentspecializations (eg. e-commerece, Oil & Gas,
Healthcare, Manufacturing, Health/life sciences, etc.)
Venture capital in India today has three forms

Equity

Conditional loans

Income notesThe number of venture capital firms are raising in India due to the welldeveloped avenues for buyingand selling of shares within SMEs, huge tax benefits for the
venture capitalist and support fromgovernment policies. Venture capital plays a strategic role
to build potential business/enterprises toreach a level where they can reap their capital gains
and can cash out these gains by leading directingtheir financed venture to any of the
following exit routes:

Initial public offerings (IPO)

Acquisition by other company

Purchase of venture capitalists share by other investors or promotersThis is done when the
Venture capitalist realizes the required return of return on his primary capitalinvested on the
business to take the exit route. Venture capital financing helps both the entrepreneurs aswell
as the venture capitalist to realize their goals.With venture capital financing, the venture
capitalist acquires an agreed proportion of the equity of thecompany in return for the funding
that he offers.

This could be summarized as follows :

Equity participation

Long term investment

Participation in management The rate of return on this capital lies within the success of the
business venture. Venture capital Equityfinance thereby offers the advantage of having no
interest charges. It is "patient" capital that seeks areturn through long-term capital gain
rather than immediate and regular interest payments, as in the caseof debt financing. Given

the nature of equity financing, venture capital investors are therefore exposedto the risk of
the company failing. As a result the venture capitalist must look to invest in companieswhich
have the ability to grow very successfully and provide higher than average returns to
compensatefor the risk.
2
Venture capitalists management approach differ to that of a lender or a bank. The bank
does notparticipate with the management and keeps its ties away from the ventures
management, operations andother decision making. When venture capitalists invest in a
business they typically direct and guide theventure so as to lead it towards capital gains.
They are a crucial part of the company's decision makingand occupy a place in board of
directors. These professional venture capitalists act as mentors and aim toprovide support
and advice on a range of management, sales and technical issues to assist the companyto
develop its full potential.
1.2 BACKGROUND OF THE STUDY:
Today due to the economic crisis and the change in job market. Entrepreneurship has
gained market. Anumber of technocrats in India today plan to setup their own shops and
capitalize this opportunities. Intodays highly dynamic economic climate with regular
technological inventions, few traditional businessmodels may survive but margin lies more
towards more innovative business ideas. Today it is not theconglomerates that fuel economic
growth but are the new SMEs and other innovative businesses.The bright reason for global
economic growth today lies in the hand of the small and mediumenterprises. For example, in
India SMEs alone contribute to almost 40% of the gross industrial valueadded in the Indian
economy.Whereas in the United States 55% of their global exports are supported by very
SMEs with not morethan 50 employees and 10% exports are generated by companies with
800 or more employees.There is a paradigm shift from the earlier physical production and
economies of scale model to newventures with technological advancements providing
services and under process industry.However, staring an enterprise has its own risk and is
never easy. There are number of parameters thatcontribute to its success or downfall. That
is why entrepreneurs find it difficult to find the right venturecapitalist and miss the right way
to approach them. However, there are methods and a right protocol forany entrepreneur to
reach out his investor in a right way and thereby get the funding and that is our topicof study
here.

2.2 INTRODUCTION TO THE VENTURE CAPITAL INDUSTRY

Initiative in India:
Indian tradition of venture capital for industry starts with a history of more than 150 years.
Back thenmany of the managing agency houses acted as venture capitalists providing both
finance andmanagement skill to risky projects. It was the managing agency system through
which Tata iron andSteel and Empress Mills were able to raise equity from the investing
public. The Tatas also initiated amanaging agency system, named Investment Corporation
of India in 1937, which by acting as venturecapitalists, successfully provided hi-tech

enterprises such as CEAT tyres, associated bearings, nationalrayon etc. The early form of
venture capital enabled the entrepreneurs to raise large amount of funds andyet retain
management control. After the abolition of managing agency system, public sector
termlending institutions met a part of venture capital requirements through seed capital and
risk capital forhi-tech industries which were not able to meet promoters contribution.
However all these institutionssupported only proven and sound technology while technology
development remained largely confidentto government labs and academic institutions.Many
hi-tech industries, thus found it impossible to obtain financial assistance from banks and
otherfinancial institutions due to unproven technology, conservative attitude, risk awareness
and rigidsecurity parameters. Venture capitals growth in India passed through various
stages. In 1973, R.S. Bhattcommittee recommended formation of Rs. 100 crore venture
capital funds. The seventh five year planemphasized the need for developing a system of
funding venture capital. The Research andDevelopment Cess Act was enacted in May 1986,
which introduced a cess of 5 percent on all paymentsmade for purchases of technology from
abroad. The levy provides the source for the venture capitalfund. Formalized venture capital
took roots when comptroller of capital issues venture capital guidelinesin Nov 1988.

2.3 GROWTH OF VENTURE CAPITAL INDUSTRY


Up to 1996: The Early Years:
Funds that were mobilized for venture investment were small in value.
The venture capitalists in those times were mostly from a banking background.
Banks approached the subject of venture funding much likely they approached debt
financing of a project.
The accent was on the asset-side of the balance sheet. And the focus on innovation and
businessbuilding was low.
Value creation as a focus had not yet been fully discovered, and exit strategies were
beingthought more around the life-term of the fund.
Valuations were low.
No competition between VCs.
Indian entrepreneurs had not yet discovered the venture capital route to funding and
growth andit reflected in the small amounts that were invested.
There was little or no active participation of venture capitalists in entrepreneurial activities
suchas financial structuring, business strategy.

Business enhancement through networks.


1997 to 2000: The Rock n Roll Years:

The SEBI guidelines of 1996 acted as huge incentive for institutionalacked MNC venture
capital companies to focus their attention on India.
The range of venture capitalists now spanned incubators, ingents, classic venture
capitalists andeven private equity players. And the lines between them had begun to blur.
Venture capitalists were instrumental in introducing risk taking too many, members of
theprofessional class.
Innovation was the key, and idea flows equaled doer flows at a frantic pace never before
seen.

2001 Onwards: The Reality Years:


The number of people who had got in to venture capital game was truly impressive.
In addition to the seasoned players, there were finance and noon finance professionals of
different hues entering the industry and people with little or no experience running
thecompanies.
Venture capital community is finally recognizing that the evolution and business is an ongoingprocess. This added to the return of the business maturation cycle of five to seven
years, portendsa less frenetic and more sustained pace of venture activity.

2.11 CONTRIBUTORS TO THE VENTURE FUND:

Foreign Institutional Investors.

All India Financial Institutions.

Multilateral Dev Agencies.

Other Banks.

Other Public.

Private Sector.

Public Sector.

Nationalized Banks.

State Financial Institutions.

Insurance Companies.

Mutual Funds.

Conclusion: The world is becoming increasingly competitive. Companies are required to be


super efficient with respect to cost, productivity, labour efficiency, technical back up, flexibility
to consumer demand, adaptability and foresightedness.
There is an impending demand for highly cost effective, quality products and hence the need
for right access to valuable human expertise to guide and monitor along with the necessary
funds for financing the new projects.
The Government of India in an attempt to bring the nation at par and above the developed
nations has been promoting venture

capital financing to new, innovative concepts & ideas, liberalizing taxation norms providing
tax incentives to venture firms, giving a Philip to the creation of local pools of capital and
holding training sessions for the emerging VC investors.
There are large sectors of the economy that are ripe for VC investors, like, I.T, Pharmacy,
Manufacturing. Telecom, Retail franchises, food processing and many more. The nation
awaits for the burgeoning VC business in India in spite of the existing shortcomings in the
Indian infrastructure. Looking ahead for a bright future for India Inc.

VCFs are regulated by SEBI (Venture Capital Fund) Regulations, 2000


Definitions:
Venture capital fund means a fund established in the form of a trust or a company
including a body corporate and registered under these regulation which
(i) has a dedicated pool of capital;
(ii) raised in a manner specified in the regulations; and
(iii) invests in accordance with the regulations; [Section 2 (m)]
Venture capital undertaking means a domestic company
(i) whose shares are not listed on a recognized stock exchange in India;
(ii) which is engaged in the business for providing services, production or manufacture of
article or things or does not include such activities or sectors which are specified in the
negative list by the Board with the approval of the Central Government by notification in the
Official Gazette in this behalf.t-on-Study-of-Venture-Capital-in-India#
Registration
Any existing VC on the date of Regulations to make an application for registration within
3months from the date of Regulations
Application to be made in Form A accompanies with non-refundable fee as prescribed in
the Schedule in manner specified in Part B
Application fees- Rs. 100000
Registration fees- Rs. 10,00,000

ELIGILBILITY CRITERIAS
Company:
-Main object as business of VC in MoA

-prohibition to make invitation for public subscription


-director/principal officer/employee not to be involved in any litigation in securities market
-as the same will have a bearing on the applicant
- director/principal officer/employee not being convicted of any offence
-if it is a fit and proper person
-To check the criterias specified in Schedule II of SEBI (Intermediaries) Regulations, 2008
Trust:
-the trust deed duly registered under the Registration Act, 1908
-main object to carry on the business of VC
-the directors of trustee company or its trustee not to be involved in any litigation in securities
market
-the directors of trustee company or its trustee not being convicted of any offence
-if it is a fit and proper person
-To check the criterias specified in Schedule II of SEBI (Intermediaries) Regulations, 2008
Body Corporate:
-set up or established under laws of Central or State Legislature
-applicant permitted to carry on the business of VC
-Same as in case of company/trust
Minimum Investment in VCF [Reg 11]
VCF raises money from investors
Indian
Foreign
Non-Residents
In form of units
Defined under Reg 2(l) as-unit means beneficial interest of the investors in the scheme
or fund floated by trust or shares issued by a company including a body corporate;
No VCF in form of company/trust to accept any investment below Rs. 5lac
Proviso applicable to employees/directors/principal officer of the VCF/fund manager/asset
management company

Each fund set up by VCF to have firm commitment from the investors of atleast Rs. 5
crore before start up of operations
VCF- Trust vs Company
Trust form is more tax advantageous
However, securities that a Trust form can acquire are limited to equity securities under
Indian Trust Act, thus venture capital trust firm investing in pref share can lose its tax benefit
status
It is easy to form and has minimal compliances requirement;
Liquidation of the funds in case of company structure would be a long drawn process,
whereas in case of a trust it would be simpler to dilute the trust;
Distribution of the returns on maturity or at the end of the tenure of the fund will be simpler
in case of trust form than in case of company structure;
Repatriation of the capital in the event of losses would be difficult in company form of
structure as company cannot redeem equity or preference shares unless out of profits or
fresh issue of shares.
In case of trust since there are beneficiaries it is hard to say who owns a Venture Capital
Trust in case of Non-Resident beneficiaries
FDI Policy for VCF in India
Domestic VCF set-up as a Trust
a person resident outside India (non-resident entity/individual including an NRI) cannot
invest in such domestic VCF under the automatic route of the FDI scheme and would be
allowed subject to approval of the FIPB.
Domestic VCF set up as a Company
a person resident outside India (non-resident entity/individual including an NRI) can invest
in such domestic VCF under the automatic route of FDI Scheme, subject to
the pricing guidelines,
reporting requirements,
mode of payment,
minimum capitalization norms, etc.
Offshore VCFs allowed to invest in domestic venture capital undertakings through automatic
routes.
A bit of Taxation
Prior to Finance Act, 2007 registered VCFs enjoyed pass through status on income from
all their investments

Finance Act 2007 changed the definition of VCU under which benefit of pass through
status is restricted to 9 sectors only
Section 10(23 FB) of the Income Tax Act, 1961
Income earned by a domestic SEBI registered VCF (whether a trust or a company) from
an investment in a venture capital undertaking is exempt from tax.
Section 115U of the Income Tax Act
Such VCFs have been accorded a pass through status, i.e., the investors in the VCF are
directly taxed on any income distributed by the VCFs as though the investors have made
direct investments in the portfolio companies.
Therefore they are only allocating the funds for which they receive management fees
to avail this pass through status, the VCFs investments must be made in domestic
companies whose shares are not listed on any recognized stock exchange in India

Table of Contents of Project Report:


CHAPTER 1: Preface
CHAPTER 2: Executive Summary
CHAPTER 3: Introduction
3.1 What Is Venture Capital?
3.2 Investment Philosophy
CHAPTER 4: Objectives of the Study
CHAPTER 5: Research Methodology
CHAPTER 6: Venture Capital in India
6.1 A Brief History
6.2 Venture Capital in India
CHAPTER 7: Constraints in Venture Capital in India
7.1 Problems with Venture Capital in the Indian Context
7.2 Venture Capital Financing Process
CHAPTER 8: Classification of Venture Capital
CHAPTER 9: Findings & Analysis
9.1 Indian Scenario - A Statistical Snapshot
9.1.1 Contributors of Funds

9.1.2 Methods of Financing


9.1.3 Financing by Investment Stage
9.1.4 Financing by Industry
9.1.5 Financing by States
9.2 Financing Options In General
9.3 Structure of Venture Capital industry
9.4 Corporate Venturing
9.5 Generating A Deal Flow
9.6 Due Diligence
9.7 New Financing
9.8 Inter-Company Transactions
9.9 Investment Valuation
9.10 Structuring A Deal
9.11 Promoter Shares
9.12 Handling Director's and Shareholder's Leans
9.13 Monitoring and Follow Up
9.14 Exit
9.15 Accessing Venture Capital
CHAPTER 10: Findings
CHAPTER 11: Limitations of the Study
CHAPTER 12: Suggestions
CHAPTER 13: Conclusions
CHAPTER 14: ANNEXURES
14.1 SEBI Guidelines
14.2 Venture Capitalist Addresses