Submitted by: Name: Amrita – Hazra Roll No.: 19/MBA/RDIAS/02

Submitted to: Ms Ankita Chopra Project Guide

RUKMINI DEVI INSTITUTE OF ADVANCED STUDIES (Affiliated to GGSIPU, Delhi) Madhuban Chowk, Rohini, Delhi-85.


I am deeply indebted to my Project Coordinator Ms Ankita Chopra. for her valuable suggestion, able guidance and constant encouragement throughout the Project. I would also like to thank all others who helped me directly and indirectly during this project.

Amrita Hazra



This is to certify that Ms. AMRITA HAZRA of M.B.A (FT)-4th Semester, Batch 2002-2004, Roll No 19/RDMB/2002, has undertaken a project on “VENTURE CAPITAL INDUSTRY IN INDIA” and completed the work under my supervision. I am satisfied with the project submitted.



Small Industrial Development Bank of India (SIDBI). Investment valuation.  Investors feel that they would like to retain control and also to ensure that the business must pass onto their family. such as what is venture capital . Value Addition and monitoring and the exit routes. However there are several problems faced by the Venture Capitalists in India which include:  Venture Capital Financing is still not regarded as commercial activity. This project also includes the various contributors to this industry and their industry wise investments such as those of Public sector. It also includes the current Indian scenario with a brief profile of the major players in this industry such as State Finance Corporations. Pricing and structuring the deal.S. making a deal. Private Sector. options to finance a venture which includes both equity and debt. Due diligence. 4 . Several companies were financed with this mode of funding which included SQL Star of Hyderabad. And the first origin of modern day Venture Capital in India which can be traced to the setting up of a Technology Development Fund (TDF) in the year 198788. the investment philosophy . what are its process. through the levy of a cess on all technology import payments. The theoretical foundations cover the stages in the investment cycle of Venture capital process such as. a brief history of the venture capital industry and its overview. Unit Trust of India (UTI) etc. Nationalized Banks. Satyam Infoway to name a few. It also includes a brief summary on the Committee on Development of Small and Medium Entrepreneurs under the chairmanship of R. Bhatt which first highlighted venture capital financing in India in 1972. manage portfolios. Various factors on which the success of venture capital firms depends such as abandoning the losers. angel investors. the various modes to access the venture capital. Mutual Funds etc. as well as focus on industry specific niches are also discussed in the project. And the categorization venture capital funds such as incubators.EXECUTIVE SUMMARY The project covers various aspects of the Indian Venture Capital Industry. private equity players and venture capitalists.

The Central Board of Direct Taxation (CBDT).The Foreign Investment Promotion Board (FIPB) and the Reserve Bank of India (RBI).  Training and Development of Venture Capital Managers  Broad Knowledge Base Hence the project report analyses and throws a spotlight over the current scenario regarding the Venture Capital Funds in India and regulations of “Securities Exchange Board of India” providing the guidelines for such ventures in India. Taxes and Regulations  Limitations on structuring of Venture Capital Funds(VCFs)  Problem in raising of funds. etc. Securities and Exchange Board of India. venture clubs venture networks. business incubators etc. Returns. promotional efforts and development strategy employing new concepts such as venture fairs.  A Statutory Co-ordination Body  Encouragement and funding of R&D by private and public sector companies and the government for ensuring technological competitiveness. 5 . However there are several measure which have been provided:  Social Awareness  Deregulated Economic Environment  Fiscal Incentives  Encouragement to Entrepreneurship and Innovation  A vigorous marketing thrust. The various regulatory issues for Venture Capital The Indian Trust Act 1882.



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it is innovation and technical capability that are big business-drivers. prudence and a clear understanding of the market are among the sought after qualities of a promoter. Venture Capital derives its value from the brand equity. Arthur Rock & Co. This is a paradigm shift from the earlier physical production and ‘economies of scale’ model. However. endowment funds. few ‘traditional’ business models may survive. constructive criticism.: Sun. is a long-term liquid investment. Rediff. A number of technocrats are seeking to set up shop on their own and capitalize on opportunities. Apple Computers then made it to the Fortune 500 and Arthur Rock & Co. Satyam Infoway. In these sectors. Knowledge driven industries like infotech. Countries across the globe are realizing that it is not the conglomerates and the gigantic corporations that fuel economic growth any more. Intel. business sense and a lot more. Microsoft. which started out in the US in 1977 with the capital firm. they bring to table at a significantly lower management agency cost. Venture capital became better known after the famous legend of Apple Computers. In the highly dynamic economic climate that surrounds us today. This growing trend can be attributed to rapid advances in technology in the last decade. WHAT IS VENTURE CAPITAL???? Venture Capital is money provided by professionals who invest alongside management in rapidly growing companies. starting an enterprise is never easy.VENTURE CAPITAL INTRODUCTION Venture capital. Pizza Corner…. viz. quasi-equity and some times debt in new and high-risk ventures. However. today is the small and medium enterprises. Experience. a financial innovation of the twentieth century. Professionally managed venture capital firms generally are private partnerships or closelyheld corporations funded by private and public pension funds. which lie beyond the control of the entrepreneur. domain knowledge. The essence of any economy. industry contacts. health-care. which can be in the form of equity. There are a number of parameters that contribute to its success or downfall. This is where the venture capitalist comes in. with money. attained height in Venture capital industry. Prominent among these is the timely infusion of funds. 9 . professional image. However the success of Venture Capital in USA stimulated world countries to practice on Venture capital. entertainment and services have become the cynosure of bourses worldwide. Mastek. there are other factors. integrity.

which raises monies through loans. and makes or proposes to make investments in accordance with these regulations. Intel. these funds are governed by the Securities and Exchange Board of India (SEBI) guidelines. especially with contacts and strategy formulation. For decades. Federal Express. They also actively work with the company's management. venture capitalists carefully screen the technical and business merits of the proposed company. many venture partnerships manage multiple funds simultaneously. In India. Compaq. A Venture Capitalists strives to provide entrepreneurs with the support they need to create up-scalable business with sustainable growth. donations. foreign investors. and the venture capitalists themselves. economic growth and international competitiveness. for the higher risks they assume. while providing their contributors with outstanding returns on investment. According to this. venture capital fund means a fund established in the form of a company or trust. up scaleable companies Purchase equity / quasi-equity securities Assist in the development of new products or services Add value to the company through active participation Take higher risks with the expectation of higher rewards Have a long-term orientation When considering an investment. Many times they co-invest with other professional venture capital firms. corporations. issue of securities or units as the case may be. Companies such as Digital Equipment Corporation. Microsoft and Genentech are famous examples of companies that received venture capital early in their development. Venture capitalists mitigate the risk of investing by developing a portfolio of young companies in a single venture fund. Sun Microsystems. venture capitalists have nurtured the growth of America's high technology and entrepreneurial communities resulting in significant job creation.foundations. Venture Capitalists generally:        Finance new and rapidly growing companies Typically knowledge-based. 10 . wealthy individuals. sustainable. Apple. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. In addition.

Such enterprises generally do not have any major collateral to offer as security. which require funding. He is driven by maximization: wealth maximization. nets a very high return on his investments – high enough to make up for the losses sustained in unsuccessful projects. electronics and biotechnology). Some projects fail and some give moderate returns. These funds are then invested in several fledging enterprises. the probability of success is very low. that is one reason why venture capitalists assess several projects and invest only in a handful after careful scrutiny of the management and marketability of the project. 11 . but are unable to access it through the conventional sources such as banks and financial institutions. The returns generally come in the form of selling the stocks when they get listed on the stock exchange or by a timely sale of his stake in the company to a strategic buyer. the entire amount gets written off. Exit is preferably through listing on stock exchanges. This method has been extremely successful in USA. He cannot survive on minimalism. The idea is to cash in on an increased appreciation of the share value of the company at the time of disinvestment in the investee company. All projects financed do not give a high return. A venture capitalist is not a lender. Probably. but an equity partner. If the venture fails. Venture capital funding may be by way of investment in the equity of the new enterprise or a combination of debt and equity.INVESTMENT PHILOSOPHY The basic principal underlying venture capital – invest in high-risk projects with the anticipation of high returns. a venture financier is one who funds a start up company. The investment. because the deal which succeeds. in most cases promoted by a first generation technocrat promoter with equity. Typically first generation entrepreneurs start such enterprises. To conclude. and venture funds have been credited with the success of technology companies in Silicon Valley. however. They monitor and evaluate the project on a continuous basis. though equity is the most preferred route. hence banks and financial institutions are averse to funding them. The entire technology industry thrives on it. Since most of the ventures financed through this route are in new areas (worldwide venture capital follows "hot industries" like infotech. The venture capitalist is however not worried about failure of an investee company. is a long-term risk capital as such projects normally take 3 to 7 years to generate substantial returns. Venture capitalists offer "more than money" to the venture and seek to add value to the investee unit by active participation in its management. Venture capitalists are sources of expertise for the companies they finance.

LIMITATIONS OF THE PROJECT Major limitation of the project has been the unavailability of current data. To identify the problems faced by the Indian venture Capitalists. 3. 6. of the contributors to the Indian Venture Capital Industry (source of data being the year 1998) and no comparative analysis has been undertaken of the Venture Capital Industry in India with those of the developed nations like USA.OBJECTIVE OF THE STUDY Objective of the study has been to analyze the: 1. To identify the major players in the Indian Venture capital Industry. 5. UK due to lack of adequate data. To find out the different contributors to the Indian Venture Capital Industry and their investment industry wise. 2. 12 . Trends in the Indian Venture Capital Industry. To study the various guidelines of the regulatory body “SEBI”. To study the current Indian scenario. 4.

com www. BUSINESS WORLD 13 Newspapers and magazines being “THE ECONOMIC TIMES”. BUSINESS TODAY.SOURCES OF DATA The sources of for this project is secondary in nature but predominantly being the internet. Websites which have contributed to the information for this project are : • • • • • • www. newspapers and magazines.“THE TIMES OF INDIA”.indiainfoline.namesthenri.

such as what is venture capital . Other aspects that are covered are the SEBI guidelines that govern the venture capital firms and how venture capital financing is different from commercial lending for a project. The current Indian scenario. Lastly what the top venture capitalist of this world sees this industry to be as in the future. modes to access the venture capital. a brief history of the venture capital industry and its overview.OVERVIEW OF THE STUDY The project covers various aspects of the Indian Venture Capital Industry. what is its process. a brief profile of the major players in this industry. contributors to this industry and their industry wise investments. The project also includes the various factors for the success of venture capital firms. 14 . problems faced by them and the measures that should be adopted to tackle such problems.


federal government wanted to speed the development of advanced technologies. Christopher Columbus sought to travel westwards instead of eastwards from Europe. J. And thus evolved the concept of Venture Capital. They include. and in particular. J. private venture capital partnerships passed SBICs in total capital under management. The Second World War produced an abundance of technological innovation. the Federal Reserve System conducted a study that concluded that a shortage of entrepreneurial financing was a chief obstacle to the development of what it called "entrepreneurial businesses.H. Indeed. Queen Isabella of Spain. The modern venture capital industry began taking shape in the post–World War II. Whitney & Co. These partnerships added to the venture capitalist’s toolkit. Finally. His far-fetched idea did not find favor with the King of Portugal. In the mid-1950s. some of the earliest work on micro circuitry. he taught at the Harvard Business School. At the same time a number of venture capital firms were forming private partnerships outside the SBIC format. whose biggest success was Digital Equipment. In the fifteenth century. which is now defunct but was one of the earliest commercial airlines. who refused to finance him. Jock Whitney is considered one of the industry’s founders. nearly 600 SBICs were in operation. to reach India.S. Whitney’s investment in Minute Maid was intended to commercialize an orange juice concentrate that had been developed to provide nourishment for troops in the field.BRIEF HISTORY The story of venture capital in the history of mankind. Soon commercial banks were allowed to form SBICs and within four years. who concentrated on conventional corporate management. also formed in 1946. primarily with military applications. In 1957. The Rockefeller Family. His lectures on the importance of risk capital were considered quirky by the rest of the faculty. the U." In the 1950s. 16 . L S Rockefeller. including these three: American Research and Development Corporation. by offering a degree of flexibility that SBICs lack. The founder of ARD was General Georges Doroit. one of whose early hits was Minute Maid juice. decided to "fund" him for his venture.H. one of whose earliest investments was in Eastern Airlines. The earliest members of the organized venture capital industry had several role models. Within a decade. formed in 1946." As a response this a number of Small Business Investment Companies (SBIC) were established to "leverage" their private capital by borrowing from the federal government at below-market interest rates. for example. a Frenchborn military man who is considered "the father of venture capital.

in the 1980s. In 1978. 17 . It raised US$25bn in committed capital for investments by venture firms. These included Federal Express in 1978. The consensus today is that private equity investments generally should give the investor an internal rate of return something to the order of 15% to 25%. Then in 1974. The late 1980s marked the transition of the primary source of venture capital funds from wealthy individuals and families to endowment. there were a number of high-profile IPOs by venture-backed companies. This rekindled interest in venture capital on the part of wealthy families and institutional investors. the average long-term return on venture capital funds fell below 8%. depending upon the degree of risk the firm is taking. As a result. Returns on venture capital investments plunged. For example. First. who invested over US$16bn into domestic growth companies in all sectors. the venture capital industry began its greatest period of growth. Indeed. venture capital suffered a double-whammy. leading to yet another downturn in venture funding. In 1998. though. all high-risk investment of these funds was halted.000 Digital invested to start the company in 1959 had a market value of US$37mn. In 1980. The surge in capital in the 1980s had predictable results. Disappointed families and institutions withdrew from venture investing in droves in the 1989-91 period. Many investors went into the funds anticipating returns of 30% or higher. The decade also marked the explosion in the buy-out business. when Digital Equipment went public in 1968 it provided ARD with 101% annualized Return on Investment (ROI). venture firms raised and invested less than US$600 million. As a result of poor public market and the pension fund legislation. and Apple Computer and Genetech Inc in 1981. but primarily focused on information technology. the venture capital industry in the United States continued its seventh straight year of growth. venture capital fund raising hit rock bottom in 1975. a red-hot IPO market brought over 1. In the 1970s. There were a lot of disappointed stock market investors and a lot of disappointed venture capital investors too.000 venture-backed companies to market in 1968. The economic recovery and the IPO boom of 1991-94 have gone a long way towards reversing the trend in both private equity investment performance and partnership commitments. venture capital became a hot market. after Congress legislation against the abuse of pension fund money. The US$70. However. pension and other institutional funds. particularly for wealthy individuals and families. However. That number soared to nearly US$4bn by 1987. it was still considered too risky for institutional investors.The 1960s saw a tremendous bull IPO market that allowed venture capital firms to demonstrate their ability to create companies and produce huge investment returns. by 1990. the public markets went into a seven-year slump. That was probably an unrealistic expectation to begin with.


Making a deal Due diligence Investment valuation Pricing and structuring the deal Value Addition and monitoring Exit Making A Deal In generating a deal flow.  Target an ownership position in the investee firm so as to achieve desired appreciation on the proposed investment. 5. Financing a new venture should be done after carefully evaluation of the project. This is achieved primarily through plugging into an appropriate network. 19 . The investment process is industry specific and may vary with time and region. Investment valuation Typically in countries where free pricing regimes exist. 3. the venture capital investor creates a pipeline of ‘deals’ or investment opportunities that he would consider for investing in. They avoid this through due diligence and scrutiny of the business plan.VENTURE CAPITAL PROCESS Obtaining capital for a project through this route is very difficult. companies may have experienced operational problems during their early stages of growth or due to bad management. product. It involves many steps which a prospective entrepreneur has to adopt when he approaches a investor (Venture Capitalists). The appreciation desired should yield a hurdle rate of return on a Discounted Cash Flow basis. Due Diligence Due Diligence refers to evaluating an investment proposal. Sometimes financing from venture capital may end up being used to finance these losses. products. capital costs and means of financing and profitability projection of the company. The typical stages in the investment cycle are given below. 2. It includes carrying checks on the proposal related to aspects concerning management team. They are: A strong business plan that outlines the management team. the valuation process goes through the following steps:  Evaluate future revenue and profitability  Forecast likely future value of the firm based on experienced market capitalization or expected acquisition proceeds depending upon the anticipated exit from the investment. Screening can be sometimes elaborate and rigorous and sometimes specific and brief. marketing plan. 4. These could result in losses or cash flow drains on the company. New Financing Sometimes. 1. technology and the market. 6.

Warrants4. call. The objective in selecting the instrument would be to maximize venture capital’s returns/protection and yet satisfy the entrepreneur’s requirements. Loan- Issues clean vs secured Interest bearing vs non interest bearing convertible vs one with features (warrants) 1st Charge. Options- exercise price. 2nd Charge. The instruments could be as follows: Instrument 1. The structure should take into consideration various commercial issues (i. loan vs loan stock Maturity 2.e what the entrepreneur wants and what the venture capital would require to protect the investment). Common shares- exercise price.Structuring of deal It refers to negotiation between entrepreneurs and venture capitalists for closing the deal. expiry period new or vendor shares par value partially-paid shares 5. Preference shares- redeemable (conditions under Company Act) participating par value nominal shares 3. The instruments to be used in structuring deals are many and varied. expiry period. put 20 .

In the present context there is no proper means of exit. In order to take the full advantage of the Venture Capital the Government should consider the proposals to bring down certain hindrances that come in the way for the exit of the venture capitalists ACCESSING THE VENTURE CAPITAL Venture capital has been in India for quite sometime.Exit strategy Exit is one of the most important issue from both the sides (venture capitalists and entrepreneur). The only difference being exit. one can exit at a price but with an unlisted security. 4. sale to another company or sale at the time of Initial Public Offer (IPO). If one buys a listed security. This factor is critical to smaller and mid sized companies. exit becomes difficult. out of a 100 proposals received only 1 gets funded. because of stringent listing requirements. The actual return from the for venture capitalists come at the time of exit. 3. The key factors which they look for in 1. appropriate changes have to made to the existing systems in order for the venture capitalists to realise their returns after holding on to them for a certain period of time. The standard parameters used by venture capitalists are very similar to any investment decision. There are several exit routes. buy-back by promoters. which are unable to get listed on any stock exchange. The Management The Idea Valuation Exit 21 . The rejection ratio is very high. 2.

 VENTURE CAPITALISTS (VCS) VCs are organizations raising funds from numerous investors & hiring experienced professional mangers to deploy the same. Typically. In India there is a lack of home grown angels except a few like Saurabh Srivastava & Atul Choksey (ex-Asian Paints). eVentures.CATEGORIZATION The "venture funds" available could be from:  INCUBATORS An incubator is a hardcore technocrat who works with an entrepreneur to develop a business idea. Sailesh Mehta. and prepares a Company for subsequent rounds of growth & funding. an angel investor would:       invest only his chosen field of technology take active participation in day-to-day running of the Company invest small sums in the range of USD 1 . Infinity are examples of incubators in India. Prakash Agarwal. K. Typically:    invest into proven/established businesses have “financial partners” approach invest between USD 5 –100 million 22 . Kanwal Rekhi.  ANGEL INVESTORS An angel is an experienced industry-bred individual with high net worth.3 million not insist on detailed business plans sanction the investment in up to a month help company for "second round" of funding The IndUS Entrepreneurs (TiE) is a classic group of angels like: Vinod Dham. Chandrashekhar. Prabhu Goel. They typically:        invest at “second” stage invest over a spectrum over industry/ies have hand-holding “mentor” approach insist on detailed business plans invest into proven ideas/businesses provide “brand” value to investee invest between USD 2 – 5 million  PRIVATE EQUITY PLAYERS They are established investment bankers.B. Suhas Patil.

The IndUS Entrepreneurs (TiE). They are people with experts in their fields. The group saw value in getting together on a regular basis to network with one another. A delayed flight kept the group waiting. and provided an opportunity for people to get to know one another. They are the latest angels in the Indian industry. the idea of TiE was born as a mechanism for high achievement-oriented IndUS entrepreneurs to network. It is important to choose the right Angel because they will sit on your Board of Directors. This venture capital financing is typically used to prepare the company for "second round" financing in the form of an initial public offering (IPO). Meeting at least once a month. participants and mentors. Some of them have made their millions riding the IT boom in Silicon Valley. An needs money to make things happen. This is because they support a fledging enterprise at a very early stage – sometime even before commercialization of the product or service offering. They understand the field entrepreneur needs this kind of expertise. the group started attracting greater participation. Angels are people with less money orientation. Typically. these individuals are rich in terms of financial resources and experience. it is imperative to consider their experience in a relevant industry. successful veteran entrepreneurs. Over the years. reputation. a core group of about 10-15 individuals worked hard to establish the organization. contributed as speakers. The idea was sparked off in 1992. when a group of Silicon Valley entrepreneurs with roots in the Indian subcontinent met by chance for a meeting with a visiting dignitary from India. It turned out that most of the assembled invitees to the meeting had achieved varying degrees of entrepreneurial success. a networking society that brings together highly influential Indians across the US was set up in 1992. Angels provide funding by "first round" financing for risky investments – risky because they are a young /start-up company or because their financial track record is unstable. (viz a new drug which would require significant research & development funding) or make a strategic acquisition to achieve certain levels of growth & stability. Having witnessed the maturity of the Silicon Valley into the global tech hotspot and thrived in the environment there. who play an active role in making an enough hands-on experience and are from an operational perspective.ANGEL INVESTORS Angels are important links in the entire process of venture capital funding. When choosing an 'Angel'. often for the duration of their investment and will assist in getting "second round" financing. Thus. TiE membership has now 23 . Gradually. There are a number of professionally qualified people. and the TiE concept started gaining momentum. an angel is an experienced industry-bred individual with high net worth. qualifications and track record. He also Angels bring both to the table of an entrepreneur. Example – A company may need "first round" financing to develop a new product line. especially from IITs who had migrated to USA. The aim of the organization is to get the community together and to foster entrepreneurs and wealth creation. but early-stage company work.

who has started three hi-tech companies so far and is on the board of five other companies as a private investor. and two have already made successful IPOs.grown to over 600 members. • • • 24 . law firms. are headed by Indians. Austin and Los Angeles. Hotmail and Amazon. The environment is traditional in the sense of it following a gurukul environment of sorts. He is the current chairman of the TiE. The issue here is to identify a good idea that hasn't attracted any money. K. It's about angel investing. • • • Prabhu Goel. who founded the semiconductor company Cirrus Logic in 1984. TiE is also supported by over 20 institutions that include leading Silicon Valley venture capital investors. one of the most closely watched start-ups in the Silicon Valley today.B. CEO & President of the US$15bn Providian Financial and the man who is using technology to re-order consumer finance. one of the first Indians to become a big name in the valley. Suhas Patil. father of the Pentium chip and now the CEO of the Silicon Spice. and then fund it the money coming from the member's own pockets. Chandrashekhar. Fifty percent of business plans submitted to venture capitalists in the Valley and outside is now from Indians and TiE can take the lion's share of the credit for this. TiE isn't about venture capitalist funding. where the gurus transfer knowledge on business plans. Some of the famous names include • Vinod Dham. Sailesh Mehta. past CTO and member of Novell's board. and chapters in Boston. As of 1998. Kanwal Rekhi. whose fiber optic network carries 30% of all Internet content traffic and whose servers host such popular websites such as Yahoo. heads the US$200mn Exodus Communications. over two dozen start-up companies have benefited from TiE. now invests in a number of new ventures. The six year old company already has a market share of 50%. Prakash Agarwal. whose NeoMagic integrates memory and logic on a single chip. management strategies and survival kits to new TiE members. ‘serial entrepreneur’. founder of Excelan. accounting firms and banks. What's more? About 30 per cent of the projects that are funded.

sailors and other material needed for the long voyage. Venture capital firms may generally provide soft loans (equity participation) and may charge the payment of royalty on the turnover of the recipient company over a specified period of time. Resource so provided is eligible to be called Venture Capital. in financing start-up or innovative ventures. The project is innovative and has not been set up earlier. and he seeks to enter entrepreneurship. Financing such a project involves moderate or normal risks. decided to fund him and the voyages of Christopher Columbus are now empanelled in history. a few with time and cost escalation. ships. The financier assesses the cost of the project against the return it is anticipated to generate to satisfy that the return generated over a period of time would fully liquidate the loan given with interest. while venture capital financing is like surveying in an unknown region. 25 . The Wright Brothers at the dawn of the 20th Century. Venture capital financing involves higher risk than conventional loans to industry and business. The plan to be executed needed resources. "His (Columbus') far-fetched idea did not find favor with the King of Portugal. Everything about the project is well-known. An applicant for venture capital possesses superior knowledge-capital or knowledge-assets. who refused to finance him. though India it was known was located towards the east of Spain. Queen Isabella of Spain. While in a conventional term loan 90 to 95% of the projects may come through. The project can be assessed with relative ease through well-established yardsticks and risk areas identified. Projects indicating higher risks. which has already been recognised and similar projects of the same type executed by others.How is Extending Venture Capital for an Endeavour is Different from Extending Term Loan for a Conventional Commercial Project? A commercial project is undertaken by an entrepreneur for a productive activity. Pricing of venture capital financing must take this factor into consideration. One that would come forward to finance the project for execution of the blue-print to produce a flying machine is a provider of venture capital. and resources extended to Wright brothers for the purpose is Venture Capital. Conventional Project financing is like journeying in a familiar territory. Finally. which if translated into activity promises to provide rich dividends. the rate of failures may at times be more than that of success. when successful alone can be covered under venture financing. The applicant seeking finance may be a new entrepreneur or an established businessman. Taking a decision on financing based on the feasibility and viability of the project is comparatively an easier process. however with inherent uncertainties. In contrast an applicant for venture capital primarily possesses expert knowledge. but with the potential for very large return. prepared the blue print for a machine that could fly. Similarly Christopher Columbus in the Nineties of the 15th Century prepared a plan to discover a route to India by sailing from Spain in the western direction.


according to this report from NASSCOM. In the absence of an organised venture capital industry until almost 1998 in India. In September 1995 the Indian government issued guidelines for overseas investments in venture capital in India. around Rs30bn had been committed by domestic VCFs and off-shore funds. which are members of IVCA. Later. Entrepreneurs have largely depended upon private placements. In 1973. Pursuant to this regulatory framework some domestic VCFs were registered with SEBI. entrepreneurial venture financiers willing to take a high risk in the expectation of high returns. 27 . Figures from the Indian Venture Capital Association (IVCA) show that until 1998. these guidelines restricted the setting up of VCFs to the banks or the financial institutions only. Figures available from private sources indicate that the overall funds committed are around US$1. some public sector funds were established but the activity of venture capital did not gather momentum as the thrust was on high-technology projects funded on a purely financial rather than a holistic basis. the trend favoured venture capital being supplied by smaller-scale. a study was undertaken by the World Bank to examine the possibility of developing venture capital in the private sector. a trend that has continued in this decade. the Securities and Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations. Furthermore. Gompers and Lerner.OVERVIEW OF INDIAN VENTURE CAPITAL (1) Indian venture capital is at a take-off stage in India. Some overseas investment also came through the Mauritius route. Changes to the regulatory environment look set to encourage the flow of investment to the Indian high-tech sector.3bn. public offerings and lending by financial institutions. the venture capital industry . 1996. based on which the Indian government took a policy initiative and announced guidelines for venture capital funds (VCFs) in 1988. individual investors and development financial institutions have played the role of venture capitalists. Internationally. The flow of investments and foreign currency in and out of India has been governed by the Reserve Bank of India's (RBI) requirements. a committee on the development of small and medium-sized enterprises highlighted the need to foster venture capital as a source of funding for new entrepreneurs and technology. Thereafter. However. high-growth companies' (Venture Capital still in a nascent stage in India. the Central Board of Direct Taxes (CBDT)issued guidelines. 1999) . For tax exemption purposes.understood globally as ‘independently managed. However. dedicated pools of capital that focus on equity or equity-linked investments in privately held. as part of its mandate to regulate and to develop the Indian capital markets.

In his 2000 budget speech. knowledge. To promote this flowering of knowledge-based enterprise and job creation. there is undoubtedly a tremendous potential for venture capital activity in India. India. skills. This liberalisation and simplification of procedures is expected to encourage non-resident Indians (NRIs) in Silicon Valley and elsewhere to invest some of their capital. In various developed and developing economies.The funds available for investment are less than 50 per cent of the committed funds and actual investments are lower still. there is an increased awareness and interest of domestic as well as foreign investors in venture capital. whether in Silicon Valley. India's finance minister announced that a key ingredient for future success lay in venture capital finance. entrepreneurship and technology can combine to yield unprecedented growth of incomes. due to economic liberalisation and an increasingly global outlook in India. Objective and vision for venture capital in India Venture capital is very different from traditional sources of financing. While only eight domestic VCFs were registered with SEBI during 1996-1998. venture capital connotes human as well as financial capital. along with Israel. he announced a major liberalisation of the tax treatment for venture capital funds. is recognised for its globally competitive high technology and human capital. venture capitalists provide networking. management and marketing support as well. Bangalore or Hyderabad have shown how ideas. This very blend of risk financing and handholding of entrepreneurs by venture capitalists creates an environment particularly suitable for knowledge and technology-based enterprises. high-return investment. India's recent success story in software and IT is almost a fairy tale when considering obstacles such as inadequate infrastructure. employment and wealth. It also indicates the potential India has in terms of knowledge and technology-based industry. information and complementary resources. Venture capitalists finance innovation and ideas. restricted access to foreign skills and capital. 28 . drive the industry through ownership of the levers of control in return for the provision of capital. expensive hardware. In the broadest sense. and limited domestic demand. knowledge and enterprise in Indian ventures. technological and knowledge-based ideas . meanwhile. Institutional interest is growing and foreign venture investments are also on the rise. therefore. Scientific. investors and investee firms work together closely in an enabling environment that allows entrepreneurs to focus on value creating ideas.properly supported by venture capital can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner. This makes it a high-risk. SEBI was granted the responsibility for the registration and regulation of both domestic and overseas venture capital funds. Taiwan and the US. venture capital has played a significant developmental role. Venture capitalists. In the global venture capital industry. which have a potential for high growth but with inherent uncertainties. 14 funds have already been registered in 1999-2000. Young Indian entrepreneurs. Given the proper environment and policy support. At the same time. Apart from finance.

can help a great deal in identifying and actualising some of this research into commercial is needed if high quality public offerings (IPOs) are to be achieved. over 115. All of these candidates are potential entrepreneurs. innovation. particularly in the Indian context.6 per cent over a typical five year post-listing holding period. Given the limited infrastructure. ideas .India has the second largest English speaking scientific and technical manpower in the world. ideas. The sequence of steps in the high technology value chain is information. This will also protect smaller investors. A suitable venture capital environment .which includes incubation facilities . product development and marketing. compared with 22. Many also graduate with diploma courses in computers and other technical areas. India also has a vast pool of existing and on-going scientific and technical research carried out by a large number of research laboratories.000 management graduates annually. Many experts believe that just as the US did in the semiconductor industry in the eighties. Some of its management (IIMs) and technology institutes (IITs) are known globally as centres of excellence. it is still behind in terms of product and packaged development. India is still at the level of ‘knowledge'. Experience of US market The potential of venture capital is tremendous when looking at the experience of other countries.and beyond. The development of a proper venture capital industry. This will take capital and other support. it certainly needs policy support to move to the third stage . In the present situation. the return multiple vis-à-vis non-venture funded companies is much higher. an individual investor becomes a venture capitalist of a sort by financing new enterprises and undertaking unknown risks. knowledge. In such cases. This situation can be corrected by venture-backed successful enterprises accessing the capital market.5 per cent for non-venture backed IPOs. Every year. A study of the US market between 1972 and 1992 showed that venture-backed IPOs earned 44. Basically. Management institutes produce 40. towards innovation and product development.000 engineers graduate from government-run and private engineering colleges. including defence laboratories as well as universities and technical institutes. This is not expected to happen automatically. it is time for India to move to a higher level in the value chain. low foreign investment and other transitional problems. The success of venture capital is only partly reflected by these numbers. since 80 per cent of the firms that receive venture capital are sold to other companies rather than achieving an IPO. This is crucial for sustainable growth and for maintaining India's competitive edge. Investors also get enticed into public offerings of unproven and at times dubious quality. It is also important to recognise that while India is doing very well in IT and software. which can be provided by venture capitalists. 29 .

senior management personnel have been leaving established multinationals and Indian companies to start new ventures. Taiwan and Israel clearly show that this can happen. venture-backed companies saw their sales grow. which can leverage innovation.etc. Examples of the US. At the same time. by 66. this is still to happen. The quality of enterprise in human capital in India is on an ascending curve. is an even larger pool of angel or seed/start-up funds provided by private investors. At home in India. in 1999. start-up access to R&D flowing out of national and state level laboratories. the risk-taking capacities among the budding entrepreneurs. technology firms received approximately 80 per cent. this can certainly become a reality in India as well. The top ten US sectors. technically-qualified entrepreneurs in India. The environment is ripe for creating the right regulatory and policy environment for sustaining the momentum for high-technology entrepreneurship. approximately US$90bn of angel investment was available. By contrast. 30 . tax and institutional environment. India is attractive for risk capital India certainly needs a large pool of risk capital both from home and abroad. on average. in India. but also because a venture capitalist brings expertise that leads to superior product development.This potential can also be seen in the growth of sales figures for the US. cumulative disbursements to date are less than US$500m. measured by asset and sales growth. venture capital is valuable not just because it makes risk capital available in the early stages of a project. Thus. The big focus of venture capital worldwide is. From 1992 to 1998. What is needed is a vibrant venture capital sector. thus making the total ‘at-risk' investment in high-technology ventures in a single year worth around US$120bn. By bringing venture capital and other supporting infrastructure. Certain NRI organisations are taking initiatives to create a corpus of US$150m to strengthen the infrastructure of IITs. More focused attempts will be required in all these directions. In 1999. promote technology and harness the ongoing knowledge explosion. Indians abroad have leapfrogged the value chain of technology to reach higher levels. of course. But this is dependent on the right regulatory. India is rightly poised for a big leap. provide the indications of a growing number of young. Thus. The export growth by venture-funded companies was 165 per cent. according to estimates. support from universities. Additional to this huge supply of venture funds from formally organised venture capital firms.5 per cent per annum as against five per cent for Fortune 500 firms. partly ignited by success stories of Indians in the US and other places abroad. Already there are success stories in India. and infrastructure support. legal. such as telecoms. were technology-related. Recent phenomena. an increasing number of savvy. technology. Steps are being taken at governmental level to improve infrastructure and R&D. technologyparks. of $30bn of venture capital invested in the US. of which technology firms have received only 36 per cent.

As against the earlier trend. Some experts believe that India lacks strong anchor companies like HP and IT stocks on the stock exchanges has been growing steadily. though not of the same magnitude. Others believe that Indian entrepreneurs are not yet globally connected and are often unwilling to share equity with a quality risk capital investor. The number of players offering growth capital and the number of investors is rising rapidly. much needs to be done in all of these areas. the venture capital creation process has started taking off. The demand for Indian IT stocks is very high. especially on the exit side. in India. the venture creation phenomenon for the IT sector in India had been quite unsatisfactory. as is evident from the listing of ADRs of Infosys Technologies and Satyam Infoway.a phenomenon for the world to watch and reckon with. All the four stages including idea generation. The IPOs achieved by software companies in India in 1999 have attracted record investor subscriptions. When that happens we would have created not ‘Silicon Valley' but the ‘Ind Valley' . the demand for software and phenomenon. the info-tech industry's market capitalisation reached in excess of US$59bn. 31 . even on Nasdaq. it is apparent that investors are willing to take higher risks for a potentially higher reward by investing in start-up companies. In India. Venture capital at a take-off stage in India Lately. Until 1998. exit options were considered to be few. There was also a perception that start-ups in India do not typically attract the right managerial talent to enable rapid growth. The Indian government initiatives in formulating policies regarding sweat equity. Finally. growth ramp-up and exit processes . with the general feeling that entrepreneurs were unwilling to sell their start-ups even if it was feasible. much of the risk capital available was not quickly deployed. As a result. showing the highest increase in absolute valuation compared to any other industry during the last year. However. The successful IPOs of entrepreneur-driven Indian IT companies have had a very positive effect in attracting investors. since March 1999. A similar investor preference for start-up IT companies is being seen. On 2 May 2000.This can happen by creating the right environment and the mindset needed to understand global forces. Risk capital in all forms is becoming available more freely. things have been changing dramatically for the better. stock options. where it was easy to raise only growth capital. Investors have lapped up the offerings of these two companies and their shares have appreciated tremendously since their IPOs on Nasdaq. Yet. even financing of ideas or seed capital is available now. The venture capital phenomenon has now reached a take-off stage in India. tax breaks for venture capital along with overseas listings have all contributed to the enthusiasm among investors and entrepreneurs. However. Most of the companies have recorded substantial increases in their market capitalisation during the last year.are being encouraged. which funded the start-ups of early Silicon Valley entrepreneurs. start-up. as has the creation of the dot.

The fund is expected to be a key component in addressing the rapidly growing demand for venture capital in India. Karnataka. dot. The fund will be looking at supporting entrepreneurship in high growth sectors. Many state governments have already set up venture capital funds for the IT sector in partnership with local state financial institutions and SIDBI. who has emerged as a strong proponent of India's software-driven IT industry. set up in association with various financial institutions and the industry. NFSIT. 32 .The Indian government sets up a venture capital fund The Indian government has reiterated its commitment to the Indian software-driven IT industry by creating a National Venture Capital Fund for the Software and IT Industry (NFSIT). services. (1) Source of the article is from NASSCOM’s website. Delhi. The objective of the fund is to encourage entrepreneurship in the areas of software. operates under the umbrella of the Small Industries Development Bank of India (SIDBI).com and other IT related sectors in which India has inherent as well as acquired competency. These include Andhra Pradesh. The fund was launched by prime minister Atal Behari Vajpayee. Kerala and Tamil Nadu.

It drew attention to the problems of new entrepreneurs and technologists in setting up industries. news. SEBI came out with guidelines for venture capital funds. In 1988. A 5percent was levied on all know-how payments to create a venture capital fund by IDBI. since small-scale industries form the major constituents and the backbone of Indian Economy. (GVFL) were formed. Indian website featuring electronic shopping. Hyderabad based training and software development company  Satyam Infoway. In 1976. ICICI also started to become a partner of the venture capital industry in the same year. venture capital took the form of risk capital and seed capital. Today. The period 1986-87. the seed capital scheme was introduced by IDBI. ICICI launched a venture capital scheme to encourage new technocrats in the private sector in emerging fields of high -risk technology. In 1996. 50bn. is regarded an eventful year for the venture capital industry in the country. venture capital financing was introduced in India by the all India Financial Institutions with the inauguration of Risk Capital Foundation (RCF) sponsored by IFCI. Consequently. through the levy of a cess on all technology import payments. In 1975.S. which paved the way for entry of foreign venture funds into India. with a view to encourage the technologist and the professionals to promote new industries. chat. Economic prosperity and development of the state is impossible without adequate economic support to the small-scale industrial sector. TDICI (now ICICI Ventures) and Gujarat Venture Finance Ltd. the first private ISP in India  Rediff on the Net. In 1986.INDIAN SCENARIO The Committee on Development of Small and Medium Entrepreneurs under the chairmanship of R. etc 33 . Some of the companies that have received funding through this route include:  SQL Star. The first origin of modern day Venture Capital in India can be traced to the setting up of a Technology Development Fund (TDF) in the year 1987-88. Government of India felt the need of venture capital funds in India in the context of structural development and growth of small-scale business enterprises. stands over Rs. Till 1984. Bhatt first highlighted venture capital financing in India in 1972. the total pool of Indian Venture Capital today.

has brought about further development and improvement in venture capital financing. OPTIONS TO FINANCE A VENTURE Projects can be financed both through equity and debt instruments. Public Sector Banks or promoted by Foreign Banks/ Private sector or financial institutions like Indus Venture Capital Fund. solutions for supply chain management The infotech companies are the most favored by venture capitalists. IFCI. ICICI. several venture capital firms are incorporated in India and they are promoted either by all India Financial Institutions like IDBI. Planetasia. At provider of interactive software selection  Yantra. Banks and development financial institutions like ICICI. pioneer of Gigabit-scaled IP routers for inter/intra nets  Selectica. IDBI and IFCI were providers of term loans for funding projects. Microland’s subsidiary. one of India’s leading portals  Torrent Networking. ITLInfosys’ US subsidiary. companies from other sectors also feature equally in their portfolios. 34 . The rapid growth in the financial markets. The other sectors such as pharmaceutical. State level financial institutions. Credit Capital Venture Fund etc. medical appliances and biotechnology industries also get much preference. However. unconventional investments in a gamut of industries have sprung up all over the country. recent developments have shown that India is maturing into a more developed marketplace.

energy and other areas beneficial to the development process in India. 35 . agriculture.  Private Venture Capital Funds promoted by the foreign banks/private sector companies and financial institutions such as Indus Venture Capital Funds.  State Finance Corporations sponsored Venture Capital Funds promoted by the statelevel developmental financial institutions such as Gujarat Venture Capital Limited (GVCL) and Andhra Pradesh Industrial Development Corporation’s.  to provide financial assistance for attaining commercial application of indigenous technology or adapting imported technology for wider domestic application.  Bank-sponsored Venture Capital Funds promoted by public sector banks such as Can finance and SBI Caps. health.STRUCTURE OF VENTURE CAPITAL INDUSTRY The Venture capital firms in India can be categorized into the following four groups:  All India Developmental Financial Institutions sponsored Venture Capital Funds promoted by the all-India development financial institutions such as Technology Development and Information Company of India Limited(TDICI) by ICICI. to provide risk capital to first generation entrepreneurs for setting up industrial projects and to accelerate the pace and quality of technological innovations for products having application in industry. Risk Capital Technology Financial Corporation Limited (RCTCF) by IFCI and Risk Capital Fund by IDBI. Venture Capital Limited (APIDC-VCL). Objectives of VCFs in India The objective of Indian venture Capital Funds are:  financing and development of high technology businesses. Credit Capital Venture Funds and Grindlay’s India Development Fund.

Interest at concessional rate of 9percent is charged during technology development and trial run of production stage and it will be 17percent once the product is commercially traded in the market by the financially assisted firm. bio-technology. 40 to 50 crores. management consultancy. Financial assistance is extended in the form of unsecured loans involving minimum legal formalities. It provides both risk capital and technology finance and roof to innovative entrepreneurs and technocrats for their technology oriented ventures. 20 crores and the same was targeted to be increased to Rs.5 crores.  Technology Development and Information Company of India Limited (TDICI) This venture Capital fund was jointly floated by Industrial Credit & Investment Corporation of India (ICICI) and Unit Trust of India (UTI) to finance the projects of professional technocrats who take initiative in designing and developing indigenous technology in the country. Risk Capital Foundation (RCF) to give positive encouragement to the new entrepreneurs. 100 crores with the objective of financing green field ventures and steering industrial development.BRIEF PROFILE OF MAJOR PLAYERS  IDBI Venture Capital Fund This was established in1986 with the objective to finance projects whose requirements range between Rs. environmental. electronics. UTI launched venture capital unit scheme (VECAUS-I) to raise resources for this fund. TDICI established by UTI jointly with ICICI acts as an advisor and manager of the fund. pharmaceutical. food products. IDBI venture capital funds extends its financial assistance to the ventures likely to be engaged in the fields of chemicals. computer software. 36 . non-conventional sources of energy and other innovative services in the country. 1988. 50 lakhs and 15percent for those above 50 lakhs. non-conventional energy. (RCTFC) IFCI had sponsored in 1985. veterinary biological.  Unit Trust of India (UTI) In 1988-99 UTI set-up a venture capital fund of Rs. 5 lakhs to 2.  Risk Capital and Technology Finance Corporation Ltd. The promoters’ stake should be at least 10percent for the ventures below Rs. refractories and medical equipments. TDICI favours the firms seeking financial assistance for developing information technology. It has set up a second venture capital fund in March 1990 with a capital of Rs. RCF was converted into RCTFC on 12th January. engineering. 20 crores in collaboration with ICICI for fostering industrial development. Technology Development and Information Company of India Limited (TDICI) was launched with an authorized capital base of Rs.

 Andhra Pradesh Industrial Development Corporation (APIDC) APIDC Venture Capital Ltd. exclusively for support to entrepreneurs in the small sector. Financial services and India Investment Fund represents the venture capital launched by Grindlays Bank. Grindlays Bank and many other banks have participated in the venture capital fund building Industry in order to provide financial assistance to the projects associated with high risks. SBI venture capital is monitored through SBI capital markets.  Commercial Banks Sponsored Venture Capital Funds State Bank of India. The fund would be augmented in future. Total corpus of Rs. 10 crores. 37 . 24 crores of the referred venture capital fund was cofinanced by GIIC. some private corporates and World Bank. Small Industrial Development Bank of India (SIDBI) Small Industrial Development Bank of India (SIDBI)has decided to set-up a venture capital fund in July 1993. depending upon requirements. surgical instruments. (APIDC-VCL) was promoted by APIDC with an authorized capital of Rs. Its main objective is to encourage technologybased ventures particularly those started by first generation technocrat entrepreneurs and ventures involving high risk in the state of Andhra Pradesh.2 million on 29th August 1989. Canbanks venture capital functions through Canbank. to provide financial support to the ventures whose requirements range between 25 lakhs and 2 crores. Canara Bank.  Gujarat Venture Finance Limited(GVFL) GVFL has been promoted by the Gujarat Industrial Investment Corporation Limited (GIIC) in 1990. conservation of energy and food processing industries are financed by GVFL. The firms engaged in biotechnology. state financial corporation. Initially a corpus has been created by setting apart Rs.

29.47 million 1997.000. There has been an average increase of almost 20 percent in the project size from the previous year.17 million 1997. Private Sector Venture Capital Funds i) Hindus Venture Capital Funds: Hindus venture capital fund is one of the noteworthy private venture capital companies. It extends financial support to the firms operating in the area of healthcare products. ii) 20th Century Venture Capital Fund: 20th century venture capital fund has been established with a corpus of Rs. electronics and computer technology. 14. It is the first private managed venture fund with a subscribed capital of Rs. iii) Credit Capital Venture Fund (CCVF): CCVF(India) Limited has been formed as a subsidiary of credit capital finance corporation limited in April1989.25 million in 1998 from Rs.21 crores contributed by several Indian and international institutions/ companies. Hindus venture management limited.10 crore contributed to the extent of Rs. 884. The fund envisages focus on sick industries and first generation entrepreneurs. 20 crores promoted by 20th century finance company limited.6. 10. Average investment per project has increased to Rs. It has been promoted with an initial corpus of Rs. 17.04 million in 1998 from Rs.  Pool of Venture Capital Funds in India There has been an increase in the pool of funds available for Venture capital activity to Rs.46 million in 691 projects in 1997.5 crore by international financial agencies and the remaining raised through public subscription.59.85 million in 728 projects from Rs. 38 . 25. Investment strategy of the fund is not to invest more than 10percent of its corpus in one project and equity stake in a company upto 50 percent. a separate company has been entrusted to manage the funds of Hindus venture capital fund. Investments have gone up to Rs. This fund has been promoted by nearly 15 major industrial houses in the country with the objectives of reviving sick units. 12.595.

the total investment in industrial products and machinery exceeded that in the computer industry.67 313.09 1.61 442.01 100.14 433. In the previous year.21 0.VENTURE CAPITAL FUNDS IN INDIA CONTRIBUTION TO "Venture Capital Funds" (1) Contributors Rs. There is an interesting change here compared to the previous year. compared to other industries.63 1. the maximum investment has been made in industrial products and machinery followed by investment in computer software and service. Agencies Other Banks Other Public Private Sector Public Sector Nationalized Banks Non-Residents Indians Insurance Companies Mutual Funds Total 15.05 0. Million Foreign Institutional Investors All Indian Financial Institute Multilateral Dev.50 4.43 2.05 7.50 29.727. This is a clear indication that investment in the IT industry.76 725. as a whole is attracting greater attention.45 1.48 1.72 2.04 1998 % 50.79 25. This is in keeping with global trends.32 623.86 7.884.298.39 62.178.69 5.47 2. 39 . In 1998 the total of the investments in computer software and hardware put together exceeds investments in industrial products and machinery.709.00 Investment by Industry As in the previous year.

146.48 735.51 82. Million 5.865.Contributors Industrial Products and Machinery Computer Software Service Consumer Related Medical Computer Hardware System Food and Food Processing Tel. Industry wise Investment Investment Stages Start-up Stage Later Stage Other Early Stage Seed Stage Turnaround Financing Total Rs.95 million in turnaround projects.478. 2.87 1.95 12.85 million. 82.478.956.381. has been invested in start-up projects.49 817. Rs. and Data Communication Biotechnology Other Electronics Energy Related Others Total 1998 Rs. 146.39 million in other early stage projects.40 million.559. 12.40 4. Rs.06 229.508.67 2.60 million in later stage projects.208. followed by Rs.51 million in seed stage projects and only Rs.85 % 219 100 52 47 30 50 18 27 40 18 127 728 Investment by Stages of Financing A sum of Rs.5.41 718.89 448.60 2.203.77 426. 643. 4.85 1998 % 355 166 118 80 9 728 40 .39 643.56 417.559. which is almost 41 percent of the total venture capital investment of Rs.56 1. Million 2.559.09 12.

14.72 million per project in the other early stage and Rs. This is because. venture capital 41 . agriculture. the amounts of investments in such projects are also very little. of the challenges and issues with regard to its development. since later stage projects generally require larger amounts of finance. This shows that the average investment per project is the maximum in the later stage. But alas. further supporting the theory that venture capitalists are generally not keen to fund turnaround projects.04 million per project in the seed stage.21 million per project in the turnaround stage Rs. This is as expected. 26.98 million per project in the later stage.50 million per project in the start-up stage. Indian venture capital industry is still at the take-off stage and not achieved the objectives so as to provide financial assistance for attaining commercial application of indigenous technology or adapting imported technology for wider domestic application. These averages also show that not only are the number of investments in turnaround projects minimal. Seed stage investments generally require smaller investments per projects. 9. 18.The average amount of investments per project makes an interesting study. health. energy and other areas beneficial to the development process in India.indiainfoline. to provide risk capital to first generation entrepreneurs for setting up industrial projects and to accelerate the pace and quality of technological innovations for products having application in industry. It is Rs. Rs. (1) source of data being www. 8.

abandon losers. However there are several problems associated with the Venture Capital Funds in India!!! 42 . Manage portfolios ruthlessly. whose projects are underpinned by personal relationships. 2. But there are several challenges faced by the Venture Capital Industry:  Venture Capital Financing is still not regarded as commercial activity. Corporate venturing models would probably benefit Indian companies who are large players in the Indian market in another five to 10 years by enabling them to diversify and at the same time help start up companies. Focus on specific industry niches. Simply making a good financial return is not sufficient. whereas abandoning ventures has never been easy for large corporations. which launched the successful corporate ventures had created new products in the market operating at the higher end of the value chain and had attained a certain size in the market. political concerns. Although corporate managers have a clear focus in their business. prioritized objectives.  Investors feel that they would like to retain control and also to ensure that the business must pass onto their family.  Restricted scope of Venture Capital in India to hi-tech projects and for turning Research and Development into Commercial Production  Entrepreneurs sensitiveness to the mode of divestment and  Ambiguous government policy towards inter-corporate investment and issue of shares to the entrepreneurs at below per value or in the form of a “ guest equity”. Multinationals led by Intel are the best examples of corporate venturing in an Indian context. Their biggest challenge is to establish clear. 3. But the question is how relevant is corporate venturing in the India? The firms. they run into ambiguity with venture programs.FACTORS FOR THE SUCCESS OF VENTURE CAPITAL FIRMS The success of venture capital firms rest on the following characteristics: 1. Most Indian companies are yet to move up the value chain and consolidate their position as players in the global market.

Abroad. to established businesses with profitable operating histories. The other issues that led to such a situation include:  License Raj And The IPO Boom Till early 90s. The IT industry (which is most suited for venture funding because of its "ideas" nature) in India till recently had a service centric business model. yet our share in the global market is less than 1 per cent. The biggest problem was a mindset change from "collateral funding" to high risk high return funding. All these combined to a slow start to the industry. this problem is solved by the presence of `angel investors’. the promoters were well-established industrial houses. What was needed was ability to get a license and then get the project funded by the banks and DFIs. 43 . Products developed for Indian markets lack scale. only commodity centric businesses thrived in a deficit situation. Exposure to fast growing intellectual property business and services sector was almost zero. They are typically wealthy individuals who not only provide venture finance but also help entrepreneurs to shape their business and make their venture successful. To fund a cement plant. Within the software industry. If the industry has to grow further and survive the flux it would only be through innovation. True venture capital is capital that is used to help launch products and ideas of tomorrow. Most of these entities were capable of raising funds from conventional sources.  Scalability The Indian software segment has recorded an impressive growth over the last few years and earns large revenues from its export earnings. Most of the pioneers in the industry were people with credit background and exposure to manufacturing industries. In most cases. with no apparent need for funds. Most of the venture capital units were offshoots of financial institutions and banks and the lending mindset continued. the value chain ranges from body shopping at the bottom to strategic consulting at the top. Most venture capital companies want to provide capital on a secured debt basis. including term loans from institutions and equity markets.  Mindsets Venture capital as an activity was virtually non-existent in India. Higher value addition and profitability as well as significant market presence take place at the higher end of the value chain.PROBLEMS WITH VENTURE CAPITAL IN INDIA One can ask why venture funding is so successful in USA and faced a number of problems in India. venture capital is not needed. under the license raj regime. For any venture idea to succeed there should be a product that has a growing market with a scalable business model.

Given the dull market for mergers and acquisitions. is not made applicable for structuring of VCFs in India. Thanks to the software boom. pricing was dependent on the erstwhile CCI regulations. Allowing pension funds. the number and quality of deals available to the venture funds gets reduced. insurance companies to invest in the VCFs would enlarge the possibility of setting up of domestic VCFs. corporate bodies etc. all issues were under priced. while offshore funds routed through Mauritius follow RBI guidelines. Further. Returns. while in Indian domestic financial institutions. A proper tax-efficient vehicle in the form of ‘Limited Liability Partnership Act’ which is popular in USA.  Valuation The recent phenomenon is valuation mismatches. Taxes and Regulations There is a multiplicity of regulators like SEBI and RBI. Abroad. The government must allow pension funds and insurance companies to invest in venture capitals as in USA where corporate contributions to venture funds are large. Given the failure of the OTCEI and the revised guidelines. Even now SEBI guidelines make it difficult for pricing issues for an easy exit. if mutual funds are allowed to invest upto 5 percent of their corpus in VCFs by SEBI.  Problem in raising of funds In USA primary sources of funds are insurance companies. small companies could not hope for a BSE/ NSE listing.  Limitations on structuring of Venture Capital Funds(VCFs) VCFs in India are structured in the form of a company or trust fund and are required to follow a three-tier mechanism-investors. trustee company and AMC. This coupled with the fancy for software stocks in the bourses means that most companies are preponing their IPOs.  Exit The exit routes available to the venture capitalists were restricted to the IPO route. Given this. In general. investors’ liability towards the fund is limited to the extent of his contribution in the fund and also formalities in structuring of fund are simpler. Consequently. In this form of structuring. such funds are made under the Limited Partnership Act. strategic sale was also not available. it may lead to increased availability of fund for VCFs. Domestic venture funds are set up under the Indian Trusts Act of 1882 as per SEBI guidelines. most promoters have sky high valuation expectations. pensions funds. Before deregulation. it is difficult for deals to reach financial closure as promoters do not agree to a valuation. multilateral agencies and state government undertakings are the main sources of funds for VCFs. 44 . which brings advantages in terms of taxation.

 Absence of ‘angel investors’ In Silicon Valley. Redeemable Preference shares etc. Private equity investors typically invest at expansion/ later stages of growth of the company with large investments. income from investments only in equity instruments of venture capital undertakings is eligible for tax exemption. Harmonization of SEBI regulations and income tax rules of CBDT would provide much required flexibility to VBCFs in structuring the investment instruments and also availing of the tax breaks. In contrast to this phenomenon. Indian industry is marked by an absence of angel investors. initial/seed stage financing is provided by the angel investors till the company becomes eligible for venture funding. while off-shore Funds which are structured in tax havens such as Mauritius are able to overcome the investment restriction of SEBI and also get exemption from Income Tax under Tax Avoidance Treaties. Venture capitalist through financial support and value-added inputs enables the company to achieve better growth rate and facilitate its listing on stock exchanges.  Limitations of investment instruments As per the section 10(23FA) of the Income Tax Act. Lack of Inventive to Investors Presently. which is a nurturing ground for venture funds financed IT companies.  Domestic VCFs vis-à-vis Offshore Funds The domestic VCFs operations in the country are governed by the regulations as prescribed by SEBI and investment restrictions as placed by CBDT for availing of the tax benefits. whereas SEBI regulations allow investments in the form of equity shares or equity related securities issued by company whose shares are not listed on stock exchange. As VCFs normally structure the investments in venture capital undertakings by way of equity and convertible instruments such as Optionally/ Fully Convertible Debentures.. In absence of any inventive. Thus investments by VCFs by instruments other than equity can also be qualified for Tax exemption. 45 . they need tax breaks on the income from equity linked instruments.. The problem of raising funds from these sources further gets aggravated with the differential tax treatment applicable to VCFs and mutual funds. high net worth individuals and corporates are not provided with any investments in VCFs. They pay maximum marginal tax 35percent in respect of non exempt income such as interest through Debentures etc. There after. This denies a level playing field for the domestic investors for carrying out the similar activity in the country. it is extremely difficult for domestic VCFs to raise money from this investor group that has a good potential. While the income of the Mutual Funds is totally tax exempted under Section 10(23D) of the Income Tax Act income of domestic VCFs which provide assistance to small and medium enterprise is not totally exempted from tax.

project consultancy.  Legal framework Lack of requisite legal framework resulting in inadequate penalties in case of suppression of facts by the promoters-results in low returns even from performing companies. investment in company is also restricted upto 40 per cent of equity of investee company. Further. in recent time. as per Income tax rules. tourism etc. which could be upto 49 per cent of equity of the Investee Company. Absence of such mechanism puts limitations in structuring the deals. Opening up of restrictions. design and testing services. Further. on investing in the services sectors such as telecommunication and related services. Also SEBI regulations do not restrict size of an investment in a company. This has bearing on equity investments particularly in unlisted companies.  Anomaly between SEBI regulations and CBDT rules CBDT tax rules recognize investment in financially weak companies only in case of unlisted companies as venture investment whereas SEBI regulations recognize investment in financially weak companies which offers an attractive opportunity to VCFs.  Limitation on application of sweet equity and ESOP In the US. sweet equity and ESOP issued to entrepreneur and employees gets taxed twice at the time of acquisition and divestment. as a perquisite in its income. services and software bag the largest share of venture capital investments. to the extent of 33 per cent defeats the entire purpose of its issue. The same may be allowed by CBDT for availing of tax exemption on capital gains at a later stage. would increase the domain and growth possibilities of venture capital. an entrepreneur can declare that he has nothing much to contribute except for ‘intellectual’ capital and still he finds venture capitalists backing his idea with their money. in India other conventional sectors dominate venture finance. the concept of par value of shares does not exist that allows the different par value shares. However. as per present tax structure in India. maximum investment in a company is restricted to less than 20 per cent of the raised corpus of VCF and paid up share capital in case of Venture Capital Company. Tax incidence at two points involving undue hassles to allottees of sweat equity of individual. 46 . And when they come together. Limitations on industry segments In sharp contrast to other countries where telecom. there is a way to structure the investment deal in such a manner that the entrepreneur can still ensure a controlling stake in the venture. In the US. VCFs may place the investment restriction for VCFs by way of maximum equity stake in the company.

Also intervention allied agencies like the Department of Electronics. These funds have to secure the permission of the FIPB while setting up in India and need a clearance from the RBI for any repatriation of income.  The Securities and Exchange Board of India has come out with a set of guidelines attached in the annexure. (In the US. In addition to the above there are a number of arms of the Government of India – Ministry of Finance that may have to be approached in certain situations.REGULATORY ISSUES There are a number of rules and regulation for venture capital and these would broadly come under either of the following heads:  The Indian Trust Act. 1956 depending on whether the fund is set up as a trust or a company. a venture capital firm is normally set up as a limited liability partnership)  The Foreign Investment Promotion Board (FIPB) and the Reserve Bank of India (RBI) in case of an offshore fund. incomes may be freely repatriated). the National Association of Software and Computers (NASSCOM) and various taskforces and standing committees is not uncommon. Probably this explains why most of the funds prefer to take the easy way out by listing as offshore funds operating out of tax havens like Mauritius (where the Avoidance of Double Taxation Treaty. 47 . 1882 or the Company Act. The long term capital gains tax is at around 10% in India and the relevant clauses to venture capital may be found in Section 10 (subsection 23).  The Central Board of Direct Taxation (CBDT) governs the issues pertaining to income tax on the proceeds from venture capital funding activity.


 Fiscal Incentives Though Venture Capital funds like Mutual funds are exempted from paying tax on dividend income and long-term capital gains. from equity investment. So it is imperative that the Government streamlines its guidelines on tax exemption for Venture Capital Funds. promotional efforts and development strategy employing new concepts such as venture fairs. such as: MEASURES TO BE PROVIDED From the experience of Venture Capital activities in the developed countries and detailed case study of venture capital in India we can derive that the following measures needs to be provided to boost Venture Capital industry in India.  Deregulated Economic Environment A less regulated and controlled business and economic environment where an attractive customer opportunity exists or could be created for high-tech and quality products.  Marketing Thrust A vigorous marketing thrust. venture clubs venture networks.  Enterpreneurship And Innovation A broad-based (and less family based) entrepreneurial traditions and societal and governmental encouragement for innovation creativity and enterprise. business incubators etc. Hardly few know about the principal objectives and functions of the existing venture capital funds in the country and thus banking of the media is required to bridge the gulf between the society and the existing venture capital funds.After analyzing the various problems being faced by the Venture Capitalists in India certain issues need to be dealt with very seriously regarding the growth and success of such ventures.. 49 . for the growth of venture capital. Hence certain remedial measures should be provided. unlike Mutual funds there are pre-conditions attached to the tax shelter.  Social Awareness Lack of social awareness of the existence of venture capital industry has been observed.

The coordination organ would not only maintain link with the domestic professional institutions. 50 . such professionals are not easily available particularly in developing countries like India.  Training and Development of Venture Capital Managers For the success of venture capital fund. venture capital funds need professionals with initiative. Central Government should come forward to promote the referred coordination organ in the form of a statutory body. business and entrepreneurship oriented education system where scientist and engineers have knowledge of accounting.  Technological Competitiveness: Encouragement and funding of R&D by private and public sector companies and the government for ensuring technological competitiveness. finance and economics and accountants understand engineering or the physical sciences. be it privately owned or public sector financial institutions. Therefore management schools need to develop social training programs to train venture capital mangers in which risk taking and entrepreneurial attitude needs to be incubated. drive and vision to identify such entrepreneurs who have sound & ideas and innovative vision. For this. A Statutory Co-ordination Body A harmonious co-ordination needs to be maintained among the technology institutes. technology institutes and universities but also with the global venture capital funds in order to exchange the novel ideas that can help in standardizing Indian practice on venture capital funds. professional institutes and universities who are the producers of future venture capital managers. The coordinating organ so formed is expected to ventilate an outline of the latest requirements of the venture capital funds management. strategies need to be found to promote entrepreneurship. Unfortunately.  Broad Knowledge Base A more general.

Inter accruals alone may not be adequate to backroll the repurchases and institutional funding for such buyouts is rarely forthcoming. exit routes etc should be adopted. a special purpose vehicle (SPV) can be created which would hold the shares bought back from the venture capital firms in trust until the firm achieves a certain rate of return. For entrepreneur driven companies where value creation is through intellectual property patents. Though there is no legal bar on such funding. Venture funds would prefer the company to invest back dividends into the business. Exit Routes For venture capital funds. To provide the lenders with an additional degree of security. Meanwhile. going public is one way for the investors to be paid back. All these measures such as a broad knowledge base. but the risk of extending against the shares of newly established company have kept away most of the bank and financial institutions. 51 . As such the question of stream of dividends pay outs prior to IPO over three years as is required in India is a hindrance. exits are crucial. Creative financial engineering can find a way around this problem. such norms are archaic. Current rules of companies going public in India insist on sustained track record of profits. Another exit route can be repurchases of shares by promoters but it is an expensive way of assuring investors an exit bank roll. methodologies and processes. to ensure effective growth and success of Venture Capital Funds in India such that a potential investor develops the confidence to invest in the Indian markets. a certain proportion of the firms sales proceeds can be funneled directly to the SPV to amortize debt. Venture capitalists earn through value creation leading to exits and not through dividends.

Prentice Hall. 5th Edition. 2 nd Edition.  James C. Tata Mc Graw Hill Publishing Company Limited. 1992. 2002.  L M Bhole: Financial Institutions and Markets. 1996. 2001. Van Horne and John M. Newspapers:  Times of India  Economic Times  Hindustan Times 52 .  H R Machiraju: Indian Financial System. Tata Mc Graw Hill Publishing Company Limited. Jr: Fundamentals of Financial Management. Theory and Practice. Galgotia Publication Company. 9 th Edition. 2 nd Edition. 2 nd Edition. Wachowicz. Vikas Publishing House.  M Y Khan: Indian Financial System.BIBLIOGRAPHY  R P Rustogi: Incorporating the Emerging Trends in the Indian Capital Market. 2th Edition. 2000. 2002.  Prasanna Chandra: Financial Management.


unless the context otherwise requires.1 SEBI GUIDELINES FOR VENTURE CAPITAL PRELIMINARY Short title and commencement (1) These regulations may be called the Securities and Exchange Board of India (Venture Capital Funds) Regulations. Definitions In these regulations. 1992 . (j) "sick industrial company" has the same meaning as is assigned to Sick Industrial Companies Act. 1882 (l) "units" means the interest of the investors in a scheme of a venture capital fund set up as a trust. which consist of each unit representing one undivided share in the assets of the scheme. (d) "economic offence" means an offence to which the Economic Offences Act. (c) "company" means a company incorporated under the Companies Act. 1995 issued by the Government of India for Overseas Venture Capital Investments in India as amended from time to time. 1985.APPENDIX. 1996. 54 . (a) "Act" means the Securities and Exchange Board of India Act. 1956 . (i) "Schedule" means a schedule annexed to these regulations. (k) "trust" means a trust established under the Indian Trusts Act. (2) They shall come into force on the date of their publication in the Official Gazette. (h) "inspecting officer" means an inspecting officer appointed by the Board . 1974 applies for the time being. (b) "certificate" means a certificate of registration granted by the Board . (g) "Government of India Guidelines" means the guidelines dated September 20. (f) "Form" means any of the forms set out in the First Schedule. (e) "enquiry officer" means an enquiry officer appointed by the Board.

55 . and makes or proposes to make investments in accordance with these regulations. issue of securities or units as the case may be. donations.(m) "venture capital fund" means a fund established in the form of a company or trust which raises monies through loans.

may extend the said period upto a maximum of six months from the date of such commencement. documents. who on the date of commencement of these regulations is carrying any activity as a venture capital fund without a certificate shall make an application to the Board for grant of a certificate within a period of three months from the date of such commencement: Provided that the Board. in special cases. (6) The Board may in order to protect the interests of investors appoint any person to take charge of records. securities and for this purpose also determine the terms and conditions of such an appointment. (5) The Board may in the interest of the investors issue directions with regard to the transfer of records. namely:(a) if the application is made by a company. the carrying on of the activity of a venture capital fund. 56 . (2) Any company or trust. (4) Any company or trust referred to in sub-regulation (2) who fails to make an application for grant of a certificate within the period specified therein shall cease to carry on any activity as a venture capital fund.REGISTRATION OF VENTURE CAPITAL FUND Application for grant of certificate proposing (1) Any company or trust to carry on any activity as a venture capital fund on or after the commencement of these regulations shall make an application to the Board for grant of a certificate. documents or securities or disposal of investments relating to its activities as a venture capital fund. (ii) it is prohibited by its memorandum and articles of association from making an invitation to the public to subscribe to its securities. (3) An application for grant of certificate under sub-regulation (1) or sub-regulation (2) shall be made to the Board in Form A and shall be accompanied by a non-refundable application fee as specified in Part A of the Second Schedule to be paid in the manner specified in Part B thereof. Eligibility Criteria For the purpose of the grant of a certificate by the Board the applicant shall have to fulfil in particular the following conditions. (i) memorandum of association has as its main objective.

(d) the company or trust has not been refused a certificate by the Board or its certificate has been suspended under regulation 30 or cancelled under regulation 31. (c) if the application is made by a body corporate(i ) it is set up or established under the laws of the Central or State Legislature. been convicted of any offence involving moral turpitude or of any economic offence. if any. is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant. as the case may be. (i) the instrument of trust is in the form of a deed and has been duly registered under the provisions of the Indian Registration Act. The directors or the trustees. of such body corporate. The applicant is permitted to carry on the activities of a venture capital fund. 1908 . The applicant is a fit and proper person. Furnishing of information. or any trustee is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant. or a trustee has not at any time. (v) the applicant is a fit and proper person. (ii) the main object of the trust is to carry on the activity of a venture capital fund. (iv) the directors of its trustee company. if any. clarification The Board may require the applicant to furnish such further information as it may consider necessary. 57 .(iii) its director or principal officer or employee is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant. (v) it is a fit and proper person. (iv) its director. if any. principal officer or employee has not at any time been convicted of any offence involving moral turpitude or any economic offence. (b) if the application is made by a trust. (iii) the directors of its trustee company.

Conditions of certificate The certificate granted under regulation 7 shall be inter-alia. the objections indicated by the Board. (2) The decision of the Board to reject the application shall be communicated to the applicant within thirty days. it shall send an intimation to the applicant. before rejecting any such application. within thirty days of the date of receipt of communication. (c) the venture capital fund shall forthwith inform the Board in writing if any information or particulars previously submitted to the Board are found to be false or misleading in any material particular or if there is any change in the information already submitted. the applicant shall pay to the Board. Procedure for grant of certificate (1) If the Board is satisfied that the applicant is eligible for the grant of certificate. the registration fee specified in Part A of the Second Schedule in the manner specified in Part B thereof. the Government of India Guidelines and these regulations. if the Board is of the opinion that a certificate should not be granted. subject to the following conditions. on being satisfied that it is necessary to extend the period specified in the first proviso. Provided further that the Board may. namely:(a) the venture capital fund shall abide by the provisions of the Act.Consideration of application An application which is not complete in all respects shall be rejected by the Board: Provided that. extend such period by such further time not exceeding ninety days. (2) On receipt of intimation. Procedure where certificate is not granted (1) After considering an application made under regulation 3. (3) The Board shall on receipt of the registration fee grant a certificate of registration in Form B. (b) the venture capital fund shall not carry on any other activity other than that of a venture capital fund. the applicant shall be given an opportunity to remove. 58 . it may reject the application after giving the applicant a reasonable opportunity of being heard.

(2) Any company or trust referred to in sub-regulation. 59 .Effect of refusal to grant certificate (1) Any applicant whose application has been rejected under regulation 9 shall not carry on any activity as a venture capital fund. securities and for this purpose also determine the terms and conditions of such an appointment. (4) The Board may in order to protect the interests of the investors appoint any person to take charge of records. documents. (3) The Board may in the interest of the investors issue directions with regard to the transfer of records. documents or securities or disposal of investments relating to its activities as a venture capital fund. on and from the date of the receipt of the communication under regulation 9. cease to carry on any activity as a venture capital fund. whose application for grant of certificate has been rejected under regulation 9 by the Board shall.

(b) at least 80 percent of funds raised by a venture capital fund shall be invested in:(i) the equity shares or equity related securities issued by a company whose securities are not listed on any recognised stock exchange: Provided that a venture capital fund may invest in equity shares or equity related securities of a company whose securities are to be listed or are listed where the venture capital fund has made these investments through private placements prior to the listing of the securities. Restrictions on investment by a venture capital fund All investments made or to be made by a venture capital fund shall be subject to the following restrictions: (a) the venture capital fund shall not invest in the equity shares of any company or institution providing financial services.(a) employees or the principal officer or directors of the venture capital fund. foreign or non-resident Indian. which has at the end of the previous financial year accumulated losses. a "financially weak company" means a company. Explanation: For the purposes of this regulation.INVESTMENT CONDITIONS AND RESTRICTIONS Minimum investment in a venture capital fund (1) A venture capital fund may raise monies from any investor whether Indian. Explanation: For the purposes of this regulation. (ii) the equity shares or equity related securities of a financially weak company or a sick industrial company. providing financial assistance in any other manner to companies in whose equity shares the venture capital fund has invested under sub-clause (i) or sub-clause (ii). which has resulted in erosion of more than 50% but less than 100% of its networth as at the beginning of the previous financial year. (2) No venture capital fund set up as a company or any scheme of a venture capital fund set up as a trust shall accept any investment from any investor which is less than five lakh rupees: Provided that nothing contained in sub-regulation (2) shall apply to investors who are. or (c) persons or institutions of foreign origin. or (b) non resident Indians. whose securities may or may not be listed on any recognised stock-exchange. or directors of the trustee company or trustees where the venture capital fund has been established as a trust. as the case may be. "funds raised" means the actual monies raised from investors for subscribing to the securities of the venture capital fund and includes monies raised from the author of the trust in case (iii) 60 .

the venture capital fund has been established as a trust but shall not include the paid up capital of the trustee company. as the case may be. by the venture capital fund. listed on any recognised stock exchange till the expiry of three years from the date of the issuance of securities or units. if any. as the case may be. Prohibition on listing No venture capital fund shall be entitled to get its securities or units. 61 .

file with the Board a placement memorandum which shall give details of the terms subject to which monies are proposed to be raised from the investors. (b) details of entitlement on the units of the trust for which subscription is being sought. (h) manner in which the benefits accruing to investors in the units of the trust are to be distributed. of the scheme. if any. (d) tax implications that are likely to apply to investors. Contents of placement memorandum (1) The placement memorandum referred to in regulation 16 shall contain the following. Placement memorandum (1) The venture capital fund established as a trust shall. and of fees to be paid to such a company. if any. 62 .GENERAL OBLIGATIONS AND RESPONSIBILITIES Prohibition on inviting subscription from the public No venture capital fund shall issue any document or advertisement inviting offers from the public for the subscription or purchase of any of its securities or units. in which the scheme is to be wound up. (i) details of the asset management company. (e) manner of subscription to the units of the trust. namely:(a) details of the trustees or trustee company of the venture capital fund. Private placement A venture capital fund may receive monies for investment in the venture capital fund through private placement of its securities or units. (g) the manner. before making an offer inviting any subscription to its securities. before issuing any units file with the Board a placement memorandum which shall give details of the terms subject to which monies are proposed to be raised from investors. (c) details of investments that are proposed to be made. if any. (f) the period of maturity. (2) A venture capital fund established as a company shall.

63 . (b) details of investments that are proposed to be made. Changes in the placement memorandum to be intimated to the Board Amendments or changes to any placement memorandum already filed with the Board can be made only if. in writing. namely:(a) details of the securities that are being offered. (e) manner of subscription to the securities that are to be issued. records and documents which shall give a true and fair picture of the state of affairs of the venture capital fund.(a) a copy of the placement memorandum indicating the changes is filed with the Board. the Board communicates any amendments to the placement memorandum. Circulation of placement memorandum The placement memorandum referred to in regulation 16 may be issued for private circulation only after the expiry of twenty one days of its submission to the Board: Provided that if. (c) details of directors of the company. within twenty one days of submission of the placement memorandum. the Board has not communicated any objections or observations on the said amendments or changes. and (g) details of the asset management company. (d) tax implications that are likely to apply to investors. (2) Every venture capital fund shall intimate the Board. the place where the books. records and documents referred to in sub-regulation (1) are being maintained. the venture capital fund shall carry out such amendments in the placement memorandum before such memorandum is circulated to the investors. and (b) within twenty one days of such filing.(2) The placement memorandum referred to regulation 16 shall contain the following. and of fees to be paid to such a company. (f) manner in which the benefits accruing to investors in the securities are to be distributed. Maintenance of books and records (1) Every venture capital fund shall maintain for a period of ten years books of accounts. if any.

(2) Where any information is called for under sub-regulation (1) it shall be furnished to the Board within fifteen days. 64 . no further investments shall be made on behalf of the scheme so wound up. (a) when the period of the scheme.Power to call for information (1) The Board may at any time call for any information from a venture capital fund with respect to any matter relating to its activity as a venture capital fund. Effect of winding up (1) On and from the date of intimation under regulation 23. that the scheme shall be wound up in the interests of investors in the units. (3) of regulation 23. (2) Within three months from the date of intimation under sub-regulation. 1956 (3) The trustees or trustee company of the venture capital fund set up as a trust shall intimate the Board and investors of the circumstances leading to the winding up of the scheme under sub-regulation (1). Submissions of reports to the Board The Board may at any time call upon the venture capital fund to file such reports as the Board may desire with regard to the activities carried on by the venture capital fund. if any. as the case may be. (b) if it is the opinion of the trustees or the trustee company. the assets of the scheme shall be liquidated. mentioned in the placement memorandum is over. (2) A venture capital fund set up as a company shall be wound up in accordance with the provisions of the Companies Act. (c) if seventy five percent of the investors in the scheme pass a resolution at a meeting of unit holders that the scheme be wound up. or (d) if the Board so directs in the interests of investors. and the proceeds accruing to investors in the scheme distributed to them after satisfying all liabilities. Winding up (1) A scheme of a venture capital fund set up as a trust shall be wound up.

Board's right to inspect or investigate (1) The Board may appoint one or more persons as inspecting or investigating officer to undertake inspection or investigation of the books of accounts, records and documents relating to a venture capital fund for any of the following reasons, namely:(a) to ensure that the books of account, records and documents are being maintained by the venture capital fund in the manner specified in these regulations; (b) to inspect or investigate into complaints received from investors, clients or any other person, on any matter having a bearing on the activities of the venture capital fund; (c) to ascertain whether the provisions of the Act and these regulations are being complied with by the venture capital fund; and (d) to inspect or investigate suo motu into the affairs of a venture capital fund, in the interest of the securities market or in the interest of investors. Notice before inspection or investigation (1) Before ordering an inspection or investigation under regulation 25, the Board shall give not less than ten days notice to the venture capital fund. (2) Notwithstanding anything contained in sub-regulation (1), where the Board is satisfied that in the interest of the investors no such notice should be given, it may by an order in writing direct that the inspection or investigation of the affairs of the venture capital fund be taken up without such notice. (3) During the course of an inspection or investigation, the venture capital fund against whom the inspection or investigation is being carried out shall be bound to discharge its obligations as provided in regulation 27. Obligations of venture capital fund on inspection or investigation by the Board (1) It shall be the duty of the venture capital fund whose affairs are being inspected or investigated, and of every director, officer and employee thereof, of its asset management company, if any, and of its trustees or directors or the directors of the trustee company, if any, to produce before the inspecting or investigating officer such books, securities, accounts, records and other documents in its custody or control and furnish him with such statements and information relating to the venture capital fund, as the inspecting or investigating officer may require, within such reasonable period as the inspecting officer may specify.


(2) The venture capital fund shall allow the inspecting or investigating officer to have reasonable access to the premises occupied by such venture capital fund or by any other person on his behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the venture capital fund or such other person and also provide copies of documents or other materials which, in the opinion of the inspecting or investigating officer are relevant for the purposes of the inspection or investigation, as the case may be. (3) The inspecting or investigating officer, in the course of inspection or investigation shall be entitled to examine or to record the statements of any director, officer or employee of the venture capital fund. (4) It shall be the duty of every director, officer or employee, trustee or director of the trustee company of the venture capital fund to give to the inspecting or investigating officer all assistance in connection with the inspection or investigation, which the inspecting or investigating officer may reasonably require. Submission of Report to the Board The inspecting or investigating officer shall, as soon as possible, on completion of the inspection or investigation submit an inspection or investigation report to the Board: Provided that if directed to do so by the Board, he may submit an interim report. Communication of findings etc. to the venture capital fund (1) The Board shall, after consideration of the inspection or investigation report or the interim report referred to in regulation 28, communicate the findings of the inspection officer to the venture capital fund and give him an opportunity of being heard. (2) On receipt of the reply if any, from the venture capital fund, the Board may call upon the venture capital fund to take such measures as the Board may deem fit in the interest of the securities market and for due compliance with the provisions of the Act and these regulations.



Suspension of certificate The Board may suspend the certificate granted to a venture capital fund where the venture capital fund: (a) contravenes any of the provisions of the Act or these regulations; (b) fails to furnish any information relating to its activity as a venture capital fund as required by the Board; (c) furnishes to the Board information which is false or misleading in any material particular; (d) does not submit periodic returns or reports as required by the Board; (e) does not co-operate in any enquiry, inspection or investigation conducted by the Board; (f) fails to resolve the complaints of investors or fails to give a satisfactory reply to the Board in this behalf. Cancellation of certificate The Board may cancel the certificate granted to a venture capital fund:(a) when the venture capital fund is guilty of fraud or has been convicted of an offence involving moral turpitude; (b) the venture capital fund has been guilty of repeated defaults of the nature specified in regulation 30; or (c) contravenes any of the provisions of the Act or these regulations. Manner of making order of cancellation or suspension No order of suspension or cancellation of certificate shall be made by the Board, except after holding an enquiry in accordance with the procedure specified in regulation 33. Manner of holding enquiry before suspension or cancellation (1) For the purpose of holding an enquiry under regulation 32, the Board may appoint one or more enquiry officers. 67

at its registered office or its principal place of business. (2) The venture capital fund shall. Show-cause notice and order (1) On receipt of the report from the enquiry officer. shall. the venture capital fund may appear through any person duly authorised by the venture capital fund: Provided that no lawyer or advocate shall be permitted to represent the venture capital fund at the enquiry: Provided further that where a lawyer or an advocate has been appointed by the Board as a presenting officer under sub-regulation (6). as soon as possible pass such order as it deems fit. and 68 . if any. (6) The enquiry officer may. if he considers it necessary. send a reply to the Board. (3) The Board. Effect of suspension and cancellation of certificate (1) On and from the date of the suspension of the certificate. (3) The venture capital fund may. within fourteen days of the date of the receipt of the showcause notice. the venture capital fund shall cease to carry on any activity as a venture capital fund during the period of suspension. (4) The enquiry officer shall give a reasonable opportunity of hearing to the venture capital fund to enable him to make submissions in support of its reply made under sub-regulation (3). submit a report to the Board and recommend the penal action. the Board shall consider the same and may issue to the venture capital fund a show-cause notice as to why the penal action as proposed by the enquiry officer should not be taken against it. of the venture capital fund. after taking into account all relevant facts and submissions made by the venture capital fund.(2) The enquiry officer shall issue to the venture capital fund. ask the Board to appoint a presenting officer to present its case. within fourteen days from the date of receipt of such notice. furnish to the enquiry officer a written reply. (7) The enquiry officer shall. together with copies of documentary or other evidence relied on by it or sought by the Board from the venture capital fund. after considering the reply. a notice setting out the grounds on which action is proposed to be taken against it and calling upon it to show cause against such action within a period of fourteen days from the date of receipt of the notice. it shall be lawful for the venture capital fund to present its case through a lawyer or advocate. if any. to be taken against the venture capital fund as also the grounds on which the proposed action is justified. (5) Before the enquiry officer.

documents or securities that may be in its custody or control. and shall be subject to such directions of the Board with regard to the transfer of records. (2) On and from the date of cancellation of the certificate. with immediate effect. documents or securities that may be in its custody or control. relating to its activities as venture capital fund. cease to carry on any activity as a venture capital fund. 69 . Publication of order of suspension or cancellation The order of suspension or cancellation of certificate passed under regulation 35 may be published by the Board in two newspapers.shall be subject to such directions of the Board with regard to any records. the venture capital fund shall. as the Board may specify. relating to its activities as venture capital fund. as the Board may specify.

500001 Canbank Venture Capital Fund Limited 2/F Kareem Towers. 70 .400028 AIA Capital India Private Limited 9B Hansalaya Barakhamba Road New Delhi . 2nd floor 242 Lady Jamshedji Road Mumbai .560052 Draper International (India) Private Limited V203 Prestige Meridian -1 M. Basheerbagh Hyderabad .400021 APIDC Venture Capital Limited 1102 Block A. 9. 7. 11th floor 19/5 -19/6 Cunningham Road Bangalore . 3.560001 2. 5. Road Bangalore . 4.Ambedkar Road Parel Mumbai . 6. 11th floor Babukhan Estate. 8.560052 Alliance Venture Capital Advisors Limited 607 Raheja Chambers Free Press Journal Road. Nariman Point Mumbai . 20th Century Finance Corporation Limited Centre Point Dr.APPENDIX-2 List of Venture Capital Companies in India 1.Representative Office 2634 Oberoi Towers Nariman Point Mumbai .400021 Acuity Strategic Financials Private Limited 14 Santosh.G.400012 AIG Investment Corporation (Asia) Limited India .110001 Alliance DLJ Private Equity Fund 404 / 405 Prestige Centre Point 7 Edward Road Bangalore .

3rd floor 24 Barakhamba Road New Delhi . 71 . 15 . 4th floor 17 Commissariat Road D'Souza Circle Bangalore . 16 .400020 GE Capital Services India Limited AIFACS Building 1 Rafi Marg New Delhi .110001 ICICI Securities and Finance Company Limited 41/44 Strand Palace M. 14 .10 .700071 Industrial Development Bank of India IDBI Tower Cuffe Parade Mumbai .400005 ICICI Venture Funds Management Company Limited (formerly TDICI) Raheja Plaza. 1st floor Behind Popular House Ashram Road Ahmedabad . 17 .110001 Gujarat Venture Finance Limited Premchand House Annexe. 13 .Desai Marg Colaba Mumbai .380009 HSBC Private Equity Management Mauritius Limited Ashoka Estate.560025 IFB Venture Capital Finance Limited 8/1 Middletown Row Calcutta . 12 .400005 11 . eVentures India (Consultair Investments Private Limited) Khetan Bhavan 8 Jameshedji Tata Road Churchgate Mumbai .

400021 Tata Investment Corporation Limited Ewart House.18 . Shah Marg Nariman Point Mumbai .400021 Vista Ventures DBS Corporate Club 26 Cunningham Road Bangalore .400052 19 . 21 . 3rd floor Homi Modi Street Fort Mumbai . 22 .400001 Templeton India Private Equity Fund 125 Free Press House Nariman Point Mumbai . 20 . Small Industries Development Bank of India (SIDBI) SIDBI Venture Capital Limited Nariman Bhavan 227 Vinay K.560052 Walden-Nikko India Management Company Limited One Silverstone 294 Linking Road Khar (West) Mumbai . 72 .

we fund very few ideas that we hear. Pramod Haque says outsourcing to India is very crucial for start-ups. So a lot of people know about us and approach us with ideas. Q: How many ideas do you hear a day? A: I don't have the exact number but we hear a lot of ideas. So for those two reasons. Also we are focused exclusively on the information technology space. Probably less than 1-2% of the ideas we hear get funded. since their breakeven formula does not work for such Pramod Haque Managing Partner. Q: Is it because they are not good or is it because those are not in the areas of your interest? A: It's a combination of both.APPENDIX-3 What the leader speaks!!!! www.ibef. our focus and then our standards. Forbes' number one venture capitalist in the world. 73 . He says rarely does his company finance a start-up which does all its work in the US. We are very selective and we maintain a very high standard. And many ideas we hear are outside that space. We have a team of about eight investment personnel and we have been in business for forty-three years. Norwest Venture Partners Forbes' number one venture capitalist Pramod Haque roots for outsourcing.

There is a very high percentage of Indian professionals that work in the valley. haven't been able to verify them. 74 . But I think lot of successful companies in the Valley have been started by Indians. What is it that makes Indians at Silicon Valley great venture capitalists? A: There are lot of Indians who participate in Silicon Valley endeavours. There was a time when I heard some statistics. we see the best of the best and therefore we are fortunate enough to have been affiliated with leading companies. So success breeds success. are started by Indians. that 40% of the companies that get started in the Valley. Q: Is their success rate better than the rest? A: I really don't have numbers.Q: It is very rare that we get two Indians on the top any financial list like this. Both our firms .Norwest Venture Partners and Kleiner Perkins .have had a long history of funding some very good companies.

there were lot of good companies that were funded in the 2001-02 . Q: Any idea about failed companies? A: I think a lot of companies failed. have all been rolled back in the last year or so and to some extent they reflect the 75 . Q: VC is after all early investment in slightly risky proposition. I can give you rough numbers.. there is a later stage investing is going on in some of these companies that we have just talked about 3000 companies.000 companies that got started in the 1998-2001 and I would say that at this stage. there are probably only about 3000 of them still there. Q: Is there any particular characteristic that distinguishes these? A: These are all in hi-tech sector. And of the 3000-odd companies we spoke of. I think the key thing to spot in those companies is that they are highly differentiated and that have not been leapfrogged by someone else and therefore are worthy of continuing investments. A: In some sense. But I don't think there is a lot of that is happening. Predominantly the companies that are getting funded today in the Silicon Valley are brand new start-ups. Q: What do you think of valuations? A: I think it is very fair to say that valuations in the private equity market and in the VC market. There were somewhere around 10. or are you looking at the 3000? A: I think they are probably referring to some of the 3000 that are left or were successful enough. Not because the product ideas were not good but because the economy was in recession and the entire hi-tech industry was in the dumps. Some of them might work because some of these companies have little or not sales traction. we are very selective. So I think one of the things that is happening that VC have gone back and tried to differentiate between companies that were not having traction because the idea was poor and the companies that were not having traction because the market wasn't buying.and some of these good companies were unable to get enough traction in the market place. So 70% of them have either been shutdown or they have been consolidated where they have been merged with each other or with other larger companies. They are all in IT sector. So you pick the best out of those. And in some sense they would qualify as later stage investments because they do have a product in place. Even among those. are you looking at that 7000 that were shutdown.Q: Forbes says that venture capitalists are taking second look at funding? A: I think what they were referring to is that . Q: When Forbes talks about people like you. There was a time when people were following this very closely..

system company or a semiconductor company. The rough rule of thumb we have is that a software company should be able to get cash-flow breakeven in 34 years with about $20 million of equity capital and a hardware company. So that is one type of outsourcing. what I call the pre . that Cisco paid $7 billion for. one of the companies that. That was a company called Cerent Corporation.1995 levels. So it's almost that the clock has been rolled back ten years. what we tell the entrepreneurs that are involved in these companies. who have come to companies here. Larger established companies who have seen their revenues declined during the recession and had to perform as far as earnings are concerned. the exit valuations have dropped in the market place and innovation. I believe in spite of all the noise that you hear from political figures at this time. But I think outsourcing is also very essential for smaller start-ups. And so rarely do we start a company today in the US where we do not ask the entrepreneurs to fund or to outsource some of their development work to India. when we fund new companies or even existing companies. if it is going to happen has to be successful for investors as well as entrepreneurs and I have often said that innovation as a business model. These are large established companies and they are outsourcing some of the IT functions or maintenance functions. As we said earlier. What’s your take on it? A: As a US venture capitalist. we had funded and had a very successful acquisition. There 76 . have really taken a look at their cost structure and decided that they need to reduce their cost structure. to outsource. which means that investors and entrepreneurs. To give you an example. Q: Are we seeing the trend happening? A: I think it's a trend that will accelerate. Over the last year we have exited about three companies. You are not going to see those kinds of acquisition prices in a long-time. Now it is very difficult to achieve those kinds of numbers if you do all the development work in India. which is where I have spent lot of my time and there is a very fundamental reason for that. So we have several companies. I am very bullish on outsourcing and from my perspective there are really two broad categories of that. Q: Outsourcing has become a big issue. where we have had acquisitions and I would say that the average acquisition price is more than the $175 million range. So the public market itself has come down substantially in valuations and therefore private companies have also come back in their valuations. at the end of the day see a return on their investment. Now because exit valuation have dropped to. needs to get cash-flow breakeven with about $40-45 million dollars of investment over four years. especially for early stage companies. when they spend time and money. that the market is really gone back to the early nineties. Q: What kind of opportunities do you take into account when you consider a proposal? A: Our view is that really.valuation of the public market. It's election time and there is some real pain undoubtedly.

but also innovation has started again. as well as semiconductors. Not only IT spending is coming back. the early adopters of those technologies. I think at this stage. A: India is very well known for its software development expertise. it has to figure out a way. it doesn't make sense to invest in a company that is only going to work in America. it has to be outsourcing? A: If that is going to be successful within the parameter that I described. A product was developed in Bangalore and now we have setup the company in the US. we saw IT spending plunge. to reduce its cost structure and the only way that I know is to say. Q: What kind of work. But we would then continue to fund the development work here in India. which has a business process improvement software product. it is fair to say that countries like Taiwan and China have very good advantage when it comes to manufacturing of hardware that goes into some of these electronic systems. we are going to take a substantial fees of our development work and to move in countries like India and China.are lot of people who are not finding jobs but my belief is that the short-term pain will eventually lead to long-term gain. Q: You are saying that there is work for everybody? A: Not necessarily in the outsourcing arena. These are companies that are actually building real products that we can sell into core markets in America and in Europe and in India as well. Q: How do you see future? A: I think IT is not going to go away. sales and marketing is there and lot of the initial customers in the US. whose core priority in the 2001-02 timeframe was cost reduction and therefore they were not buying any new 77 . Q: So you are saying hope for VC. In the 2000-01 timeframe. But the early markets are still in the US and in Europe. we would set up that company and organise it in the US and we would hire a CEO there and the sales in the BPO marketing because we need to close to the actual customers. IT spending is continuing to increase as a percentage in GDP. We see more and more CIOs now. But IT spending is coming back. Q: What kinds of products? A: For example we have just funded a company in Bangalore. Q: Will you keep investing? A: Actually we have invested in few of these companies and our model is that we will find companies here in India that have core technology and what we will do then is. These are product companies.. because we were in the middle of recession.

Q: But what about margins? A: Yes. A lot of these companies have to outsource some of their development and even customers support to countries like India and China so that they can maintain the same margins.. that is funding smaller companies. And that is still a mystery. that is another reason for outsourcing. so that there can be mutual trading. Q: Are you happy with the intellectual property laws. So some of these jobs are getting created in US and some of these jobs are getting created in India. Now in 2004 their core priorities are starting to shift and they are looking at increasing their revenues and they are looking at ways of doing that and technology is a very big factor. There is more room for improvement there and I think in general as you look at this whole issue of outsourcing. Q: How easy it is to remain on the top of the list? 78 . Q: If India remains closed but American companies see advantage in outsourcing work in India. I think one of the challenge is and the concern that we have about the Chinese market is the lack of intellectual property protection. As I said earlier a lot of the rhetoric that we hear today is primarily because this is election year. our Secretary of State. The pains are real. the recent example is Ten Sports and Doordarshan controversy. Q: How do you view VC funding to companies in China? A: Speaking from a small company perspective. we as Norwest Venture Partners has some reticence in terms of going out and investing in startups in that arena. But I think this country has a running start and I think our heritage with the British system of justice provides the groundwork for the right kind of intellectual property laws to be laid. for example.technologies. Colin Powell has pointed out that as long as India opens up its markets. the intellectual property laws are not well defined and I think till such time as those laws get better defined. I can point to several new companies that we have funded. how much of a spoiler can the government of America be? A: It is hard to say. which we would not have funded unless we were convinced that these companies can get to cash-flow breakeven to a $20 million worth of capital in the software industry and the only way we can do that is to outsource some of those jobs. So I think there is need to be fair amount of give and take and if that happens I think we will see tremendous growth in the trading between these two countries in the hi-tech sector. There are lots of people in the market place that are not finding jobs but at the end of the day I am a firm believer that outsourcing actually helps create new jobs in US.. so that US companies can sell products here as well as Indian companies bidding for outsourcing contracts. A: I think the Indian market intellectual property laws need to get beefed up even more. that have created new jobs in the US.

we have done deals with Mayfield and we do deals with lot of various venture capitalists also. Other people also create successful company. 79 . We have gone out and invested in large companies.A: I don't think it is the priority. In the past we have done deals with the Kleiner Perkins. The thing that we focus on is. how do we build successful companies.

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