VENTURE CAPITAL Introduction Venture capital is a growing business of recent origin in the area of industrial financing in India.

The various financial institutions set-up in India to promote industries have done commendable work. However, these institutions do not come upto the benefit of risky ventures when they are undertaken by new or relatively unknown entrepreneurs. They contend to give debt finance, mostly in the form of term loan to the promoters and their functioning has been more akin to that of commercial banks. The financial institutions have devised schemes such as seed capital scheme, Risk capital Fund etc., to help new entrepreneurs. However, to evaluate the projects and extend financial assistance they follow the criteria such as safety, security, liquidity and profitability and not potentially. The capital market with its conventional financial instruments/ schemes does not come much to the benefit or risky venture. New institutions such as mutual funds, leasing and hire purchase Company’s have been established as another leasing and hire purchase Company’s have been established as another source of finance to industries. These institutions also do not mitigate the problems of new entrepreneurs who undertake risky and innovative ventures. India is poised for technological revolution with the emergence of new breed of entrepreneurs with required professional temperament and technical know how. To make the innovative technology of the entrepreneurs a successful business venture, support in all respects and more particularly in the form of financial assistance is all the more essential. This has necessitated the setting up of venture capital financing Division/ companies during the latter part of eighties. Concept of venture capital The term ‘Venture Capital’ is understood in many ways. In a narrow sense, if refers to, investment in new and tried enterprises that are lacking a stable record of growth. In a broader sense, venture capital refers to the commitment of capital as shareholding, for the formulation and setting up of small firms specializing in new ideas or new technologies. It is not merely an injection of funds into a new firm, it is a simultaneous input of skill needed to set up the firm, design its marketing strategy and organize and manage it. It is an association with successive stages of firm’s development with distinctive types of financing appropriate to each stage of development. Meaning of Venture Capital Venture capital is long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth. Venture capitalist pool their resources including managerial abilities to assist new entrepreneur in the early years of the project. Once the project reaches the stage of profitability, they sell their equity holdings at high premium. Definition of the Venture Capital Company A venture capital company is defined as “a financing institutions which joints an entrepreneur as a copromoter in a project and shares the risks and rewards of the enterprise.” Features of Ventures Capital Some of the features of venture capital financing are as under: Venture capital is usually in the form of an equity participation. It may also take the form of convertible debt or long term loan. Investment is made only in high risk but high growth potential projects. Venture capital is available only for commercialization of new ideas or new technologies and not for enterprises which are engaged in trading, booking, financial services, agency, liaison work or research and development. Venture capital is joins the entrepreneur as a co-promoter in projects and share the risk and rewards of the enterprise. There is continuous involvement in business after making an investment by the investor. Once the venture has reached the full potential the venture capitalist disinvests his holding either to the promoters or in the market. The basic objective of investment is not profit but capital appreciation at the time of disinvestments.

Venture capital is not just injection of the money but also an input needed to set-up the firm, design its marketing strategy and organize the manage it. Investment is usually made in small and medium scale enterprises. Disinvest Mechanism The objective of venture capitalist’s to sell of the investment made by him at substantial capital gains. The disinvestments options available developed countries are : Ø Promoter’s buy back. Ø Public issue Ø Sale to other venture capital Funds. Ø Sale in OTC market and Ø Management buy outs. In India, the most popular investment route is promoter’s buy back this permits the ownership and control of the promoter in tact. The Risk capital and Technology Finance Corporation, CAN-VCF etc. in India allow promoters to buy back equity of their enterprises. The public issue would be difficult and expensive since first generation entrepreneurs are not know in the capital market. The option involves high transaction cost and also less feasible for small ventures on account of high listing requirements of the stock exchange. The OTC Exchange in India has been set up in 1992. It is hoped that OTC1 would provide disinvestments opportunities to venture capital firms. The other investment options such as management buy out or sale to other venture capital fund and not considered appropriate in India. Scope of Venture Capital Venture capital may take various forms at different stages of the project. There are four successive stages of development of a project viz. development of a project idea, implementation of the idea, commercial production and marketing and finally large scale investment to exploit the economics of scale and achieve stability. Financial institutions and banks usually start financing the project only at the second or third stage but rarely from the first stage. But venture capitalists provide finance even from the first stage of idea formulation. The various stages in the financing of venture capital are described below: Development of an Idea: In the initial stage venture capitalists provide seed capital for translating an idea into business proposition. At this stage investigation is made in-depth which normally takes a year or more. Implementation Stage – Start up Finance : When the firm is set up to manufacture a product or provide a service, start up finance is provided by the venture capitalists. The first and second stage capital is used for full scale manufacturing and further business growth. Fledging Stage – Additional Finance : In the third stage, the firm has made some headway and entered the stage of manufacturing a product but faces teething problems. It may not be able to generate adequate funds and so additional round of financing is provided to develop the marketing infrastructure. Establishment Stage – Establishment Finance : At this stage the firm is established in the market and expected to expand at a rapid pace. It needs further financing for expansion and diversification so that it can reap economies of scale and attain stability. At the end of the establishment stage, the firm is listed on the stock exchange and at this point the venture capitalist disinvests their shareholding through available exit routes. Before investing in small, new or young hi-tech enterprises, the venture capitalist look for percentage of key success factors of a venture capital project. They prefer project that address these problems. After assessing the viability of projects, the investors decide for what stage they should provide venture capital so that it leads to grater capital appreciation. All the above stages of finance involve varying degree of risk and venture capital industry, only after analysing such risk, invest in one or more. Hence they specialize in one or more but rarely all.

Nature and Scope Merchant hankers can assist venture proposals of technocrats, with high technology which are new and high risk, to seek assistance from venture capital funds for technology based industries which contribute significantly to growth process. Public issues are not available or such Greenfield ventures. Venture capital refers to organize private or institutional financing that can provide substantial amounts of capital mostly through equity purchases and occasionally through debts offerings to help growth oriented firms to develop and succeed. The term venture capital denotes institutional investors that provide equity financing to young businesses and play an active role advising their managements. Venture capital thrives best where it is not restrictively defined. Both in the U.S.A., the cradle of modern venture capital industry and U.K. where it is relatively advance venture capital as n activity has not been defined. Laying down parameters relating to size of investment, nature of technology and promoter’s background do not really help in promoting venture proposals. Venture capital enables entrepreneurs to actualize scientific ideals and enables inventions. It can contribute as well as benefit from securities market development. Venture capital is a potential source for augmenting the supply of good securities with track record of performance to the stock market which faces shortage of good securities to absorb the savings of the investors. Ventura capital in turn benefits from the rise in market valuation which results from an active secondary market. VENTURE CAPITAL IN INDIA Venture capital funds (VCFs) are part of the primary market. There are 35 venture capital funds registered with SEBI apart from one foreign venture capital firm registered with SEBI. Data available for 14 firms indicate that total funds available with them at the end of 1996 was Rs.1402 crores, which Rs.672.85 crores had been invested in 622 projects in 1996. Ventura capital which was originally restricted to risk capital has become now ‘private equity’. Venture capital represent funds invested in new enterprises which are risky but promise high returns. VCFs finance equity of units which propose to use new technology and are promoted by technical and professional entrepreneurs. They also provide technical, financial and managerial services and help the company to set up a track record. Once the company meets the listing requirements of OTCEI or stock exchange, VCF can disinvest its shares. CHARACTERISTICS OF VENTURE CAPITAL The three primary characteristics of venture capital funds which may them eminently suitable as a source of risk finance are : (1) that it is equity or quasi equity investments; (2) it is long-term investment; and (3) it is an active from of investment. First, venture capital is equity or quasi equity because the investor assumes risk. There is no security for his investment. Venture capital funds by participating in the equity capital institutionalize the process of risk taking which promotes successful domestic technology development. Investors of venture capital have no liquidity for a period of time. Venture capitalist or funds hope that the company they are backing will thrive and after five to seven years from making the investment it will be large and profitable enough to sell its shares in the stock market. But a reward is thee for liquidity and waiting. The venture capitalists hope to sell their share for many times what they paid for. If the unit fails the venture capitalists losses everything. The probability distribution of expected returns for most venture capital investment is highly skewed to the right. The success rate is 10-20 percent.

Chicago and Dallas. This is achieved by permitting promoters to have stake in the company at par value or even below it. purchase of equity shares.S. These features of venture capital render it eminently suitable as a source of risk capital for domestically developed technologies. For his trouble. managerial and technical services. Promoters in US are often given a choice by venture capital to pick up equity even below par. venture capital is long-term investment involving both money and time. After the second world war in 1946. Although venture capital evolved as a method of early sage financing it includes development. Venture capital funds are also extant in U.. The sweat equity concept would grow faster if some flexibility is given in restricting the paid-up capital of the company. Origin The origin of venture capital can be traced to USA in 19th century. The venture capital funds takes a good deal of interest in the units financed by them and assist the companies with several financial.A. have about $30 billions on an annual basis to seek-out promising start-ups and take in them. Units in developing countries need funds for financing various stages of development. In direct investment individual or partnership of the individuals appraises the proposal. The institutional investors invest about 10 percent of their portfolio in the venture proposals. Venture capitalist participates in the Board and guides the firm on strategic and policy matters. the American Research and Development was formed as first venture organization which financed over 900 companies. Individuals make venture capital investments directly or indirectly. and value to company by active participation. Such a broad approach would help venture funds to diversify their investment and spread risks. Sweat equity concept played a major role for the growth of enterprises funded by venture capital. it requires only a Board resolution. Actually venture capitalist developers venture situations in which to invest. venture capital investment involves participation in the management of the company. assist in transformation of innovative technology based ideas into products and services. venture capitalist appraises the proposal and presents his evaluation to the investors. Venture capital had been a major contributor in development of the advanced countries like UK. The ventures financed were risky but carried more than proportionate promise of high return. .35 and Rs.K. The features of venture capital generally are.25 respectively while promoters of Grand Pharma are given an option to purchase the stock at par. He also collects an annual fee of 2 percent (of capital lent or invested in equity) to cover costs. New York. life insurance companies and even universities. Vijay Growth Financial Services have allowed the promoters in projects to have a stake in equity at par value while they invested at premium.Secondly. The electronic units in these areas got a start from these firms. In the indirect approach. investors include institutions such as pension funds. Venture Capital funds are privately owned and constitute the largest source of equity capital. The entrepreneurs often used to feel that the terms and conditions laid down by the venture capitalist cover only the financial risk and did not compensate the ‘toil and sweat’ put in by the entrepreneur. The concept is likely to usher in a new era of mutual trust between the entrepreneur and venture capitalists. APIDC-VLC and Gland Pharma’s (manufacturing prefilled syringes) US collaborator would pick up stock at Rs. Specialist venture capital funds in U. In Japan there are about 55 active venture firms with funds amounting to $ 7 billions (1993). SWEAT EQUITY The concept is based on the conversion of the efforts for sweat put in by promoter into financial terms and counting it as equity. In USA. expansion and buyout financing for units which are unable to raise funds through normal financing channels. It is a reward to the promoters for the sweat they have put in while setting up the project. New venture proposals in high technology area are attractive because of the perceived possibility of substantial growth and capital gains. San Francisco.. Elsewhere. Apart from individuals. Japan and several European countries. venture capitalist receive 20 to 25 percent of the ultimate profits of the partnership know as carried interest. the venture capital funds got a boost after the creation of Small Business Investment Company under the Small Business Investment Act in 1958. assume risks in the expectation of large rewards. The sources of venture capital in the USA are several. and possess a long-term perspective. financing new and rapidly growing companies. There are a number of venture capital firms in Greater Boston. Finally. France and Korea.

FINANCE FOR DIFFERENT STAGES VCCs are interested to invest at three stages in a company’s development. and (iii) growth capital for major expansion of the company. conditional loans and income notes. VENTURE CAPITAL FUNDS (VCFS) IN INDIA To finance venture proposal the Government of India created a venture capital fund to be administered by IDBI. The amendment does not specify the nature of intellectual property rights or value addition against which sweat equity shares can be issued. Guidelines relating to their establishment have been issued.SWEAT EQUITY SHARES The concept of sweat equity has a wider dimension in terms of rewarding intellectual capital contributed in venture. five years. The levy formed the source for funding venture capital fund. All venture capital funds (VCFs) in India provide equity upto a maximum participation of 49% of total equity capital of the firm under which the ownership of the firm remains with the entrepreneur. Finally in growth stage VCC helps the company in major expansion to enjoy the benefits of economies scale. say. VALUATION The norms for valuation of intellectual property right/sweat in the case of the venture proposal and the extent to which it can be capitalized need to be specified objectively and should not be left to the arbitrary discretion of the company or management. The evaluation by rating agencies may be made compulsory for companies. SEBI is the authority to regulate this segment of financial services industry. DISCLOSURES Before issue of sweat equity it is necessary that adequate disclosures are made to share holders in terms of its usefulness to the operations of the companies. identified persons to whom it is to be issued and proportion in total equity. SEBI is authority to regulate to their establishment have been issued. 1999. method of valuation. During the second stage VCC helps the entrepreneur develop his company to stage where she/he can secure capital or loans from the various external sources. In 1988. Among these three. INVESTMENT IN VENTURE CAPITAL BY BANKS To encourage the flow of finance for venture capital commercial banks are allowed to invest in venture capital without any limit since April 1999. which propose to raise monies from capital market within a specific period. Credit rating agencies may help in devising appropriate methodology for evaluating sweat/intellectual property right. A conditional loan is repayable in the form of royalty ranging between 2 percent and 15 percent after the venture is able to generate sales and no interest is paid on such loans. a scheme was formulated under which venture capital funds are enable to invest in new companies and be eligible for the concessional treatment of the capital gains available to non-corporate entities. (i) start-up. The monetary and credit policy for the year 1999-2000 provides . The issue of sweat equity hares by companies was allowed by Companies (Amendment) ordinance. The entrepreneur has to pay interest and royalty on sales at lower rates. the first is most risky but promises high returns. The budget for 1986-87 imposed a research and development levy on all payments made for import of technology. FORMS OF VENTURE CAPITAL ASSISTANCE Venture capital in India is available in three forms viz equity. SEBI guidelines for issue of sweat equity shares by listed companies are yet to be issued. (ii) money to finance and launching of an enterprise. Income note has combinational features of conventional and conditional loans.

procedural rules and regulations for establishing industry. the Monetary and Credit Policy (1999-2000) provides for the inclusion of investment in venture capital under priority sector lending. . The venture capitalist on the other had would like to ensure that the entrepreneurs they choose to finance have integrity. appointment of key personnel and proposals for expansion and diversification. Characteristics of Entrepreneur In India.that the overall ceiling of investment by banks in ordinary shares. market. The project as well as entrepreneur are appraised. Among the advanced countries like USA. Entrepreneurs have not been able to develop commercial orientation and commitment towards their business. only the entrepreneurial aspect is presented. proposed means of finance. They have their nominees on the boards of assisted concerns. take a long time to innovate in products and take inordinately long to market products relative to foreign countries. and strategy to stay ahead of competition. finding of market surveys. Venture capital is treated as another source of funds. The availability of funds at concessional rate did not enforce a discipline to perform and e accountable. survival is doubtful let alone operation of enterprises profitably. Indian companies and management do not make optimal use of information technology. Protection which does not promote competitiveness is the highest in India among all the 49 countries surveyed by Indo German Investment Promotion Service in 1996. Here. Evaluation of product risk. commercial orientation. Until liberalization in 1992 industry and business were controlled by government through industrial licensing. After financing the venture. the five characteristics. In advanced countries the economies are open and the entrepreneurs have to face a clear market focus and capable of hard work and risk handling capacity. and financial consideration. and reservation of the industries exclusive for public sector to help government be in commanding heights of the economy. technology. familiarity with the target market and ability to evaluate and handle risk well. long-term vision. On the overall ranking India comes in near the bottom oat 52 out of 59 countries. India also scores poorly in regard to costs. projected financial statements. Venture capital funds follow an elaborate appraisal of the venture proposal which includes the background of the entrepreneur. In developed countries these attitudes are widespread. market risk and technology are undertaken. convertible debentures of corporate and units of mutual funds which is currently at 5 per cent of their incremental deposits will stand automatically enhanced to the extent of banks’ investments in venture capital. They have operated too long under state regulation which also insulates them from competition. Japan and Singapore the five characteristics essential for entrepreneur are sustained and intense efforts. The Global Competitiveness Report (1999) published by the World Economic Forum which calculates competitive found that India has no competitive strength. managerial skill. labour quality. The different in emphasis on the trains of an entrepreneur arises out of economics environment. In such an environment venture capitalist would not come forward to finance venture proposals of entrepreneurs with low motivation and commitment. In such a regulated environment entrepreneurial attitudes are not fully developed and entrepreneurs do not have sound business practices. On the other hand the entrepreneurs were complacent and negligent with a widespread tendency to default. Further. project. cost. The economy cannot sustain growth unless it is competitive. The government sponsored development finance institutions provided easy access to concessional funds. emphasized are integrity. There was no development capital market which allocates funds on the basis of profitability and risk. clarity of vision and well articulated strategy to face competition and handle risks. EVALUATION OF VENTURE PROPOSAL Evaluation of the venture proposal is broadly. VCFs have to be consulted on such matters as capital investment. monitoring is based on regular flow of information. entrepreneurial development and sources of finance. based on the characteristics of the entrepreneur product. management structure and implementation schedule. urge to grow. use of infrastructure and management practice.

Venture capital investment is defined as a vehicle for enabling pooled investment by a number of investors in equity and equity related securities o companies which will generally be private companies. They cannot also monitor the performance of the funds periodically. there are no stipulations regarding minimum net worth. The basis of pricing should be disclosed to public. Establishment and Structure Venture capital firms or entries are typically close-ended with a definite chartered life. research divisions of listed companies and provide loans. TAX ASPECTS . profit earning capacity. According to the Consultative Paper. To avail of tax benefits. the VCFs required to follow CBDT guidelines (July 1995). GUIDELINES FOR VENTURE CAPITAL FUNDS The guidelines/ regulations are embodied in a Consultative Paper (XI) dated 13. SEBI would have powers for inspection and inquiry into their operations. Other avenues such as IPOs and sale of holding to another firm are already available promoting the exit of VCF from their investment. Investment Venture capital funds are permitted to invest upto 80 percent of their resources in unlisted companies. The have to however submit half-yearly results. and where the venture capital investor expects to take an active role. SOURCES OF FUNDS Venture capital funds should raise resources only from domestic-off-shore institutional investors. and whose shares are not quoted on any stock exchange. VALUATION There are no uniform rules for valuing investments by venture capital funds. Offshore investors have to conform to guidelines covering their investments issued on September 22. The different risk periods cannot make comparable valuation in the absence of uniforms rules. VCFs could invest in sick units. (Budget 1997–98).1996. Further it was specified that existing VCFs register with SEBI within three months of notification (February 1996). They can invest upto 20 percent (earlier it was five percent) of their corpus in the equity of any single company. 1995.7.1996 which have been approved by SEBI Board in principle as reported in Press on 3. The reduction of capital gains tax rate to ten per cent and introduction of buy-back should meet the exit problem faced by venture capital firms. In case of a VCFs asset management company. Venture Capital investment are essentially equity investments in companies that are not sufficiently mature to access the general public through stock markets. venture capital companies as promoters have to meet the lock-in period of three years for unlisted shares.The venture capitalists would like to disinvest to realize capital gains or to rotate funds to other ventures in need. but have sufficiently high growth prospects to compensate for the incremental risk.2. 1956. corporate bodies and high net worth individuals. Registration An entry sponsoring a venture capital fund or the funds itself has to apply to SEBI and registration is granted subject to either a trust being formed and a trustee company incorporated or the venture capital company being incorporated. According tot the guidelines they have the option to establish a venture capital fund either as a trust registered under the Indian Trust Act or as a company incorporated under the Companies Act. However. EXIT Pricing of the shares at the time of disinvestments by public issue or general offer of sales by VCF/VCC may be done on the basis of objective criteria like book value. If truest form is chosen. a two tiered structure is considered desirable and necessary in which the trust is distinguished from the asset management company which picks stocks/investments and manages the individual portfolios. turn around companies. but not in non-banking non-finance companies. This provision prevents rollover of funds and divesting investment after the company has established itself. Investors have to wait until the exit period.

the diving line between venture capital and project finance would become very thin. Venture capitalist plays this role with the help of following major functions: Venture capitalist provides finance as well as skills to new enterprises and new ventures of existing ones based on high technology innovations. Start-up stage is the second stage of the firm’s development. It may also find its access to external sources of finance very difficult.2.1996 discussed below). Ø it invest 80 percent of its total paid-up capital in acquiring equity share of the venture capital undertakings. The first stage of development of a firm is development of an idea for delineating precise specification for the new product or services and to establish as business plan. The condition for approval are: Ø it is registered with the SEBI (guidelines of 13. In the third phase. to manufacture a product or to render a service. The entrepreneur needs seedling finance and skills for this purpose. At this stage entrepreneur sets the enterprise to carry into effect the business plan. fledgling and establishment. but is facing enormous teething problems. FUNCTIONS OF VENTURE CAPITALIST Venture capital is growingly becoming popular in different parts of the world because of the crucial role it plays in fostering industrial development by exploring vast and untapped potentialities and overcoming threats. In the development stage that follows the conceptual stage venture capitalist develops a . appropriate to each stage of development. 1995 provided [Section 10 (23 F) of the IT Act] income tax exemption on any income by way of dividends or long-term capital gains of a venture capital fund or a venture capital company from investments made by way of equity shares in a venture proposal. If the definition of venture capital is widened as suggested by the industry.) Ø it shall not invest more than 40 percent in the equity capital of one venture undertakings. It may not be able to generate adequate internal funds. in some cases. entered the stage of manufacturing a product or service. In 1994 IDBI shifted the focus to less technology oriented ventures. Thus. A lock-in period of three years is however applicable for unlisted shares.S. this is the final injection funds from venture capitalists. Operations of VCFs Venture Capital funds have been clamoring for a widening of the definition fro high technology and small/new entrepreneur to provide of long-term growth capital. Ø it shall maintain books of account. Ø it shall not invest more than 20 percent (Budget for 1997-8 raised it from 5 to 20 percent. Shares have to be held for at least 12 months to enjoy tax exemption. development of an idea. The Finance Act. It provides ‘seed capital funds’ to finance innovations even in the prestart stage. on 18-7-1995 specifying that the prescribed authority for approval for exemption under Section 10 (23F) of Income Tax Act is Director of Income Tax (Exemption). the entire cycle takes between 5 to 10 years. Ø it invests 80 percent of its total monies by acquiring equity shares of venture capital undertakings. In this process of development venture capitalist supplies start-up finance and skills. To enjoy tax exemption the venture capital company has to obtain approval and satisfy prescribed conditions. DIMENSIONS OF VENTURE CAPITAL Venture capital is associated with successive stage of a firm’s development with distinctive types of financing. It have been estimated that in the U. there are four stages of a firm’s development. Income Tax (Exemption). the firm has made some headway. To get over the problem. The Central Board of Direct Taxes (CBDT) issued guidelines. start up. Venture capitalist finds this stage as the most hazardous and difficult in view of the fact that majority of the business projects are abandoned at the end of the seedling phase. and submit audited accounts to the Director.VCFs/VCCs have been provided complete income tax relaxation (July 1995) and exemption from long-term capital gains tax after they are listed on stock exchanges. In the last stage of the firm’s development when it stabilizes itself and may need. the entrepreneur will need a large amount of fledgling finance from the venture capitalist. viz. establishment finance to exploit opportunities of scale.A.

e. commercial. venture capitalist helps the firm t move to the exploitation stage. There were only 10 companies in the market supplying venture capital. In the appropriate government legislation also contributed to the failures. However. The natural birth place of venture capital in the U. technical. The major factors contributing to this phenomenal growth in venture capital activity in Britain were strengthening of the enterprise culture. commercial. of which 200 formed the core of the industry. Therefore. The pool of capital employed which stood at Rs.A. the development and financial needs. interviewing and employing outstanding corporate achievers to professionalism the firm. It acts as a trigger in launching new business and as a catalyst in stimulating existing firms to achieve optimum performance.1 billion in funds under the management. Venture capitalist assists the entrepreneurs in locating. PRESENT STATE OF VENTURE CAPITAL IN INTERNATIONAL AREA.. there were 585 such companies with 205 millions in capital between them. Venture capitalist’s job extends even as far as to see that the firm has proper and adequate commercial banking receivable financing. In the U. these companies ran into difficulties due to lack of understanding of venture capital principles on the part of the management land their inexperience. ensure that the innovation is directed at a clearly defined market opportunity and satisfied himself that the management team at the helm of affairs is competent enough to achieve the targets of the business plan.. The buoyancy in American venture capital activity was due to abundant technological opportunities for the creation and commercialization of new goods and services. The most important features of American venture capitalist is that they are totally involved with firms based on high technological innovation right from the stage of conception of business ideas to the final stage of their establishment. the venture capitalist has to assess the intrinsic merits of the technological innovation.business plan (in partnership with the entrepreneur) which will detail the market opportunity. venture capitalist is expected to perform not only the role of a financier but also a skilled faceted intermediary supplying a broad spectrum of specialist services – technical. They are almost a full-fledged partner in the business along with the entrepreneur. There were $24. managerial. the product. of starting a business. The legislation used to spur venture capital was ‘Small Business Investment Companies’ with tax advantage and government loan money. i. sharing the risk and added value created in the process. In this crucial stage. Thus. . venture capital activity flourished in the years. These were the years when venture capitalist became more involved in development financing both for their portfolios and for new investment. large potential gains associated with equity and management participation in high technology ventures and tax relief.5 billions in 1975 surged significantly to $ 7. Venture capital industry in its present form started in 1949 – the year of the formation in Boston of the American Research and Development Corporation.. since 1980. in addition to risk capital. They provide.S. Learning from the experience of 60’s new venture capital companies were formed which were better structured and organized in 70’s. The development of the venture capital industry there has taken place over quite a long period. Both these factors were the outcome of strong government support. By 1962. freedom of foreign investment in the U. managerial. public acceptability of being in business of taking risks for oneself. While launching the innovation the venture capitalist will seek to establish a time frame for achieving the predetermined development marketing. his role is not restricted to that of a mere suppliers of funds but that of an active partner with total investment in the assisted projects. Venture capitalist fills the gap in the owner’s funds in relation to the quantum of equity required to support the successful launching of a new business or the optimum scale of operations of an existing business. In 1988 there were 587 active capital firms.6 billions by the end of 1982 due to the tax reduction in 1978.e. In 1987 Britain had 140 such companies with total investments of £ 800 million. of trying to make a profit and development of the listed securities market. sales and profit targets. financial and entrepreneurial services so as to enable the firm to achieve optimum performance. In each investment.S.2. i. launching of the innovation. the government loan guarantee scheme and business expansion scheme to render fiscal and financial incentives to venture capitalists. financial and entrepreneurial.A.K. as the venture capitalist assumes absolute risk.

it is interesting to observe that private sector organizations did not take much interest in setting up venture capital firms until recently. and sponsored VCFs have retarded the growth of venture capital companies. Industrial Finance Corporation of India set up the Risk Capital Foundation in 1975 with a view to providing special assistance to new entrepreneurs. Finally. These institutions have also been found lacking flexibility. commercial banks constituted VCs organizations. That potential is for close involvement in the management of the Company being backed and in the panning and ownership of the company over a period of perhaps 5 to 7 years. IPS in Kenya. Venture capital as a source of the launch capital either of the American type or the slightly variant (in scope) British type is. conspicuous by its absence in India. with a view to assisting entrepreneurs who have skills but lack finance to bring in the requisite promoter’s contribution. Further. Besides in some developing counties such as Philippines and Argentina..The British venture capital funds have certain special characteristics. In recent years few VC firms have come up in countries such as Korea. They have come into existence to fill a potential gap in the market unfilled by the banks or the various government schemes. Further. Venture capital organizations in these countries have not been made much headway because of several factors. There are. for example. especially by commercializing the R&D results from the Korean Advanced instituted for Services and Technology. However. Unfortunately financial markets in most of the developing countries are not properly developed to provide scope for sales of shares as and when desired by their holders. Some venture capitalist provide funds even right from the research stage. IFC played crucial role in setting up SOFINNOVA in Spain. Only a few Asian countries made serious efforts to establish venture capital organization. Foreign venture Capital firms have not been in existence in developing counties excepting Taiwan which has been able to attract foreign VC firms since the initiation of the venture capital in 1983. drive and managerial skills needed for venture financing. number of VC firms have been established with the help of Korea Technology Advancement Corporation (KTAC). Industrial Credit and Investment Corporation of India (ICICI) also launched a venture capital . by and large. These VC organizations were usually set up by development banks as subsidiaries or separately managed funds. For example. VIBES in Philippines. In a number of developing countries including.2 crores. VENTURES CAPITAL IN INDIA. In some countries. inefficient performance of the government. Another factor contributing to slow growth of VC firms is absence of entrepreneurial approach among development banks and commercial banks. Brasilpai in Brazil. KDIC in Korea and SEA VI in South East Africa. State financial corporations’ special share capital schemes under which SFCs extend special share capital assistance to projects in the small-scale sector from their special class of share capital contributed jointly by the concerned state Government and IDBI and IDBI’s own scheme for such assistance (operated mainly through State Industrial Development Corporation / State Financial corporation)_ in respect of medium-sized projects costing upto Rs. Taiwan and Malaysia on the initiative of some private sector institution. disinvestments factor has hindered the progress of VC firms in developing countries. some institutional venture capital funds/ schemes in operation in India. viz. VENTURE CAPITAL IN DEVELOPING COUNTRIES Venture capital as such as has not been a popular source of financing in developing countries. Most of the ventures assisted by the Bank have been sponsored by professionally qualified entrepreneurs and the process/technology involved a wide range of new and indigenously developed ones. particularly technologists and professionals for promoting medium-sized industrial projects. KTAC is a venture Capital group set up in 1974 with the sole objective of investing in high tech business. In Korea. Industrial Development Bank of India (IDBI) introduced two seed capital schemes. Absence of tax incentives is another crucial factor responsible for slow growth of the companies. In 1985 the IDBI introduced venture capital fund scheme to assist industry’s efforts for technological advancements. VC firm came into existing with the support of International Finance Corporation (IFC) since 1978. One such factor is dearth of funds available for funding high risk technology ventures. In 1986. Investors are attracted towards equity investment only they are assured of making capital games by disposing off equity shares. For instance. of course. India tax laws favour debt against equity.

Two new fund were launched recently.20 crores. the finance minister declared that a scheme will be formulated under which Ventures Capital Companies / Funds will be enabled to invest in new companies and be eligible for the concessional treatment of capital gains available to non-corporate entities. 1990 ICICI and UTI have jointly launched their second venture fund for Rs.K.scheme to encourage new techno crafts in the private sector in new fields of high technology with inherent risk. Under this scheme ICICI assists projects. The new subsidiary – Gujarat Venture Finance Ltd. This venture capital has been set up with a capital of Rs.2 crores. State Bank of India. in the form of equity or conditional loan with flexible charges and repayment period or conventional loan. 21 crore contributed by several Indian and international institutions. the Industrial Credit and Investment Corporation set up with the UTI ‘The Technology Development and Information Company of India Ltd. This organization would finance venture capital entirely through equity participation. In private sector a few venture capital funds have been established. It is interesting to note that the commonwealth Development Corporation of the U.100 crores. Twentieth Century Finance Company and Infrastructure Leasing and Financial Services Ltd. or U. and/or the entrepreneur being relatively new and not affluent though otherwise qualified and the size being modest. TDICT has started providing venture capital. The fund provides both equity capital as well as managerial support to entrepreneurs. the size of the fund would appear to be too small. The other private venture capital firms set up in India are Credit Capital Venture Fund. The second one is the venture capital fund with an initial capital of Rs.S.24 crores to cater to projects which will enhance the growth of the national economy. – would financially support the entrepreneur having both indigenous and imported technologies not tried before in the country. to set up technological ventures which have potential for fast growth. The fund is being used for providing assistance mainly in the form of equity. conditional loans and convertible debenture. ‘SBI capital markets invests in the equity shares of new and unknown companies.10 crore..fledged individual corporate or institutional venture capitalist in India offering a broad spectrum of multi-faced specialist services like the venture capitalist in the U. The above venture capital funds / schemes are essential in the nature of equity assistance funds/schemes. REGULATORY FRAMEWORK FOR VENTURE CAPITAL IN INDIA. will also be participating in this fund. having regards to the mammoth task to be performed by venture capital finance in India. Canara Bank and Grind lay’s Bank have shown interest in this area. The first one called India fund – floated by the International Division of Merrill Lynch with subscription by non-resident Indians living mainly in the UK and Western Europe is managed by the UTI.K. Further. If it desires to raise fund from the public the promoter’s share shall be less than 10 per cent. Canara Bank has also set up a venture capital fund through its subsidiary. One such fund is Indus Venture Capital Fund (IVCF). launched a venture capital finance scheme’ through a newly registered subsidiary with the help of the Capital Trust Fund worth Rs.. with initial investment not exceeding Rs. 1990 The Gujarat Industrial Corporation Ltd. In January.10 crores established in December 1986 by IDBI to provide equity capital for pilot plants attempting commercial applications of indigenous technology and to adapt previously imported technology to wider domestic application. In July. viz. R & D funds and technical and managerial services including Technology and Information. Among commercial banks. The assistances should . SBI’s merchant banking subsidiary. Venture capital assistance should go mainly to enterprises where the risk element is comparatively high due to the technology involved being relatively new. In his budget speech for 1988-89. To undertake the task on a continuous and systematic basis. (as bank financial Services) Grind lay’s Bank launched India investment fund to provide venture capital assistance to high risk projects. untried or very closely held. The ICICI also established in 1988 with UTI ‘venture capital fund’ with Rs. Such companies will have to comply with the following guidelines.’ (TDICI) in 1989. The minimum size of a venture capital company would be Rs. subscribed equally by ICICI and UTI. There are no full.

Another type of situation commonly found in our country is where the local group and a multi-national company may be ready to enter into a joint venture but the former does not have sufficient funds to put up its share of the equity and the latter is restricted to a certain percentage. For the personal reasons or because of competition.be mainly for equity support though loan support to supplement this may also be given. not just the equity. Thus. and promoters want to put in maximum funds. What is needed is the supply of equity to persons who have fertile ideas. necessary expertise and competence and who can bring about improvements in some units. New or relatively untried or very closely held or being taken from pilot to commercial state or which incorporate some significant improvement over the existing ones in India. FUTURE OF VENTURE CAPITAL IN INDIA Rapidly changing economic environment accelerated by the high technology explosion. either through a change in the product line or use of existing facilities in a different way or in any other manner. It can act not only act as a financial catalyst but also provide strong impetus for entrepreneurs to develop products involving newer technologies and commercialize them. provide a thrust to exports and help in the overall enrichment of the economy. There are many entrepreneurs in India with a good project idea but no previous entrepreneurial track record to leverage their firms. venture capital assistance will be given to those entrepreneurs which satisfy the following parameters : Total investment not to exceed Rs. This is very likely to continue as professional start their own units. demand for newer technology and products in India has gone up tremendously.10 crores. With falling tax rates equity becomes attractive. With rapid international march of technology. the pace of development of new and indigenous technology in the country has been slack in view of the fact that several process developed in laboratories are not commercialized because of unwillingness of people to take entrepreneurial risks. development finance institutes. risk their funds as also undergo the ordeal of marketing the products and process. Venture capital can open a new window for such entrepreneurs and help them to launch their projects successfully. the local group may not be keen to invite any one in its industry or any major . professionally or technically qualified with inadequate resources or banking to finance the project. venture financing assumes more significance. There are large number o sick companies which offer opportunities for turn-around. Foreign equity upto 25 per cent multilateral / international financial organizations. The changed financial and fiscal environment during post liberalization period hold out bright future of venture capital in India. venture capital will be needed urgently to solve the serious problems of sickness which has plagued many Indian Industries. managers and administration and persons with adequate experience of industry. In addition. The promoter has to compulsorily contribute 25 percent of the projects cost. ancillarisation takes place and large companies began sourcing their requirement rather than making every thing themselves. reputed mutual funds. to fill the gap in their contribution to project cost. The debt-equity ratio is generally 2:1. finance. This is very likely to continue as professional start their contribution to project cost. emerging needs of new generation of entrepreneurs in the process and inadequacy of the existing venture capital funds/schemes are indicative of the tremendous scope for venture capital in India and pointers to the need for the creation of a sound and broad-based venture capital movement India. In new companies today. In such a situation.. i. etc. This will give a fillip to the development of new technology and would go a long way in broadening the industrial base. A venture capital is firm can raise funds through pubic issues and/or private placement to finance VCF/VCCs. A venture capital is required to invest at least 75 per cent of its funds in venture capital activity. Relatively new. creation of jobs.e. Under the circumstances these entrepreneurs will be left with no option but to resort to venture capital firm. would be permitted provide these are management neutral and are for medium to long-term investments. handle customers and bankers. However because industry is more competitive today promoters are willing to contribute as much as 40 per cent of the project cost. accounts etc. Banks and other finance institutions being risk averse will fund a new venture. A venture capital fund will be managed by professional such as bankers.

manufacturing. if the public invest in venture fund who in turn will invest in equity of new business. An entrepreneurial tradition must be more broad based and less family based. being acquired by the client or obtaining at an exorbitant rate from a source outside the industry. There is need for venture capital for development of many products and services which are relevant to our country and which can be produced with less domestic technological innovation and smaller domestic markets. A large number of smaller units serving as ancillaries to major industrial groups need capital. it will be desirable to establish a separate national venture capital fund tow which the financial institutions and banks can contribute. In view of the above. PREREQUISITES TO SUCCESS OF VENTURE CAPITAL IN INDIA. losing their major client. These has to be some institutional changes which offer the venture capitalist the opportunity to off load the investment. The venture fund having representatives on the Board of Directors of the company would overcome it. Investors or have no means to vouch for the reasonableness of the claims made by the promoters about profitability of the business. remodeled jewellery. I Advantages to Investing Public: The investing public will be able to reduce risk significantly against unscrupulous management. Venture capitalist can help these units and save them from the crisis. It is generally found that small suppliers are faced with a choice of going out of business. The success of venture capital in India requires the following. The major thrust of this fund should be on the promotion of viable new business in India to take advantage of the on coming high technology revolution and setting up of high growth industries so as to take the Indian economy to commanding heights. baby and health care market. To this end. commercial. Tax policies need to be carefully scrutinized to eliminate those provisions which work heavily against the emergence of risk capital. Attractive customer opportunities of high-technology type should be created. The fund should offer a comprehensive package of technical. The investors do not have any means to ensure that the affairs of the business are conducted prudently. managerial and financial assistance and services to building entrepreneurs and be a position to offer innovative solutions to the varied problems faced by them in business promotion. developmental an exploitation phases in the process of commercialization of the technological innovation and (ii) as may of the risk stages-development. marketing. retirement homes and small houses. which has Immense growth prospects in India. Importance of venture capital Venture capital is of great practical value to every corporate enterprises in modern times. In scope and content such a national venture capital fund should cover: (i) all the aspects of venture capital financing in all the three stages of conceptual. expertise and contacts of venture capitalist for upgradation of their technology in tune with the demands from the major industrial units. Disinvestments avenue have to be positively encouraged and in this both the government and the securities markets have to play a positive role. With their expertise in the field and continuous involvement in the business they would be able to stop malpractices by management. builders of resort hotels. The venture funds equipped with necessary skills will be able to analyze the prospect of the business. the proposed national venture capital fund should have at its command multi-disciplinary technical expertise. as a less intimately involved and temporary shareholder. management and growth as possible under Indian Conditions. The association of venture capital with high technological and investment opportunities must be declined. venture capitalists can play significant role in tapping its potentiality to the full. For instance. venture capitalists can provide capital and expertise to organizations selling antique.private investor to contribute equity and may prefer a venture capital company. In service sector. . transfer and innovation. Venture capitalists can also lend their expertise and standing to the entrepreneurs.

at the same time. Advantages to Promoters 1. these business will take-off with the help of finance from venture funds and this would help in increasing productivity. Venture fund assistance would eliminate those efforts by leaving entrepreneurs to concentrate upon bread and butter activities of business. Once venture capital funds start earning profits . The new entrepreneurs find it very difficult to make underwriting arrangements require a great deal of effort.g. bankers and investors will not lend money with inadequate margin of equity capital. These items of expenditure can be ill afforded by the business when it is new. stock exchange listing fee. Key Factors Developed Countries Developing Countries V I LI NI V I LI NI 1 Management skills of entrepreneur 100 – – – 100 40 – – 2 Management skills of venture capital 14 72 14 – 40 40 40 – 3 Affinity of interests between the both parties 57 20 14 – 40 40 40 – 4 Financial commitment of entrepreneurs 57 29 – 14 60 40 – 5 Projects potential for rapid growth 57 14 29 – 80 40 – 6 Project’s potential to genera above average capital appreciation 72 28 – – 60 60 40 – 7 Project’s potential to generate current income 14 43 29 14 40 20 60 – 8 Availability of tech.. it will very easy for them to raise resources from primary capital market in the form of equity and debts. 4. in addition to above. 3. Venture capital acts as a cushion to support business borrowings. he will be required to sell his idea to justify the officials of the venture fund. General: 1. the investors would be able to invest in new business through venture funds and. underwriting and broker arrangement. better capacity utilisation. A developed venture capital institutional set-up reduces the time between a technological innovation and its commercial exploitation. necessary statutory sanctions. Public issue of equity shares has to be proceeded by a lot of efforts viz. to incur recurring costs for maintenance of share registry cell. publicity of issue etc.S. expenditure on printing and posting of annual reports etc. IC) 14 43 – – – – 60 12 Keys : VI Absence of this constitutes an insurmountable obstacle for an institution to develop venture capital activities in the countries. Expertise 29 14 – 60 60 20 –– 9 Possibility of exit offered by project 14 72 14 – 40 80 60 – 10 Value of underlying assets 14 72 29 28 – 0 80 – 11 Strength of credit backing 43 14 29 40 60 60 – 12 Involvement of a multilateral institutions (e. free from the dead weight of corporate bureaucracy. which helps in exploiting full potential. . NI Not important II. 2. assistance from venture fund does not require such expenditure. brokers and thousand of investors but to obtain venture capital assistance.. III. This mechanism will help to channelise investment in new high=tech business of the existing sick business. which are often even higher for small issues. The entrepreneur for the success of public issue is required to convince tens of underwriters . 2. they can directly invest in existing business when venture funds dispose its own holding. It helps in developing new processes/products in conductive atmosphere. I The presence of this factor constitutes a clear to an incentive to an institution for developing venture capital activities in the countries. The company is required. 3. No. Therefore. Cost of public issues of equity share often between 10 percent to 15 percent of nominal value of issue of moderate size. LI The presence of this factor may influence favourable the decisions of an institution for but doe not constitute a decisive factor.

A venture capital firm serves as an intermediary between investor looking for high returns for their and entrepreneurs in search needed capital for their start ups. 3. Technology Policy Implementation Committee in the same year also recommended the same provisions. the public sector term lending institutions s meet a part of venture capital requirements through seed capital and risk capital for hi-tech industries which were not able to meet promoters contribution. 2. 4.S. The Research and Development Cess Act was enacted in May 1986 which introduced a cess of 5% on all payments made for purchase of technology from abroad. The levy provided the source for the venture capital fund. The venture capital companies and venture capital funds can be set up as joint venture between stipulated agencies and non institutional. foreign banks and their subsidiaries are eligible for setting the venture capital funds with a minimum size of Rs. INITIATIVE IN INDIA Indian tradition for VC for industry goes back more than 150 years when many of the managing agency houses acted as venture capitalist providing both finance and management skill to risky projects. The venture capital company (VCC) /Venture Capital Fund (VCF) should be managed by professionsls and . named Investment Corporation of India in 1937 which by acting as venture capitalist. The Tata also initiated a managing agency house. 6. Many hi-tech industries. However all these institutions supported only proven and sound technology while technology development remanded largely confirmed to government labs and academic institutions . scheduled banks. promoters will be required to contribute a minimum of 40 percent of capital. The balance amount can be invested in new issue of any existing or new company in equity. Foreign equity upto 25 percent subject to certain conditions would be permitted. the Seventh Five Year Plan emphasis need for developing a system of funding venture capita. cumulative convertible performance shares. United Nations development Programme in 1987 on behalf of Government examined the possibility of developing venture capital in private sector.10 crore and a debt equity ratio of 1:15 they desire to raise funds from the public. promoters but the equity holding of such programmes should not exceed 20 percent and should not be largest single holder. Bhatt Committee recommended formation of Rs. thus found it impossible to obtain financial assistance from banks and other financial institutions due to unproven technology conservative attitude. In 2973m R. 100 crore venture capital fund.1988. Venture capital's growth in India passed through various stages. It also paves the way for private sector to share the responsibility with public sector. help in stablising industries and in creating a new set of trained technocrafts to build and manage medium and large industries. The public sector financial institutions. The guideline provided for Non-Resident Indians investment upto 74 percent on a reportorial basis and 25 percent to 40 percent on non repatriable basis. 7. Formalised venture capita book roots when venture capital guidelines were by Comptroller of Capital Issues in November.5. 10 crore. It was the managing agency system through which Tata Iron and Steels and era press mills were able to raise equity capital from the investing public. State Bank of India. successfully promoted bi-tech enterprises such as enterprises such as CEAT Tyres . After the mobilizing of managing agency system. risk awareness and rigid security parameters. The venture capital assistance should go to enterprises with a total investment of not more than Rs. GUIDELINES The following are the guidelines issued by the Government of India 1. The economy with well developed venture capital networks. debenture bonds or any other security approved by controller of Capital issues. It should invest 60 percent of its funds in venture capital activity. resulting in faster industrial development. induces the entry of large number of technocrafts in industry. Associated Bearings National Rayon' the early form of venture capital enables the entrepreneurs to raise large amount of funds and yet retain management control.

bills discounting. Listing of VCCs/VCF can be according to the prescribed norms and underwriting of issues at the promoter's discretion. 9. THE INDIAN SCENARIO Methods of Venture Financing Venture capital is available in four forms in India : 1.These shares are retained by them till the assisted projects making profit. chief executive. (RCTC)(Subsidiary of IFCI) Technology Development and information Company of India Ltd. professional or technically qualified with inadequate resources.should be independent of the parent organization. managing director or executive director/whole time director in a company will not be allowed to hold the same position simultaneously in the VCC/VCF. Conventional Loan: Under this form of assistance. The present venture capital players can be broadly classified into the following four categories. State level financial institutions like Indus venture capital fund.Equity Participation: Venture Capital firms participate in equity through direct purchase of shares but their stake does not exceed 49% . a lower fixed rate of interest is charged till the assisted units become commercially operational. 3. ICICI..(TDICI ). The loan has to be repaid according to a predetermined schedule of repayment as per terms of loan agreement. (iii)The promoters should be new. 6. after which the loan carries normal or higher rate of interest. brooking money market. The investment on revival of risk units will be treated as a part of venture capital activity. 8.The venture Capital assistance should be extended to (i) The enterprise having investment upto Rs.A person holding a position of full time chairman/president. Share practicing at the time of disinvestments by a public issue or general sale sale offer by the company or fund may be done subject to this being calculated an objective criteria and the basis disclosed adequately to the public. inter corporate lending. (ii) The technology involved should be new and untried or it should incorporate significant improvement over the existing technology in India.. IFCL. Conventional Loan 3. The VCC/VCF will not be allowed to undertake activities such trading. 10 crores in the project. (promoted by GUC) Andhra Pradesh Industrial Development Corporation Venture Capital Ltd. 5. These shares are sole either to the promoter at negotiated price under by back agreement or the public in the secondary market at a profit. 1. The loan has to be repaid according to the a pre determined schedule as soon as the company is able to generate sales and income' At present several venture capital firms are incorporated in India and they are promoted either by all India Financial Institutions like IDBI. (iv)The enterprise should be established in the company form employing professionally qualified person for maintenance accounts.Companies Promoted by State FIs: Gujarat Venture Finance Ltd. (Promoted by APIDC) . Conditional Loan 1. Conditional Loan : Under this form of finance. 2. Companies Promoted by all India FIs: Venture capital Division of IDBI Risk Capital and technology Finance corporation Ltd. an interest free loan is provided during the implementation period but it has to pay royalty on sales.(Promoted by ICICI & UTD) 2. 7. Equity Participation 2. They will be allowed to invest in leasing to the extent 15 percent of the total funds development.

3. The RCTC . 1. it has assisted 23 project committing funds of the order of Rs..20 crores was subscribed equally by ICICI and UTI under the new Venture Capital Unit Scheme I of UTI. apart from providing assistance in the form of risk capital. Technology Development and Information Company of India Limited (TDIC – 1998). Assistance was extended in the form of unsecured loan involving minimum legal formalities. is expected to finance high tech projects in the form of venture capital for technology up gradation and development. medical equipment etc. computer software. ICICI. environmental engineering etc. The assistance is provided in the form of short term conventional loan or interest free conditional loans allowing profit and risk sharing with the project sponsors or equity participation. IDBI Venture Capital Fund The initial impetus was given by IDBI's Technology Division when venture capital fund was set up in 1986 for encouraging commercial application of indigenously developed technology and adopting imported technology for wider domestic application.80 crores upto March. By March 31. banks. tissue culture. The Risk capital and Technology FinanceCorporation The Risk Capital and Technology Finance corporation Ltd. computer integrated manufacturing system. biotechnology.20 croes to 40 projects which include computer hardware. The venture capital fund was jointly created by Industrial Credit and Investment Corporation of India (ICICI) and Unit Trust of India (UTI) to finance projects of professional technocrats in the small and medium size industries who take initiative in designing and developing indigenous technology in the country... 2. The project does not succeed . 4. 50 lakhs and 15% for those above Rs. Interest at a confessional rate of 9% is charged during technology development and trial production and 17$ once the product is introduced in the market. electronics. it has assisted 17 projects with a sanction of Rs. non-conventional energy/food processing. Under the scheme TDICI sanctioned financial support of Rs. Venture Capital Fund promoted by V. can insist on transfer of technology to some other promoter designated by it on mutually agreed terms and conditions. 3. 79. 16 crores as on 31st March 1993. corporate sector etc. (RCTC) the subsidiary of IFCI provided venture capital through technology .46.81 crores to 42 companies under scheme I and Rs. Through its Technology Finance Development Scheme. It has assisted 70 projects with a net sanction of Rs. Companies in Private Sector : Indus Venture Capital Fund (Promoted by Mafatlal and Hindustan Lever )Credit Capital Venture Fund (India) Ltd. other financial institutions. 100 croes has been contributed by UTI. The promoters stake should be at least 10% for the venture below Rs. Financial assistance under the scheme is available to projects whose requirements range between Rs. TDIC’s first venture capital fund of Rs.. 25. 2.1993. Desai & Co.5 lakhs and 2.5 crores.29 croes to 79 companies under scheme II in a variety of industries . 3. The fund extend financial assistance to venture such as chemicals.13 crores and under venture cap[ital fund scheme. The salient features of the scheme are : 1. chemicals. food and feed technology. Companies Promoted by Banks: Can bank venture capital Fund (Promoted by Canfina and Canara Bank)SBI Venture Capital Fund (promoted by SBI caps )Indian Investment Fund (promoted by Grind lays Bank)Infrastructure Leasing (promoted by Central Bank of India ) 4.B. 1993.A brief account of major ingredients of Indian venture capital industry is presents here.finance and development scheme to meet the specific needs of such technology development. The TDIC’s second venture Fund of Rs. 20th century Venture Capital Corporation Ltd. 50 lakhs.IDBI. TDICI has disbursed Rs.

4. The assistance per project may be up to Rs. high export potential. thrust areas such as import substitute. IDBI. 8. It has sanctioned Rs. 1992 assisted 17 companies with investment of Rs. (APIDC-VCL).10 crore. 6. during the post-development phase the interest rate on it would depend on the commercial viability of the project. hi-tech options are preferred.10 crore to 33 projects on March 1992 in the diverse fields like chemicals. The support is by way of either direct subscription or by way of underwriting support to the company. the first stage level venture finance company to begin venture finance activities since 1990. non-conventional energy etc. During the development phase. The equity in the project would be held for a period of 5-8 years and thereafter sold to the promoter (at a mutually price) or disposed in the secondary market.21 crores contributed by several Indian and international institutions and companies. Gujarat Venture Finance Ltd (GUFL) The Gujarat Industrial Investment Corporation promoted Gujarat Venture Finance Ltd. Andhra Pradesh Industrial Development Corporation’s Venture Capital Ltd. The projects in high priority.such as computer. Rs. SBICAP as on September 30. surgical instruments conservation of energy and good processing industries are covered by GUFL. Indus venture Management Limited has been entrusted to manage the fund of Indus venture capital fund.Indus Venture Capital Fund Indus venture capital fund is one of the noteworthy private sector venture companies. In any case direct participation will not be in excess of 49% of the total paid up capital of the assisted unit.812 lakhs. and adapting innovative technologies for domestic applications. It has been promoted with a starting corpus of Rs. 4.. medical. Total corporation of Rs. The APIDL-VCL was launched in June 1990 with a fund of Rs. (SBAICAP) The State Bank of India’s subsidiary SBI Capital Markets Ltd.Canara Bank Canara Bank has set up a venture capital fund called canbank venture capital fund worth Rs. electronics. TDICI invests in companies with attractive growth and earnings potential with a view to achieving long terms capital gain. the conditional loan would carry no interest.5 crores of which Rs. biotechnology. It provides equity and management support to the firms. machines. GUFL provides finance through equity participation and quasi equity instruments.13. The equity holdings of assisted companies are generally disinvested in a period of three years either by way of sale to public. sale by private realty or by buy back arrangements with promotes or their nominees. The firm engaged in bio-technology.State Bank of India Capital Markets Ltd.24 crores of the fund was co-financed by GIIC.2 crore in the form of equity and/or conditional loan (with flexible interest rates and repayment period). TDICIO involves in seed. Many of these projects are set-up by first generation entrepreneurs.5 crore was contributed by the World Bank. state level fiancé corporation. start-up and growth stage companies in a wide spectrum of industrial sub-sectors. APIDC-VCL has a few proposal for venture capital financing in the sphere of biotechnology and computer software applications..1 crores and does not exceed 49 percent of the total equity of a project. food stuff etc.3 crores by IDBI and Rs. 7. some private corporate and the World Bank. The Scheme seeks to assist technocrats involve in developing commercially viable technologies or products. Assistance is normally in the form of equity but depending on the circumstances loans may also be provided. Financial assistance is given to those . implementing indigenously developed yet untested technologies on commercial scale. It provides financial support to the ventures whose requirements range between 25 lakhs and 2 crores.1.5 crore was committed by Andhra Bank. extend venture capital assistance to technical entrepreneurs who have good technique ability but lack financial strength. sale in the OTC exchange of India. Assistance toe ach venture is in the range of Rs/25 lakhs to Rs. 5.

Section 52(E) of the Act should be amended to give effect to this. Capital gains by corporate bodies in India are taxed at a much investment risk and long gestation period this is a deterrent to the development of VCFs. Further. the presents portfolio of the fund consists of investment in six units worth Rs. under section 48 of the Act is not significant. electronics and computer technology. They had access to Rs. 20th Century Finance Corporation has launched venture capital fund worth Rs. 1402 crore.5 crore. At the end of 1996. The CVF went to public in January 1990 to raise Rs. Credit Capital Venture Fund (CVF) was set up by Credit Capital Corporation Limited (CVF) in April 1989 with an authorized capital of Rs.around 61 per cent of the total investment of Rs. However. this method may not give the best available prices to venture fund as it will not be able to consider future growth potential of the invested company. The basic objective is to earn capital gains through equity liquidation after certain reasonable time span.10 lakhs. The earnings of the funds depend primarily on the appreciation in stock values. Further.5 crore was subscribed by International financial agencies. Rs. according to the Venture Capital Association of India.3. The fast growing software sector has not found favour with venture capital companies. Hence. Present Position The were 20 venture capital companies in India both in private and public sector in 1994. Industrial products and machinery accounted for 29 per cent of the total venture capital investment followed by 13 per cent of the total in consumer related industries. The leading leasing company. CVF launched a new venture fund of Rs.firms who confine their commercial operations in areas of health care products. it would be advisable that all long term capital gains earned by VCCs should be exempted from tax or subject to concessional flat rate. It provides entrepreneurs who have ideas and ability.250 crore upto 1993-94 the form of assistance in these projects are follows : Equity 62% Convertible debentures 14% Debt. with equity capital for new green fields projects. 8 per cent in food processing and only 7 per cent in software and service sector. Suggestions for the growth of venture capital Funds Venture capital industry is at the take off stage in India.10 crore called The Information Technology Fund to provide direct equity support to projects in the technology information field . 14 of its members had set up 17 funds. It can play a catalytic role in the development of entrepreneurship skill that remains unexploited among the young and energetic technocrats and other professionally qualified talents. (ii) Development of Stock Markets: Guidelines issued by finance ministry provides for the sale of investment by way of public issue at the price to be decided on the basis of book value and earning capacity. 9. of investment and that the projects. may not even succeed. A major part of the deployment has been in equities. capital gains reinvested in new venture should also be exempted from tax. These companies assisted 350 projects to the tune of Rs. 673 crore. the following suggestions are offered: (i) Exemption/Concession for Capital Gains: Capital gains law represents a hurdle to the success of venture capital financing. Another 21 per cent was deployed in convertible instruments at 6 per cent in debt. Investment strategy of the equity funds is not to invest more that 10% of its corpus in one project and equity stake in a company may be upto 50%. which involve high risk but promises attractive rate of return. It can help promote new technology and hi-tech industries. In order to ensure success of venture capital in India. The benefit of the capital gains.20 crores to cater to the needs of small businessman. the capital gains may arise only after 3 to 4 years.25 lakhs.. .6.Credit Capital Venture Fund Limited The first private sector venture capital fund called. It main thrust area would be export oriented industries and technology oriented projects. being in new risky areas. 24% Out of the 350 projects assisted 62% belongs to new entrepreneurs. but no finance.

However. marketing. The guidelines by finance ministry provide that noninstitutional promoter’s share in the capital of venture fund cannot exceed 20 percent of total capital. In India. buyouts. production and finance. the number of stock exchanges can be increased to 50. expansion and growth. These stock markets provide excellent disinvestments mechanism for venture funds. The restriction on investment of 80% of the entire funds within a period of 3 years should be removed. further they cannot be the single largest equity holders. These markets do not have listing requirements and are spread over all important cities and towns in the country. Amendment of Section 77 of the Companies Act is required to enable the new venture capital companies to buy back their shares at the time of disinvestments by VC Finance Companies. permission to transact in unlisted securities with suitable regulation will ensure firsthand contact between venture fund and investors. is recommended as: Private sector is in advantageous position as compared to financial institutions and banks to provide managerial support to new ventures as leading industrial house have a pool of experienced professional managers in all fields of management viz. stock market operation may be started at man by more big cities where. say 20 percent of the investment in new venture which can be allowed as deduction from the income. (vi) Limited Partnership The Practice of the limited partnership as in vogue in UK should be permitted in order to promote integration of object between the managers and contributors for the success of venture capital projects. in addition to public financial institution and banks. mergers and amalgamation. It can be accomplished by : (i) Application of provisions applicable to non-corporate entities for taxing long term capital gains. Promotion of venture funds by private sector. however. Ceiling on interoperate loans and investment as specified in Section 370 and 372 of the companies Act should be relaxed in case of VC Finance Companies and Venture Capital Companies to enable them to invest suitable in newly promoted companies. This restriction should be relaxed so that VC Finance Company can finance through preferential issues and conditional loans.One of the major factors which contributed to the success of venture funds in the West is development of secondary and tertiary stock markets. The scope of VC should not only be confirmed to start up finance but also be broadened to development finance. promotion of such maker is not feasible in the prevailing circumstances as such laissez faire policy may attack persons with ulterior motives in the business to the determent of general public. Further. The leading business houses will be able to raise funds from the investing public with relative ease. The only investment available to the VC Finance company for investment is equity shares. Success of venture capital fund depends very much upon profitable disinvestments of the capital contributed by it. (iii) Fiscal Incentives: Fiscal incentives may be given in the form of lowering the rate of income tax. However. (iv) Private Sector Participation In US and UK where the economy is dominated by private sector. in India. (v) Review the Existing Laws Today’s need is to review the constrains under various laws of the country and resolve the issue that could come in the way of growth of the innovative mode of financing. In US and UK secondary and tertiary markets helped in accomplishing the above. stock market is not developed beyond a few important cities. Suitable exemption should be given from Section 43 A of the companies Act to venture capital finance companies so that they are not required to comply with several provisions of the Act applicable to public limited companies. because of this provision. may not like to promote venture fund business. The private sector. say. (ii) An allowance to funds similar to section 80-CC of Income Tax Act. . development of venture fund market was possible due to very significant role played by private sector which is often willing to put money in high risk business provided higher returns are expected.

invests in venture capital undertaking in accordance with the regulations. 5. Non-banking financial services 3. SEBI Regulations A venture capital fund means a fund established in the form of a trust or a company including a body corporate and registered under these regulations whichi. raised in a manner specified in the regulations. Gold financing 4. and iii. ii. Negative List 1. Activities not permitted under industrial policy of Government of India. Venture capital undertaking means a domestic company:i. has a dedicated pool of capital. production or manufacture of article or things or does not include such activities or sectors which are specified in the negative list by the Board with the approval of the Central Government by notification in the Official Gazette in this behalf. ii. whose shares are not listed on a recognized stock exchange in Indian. which is engaged in the business for providing services. Any other activity which may be specified by the Board in consultation with Government of India from time to time. Real Estate 2.(vii) Public Issue through OTCEI The suggestion of Malagam Committee regarding making the public issue through OTCEI should be implemented in case of certain specified industries.” Associate in relation to venture capital fund means a person:- . The initiative on the part of the Government in the direction would see rapid growth of a new breed of venture capital assisted entrepreneurs.

The directors of its trustee company or the trustees have not at anytime being Convicted of an offense involving moral turpitude or any economic offense. or iii. shall be rejected by SEBI. B. 4. The directors or the principal officer or employee must not have been at any time convicted for an offence involving moral turpitude or any economic offense and is a fit and proper person to act as director or principal officer or employee of the company. In both cases. None of its directors or its principal officer or employee is involved in any litigation concerned with the securities market which may have an adverse bearing on the business of the applicant. 3. The main object of the company as per its Memorandum of Association must be the carrying on of the activity of venture capital fund. Eligibility criteria For the purpose of grant of certificate by SEBI. Investible Funds means corpus of the fund net of expenditure for administration and management of the fund. Equity linked instruments includes instruments convertible into equity shares or share warrants. An application. is also a director. preference shares.000. 3. in respect of whom the venture capital fund. 1908.payable by bank draft in favor of the Securities and Exchange Board of India at Mumbai. or ii. If the application is made by a company 1. whose director. the applicant must not have already applied for certificate from SEBI or its certificate must not been suspended by SEBI or cancelled by SEBI and the applicant must be a fit and proper person. 2. SEBI may extend the period of 30 days for up to another 90 days on being satisfied that it is necessary and is equitable to do so. the following conditions must be satisfied:A. Application for grant of certificate Any company or trust or body corporate proposing to carry on any activity as a venture capital fund must apply to SEBI for grant of a certificate of carrying out venture capital activity in India. However. exercises control over the venture capital fund.000/. 2. The main object of the trust is to carry on the activity of a venture capital fund. or in combination with other persons. is involved in any litigation connected with the securities market which may have an adverse bearing in the business of the venture capital fund. The instrument of trust (Trust Deed) is in the form of a deed and has been duly registered under the provisions of the Indian Registration Act. debentures compulsorily convertible into equity. . by itself. None of its trustees or directors of the trustee company. or in combination with relatives. directly or indirectly. the applicant will be given an opportunity to make representation before SEBI and to remove any defect in the application within 30 days of the date of receipt of communication from SEBI regarding the defect. Furnishing of information and clarification SEBI may require the applicant to furnish such further information as it considers necessary for processing the application. If the application is made by a trust 1. by himself. of the venture capital fund. An application for grant of certificate must be made in from A and must be accompanied by a non-refundable application fee of Rs 25. Unit means beneficial interest of the investors in the scheme or fund floated by trust or any other securities issued by a company including a body corporate.i. directly or indirectly. Registration fee for grant of certificate is Rs 500. exercises control. before rejecting any application. which is not complete in all respects. who. It is prohibited by its Memorandum and Articles of Association from making an invitation to the public subscribe to its securities. if any.

foreign or non resident Indian by way of issue of units. and . SEBI shall grant a certificate of registration in form B. No venture capital fund shall accept any investment from any investor less than Rs500. registration fee of Rs 500. The decision of SEBI to reject the application shall be communicated to the applicant within 30 days. the applicant. However this condition is not applicable to :a. Effect of refusal to grant certificate Any applicant whose application is rejected cannot carry out any activity as a venture capital fund. it may reject the application after giving the applicant a reasonable opportunity of making its representation. After considering any application. shall not invest in the associated companies. it shall send Intimation to the applicant of its eligibility. Must pay to SEBI. Investment conditions and restrictions A venture capital fund may raise money from any source. suitable penal action can be taken. Each scheme launched or fund set up by a venture capital fund shall have firm commitment from the investors for contribution by the venture capital fund. 2. the employees of the fund manager or asset management company for the purpose of the se regulations.000 and on the receipt of such fees. namely:a. whether Indian. 4.Procedure for grant of certificate\ If SEBI is satisfied that the application is eligible for grant of certificate. venture capital fund shall not invest more than 25% corpus of the fund in one venture capital undertaking . employees or the principal officer or directors of the venture capital fund has been established as a trust b.000. venture capital fund shall disclose the investment strategy at the time of application for registration. if any. On receipt of intimation. b. All investment made or to be made by a venture capital fund shall be subject to the following conditions. if ASEBI is of the opinion that the certificate cannot be granted under law. The venture capital fund shall not carry on other activity other than that of a venture capital fund. If this formation or details submitted are found to be false or are misleading in any particular manner. 3. Conditions of certificate The certificate granted shall be subject to the following conditions 1. The venture capital fund shall abide by the provisions of the SEBI Act and these regulations. The venture capital fund shall inform SEBI in writing of any information or details previously submitted to SEBI which have changed after grant of the certificate. c. fund raised means actual money raised from investors for subscribing to the securities of the venture capital fund and includes money that is raised from the author of the trust ( in case the venture capital fund has been established as a trust ) but does not include the paid up capital of the trustee company.

The venture capital fund be four issuing any securities or units. Must file with SEBI a placement memorandum. if any. In case the venture capital fund is a trust 1. Details of the trustee or the trustee company and the directors or chief executives of the venture capital fund. subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed subject to lock-in period of one year. Not more than 25% of the investible fund may be invested by way of: a. The placement memorandum and/or subscription agreement must give the following details: A. 5. Placement Memorandum or Subscription Agreement The venture capital fund must:issue a placement memorandum which shall contain detain details of the terms and condition subject to which monies are proposed to be raised from investors. details of entitlement on the securities including units of venture capital fund for which subscription is being sought. ii. if the venture capital und seeks avail of benefits under the relevant provisions of the Income Tax Act applicable to a venture capital fund. In a recognized stock Exchange. b. the proposed corpus of the fund and the minimum amount to be raised for the fund to be operational. 3. 9. Prohibition on listing No venture capital fund shall be entitled to get its securities or units listed on any Recognized stock exchange upto the expiry of three years from the date of issue of Securities or units or units by the venture capital fund. 7. or enter into contribution or subscription agreement with the investors which shall specify the terms and condition subject to which monies are proposed to be raised the venture capital fund must file with the board for information the . However. 11. Matter in which the benefits accruing to the investor in the units of the trust are to be distributed. 4. it shall be required to disinvest from such investments within a period of one year from the Date on which the shares of the venture capital undertaking are listed. Details of the fund or asset management company if any. Tax implications that are likely to apply to the investor.d. Matter in which the fund is to be wound up. 8. 6.copy of the placement memorandum or copy of the contribution or subscription agreement entered with the investors along with a report of money actually collected from the investor. The details about performance of the fund. the maximum amount to be raised for each scheme and the provision for refund of monies to investor in the event of non receipt of minimum amount. 10. 2. venture capital fund shall make investment in the venture capital undertaking as enumerated below:i. at least 75% of the investible funds shall be invested in unlisted equity shares or equity linked instruments. and the fees to be paid to such manager. General obligations and responsibilities No venture capital fund shall issue any document or advertisemant inviting offers from the public for the subscription of the purchase of any of its securities or units Private placement A venture capital fund may raise money only through private placement of its securities or units. Period of maturity of the Fund. managed by the Fund Manager investment strategy of the fund any other information specified by the Board . Manner of subscription to the units or securities of the Venture Capital Fund. debt or debt instrument of a venture capital undertaking in which the venture capital fund has already made an investment by way of equity.

The Inspecting or Investigating officer shall. Notice before inspection or investigation Before ordering an inspection or investigation. To inspect or investigate into complaints received from investors. books or account. It shall be the duty of director. However. He inspecting or investigating officer in the course of inspection or investigation shall be entitled to exam or record the statement of any director. On receipt of the reply if any. have power to obtain authenticated copies of documents. no such notice need be given. have power to examine on oath and record the statement of any employees. The books of accounts. SEBI may call upon the venture capital fund to take such measures as the board may befit in the interest of the securities market or for due . trustee. Any of the following reason:1. it may by order in writing not give such notice. Notice to the venture capital fund. SEBI shall after consideration of inspection or investigation report or the interim report communicate the finding of the inspecting officer to the venture capital fund and give. 2. where SEBI is satisfied that in the interest of the investors. To ensure that the books of accounts records and document are being maintained by the venture capital fund in the manner specified in these regulation . He may also submit an interim report if so required. To inspect or investigate suo moto into the affairs of the venture capital fund in the interest of the securities market and the interest of investors. Obligation of venture capital fund on inspection or investigation It shall be the duty of every officer of the venture capital fund in respect of whom an inspection or investigation has been ordered and any other associate person who is in Possession of relevant information pertaining to conduct and affairs of such venture Capital fund including fund manager or asset management company. trustee. Submission of the report to SEBI The inspecting or investigating officer shall soon as possible on completion of the inspection submit his inspection or investigation report to SEBI. SEBI shall give not less than 10 days. It shall be the duty of every officer of the venture capital fund and any other associate person who is in possession of relevant information pertaining to conduct and affair of the venture capital fund to give to he inspecting or Investigating officer all such assistance and shall extend all such co-operation as may be required in connection with the inspection or investigating and shall furnish such information sought by the inspecting or investigating officer in connection with the inspection or investigation. and officer or employee of venture capital fund. from any person having control or custody of such documents. To ascertain that the provision of the SEBI Act and these regulations are being complied with by the venture capital fund. The investigating or inspecting officer shall. if any to produce to the investigating or inspecting officer such books. from the venture capital fund. for the purposes of inspection or investigation. account and other documents in his custody or control and furnish him with such statement and information as the said officer may require for the purpose of the investigation or inspection. officer or employee to reasonably assist the inspecting or investigating officer in connection with the inspection or investigation. It an opportunity to make a representation. records and document relating to the venture capital fund. directors or person responsible for or connected with the activities of venture capital fund or any other associates person having relevant information pertaining to such venture capital fund.Maintenance of books and records Every venture capital fund must maintain for a period of 8 years books of accounts. records and documents which must give a true and fair picture of state of affairs of the venture capital fund. clients or any other person on any matter having a bearing on the activity of the venture capital fund . 3. for the purpose of inspection or investigation. books account of venture capital funds. 4.

submit a report to SEBI and recommend penal action. c. d. On and from the data of suspension of certificate. On receipt of the report from he enquiry officer . b. prohibiting the person concerned from operating in the capital market or from accessing the capital market for a specified period. The enquiry. Suspension of certificate SEBI may suspend. Such direction as it deems fit in the interest of securities market or the investors including Directors in the nature of:a.SEBI shall consider the same and may issue to venture capital fund a shown cause notice as to why such penal action as proposed by enquiry officer or such appropriate action should not be taken against it. Cancellation of certificate SEBI may cancel he certificate granted to venture capital fund where the venture capital fund where the venture capital fund is guilty of fraud or as been convicted of any offence involving moral attitude or where the venture fund has been guilty of repeated default under regulation. No order of suspension or cancellation shall be made by except after holding an enquiry in accordance with the following procedure:For he purpose of holding an enquiry.within 14 days from the date of receipt of such cause notice sends a reply to SEBI. the certificate granted to a venture capital fund if the venture capital fund contravenes any of the provision of the SEBI or of the regulation made there under or required by SEBI or false or misleading information or does not submit periodical returns or reports as required by SEBI or does not co-operate with any enquiry inspection or investigation conducted by SEBI or fail to reduce the complaints investor or fail to give a satisfactory reply to SEBI in this behalf. requiring a venture capital fund not to launch new schemes or raise money from investors for a particular period. requiring the person connected to dispose of the assets of the fund or scheme in a manner as may be specified in the regulation. SEBI may appoint one or more enquiry officer. The venture capital fund . without prejudice to issue of directions or measure as about. furnish enquiry officer its reply ad make its representation before him a venture capital fund may appear through any person duly authorized by it. The venture capital fund may within 14 days from the date of receipt of such notice. if any of the venture capita SEBI shall pass an order as it deems fit. to be taken against the venture capital fund as also the ground on which such action is justified. requiring the person concerned to refund any money or the assets to the concerned investors along with the requisite interest or otherwise. He enquiry officer shall after talking into account all relevant facts and circumstance. directors issue. officer shall issue to venture capital fund at registered office or principal place of business a notice stating the ground on which the action proposed to be taken and shown cause why such action need not be taken within a period of 14 days from the date of receipt of notice.the venture capital fund with immediate effect shall cease to carry on activity of he venture capital fund and shall be subject to such . after considering the reply. he venture capital fund shall cease to carryon any activity as a venture capital fund during the period of suspension and shall be subject to such direction of SEBI with regards to any records documents securities as may be in its custody or control relating into its activity as a venture capital as SEBI specifies. On and from the date of cancellation of certificate . e. if any. prohibiting the person concerned from disposing of any of the properties of the fund or scheme acquired in violation of these regulations.compliance with the provision of the SEBI act. The board may after consideration of the investigation or inspection report and after giving reasonable opportunity of hearing to the venture capital fund or its trustees. collected under the scheme.

The application must be signed and all signatures must be original. However no such certificate of registration shall be suspended or cancelled unless the procedure specified in the regulation applicable to such intermediary is complied with. Perform from A & from B is given below From A From B From A First schedule-from From A Securities and exchange board of India (Venture capital funds) regulation . The application should complete his form and submit it along with all supporting documents to board at its head office at Mumbai. Mumbai400021 India Instruction: This form is meant for use by the company or trust (hereinafter referred to as the applicant ) for application for grant of certificate of Registration as venture capital fund.first floor Nariman point. address of the registered office. 1. This application shall be considered by board provided it is complete in all respect. Name. Information which needs to be supplied in more detail may give on separate sheets which should be attracted to the application form. address for corresponding telephone number(s). . Action against intermediaries The board may initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration who fails to exercise due diligence in the performance of its function or fails to comply with its obligations under this regulation. telex number(s). Appeal to the central government Any person aggrieved by an order of the board under these regulation may prefer an appeal to securities appellant tribunal. The order of suspension or cancellation of certificate may be published by SEBI in least two newspaper. The application must be accompanied by an application fee as specified the second Schedule to these regulation. (B) wing . All answer must be legible.direction 0of SEBI with regards to transfer of records documents and securities that may be in its custody or control relating to the activities of the venture capital fund as SEBI may specify.1996 (see regulation) Application for grant of certificate of registration as venture capital fund Securities and exchange board of India Mittal court.

in the interest of investors. liability. the details thereof.1992. we shall notify the securities and Exchange board of India Act. Such information must be submitted within the time specified by days to SEBI . of application and the name of the contact person. 8. if. We further agree that. For and on behalf of…………………………… (Name of the applicant) Authorized signatory …………………………. 4. Date and place of incorporation or establishment and date of commencement if business (enclosed certificate of incorporation. We further agree that as a condition of registration. or has at any time has been convicted for any moral turpitude or at any time has been found guilty of any economic offence. 1882 (2 of 1882) 3. if any. If SEBI so directs. code of business rules. Please state whether the applicant. Details of asset management company. 1996. director or principal officer is involved in any litigation connected with the securities market which has an adverse bearing on business of applicant. Winding. a. · A company established under the companies act.. Detail of member of the board of trustee or directors of the trustee company. is complete and true. Please also state whether there has been any instance of violation or non-adherence to the securities laws.. or 4. we shall notify the Securities and Exchange Board of India immediately any change in the information provided in the application. . in the opinion of the trustees or the trustee company. we shall abide by such operational instructions/ directives as may be issued by the securities and Exchange board of India from time to time. as the case may be.and the securities and Exchange board of India (venture capital fund) Regulation. or its parent or holding company or affiliate may have been subject to economic.fax number(s). memorandum and articles of associate or trust deed in terms of which incorporated or established). the above information should be provided for the member of the board of trustee or of the above mentioned person connected with the Trustee company . 5. Declaration statement(to be given as below). AND we further agree that. for which the applicant. in case the application has been set up as a trust b. or suspended 7. code of ethics/conduct. or 2. his partner. 2.and Government of India guidelines/ instruction as may be announced by the securities and Exchange board of India from time to time.up A scheme of venture capital fund setup as a trust shall be wound up:1. including the attachment sheets. or criminal. Submission of reports to SEBI SEBI may at any time call upon the venture capital fund to file such report as it deems fit with regards to the activity carried out by venture capital fund.(Name) (Signature) Place: Power to call for information SEBI may at anytime call upon the venture capital fund in respect to any matter relating to its activity as a venture capital fund. it is in the interest of the investors that be wound-up . or 3. In case the application is trust. Please indicate to which of the following categories he application belongs. (enclose copy of agreement with the asset management company). 6. If 75% of the investors in the scheme pass a resolution at a meeting of unit holder Of the scheme that the scheme be wound up. When the period of the scheme as mentioned in the placement memorandum is over. We hereby agree and declare that the information supplied in the application.if yes. 1956 (1 of 1956) · A trust set up under the Indian trust act. Details of member of bard of directors of venture capital fund I case the application has been sent up as accompany.

The Registration Number of the venture capital fund is IN/VC/ / Date: Place: MUMBAI By order Sd/For and on behalf of Securities and Exchange Board of India Income Tax benefits In order to encourage the development of venture capital funds. the income Tax Act. 1956. II. 1961 exempts the income of a venture capital fund from Income Tax. The trustees or trustee company of the venture capital fund is set up as a trust or the board of director in the case of the venture capital fund is set up as a company (including body corporate) shall intimate the board and investors of the circumstance leading to the winding up of the fund scheme.The venture capital fund setup as a shall be wound up according to provision of the Companies Act. 1996 Certificate of registration as venture capital fund I. Within three months from the date of intimation. VCU means a domestic company whose share are not listed in a recognized stock exchange in India and . A venture capital fund set up as a body corporate shall be wound up in accordance with the provision of the statute under which it is constituted. Effect of winding up On and from the date of intimation of the winding up. the board hereby grants a certificate of registration to ------------------------------------------------------------------------as a venture capital fund subject to the conditions specified in the Act and in the regulations made there under. VCC means a company which has been granted a certificate of registration by SEBI and which fulfils the conditions laid down by SEBI with the approval of the Central Government. (15 of 1992 ) read with the regulation made There under. as inspecting officer for inspection or investigation of securities and exchange board of India (Venture capital funds) Regulation. In exercise of the powers conferred by sub-section (1) of section 12 of the securities And exchange Board of India Act. 1992. the assets of the scheme shall be liquidated and the proceeds accruing to the investors in the scheme distributed to them after satisfying all liabilities. suo-moto or upon receipt of information or complaint. o further investment shall be made on behalf of the scheme to be wound up. Income of a venture capital fund [section 10(23FB)] (on and from Financial Year 1999-2000) Any income of a venture capital fund (VCF ) or a venture capital company ( VCC ) set up to raise funds for investment in a venture capital undertaking ( VCU ) is exempt. Inspection and investigation SEBI may appoint one or more person.

production or manufacture of an article or thing but does not include activities or sectors which are specified by SEBI with a approval of the Central Government. Advertisement .which is engaged in the business for producing services.

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