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A
GRAND PROJECT REPORT
ON
“Venture capital financing in India”
In Partial fulfillment of Post Graduate Diploma in Management
(Full Time Programme)
Prepared
By
Jadhav Kinjal (Roll No.12)
Batch (2008-2010) Parul Institute of Management
PO Limda, TA:Waghodia
Dist: Vadodara, Gujarat-391760
(Approved by AICTE, MHRD, Govt. Of India, New Delhi (JANUARY 2010)
1
Acknowledgement
Completing a task is never a one man effort. It is often the result a valuable
contribution of a number of individuals in direct or in director indirect manner that
helps in shaping and achieving an objective. I express a sense of gratitude to my
guide.
I would like to express my thankfulness to our Director sir N.K.Kapoor for
granting me permission to carry on my project on Venture capital. And for taking
deep interest in my project work ensuring at each stage that target are achieved as
per schedule. Also he gives me good knowledge about the venture capital. and he
provides all guidance as per requirement of my project.
I sincerely hope that this project would strive to answer need of the corporate
world. The project need gave a challenging. and exhilarating experience in doing
research study.
2
DECLARATION
We do hereby solemnly declare that this project “VENTURE CAPITAL
FINANCING IN INDIA” is original and bonafied work done by us is being
submitted in fulfillment of the requirement for the PGDM Program of Parul
Institute of Management.
This project is our own and is not submitted to any other institution or
published any where before.
Place: Vadodara
Date:
3
Preface
In India, a revolution is ushering in a new economy, wherein major investment are
being made in the knowledge based industry with substantial low investments in
land, building, plant and machinery. The asset/ collateral – backed lending
instruments adopted for the hard for the hard core manufacturing industries, are
proving to be inadequate for the knowledge – based industries that very often start
with just an idea.
The only way to finance such industries is through venture capital. Venture capital
is instrumental in bringing about industrial development, for it exploits the vast and
untapped potentialities and promotes the growth of the knowledge – based
industries worldwide.
In India too, it has become popular in different parts of the country. Thus, the role
of venture capitalist is very crucial , different, and distinguishable to the role of
traditional finance as it deals with others money. In view of the globalization;
Venture capital has turned out to be a boon to both business and industry. There is,
thus an intense need to be exploit to the maximum its potential as a new means,
This report deals with the concept of venture capital with particular reference to
India. The report includes all facts, rules and regulations. Regarding venture capital
and its written in very comprehensive manner.
4
INDEX
Serial No Title Page No1 Introduction 52 Objective 63 Methodology 74 Data Collation and Analysis
4.1 Meaning of Venture Capital 84.2 History of Venture Capital 94.3 Notion of Venture Capital 104.4 Feature of Venture Capital 114.5 Stages of Venture Capital 125 Business plan 136 Process of Venture Capital Financing 14
6.1 Methods of Venture Financing 187 Objectives and vision for venture
Capital in India20
8 SEBI Regulation 318.1 Recommendation 339 Venture Capital in Micro Finance 3410 ICICI Venture 4011 Recommendation 4412 Conclusion 4513 Bibliography 4614 Annexure 47
5
INTRODUCTION
Capital is one of the most important factors of production. No economic entity can
start functioning without requiring capital as this helps the entrepreneurs in
acquiring machinary,equipment and other productive facilities purely in functional
terms, capital to company is like blood in human body. Here capital refers to
financial capital and not exactly produced means of production in the version of
economics. The companies entrepreneurs engaged in traditional line of business
can easily procure necessary financial capital from conventional capital market.
Whose vital ingredients are public issue, financial institution, commercial banks,
mutual funds, lease entrepreneurs, face great difficulty while venturing out to
procure financial capital for newly floated enterprise as at the initial stages of
business risk is very high and the return, quit uncertain
Common investors hesitate to invest their saving in such companies even though
they lead to high industrial growth and economic development, because it is
difficult to trade off between risk returns. Move specifically, rate of return
normally remains disproportionate to the degree of risk associated with newly
floated companies this is much more true in the case of such companies whose
business feature is based on the foundation of high technology or unproved
technology having no time tested foundation in the commercial world. Particularly
this is true in the arena of electronics and computer application industries, medical
instruments and bio-technology application industries where the change is very fast
with rapid advancement of global science and technology
However, lack of finance the new entrepreneurs and technocrats from starting new
venture though they may very well have innovative ideas and requisite
technological knowledge. Hence the arises that how these type of firms shall them
6
be financed ? under the circumstances the concept of venture capital fund was born
with a fundamental objective to provide initial capital and support in building
capital base to the entrepreneurs, having a sound background of professional
education, expertise and initiative to launch the business based on fast changing
technology.
OBJECTIVES
To understand concept of venture capital
To understand VC industry in global scenario
To study the evaluation and need of venture capital industry in India
To understand the legal framework formulated by SEBI to encourage
activity in Indian economy.
To know the impact of political and economical factors on VC investment
7
METHODOLOGY
I collected data from two sources
Primary source of data
These data were collect from the financial institution like ICICI venture that
provides venture capital for the new projects in different sectors.
Secondary source of data
These data’s are collected through internet, books and magazines. I have also gone
through the different reference book and through internet. The data used are fully
guidance oriented and not mean for the coping of product.
8
VENTURE CAPITAL
Venture capital is means of financing fast-growing privet companies. Finance may
be required for the startup, development /expansion or purchase of a company via a
mechanism. Such as in management buyout.
Venture capital is capital typically provided by outside investors for
financing of new, growing or struggling business.
Venture capital investments generally are high risk investments but offer the
potential for average returns.
Venture capital typically comes from institutional investors and high net worth
individuals and is pooled together by dedicated investment firms.
Venture capital firms typically comprise small teams with technology
backgrounds (scientists, researchers) or those with business training or deep
industry experience.
VENTURE CAPITALIST
A venture capitalist is a person or investment firm that makes venture
investments, and these venture capitalists are expected to bring managerial and
technical expertise as well as capital to their investments.
VENTURE CAPITAL FUND
Venture capital fund is a pooled investment vehicle (often a partnership) the
primarily invests the financial capital of third party investors in enterprise that are
too risky for the standard capital market or bank loss.
9
HISTORY OF VENTURE CAPITAL
USA is the place of venture capital industry as we know it today. During most its
historical evolution, the market for arranging such financing was fairly informal
relying primarily on the resource of wealthy families.
In 1946 American research and development Corporation (ARD). A publicly
treaded, closed-end investment company was formed. ARD’s best known
investment startup financing it provided in 1958 for computer maker digital
equipment crop. ARD was eventually profitable providing its original investors
with 15.8 percent annual rate of return over its twenty five years an independent
firm.
The number of such specialized investment firms eventually to be called venture
capital firms began to boom in the late 1950s the growth was aided in large part by
the creation in 1958 of the federal of the federal small Business Investment
Company program. Hundreds of SBICs were formed in the 1960s , and remain in
operation today.
10
NOTION OF VENTURE CAPITAL
Venture capital is significant innovation of the twentieth century. It is generally
considered as a synonym of risky capital. Venture capital is ofetn thought of as
“the early stage financing of new and young enterprise seeking to grow rapidly.”
In broad terms, venture capital is the investment of long-term equity finance
where the venture capitalist earns his return primarily in the form of capital gains.
The underlying assumption is that the entrepreneur and the venture capitalist would
act together in the interest of the enterprise as ‘partners’. The true venture capital
finances any risky idea. in fact, venture capital can prove to be a powerful
mechanism to institutionalize innovative entrepreneurship. It is a commitment of
capital for the formation and setting up of small-scale enterprise specializing in
new ideas or new technologies. The venture capitalist focuses on growth. He
would like to see small business growing into larger ones.
The venture capitalists management approach differs significantly from that
of a conventional banker or a lender. The banker does not involve directly in the
operation and management of the company. He plays safe, keeps off management,
remain passive and insist on security(collateral). Of course, when banker’s stake is
very high, he may get his nominee appointed on the board of the company to
safeguard hi interest. The venture capitalist is also not exactly like the stock market
investor who merely trades in the shares of a company without any relations with
or knowledge of its management. In fact venture capitalist combines the qualities
of banker, stock market investor and entrepreneur in one.
In India, the securities and exchange board of India (SEBI) guidelines
govern the operations of venture capital funds (VCFs).
11
FEATURES OF VENTURE CAPITAL
Following are the main attributes of venture capital:-
Equity participation Venture financing is actual or potential equity participation
through direct purchase of shares, options or convertible securities. the objective is
to make capital gains by selling-off the investment once the enterprise becomes
profitable
Long-term investment Venture financing is along term illiquid investment; it is
not repayable on demand. It requires long-term investment attitude that
necessitates the venture capital firms to wait for a long period, say 5-10 years, to
make large profits.
Participation in management Venture financing ensures continuing participation
of the venture capitalist in the management of the entrepreneur’s business. This
hands-on management approach helps him to protect and enhance his investment
by actively involving and supporting the entrepreneur. More than finance, venture
capitalist gives his marketing, technology, planning and management skills to the
new firm.
12
STAGES IN VENTURE CAPITAL
Following are the stages in venture financing:-
1.Early stage financing - Seed financing for supporting a concept or idea.
- R&D financing for product development.
- Start-up capital for initial production and marketing
- First stage financing for full –scale production and
marketing.
2. Expansion financing - Second stage financing for working capital and initial
expansion.
- Development financing for facilitating public issue.
- Bridge financing for facilitating public issue.
3. Acquisition/ buyout financing growth
- Acquisition financing for acquiring another firm for
further.
- Management buyout financing the enabling operating
group to acquire firm or part of its business.
- Turnaround financing for turning around a sick unit.
13
BUSINESS PLAN
The first step for a company (or an entrepreneur) proposing a new venture in
obtaining venture capital is to prepare a business plan for the consideration of a
venture capitalist.
The business plan should explain the nature of the proposed venture’s business.
what it wants to achieve and how it is going to do it. The venture’s management
should prepare the plan setting challenging but achievable goals.
The length of the business plan depends on the particular circumstances but, as
general rule, it should not be very long. It should use simple language and
technical details should be explained without jargons.
Essential Elements of a business plan:-
1. Executive summary
2. Background on the venture
3. The product or service
4. Market analysis
5. Marketing
6. Business operations
7. The management team
8. Financial projections
9. Amount and use of finance required and exit opportunities
14
PROCESS OF VENTURE CAPITAL FINANCING
The venture capital activity is a sequential process involving the following six
steps.
Deal origination
A continuous flow of deal is essential for the venture capital business.deals may
originate in various ways: (a) referral system (b) active search and(c)
intermediaries.
Screening
Venture capital is a service industry, and VCFs generally operate with a small
staff. In order to save on time and to select the best ventures, before going for an
in-dept analysis, VCFs carry out initial screening of all projects based on some
broad criteria.
Due Diligence
Once a proposal has passed through initial screening. It is subjected to a detailed
evolution or due diligence process.
The evaluation of ventures by VCFs in India includes the following steps:
Preliminary evaluation
Detailed evaluation
VCFs in India expect the entrepreneur to have:
15
Integrity
Long-term vision
Urge to grow
Managerial skills
Commercial orientation
Deal structuring
Once the venture has been evaluated as viable, the venture capitalist and the
venture company negotiable the terms of the deal, viz, the amount, form and the
price of investment. This process is termed as deal structuring.
The agreement also includes the venture capitalist’s right to control the venture
company and to change its management if needed, buyback arrangement,
acquisition, making initial public offering (IPOs), etc. Earned-out arrangements
specify the entrepreneur’s equity share and the objectives to be achieved.
Venture capitalists generally negotiate deals to ensure protection of their
interests. The venture companies like deal to be structured in such a way that their
interests are protected.
Post-investment Activities
Once the deal has been structured and agreement finalized, the venture capitalist
generally assumes the role of a partner and collaborator. He also gets involved in
shaping the direction of the venture. If a financial or managerial crisis occurs, the
venture capitalist may intervene, and even install a new management team.
Exit plan
16
Venture capitalist typically aims at making medium to long-term capital gains. The
play a positive role in directing the company towards particular exit routes. A
venture may exit in the following ways:
Initial public offering(IPOs)
Acquisition by another company
Purchase of the venture capitalists share by the promoter
Purchase of the venture capitalists share by an outsider.
VENTURE CAPITAL INVESTMENT PROCESS
17
METHODS OF VENTURE FINANCING
18
Venture Capital Investment
Process
ProductEntrepreneurial (managed)
Product
Expected Return
Expected Return
Market
Decisions
Screening
Evaluation
Approval
Equity
All VCFs in India provide equity. Generally , their contribution may not exceed 49
percent of the total equity capital. Thus, the effective control and majority
ownership of the firm may remain with the entrepreneur. when a venture capitalist
contributes equity capital, he acquires the status of an owner, and becomes entitled
to a share in the firm’s profits as much as he is liable for losses. The advantage of
the equity financing for the company seeking venture finance is that it does not
have the burden of serving the capital, as dividends will not paid if the company
has no cash flow.
Conditional loan
A conditional loan is repayable in the form of a royalty after the venture is able to
generates the sales. No interest is paid on such loans in India, VCFs charged
royalty ranging between 2 and 15 percent; actual rate depend on other factors of
the venture such as generation period, cost-flow patterns, risk and other factors of
the enterprise.
Income note
A unique way of venture financing in India was income note it was a hybrid
security which combined the features of both conventional loan and conditional
loan. The entrepreneur had to pay both royalty on sales and interest, but at
substantially low rates. Funds were made available in the form of unsecured loans
at a lower rate of interest during development phase and at a higher rate after
development. In addition to interest charges, royalty on sales could also be
charged.
19
Other financing methods
A few venture capitalist, particularly in the privet sector, introducing innovative
financial securities. The ‘participating debenture’ is an example of innovative
venture financing.
VCFs in India provide venture finance through partially or fully convertible
debenture and cumulative convertible preference shares.
OBJECTIVES AND VISION FOR VENTURE CAPITAL IN
INDIA
20
1. Venture Capital funding is different from traditional sources of financing.
Venture capitalists finance innovation and ideas which have potential for high
growth but with inherent uncertainties. This makes it a high-risk, high return
investment. Apart from finance, venture capitalists provide networking,
management and marketing support as well. In the broadest sense, therefore,
venture capital connotes risk finance as well as managerial support. In the global
venture capital industry, investors and investee firms work together closely in an
enabling environment that allows entrepreneurs to focus on value creating ideas
and venture capitalists to drive the industry through ownership of the levers of
control in return for the provision of capital, skills, information and complementary
resources. This very blend of risk financing and hand holding of entrepreneurs by
venture capitalists creates an environment particularly suitable for knowledge and
technology based enterprises.
2. Scientific, technology and knowledge based ideas properly supported by
venture capital can be propelled into a powerful engine of economic growth and
wealth creation in a sustainable manner. In various developed and developing
economies venture capital has played a significant developmental role. India, along
with Israel, Taiwan and the United States, is recognized for its globally
competitive high technology and human capital. The success India has achieved
particularly in software and information technology of success against several odds
such as inadequate infrastructure, expensive hardware, restricted access to foreign
resources and limited domestic demand, is a pointer to the hidden potential it has in
the field of knowledge and technology based industry. India has the second largest
21
English speaking scientific and technical manpower in the world. Some of the
management (IIMs) and technology institutes (IITs) are globally known as centers
of excellence. Every year over 200,000 engineers graduate from Government and
private-run engineering colleges. Many also specialize through diploma courses in
computers and other technical areas. Management institutes produce 40000
management graduates annually. Given this quality and magnitude of human
capital India’s potential to create enterprises is unlimited.
3. In Silicon Valley, these very Indians have proved their potential and have
carved out a prominent place in terms of wealth creation as well as credibility.
There are success stories that are well known. They were backed by a venture
capital environment in Silicon Valley and elsewhere in US which supports
innovation and invention. This also has a powerful grip over the nation’s collective
imagination. At least 30% of the start-up enterprises in Silicon Valley are
started/backed by Indians. Back home also, as per NASSCOM data, the turnover of
software sector in India has crossed Rs 100 billion mark during 1998. The sector
grew 58% on a year to year basis and exports accounted for Rs 65.3 billion while
the domestic market accounted for Rs 35.1 billion. Exports grew by 67% in rupee
terms and 55% in US dollar terms. The strength of software professionals grew by
14% in 1997 and has crossed 160000. The global software sector is expected to
grow at 12% to 15% per annum for the next 5 to 7 years. With the inherent skills
and manpower that India has, software exports will thrive with an estimated 50%
growth per annum. The market capitalization of the listed software companies is
approximately 25% of the total market capitalization of around US$ 200 billion as
of December,1999.There is also greater visibility of the Indian companies globally.
Given such vast potential which is not only confined to IT and software but also in
22
several other sectors like biotechnology, telecommunications, media and
entertainment, medical and health etc., venture capital industry can play a catalyst
role in industrial development.
4. It is important to recognize that while India is doing well in IT and software, it
is still a low cost developer and service provider. Though it has the advantage of
English-speaking, skilled manpower and cheap labor, its leadership is on a slipping
edge as other countries such as Philippines, China and Vietnam are moving to
occupy India’s position as the premier supplier of low end software and support
services. Many such countries have superior supplies of power, telecom and
internet connections compared with India. As the US did in the semiconductor
industry in the eighties, it is time for India to move to a higher level in the value
chain. This will not happen automatically. The sequence of steps in the high
technology value chain is information, knowledge, ideas, innovation, product
development and marketing. Basically, India is still at the level of ‘knowledge’.
Given the limited infrastructure, low foreign investment and other transitional
problems, it certainly needs policy support to move to the third stage i.e. ideas and
towards innovation and product development. This is very crucial for sustainable
growth and for maintaining India’s competitive edge. This will need capital and
other support which can be provided by venture capitalists.
5. India has a vast pool of scientific and technical research carried out in research
laboratories, defense laboratories as well as in universities and technical institutes.
A conducive environment including incubation facilities can help a great deal in
identifying and actualizing some of this research into commercial production.
23
6. Development of a proper venture capital industry particularly in the Indian
context is important for bringing to market high quality public offerings (IPOs). In
the present situation, an individual investor becomes a venture capitalist of a sort
by financing new enterprises and undertaking unknown risk. Investors also get
enticed into public offerings of unproven and at times dubious quality. This
situation can be corrected by venture capital backed successful enterprises
accessing the capital market. This will also protect smaller investors. A study of
US markets during the period 1972 through 1992 showed that venture-backed IPOs
earned 44.6% over a typical five year holding period after listing compared with
22.5% for non-venture backed IPOs. The success of venture capital is partly
reflected by these numbers since 80% of firms that receive venture capital are sold
to acquiring companies rather than coming out with IPOs, in which the return
multiple vis-à-vis non-venture funded companies is much higher. This potential
can also be seen in sales growth figures for the U.S. where, from 1992 to 1998,
venture capital funded companies sales have grown by 66.5% per annum on
average versus 5% for Fortune 500 firms. The export growth by venture funded
companies was 165%. All the top 10 sectors measured by asset and sales growth in
USA were technology related.
7. Thus, venture capital is valuable not just because it makes risk capital available
at the early stages of a project but also because of the expertise of venture capitalist
that leads to superior product development. The big focus of venture capital
worldwide is, technology. Thus, in 1999, around $30 bn of venture capital has been
invested in the U.S. of which technology firms reportedly got around 75%. Besides
24
this huge supply from organized venture funds there is an even larger pool of
"angel" funds provided by private investors. In 1999, it was expected that angel
investment would be of the order of $90 bn, thus making the total "at-risk"
investment in high technology ventures in a single year of $120 bn. By contrast, in
India, cumulative disbursements to date are not more than $500m, of which
technology firms have received only 36%.
8. The other successful experience is that of Taiwan: Hsinchu Science-based
Industrial Park is the showpiece of Taiwan’s success. Forty percent of the firms
established in this government promoted park, which currently accommodate 3,000
expatriates, were begun by entrepreneurs from the United States. The revenue of
firms located at Hsinchu Park alone was $14 billion in 1998. Facilities at Hsinchu
include English language teaching for the children of its expatriate entrepreneurs.
The Hsinchu experiment has benefited from the generally high quality of education
in Taiwan, whose institutes produce 50,000 engineers annually. Taiwan has 74
technical schools, 36 colleges and 24 universities, two of which are located near
Hsinchu Park. The venture capital environment has also been a favorable factor.
There are 110 venture capital firms in Taiwan, including 38 begun in 1998. By the
end of 1997, these firms had invested $1.32 billion in 1,839 ventures, mostly in
high technology.
9. Taiwan’s government has been particularly successful in promoting its hardware
industry through tax incentives, low tariff barriers, credit at cheap rates, good
infrastructure facilities and establishment of research institutes. The Industrial
Research Institute, owned by the government, started with semiconductor
25
technology purchased from RCA Records. The technology subsequently developed
at the Institute led to two very successful integrated chip firms. United Micro land
Corporation (UMC) and Taiwan Semiconductor Manufacturing Corporation
(TSMC), which were initially promoted by the government and ultimately
privatized.
10. Taiwan has benefited from close ties with Silicon Valley. A transnational
community of Taiwanese venture capitalists has fostered a two-way flow of
capital, skills and information between Silicon Valley and Taiwan. There is also an
emerging trend of grouping of Taiwanese and Indian high technology talents in
Silicon Valley. India can learn important lessons from the Taiwanese government’s
focus on education and encouragement of small enterprises, via facilities such as
Hsinchu Park, as well as a U.S. – style legal, regulatory, tax, and institutional
environment.
11. Similarly the venture capital industry in Israel has grown from one firm with a
corpus of $30 million in 1991, to eighty firms with a corpus of $3 billion by 1998.
Further, Israel’s IT speciality is developing technology rather than software or
products. This focus has meant that new Israeli ventures are most typically
acquired by larger technology firms, and IPO route in the U.S. markets has also
been successful. In fact, Israeli companies are the second largest group of
companies listed on the Nasdaq markets after American companies, a remarkable
achievement for a country of 6 million persons.
26
12. Like Taiwan, Israel is another country in which government policy fostered a
successful, highly diversified, self-reliant industry. In the early 1990s, Israel
restructured its legal, accounting and regulatory framework to mimic that of the
United States. The new Israeli framework guarantees U.S. investors parity with
U.S. tax rates. In 1984, the Israeli government passed a law to encourage industrial
research and development (R&D) and created the Office of the Chief Scientist to
implement government policy related to this area. The law’s strategy is to
encourage private companies to invest in R&D projects with the government
sharing the business risk. Under the law, a Research Committee appointed by the
Chief Scientist approves proposals for anywhere from 30 to 66 percent of given
projects’ funding (up to $250,000). These proposals, when funded, also receive tax
exemptions for up to ten years. As an additional incentive to entrepreneurship, the
Israeli government has created twenty six technology incubators designed to allow
start-ups to convert their ideas into commercially viable products.
13. Israel’s government participates in international cooperation, seeking to match
the nation’s technical skills with global markets, and to share start-up risks up front
with later-stage activities such a marketing. The most successful of these ventures
has been the Bilateral Industrial Research and Development Foundation (BIRD), a
joint venture with the U.S. government. The Israeli high technology industry
enjoys the same kinds of transnational ties that has helped Taiwan. Similarly, the
Israeli venture capital industry has strong U.S. connections. Several of Israel’s
experiences have relevance for India. Government policy on incubators, the
funding of R&D projects, and the BIRD project provide useful object lessons for
the Indian government and business alike.
27
14. Venture capital has played a very important role in U.K., Australia and Hong
Kong also in development of technology growth of exports and employment.
15. India certainly needs a large pool of risk capital both from home and abroad.
Examples of US, Taiwan and Israel clearly show that this can happen provided
there is right regulatory, legal, tax and institutional environment. It is also
necessary that start-up’s have access to R&D flowing out of laboratories and
universities with infrastructure support such as telecom, technology parks etc.
Steps are being taken at the level of Government, Ministry of Information and
Technology, and CSIR for improvement in infrastructure and R&D. Certain NRI
organisations are taking initiatives to create a corpus of US$500m to strengthen the
infrastructure of IITs. More focused attempts will be required in all these
directions.
16. Recent phenomena, partly ignited by success stories of Indians in US and
other places abroad, provide the indications of a growing number of young,
technically qualified entrepreneurs in India. There are success stories within India
also. At the same time increasing number of internationally savvy, senior managers
have been leaving established multinationals and Indian companies to start new
ventures. The quality of enterprise in India is on an ascending curve. The
atmosphere thus is ripe for creating the right regulatory and policy environment for
sustaining the momentum for high-technology entrepreneurship. The Indians
abroad have leapfrogged the value chain of technology to its highest levels. By
28
bringing venture capital and other supporting infrastructure this can certainly
happen at home also.
17. Another important area is the need for multi country integration. Information
Technology and Internet have brought about the trend of what can be called the
"death of distance" and operation across the countries can be seamlessly integrated.
In the Indian context with developing IT and internet technology coupled with
close linkages of Indian technocrats and entrepreneurs located in India and abroad,
there are interesting possibilities. This will of course need further regulatory and
policy support to provide operational flexibility, easy entry-exit and ownership
patterns to suit global needs. It is also to be noted that the quality and quantity of
research conceptualized in startups competes favorably with research undertaken
by big firms. This phenomenon is seen even in India.
18. What could all this mean in terms of employment generation within India?
There is probably no industry as employment intensive in productivity and
numbers as high technology. In US venture funded companies have grown jobs by
40% per annum since 1992. Conversely Fortune 500 jobs shrank by 2.5% per
annum during the same period. 60% of the jobs created by venture funded
companies were engineers/skilled jobs. Further in 62% of the venture funded
companies, stock options covered 100% of the employees. India today produces
over 60000 new computer science graduates annually and over 2 lakh more enroll
annually in computer training institutes. Besides, about 200,000 engineering
graduates come out from engineering colleges in addition to the substantial number
of persons doing diploma and certificate courses in technology related areas. By
29
contrast, in Taiwan, the total number of engineering graduates is around 50000 and
in US it is 30000 per annum. According to available estimates there are about
3,50,000 unfilled jobs of computer scientists in the US with the growth rate of
100,000 job requirement each year. Achieving even a reasonable fraction of US
scale of development in information technology and other knowledge based areas,
there is going to be a big employment generation in India. Additionally, given
India’s lower labour cost, the potential for employment is even larger than what
appears from these estimates.
19. It also needs to be noted that with other areas of business and industry getting
more and more technology oriented, there will be requirement of jobs all around.
Indications are already emerging, as firms in India which are being outsourced by
foreign organizations to provide services are recruiting hundreds of employees
within one year of their existence. Several such firms are getting located around
Delhi, Bangalore and Hyderabad. With proper venture capital support, there can be
a phenomenal increase in start-up enterprises which would generate further
employment potential.
20. Given the right environment, large flows of risk finance and venture capital
can flow into the country. Apart from the foreign investment, substantial venture
capital is likely to come from overseas Indian community in Silicon Valley. This is
particularly so as some of the Indian technocrat entrepreneurs in Silicon Valley
have strong Indian linkages at professional level and are enthused to invest in
India. There are at least 300 such entrepreneurs with individual wealth exceeding
$5 million and total wealth of about $25 US billion. Another 1000 are believed to
30
have wealth in the range of $ 1-5 million. Currently, about 20% of their wealth is
reinvested in new ventures which will rise as vesting schedules mature. The risk
capital with Indian entrepreneurs is around $6 billion and even if 15% to 20%
comes to India annually, there is a ready pool of around $1 billion available for
annual venture capital investment in India. Further, larger venture capital firms in
the United States with a combined corpus of around US$ 35 billion have reportedly
set aside up to 20% of their funds for investment offshore. India along with Ireland
and Taiwan is a favored destination for investments by these offshore venture
funds.
21. The net FII investment in Indian markets is around US $10 billion and the
flows for the last few years have generally been positive. With enhanced interest in
India as compared to some of the other emerging and Asian markets, given the
right environment good amount of money would flow as venture capital
investment. This is more so because India has already acquired credibility
particularly in the area of information technology and sectors like media,
pharmaceuticals etc. While the proportion of offshore to local capital which is
around 80% foreign and 20% domestic, may remain same for the first few years,
the recycling of entrepreneurial wealth and skills within the industry will gradually
lead to greater presence of domestic venture capital industry .
SEBI REGULATIONS
As in the case of FIIs, SEBI’s primary role in the venture capital fund is envisaged
as of a facilitator for growth rather than that of a regulator. SEBI Regulations
should encourage more venture capital investments in a hassle free manner. The
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multiplicity of regulations, as far as possible, should be avoided and one set of
regulatory guidelines may be issued under the aegis of one nodal agency for
interface with the venture capital investors which could be SEBI.
SEBI Regulations should focus more on adequate disclosure as investors in
venture capital activities are institutions or high net worth individuals who are
expected to have the capability of taking an informed decision based on the
disclosures. The regulatory requirement of seeking approval of the placement
memorandum from SEBI may be dispensed with by strengthening the disclosure
requirements. The SEBI Regulations also provide in the case of a VCF
incorporated as a trust for compulsory registration of instrument of trust under the
Indian Registration Act.
As per the provisions of Indian Registration Act, the registration of trust
document is optional. There are operational problems in the case of existing VCFs
(in existence before SEBI Regulations were notified) to register the document of
trust after lapse of four months period. It should be left to the choice of the
applicant whether to register the trust document and there should not be any
compulsion for registration of documents under the Indian Registration Act under
the SEBI Regulation. The venture capital activity is in nascent stage in India as of
today and many dimensions of it are still to be unfolded. SEBI Regulations
therefore should not curtail the flexibility of investment by a VCF.
The present regulatory framework permits the investment by VCF in sick
industrial undertaking needs a review. There are various agencies who are engaged
in restructuring, financing to sick industries and there is no acute necessity for
venture capital funds to invest mainly in sick industrial undertakings. The VCF
should focus on investment in green shoe high technology oriented, knowledge
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based, research oriented industries, however, VCFs may also be provided
flexibility to participate in the restructuring process of sick industries as and when
required
RECOMMENDATIONS
The following amendments are recommended under the existing SEBI Venture
Capital Regulations:
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The definition of VCF should be amended to include any other structures
and also the funds set up, scheme floated by a trust, company, body
corporate or other legal entities.
The Regulation should make provisions for registration of Foreign Venture
Capital Investors (FVCI).
The investment criteria needs to be redefined to permit investment by VCF
primarily in equity or equity related instruments or securities convertible
into equity of VCUs and also by way of subscription to IPO and preferential
offer in case of companies to be listed or already listed. The limit of at least
80% of the funds raised by the VCF may be dispensed with and new
investment criteria as dealt under the heading Investment related issues may
be incorporated.
The relaxations for venture capital undertaking/funds under SEBI Takeover
Code and SEBI (Initial Public Offer) guidelines as dealt under the heading
of Exit related issues may also be incorporated.
The provision for investment in sick companies and financial assistance in
any other manner may be dispensed with.
The existing provisions for approval of placement memorandum by SEBI
may be dispensed with but the content of placement memorandum may be
strengthened to include all the significant information necessary for an
investor to arrive at a fair decision.
VENTURE CAPITAL IN MICRO FINANCE
following is the example of venture capital in micro finance
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Aavishkaar India Micro Venture Capital Fund (AIMVCF)
“Aavishkaar India Micro Venture Capital Fund” (“AIMVCF”) is a fund created to
promote inclusive development in rural and semi-urban regions in India. The
fund’s mission is based on the premise that promising micro, small to medium -
sized enterprises (MSMEs) will help drive positive changes in the underserved
regions of the country. Aavishkaar was incorporated in the form of a Trust in
October 2001 and was registered with SEBI as a Venture Capital Fund in May
2002. The fund achieved its First closing in August 2007 at USD 6 mn followed by
a Final closing in January 2009 at USD 14 mn. Aavishkaar helps establishment of
entrepreneurial ventures by providing equity financing in the range USD 50,000
and USD 500,000. Aavishkaar has received subscriptions from both domestic and
global financial and development institutions like CARE Enterprise Partners,
CORDAID, NABARD etc. The key investment criteria for the fund are -
scalability and the potential to make strong positive social impact on rural or semi-
urban India. The fund management team further provides active operational &
strategic support in growing the businesses.
Aavishkaar’s investments create sustainable changes by increasing economic
activity at the bottom of the pyramid, boosting entrepreneurial spirit and
establishing socially motivated VC- funding as a new financing mechanism in
India. These efforts were recently acknowledged when Aavishkaar received the
World Business Award 2006 sponsored by the International Chambers of
Commerce, United Nations Development Program (UNDP) and Prince of Wales
Foundation in recognition of service towards fulfillment of the Millennium
Development Goals, L-Ramp Awards of Excellence 2007 presented by Dr. A.P.J.
Abdul Kalam, Former President of India. Aavishkaar along with social benefit to
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the society aims to provide returns to its investors in the range of 12-15% IRR over
10 year investment horizon. Aavishkaar generally adopts innovative modes of
financing – that facilitate reducing the risk of dilution in promoters’ equity, while
protecting Aavishkaar’s interests in the ventures. The various instruments made
use of normally are: Common equity, CCPS (Compulsorily Convertible Preference
Shares), Mezzanine funding, bridge loans, working capital loans etc.
Investment portfolio of Aavishkaar
Aavishkaar has made 16 investments across industries, which include renewable
energy, waste management, information and communications technology, agro-
based technology, handicrafts, healthcare and rural innovations. The fund’s first
investment was in 2002 - in a Chennai-based firm called Servals Automation that
has developed innovative new products to serve the rural markets. Servals’
‘blockbuster’ product is a stove burner that uses 30% less kerosene than
traditionally used stove burners. One of the fund’s recent investments is in ‘Vortex
Engineering’ that has developed a pioneering cost-effective ATM suited to rural
markets. Vortex, with its’ tie-up with various banks will serve rural markets across
India by rolling out these cash machines.
Aavishkaar’s portfolio companies today have the potential to generate direct
employment for thousands of people in addition to providing value for the end-
beneficiaries.
Investee Portfolio
Aavishkaar has made 22 investments – 17 of which are from AIMVCF, 5 from AGIMDC.
Following are the brief introduction of companies.
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Energy Solutions for the Poor
Servals encourages rural innovations that contribute towards energy self-
sufficiency. Its flagship products include a stove burner that saves up to 27%
kerosene and a straight vegetable oil stove. In recognition of its achievements, the
company has received many awards including the L-Ramp Award for Excellence
in 2007 and the "most energy efficient burner” by the Paraffin Safety Association
of South Africa (PASASA). Aavishkaar invested in to the company in 2002.
Building Transparency and Efficiency
Shree Kamdhenu Electronics Private Limited (SKEPL), a company based in the
town of Vallabh Vidyanagar, Gujarat, India, develops products and systems that
help bridge the technology gap in the dairy industry and make milk-production
more transparent for the farmers involved. Aavishkaar invested into the company
in 2003.
Tide Technocrats Private Limited
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Tide Technocrats operates in the energy space. It supports Carbon Emission
Reduction project development, designs composting facilities for municipal solid
waste management and undertakes biomass assessment for renewable energy
projects. Aavishkaar invested into the company in 2003.
Bringing India's Traditional Arts And Crafts To A Wider Market
Craftsbridge is a venture focused on adding value to the informal handicrafts sector
in India. It aims to do so by introducing design & corporate merchandising to
artisans/vendors and by acting as the 'bridge' between craftsmen and consumers.
Aavishkaar invested into the company in 2004.
Pioneering Language Technologies In India
CK technologies develops affordable bilingual office software aimed at users who
do not speak or write English. Its flagship product is a Bilingual Office Suite called
"Shakti Office”, which has both English and an Indian language (Hindi or Tamil).
The bi-lingual software means that a vast population has the benefits of
computerized systems, such as in court houses, police stations, banks etc.
Aavishkaar invested into the company in 2006.
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Share Microfin Ltd. (SML) is a MFI that aims to grow its client base to 15 million
members and its outstanding portfolio to about INR 16,382 crore by 2012-13. It is
the first MFI in India to obtain a Non Banking Financial Company (Non Deposit)
license and also the first Indian MFI to carry out a microfinance securitization
transaction. SML also provides collateral free loans to Joint Liability Groups.
Aavishkaar Goodwell invested into the company in 2007.
Funds
Aavishkaar Venture Management Services provides investment advice and support
to the following three funds:
AIMVCF (Micro Equity Fund)
Aavishkaar India Micro Venture Capital Fund intends to raise US$ 14 Million for
investment into Micro and Small Enterprises (MSMEs) that have rural and social
focus. With an average ticket size of US$ 50,000 - 500,000, the fund expects to
make 30-35 investments. This fund has been operational since May 2002, and is
registered as a Private Trust under the Indian Trust Act of 1882, and with the
Securities and Exchange Board of India (SEBI).
AGIMDC (Micro Finance Fund)
Aavishkaar Goodwell India Microfinance Development Company Ltd is a US$18
Million fund, raising funds and dedicated to micro finance institutions (MFIs).
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With an average ticked size of US$ 500,000 - 2,000,000, the company expects to
make 15-20 investments. The company has been operational since December 2006,
and is registered as a Global business license company under the Laws of
Mauritius.
BYST Growth Fund
Growth Fund is the first fund launched in year 2007 in India to provide equity like
financing for businesses run by young entrepreneurs from socially disadvantaged
population. With an average ticket size of US$ 10,000 - 250,000, the fund expects
to make 30-35 investments. The fund has been operational since March 2008 and
is registered as a Private Trust under the Indian Trust Act of 1882, and with the
Securities and Exchange Board of India (SEBI).
ICICI VENTURE
ICICI Venture is one of the largest and most successful private equity firms in
India with funds under management in excess of USD 2 billion.
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ICICI Venture, over the years has built an enviable portfolio of companies across
sectors including pharmaceuticals, Information Technology, media, manufacturing,
logistics, textiles, real estate etc thereby building sustainable value.
It has several "firsts" to its credit in the Indian Private Equity industry. Amongst
them are India's first leveraged buyout (Infomedia), the first real estate investment
(Cyber Gateway), the first mezzanine financing for a acquisition (Arch
Pharmalabs) and the first 'royalty-based' structured deal in Pharma Research &
Development (Dr Reddy's).
Following are the different sectors where ICICI venture made investment:-
Banking & financial services
Centurion bank of Punjab
Karvy stock broking ltd
Consumer services
PVR
Deccan Aviation
Tops Securities
Energy
Reliance Petroliam
Kalapataru Power
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Engineering Services
Nagarjuna Construction
Action Construction Equipment
Hospitality
Mass restaurant
Internet
Naukri.com
IT/ITES
Geogmetric software
Infowavz
Rel Q
Bill Junction/Techprocess
Life Science
Arch Pharmalabs
Malladi Drugs
Bharat Biotech
I-Ven Pharma (Dr reddy’s labs)
RFCL
Metropolis
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Logistics
Gateway Distri parks
Manufacturing
Samtel color
Tebma Shipyards Ltd
ACE Refractories
Media
Infomedia India
TV Today(Aaj tak)
Miditech
Real Estate
I-Ven Reality
I-Ven Township
Integreted township at Tellpur
Jublee Hills Landmark Projects
TSI Business Parks
Corolla Ralty
Retail
Home Solution
Shopper’s stop
Crossword
Pantaloon Retail
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Textiles
Welspan India
Sangam
RECOMMENDATION
As the entrepreneur want to start up there own firm so it is very difficult for
the new entrepreneur for paying the interest. As the interest rate charged by
the venture capitalist is too high.
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As the market is uncertain so it very risky and create problem for the venture
capital firms. Because nobody is trying to come up with IPO and IPO is the
exit rout for venture capitalist
High taxes on emerging sector such as biotechnology, pharma, IT etc… pass
through status means that the income earned by these firms are highly
taxable.
Government equity funds have been widely used to pump prime private
venture capital and reduce imbalances in the allocation of funds across
different financing stages, particularly in beginning the risk profile of seed
and start up firms is generally too high to attract sufficient venture capital.
Most of the foreign firms are doing venturing in India so as to earn profit.
Due to this Indian venture capital firms had lost there identity.
CONCLUSION
Venture capital can play a more innovative and developmental role in developing
country like India. It could help the rehabilitation of sick units through people with
ideas and turnaround management skills. A large number of small enterprises in
India become sick even before the commencement of production. Venture
capitalist could also assist small ancillary units to upgrade their technologies so
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that they could be in line with the developments taking place in their parent
companies.
Yet, another area where VCFs play a significant role in developing countries
is the services sector including tourism,publishing,health care etc. they could also
provide financial assistance to people coming out of the universities, technical
institutes etc. who wish to start their own venture with or without high-tech
content, but involving high risk. This could encourage entrepreneurial spirit. It is
not only the initial funding which is needed from the venture capitalist, but they
should also simultaneously provide management and marketing expertise a real
critical aspect of venture capital in developing countries.VCFs can improve their
effectiveness by setting up venture capital cells in R&D and other scientific
organisation, providing syndicated or consortium financing and acting as business
incubators.
BIBLIOGRAPHY
Financial management by I.M.Pandy (9th Edition)
Financial management by Ravi Kishor (3rd Edition)
WWW.ICVA.comWWW.Aavishkar.comWWW.ICICI venture
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ANNEXURES
VENTURE CAPITAL INVESTMENT BY DIFFERENT INDUSTRY
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23%
12%
7%
7%12%1%
1%
8%
2%
27%
venture capital Investment by Industry
IT&ITES
MANUFECTURING
REAL ESTATE
HEALTHCARE & LIFESCIENCE
BFSI
SHIPPING & LOGISTICS
TRAVEL & LEISUR
ENG &CONSTRUCTION
FOOD &BEVERAGES
OTHERS
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