Legal issues:-

1. Identify and Implement business legal requirements:-1. Possible legal options for the business structure are identified2. Legislation, codes and regulatory requirements affecting the structure and operations of the business

are determined and procedures are developed and implemented to ensure full compliance

2 . Comply with legislation, codes and regulatory requirements:-

1. Systems are established to ensure the legal rights and responsibilities of the business are identified, and the business is adequately protected, especially in regard to Occupational Health and Safety,business registration and environmental requirements

2. Taxation principles and requirements relative to the business are identified, and procedures are followed to ensure compliance

3. Legal documents are identified, carefully maintained and relevant records are kept and updated to ensure their ongoing security and accessibility

4. Insurance requirements are identified and adequate cover is acquired5. Compliance with legal and regulatory requirements monitored6. Investigations conducted to identify areas of non-compliance with legal and regulatory requirements

and corrective action taken where required

3 . Negotiate and arrange contracts:-

1. Legal advice on contractual rights and obligations is sought, if required, to clarify business liabilities2. Potential products/services are investigated and assessed to determine procurement rights and to

ensure protection of business interests where applicable3. Conditions applying to production/provision of relevant products and services are investigated to ensure

compliance with legal and contractual requirements as required4. Contractual procurement rights for goods and services including contracts with relevant people ,

negotiated and secured as required in accordance with the business plan5. Options for leasing/ownership of business premises identified and contractual arrangements completed

in accordance with the business plan

Venture capitalVenture Capital is a form of "risk capital". In other words, capital that is invested in a project (in this case - a business) where there is a substantial element of risk relating to the future creation of profits and cash flows. Risk capital is invested as shares (equity) rather than as a loan and the investor requires a higher"rate of return" to compensate him for his risk.The main sources of venture capital in the UK are venture capital firms and "business angels" - private investors. Separate Tutor2u revision notes cover the operation of business angels. In these notes, we principally focus on venture capital firms. However, it should be pointed out the attributes that both venture capital firms and business angels look for in potential investments are often very similar.

What is venture capital :-Venture capital provides long-term, committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a business in which he works, turnaround or revitalise a company, venture capital could help do this. Obtaining

venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business . Venture capital is invested in exchange for an equity stake in the business. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" by selling its shareholding when the business is sold to another owner.

If any entrepreneur seeks to finance his project/industry through venture capital, he has the following institutions available to him for providing finance.(i) Venture capital funds sponsored by All India financial institutions word their subsidiaries e.g. venture capital scheme of IDBI, ICICI.(ii) Venture capital funds sponsored by state level financial institutions e.g. Gujarat Venture Finance Limited (GVFL).(iii) Venture capital funds sponsored by public sector banks or their subsidiaries e.g. Confine venture Fund.(iv) Venture capital funds set up by private sector institutions, Indian or 1 Foreign e.g. Indus venture capital Fund, Twentieth Century Finance Company (TCFC), Infrastructural Leasing and Financial Services Limited.

Sources of venture capital

Following are various sources of venture capital :

1. The EXIM Bank. Export-Import Bank of India, set up in 1982, for the purpose of financing, facilitating and promoting international trade of India is the principal institution in the country for co-ordinating working of institutions engaged in financing exports and imports.EXIM Bank has made an entry into venture capital finance by investing in venture capital Fund which is the India Technology venture Unit Scheme promoted by Unit Trust of India (UTI). The objective of the fund is investment in technology sectors like(i) Information technology,(ii) Internet(iii) Media and entertainment(iv) Telecommunications(v) Biotechnology(vi) Pharmaceuticals and (vii) Health careEXIM Bank finances capital expenditure for setting up software development facilities as also working capital, equity investment in overseas ventures, direct equity participation in Indian ventures overseas, export product development etc.

2. IDBI’s venture Fund. IDBI's venture capital Fund (VCF) was started in 1986 with an initial capital of Rs. 10 crore and is a part of technology department of IDBI. It assists high technology, small and medium-sized projects requiring funds between Rs. 0.5 to Rs. 25 million (Rs. 2.5 crore). It is meant primarily to assist projects which promote commercial applications for indigenously developed technology or which adopt imported technology for wider applications. The entrepreneur's project must employ technology

that is new and untested in Indian conditions. Financial assistance is provided right from pilot stage and covers almost upto 90 percent of total cost with promoter's stake to be at least 10 per cent for ventures below Rs. 50 lakhs and 15 per cent for these above Rs. 50 lakhs. The assistance is provided in the form of unsecured loans involving minimum legal formalities. IDBI sanctions funds in various fields like electronics, food products, medical equipment, biotechnology, chemicals, computer software etc.

3. ICICI's venture Fund. Industrial Credit and Investment Corporation of India (ICICI) launched a venture capital scheme in 1986 to encourage new technocrats in the private sector in new fields of technology with inherent risk. It provided finances for the development and commercialization of viable indigenous technologies. Under this scheme, ICICI assists projects, with initial investment not exceeding Rs. 2 crores in the form of equity or conditional loan with flexible charges and repayment period or conventional loans. Two new schemes were launched by ICICI.(i) India Fund(ii) Venture capital Fund (VCF).In 1988, ICICI floated a new company known as "The Technology Development and Information Company of India Limited" (TDICI) to design a separate scheme for financing technology in India.ICICI also established with UTI in 1988, a venture capital fund with Rs. 20 crores subscribed equally by ICICI and UTI to set up technological ventures which have potential for fast growth. In January 1990, ICICI and UTI have jointly launched their second VF for Rs. 100 crores.

4. Technology Development and Information Company of India Limited (TDICI).TDICI is the venture capital fund in India created by government and operated through IDBI. This is also the largest venture capital firm in India. It provides assistance to industries directly or through venture funds which are managed by it for other institutions and venture funds out of its own resources.TDICI accepts and evaluates the promoter's business plan by knowing his management team, nature of his product, market conditions for his product, competition, his investment requirement etc. TDICI goes through the entrepreneur's business plan, if it finds the plan to be good, and the promoter is clear about his business he gets, his work is almost done, otherwise his project is dropped. TDICI also ventures two capital funds of UTI.TDICI's first venture capital fund of Rs. 200 million was subscribed equally by ICICI and UTI. Its second venture fund of Rs. 1000 million has been contributed by UTI, ICICI, other financial institutions, banks, World Bank small, medium and large industrial companies hi India.

5. IFCI's venture capital. IFCI sponsored in 1975 Risk capital Foundation (RCF), which has since been converted into a company known as Risk capital and Technology Finance Corporation Limited (RCTFC) in January 1988. RCTFC provides finance for high- tech projects in the form of venture capital for technology upgradation and development. It also assists these units which have proved to be innovative and possess the requisite technological and managerial strengths. RCTC's assistance is available in the form of short-term conventional loan or interest free conditional loans allowing profit and risk-sharing with project sponsors, or equity participation.

6. Gujrat venture Finance Limited (GVFL). Under venture capital funds sponsored by state level financial institutions is GVFL promoted in July 1990 to provide venture capital for the commercialization of new

technological developments and innovative products. It shares risk of entrepreneurs by providing financial assistance in the form of equity and quasi equity.

7. Punjab Infotech venture Fund (PIVF) is a Rs. 200 million, 10 year, close-ended venture capital Fund conceptualized and funded by the Punjab State Industrial Development Corporation (PSIDC), Punjab State Financial Corporation (PFC), Punjab State Electronics Development & Production Corporation Limited (PSED&PC) and Small Industries Development Bank of India (SIDEI).PIVF is dedicated to investing in companies in the Information Technology Sector within the State of Punjab. The Fund's investments in companies will be through the route of equity and quasi equity instruments. The Fund will seek to achieve its returns through dividends and capital gains at the tune of divestment through an initial public offering or a negotiated sale of its holding.The Fund is being managed by Punjab venture capital Limited, an asset management company, promoted by the PSIDC acting as the nodal agency of the Government of Punjab.

Meaning of Capital StructureCapital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-term finance. The capital structure involves two decisions-

A. Type of securities to be issued is equity shares, preference shares and long term borrowings (Debentures).

B. Relative ratio of securities can be determined by process of capital gearing. On this basis, the companies are divided into two-

Highly geared companies - Those companies whose proportion of equity capitalization is small. Low geared companies - Those companies whose equity capital dominates total capitalization.

For instance - There are two companies A and B. Total capitalization amounts to be USD 200,000 in each case. The ratio of equity capital to total capitalization in company A is USD 50,000, while in company B, ratio of equity capital is USD 150,000 to total capitalization, i.e, in Company A, proportion is 25% and in company B, proportion is 75%. In such cases, company A is considered to be a highly geared company and company B is low geared company.

Factors Determining Capital Structure

Trading on Equity- The word “equity” denotes the ownership of the company. Trading on equity means taking advantage of equity share capital to borrowed funds on reasonable basis. It refers to additional profits that equity shareholders earn because of issuance of debentures and preference shares. It is based on the thought that if the rate of dividend on preference capital and the rate of interest on borrowed capital is lower than the general rate of company’s earnings, equity shareholders are at advantage which means a company should go for a judicious blend of preference shares, equity shares as well as debentures. Trading on equity becomes more important when expectations of shareholders are high.

Degree of control- In a company, it is the directors who are so called elected representatives of equity shareholders. These members have got maximum voting rights in a concern as compared to the preference shareholders and debenture holders. Preference shareholders have reasonably less voting rights while debenture holders have no voting rights. If the company’s management policies are such that they want to retain their voting rights in their hands, the capital structure consists of debenture holders and loans rather than equity shares.

Flexibility of financial plan- In an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plans. Debentures and loans can be refunded back as the time requires. While equity capital cannot be refunded at any point which provides rigidity to plans. Therefore, in order to make the capital structure possible, the company should go for issue of debentures and other loans.

Choice of investors- The company’s policy generally is to have different categories of investors for securities. Therefore, a capital structure should give enough choice to all kind of investors to invest. Bold and adventurous investors generally go for equity shares and loans and debentures are generally raised keeping into mind conscious investors.

Capital market condition- In the lifetime of the company, the market price of the shares has got an important influence. During the depression period, the company’s capital structure generally consists of debentures and loans. While in period of boons and inflation, the company’s capital should consist of share capital generally equity shares.

Period of financing- When company wants to raise finance for short period, it goes for loans from banks and other institutions; while for long period it goes for issue of shares and debentures.

Cost of financing- In a capital structure, the company has to look to the factor of cost when securities are raised. It is seen that debentures at the time of profit earning of company prove to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits.

Stability of sales- An established business which has a growing market and high sales turnover, the company is in position to meet fixed commitments. Interest on debentures has to be paid regardless of profit. Therefore, when sales are high, thereby the profits are high and company is in better position to meet such fixed commitments like interest on debentures and dividends on preference shares. If company is having unstable sales, then the company is not in position to meet fixed obligations. So, equity capital proves to be safe in such cases.

Sizes of a company- Small size business firms capital structure generally consists of loans from banks and retained profits. While on the other hand, big companies having goodwill, stability and an established profit can easily go for issuance of shares and debentures as well as loans and borrowings from financial institutions. The bigger the size, the wider is total capitalization.

There are two main theories of capital structure:-

Trade Off Theory :-

This theory proposes to increase debt levels to balance interest to shield against the cost of financial

distress. The company should keep on borrowing until the marginal tax advantage of additional debt is

offset by the increase in present value of the expected costs of financial distress.

Pecking Order :-

Companies with higher earnings should take less debt, as they require less of funding requirements due

to funding met by the internal resources. A high profit making company can generate internal cash to

fund their new projects.

A balance between risk and return met by capital structure is known as the most favorable capital

structure. A sound capital structure aims at minimizing the risk and maximizing the profit margins. It

maximizes the price of the stock and minimizes the cost of capital at the same time.