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)

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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.

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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:

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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.

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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

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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

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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

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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.

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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.

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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.

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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).

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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.

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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.

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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

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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:

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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

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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

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METHODS OF VENTURE FINANCING

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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.

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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

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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

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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

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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.

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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

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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

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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.

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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

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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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