venture cap , regulation & development in india .

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INTRODUCTION Venture capital means funds available for startup

firms and small businesses with exceptional growth potential.

Venture capital is money provided by professionals who

alongside management invest in young, rapidly growing

companies that have the potential to develop into significant

economic contributors.

Venture capitalists raise money from investors and use it tofund businesses with innovative ideas that conventionalmoneylenders such as banks would not touch.


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Venture Economics, defines venture capital as 'providing seed, start-up and first stage

financing' andalso 'funding the expansion of companies that have alreadydemonstrated their business potential but do not yet have accessto the public securities market or to credit oriented institutionalfunding source


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WHAT IS VENTURE CAPITAL It means Venture capital is a form of equity financing especially designed Long term risk

capital to finance high technology projects which involve risk but at the same time ashigh potential for growth.

Definition (VCC) A financing institution which joins an entrepreneur as a co-promoter in a project andshare the risks and rewards of the enterprise

The term venturecapital is understood in many ways.

Venture Capital is a form of "risk capital". In other words, capital that is invested in aproject (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.


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Concepts

Venture Capital Fund: Is a new long term investment

in growth-oriented small/mediumfirms, exploit market

opportunities and capital gains.

Venture Capital Undertaking: Deals in a business which

providing services, production ormanufacture, not listed.

Venture Capital Institution

: Act a financial intermediary bycollecting funds from investors

looking for high potential returnsand giving it to entrepreneurswho need institutional capital


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Features of Venture Capital:

The three primary characteristics ofventure capital funds which may them actsuitable as a source of finance at time of risk are:

(1) It is equity or quasi equity investments; because the investor assumesrisk. There is no security for his investment. Venture capital funds by

participating in the equity capital institutionalize the process of risk taking ..

(2) It is long-term investment : Secondly, venture capital is long-terminvestment involving both money and time. However duration vary because of

type of venture & companys financial regimen.


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3) It is an active from of investment & risk : The most distinguishing feature of Venture Capital is that it

meets the needs of a business wherein the probability of loss isquite high because of the uncertainties associated with theenterprise, but the returns expected are also higher than normal.

The entrepreneur intends to enter into an untrodden field. Thus,

the Venture Capitalist invests in a business where uncertaintieshave yet to be quantified into risks & underlying oppurtunities . VentureCapital is thus termed as high risk, high return capital


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To sum up the features of venture capital generally are, Long time horizon

Financing new and rapidly growing companies;

Purchase of equity shares;

Assist in transformation of innovative technology based ideas

into products and services; and value to company by active

participation;

Assume risks in the expectation of large rewards; and possess a

long-term perspective.


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TYPES OF VENTURE CAPITAL FIRMS Venture Capital can be divided into many different types

according to the characteristics of the shareholders and

sources of investment -- such as private equity firms, banks,

financial institutions, private corporations, the government orinsurance companies.

HOWEVER FOLL0WING Venture forms funds in India can

be classified As..


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:

N THE BASIS OF THE TYPEOF PROMOTERS Financial institutions led by ICICI

ventures, ILFS, etc. Private venturefunds like Indus, etc.

Regional funds: Warburg Pincus, JFElectra (mostly operating out of HongKong).

Regional funds dedicated to India:Draper, Walden, etc.

Offshore funds: Barings, TCW,HSBC, etc.

Corporate ventures: venture capitalsubsidiaries of corporations.

Angels: high net worth individualinvestors.

Merchant bankers and NBFCs whospecialize in "bought out" deals also fundcompanies.

ON THE BASIS OFGEOGRAPHICALFOCUSRegional

Global

ON THE BASIS OFINDUSTRY SPECIALTY IT and IT-enabled services

Software Products (MainlyEnterprise-focused)

Wireless/Telecom/Semiconductor

Banking Media/Entertainment

Bio Technology/BioInformatics

Pharmaceuticals

Contract Manufacturing

Retail


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A venture capitalist(also known as a VC) is a person or investmentfirm that makes venture investments, and these

venture capitalists are expected to bring

managerial and technical expertise as well as

capital to their investments


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Advantages of Venture Capital

Advantages to Investing PublicIt injects long term equity finance which provides a

solid capital base for future growth.

The venture capitalist is a business partner, sharingboth the risks and rewards. Venture capitalists arerewarded by business success and the capital gain &thus VCC representing directors will ensure that the

affairs of the business are conducted prudently

Advantages to PromotersConvincing Efforts required are less compared to those

of entrepreneurs choosing to raise capital through

public issue.


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(Contd..)

GENERAL ADVANTAGES ( capitalist)The venture capitalist also has a network of contacts in many

areas that can add value to the company.The venture capitalist may be capable of providing additionalrounds of funding should it be required to finance growth.Venture capitalists are experienced in the process of preparing

a company for an initial public offering (IPO) of its shares

onto the stock exchanges or overseas stock exchange such as

NASDAQ.

They can also facilitate a trade sale..


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The Investment ProcessDeal Flow Generation

Assessment & SelectionDeal making

Monitoring

Exit


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Development of venture capital In India:framework


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The concept was introduced in India in 1987, whereby

Venture capital was introduced in India in mid eighties

by All India Financial Institutions with the

inauguration of Risk Capital Foundation (RCF)sponsored by IFCI with a view to encourage the

technologists and the professional to promote new

industries

It was operated by Industrial Development Bank ofIndia.In the same year Industrial Credit and InvestmentCorporation ofIndia was also startedventure capitalactivity.

Development In India


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Conti....Consequently the government of India promoted the venture capital during1986-87 by creating a venture capital fund in the context of structural

development and growth of small-scale business enterprises. Since then

several venture capital firms/funds (VCFs) are incorporated by Financial

Institutions (FIs), Public Sector Banks (PSBs), and Private Banks and Private

Financial companies.The Indian Venture Capital Industry (IVCI) is just about a decade old

industry as compared to that in Europe and US. In this short span it has

nurtured close to one thousand ventures, mostly in SME segment and has

supported building technocrat/professionals all through. The VC industry,

through its investment in high growth companies as well as companiesadopting newer technologies backed by first generation entrepreneurs, has

made a substantial contribution to economy. In India, however, the potential

of venture capital investments is yet to be fully realized. There are around

thirty venture capital funds, which have garnered over Rs. 5000 Crores. As of

yet ..


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Indian Private Equity and Venture CapitalAssociation (IVCA)

Indian Private Equity and Venture Capital Association (IVCA)is a member based national organization that representsventure capital and private equity firms, promotes the industrywithin India and throughout the world and encouragesinvestment in high growth companies.

IVCA members comprise venture capital firms, institutional

investors, banks, incubators, corporate advisors, accountants,

lawyers, government bodies, academic institutions and other

service providers to the venture


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STRUCTURE OF VENTURE CAPITALINDUSTRY

The Venture capital firms in India can be categorized into the following groups:

1) All India Developmental Financial Institutions : sponsored Venture Capital Fundspromoted by the all-India development financial institutions such as Technology

Development and Information Company of India Limited(TDICI) by ICICI, Risk Capital

Technology Financial Corporation Limited (RCTCF) by IFCI and Risk Capital Fund by

IDBI.

2) State Finance Corporations sponsored Venture Capital Funds promoted by the state leveldevelopmental financial institutions such as Gujarat Venture Capital Limited

(GVCL) and Andhra Pradesh Industrial Development Corporations Limited (APIDC-VCL)., Punjab Infotech Venture Fund Kerala Venture Capital Fund Pvt Ltd Venture Capital

3) Bank-sponsored Venture Capital Funds promoted by public sector banks such as Canarabank finance and SBI Caps.


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4) Private Venture Capital Funds promoted by the foreign banks/privatesector companies and financial institutions such as Indus VentureCapital Funds, Credit Capital Venture Funds and Grindlays India

Development Fund, IL&FS Trust Company Ltd

5)Those established as an overseas venture capital fund.For example:

- Walden International Investment Group

- HSBC Private Equity management Mauritius Ltd

Conti


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Rules & regulations of VC in India


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AS PERSEBI

AS PER

INCOMETAXACT,1961


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Rules by SEBI:VCF are regulated by the SEBI (Venture Capital Fund)

Regulations, 1996.The following are the various provisions: A venture capital fund may be set up by a company or a trust,

after a certificate of registration is granted by SEBI on anapplication made to it. On receipt of the certificate of registration,it shall be binding on the venture capital fund to abide by the

provisions of the SEBI Act, 1992 .


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Contd

A VCF may raise money from any investor, Indian, Non-resident Indian or

foreign, provided the money accepted from any investor is not less than Rs

5 lakhs. The VCF shall not issue any document or advertisement inviting

offers from the public for subscription of its security or units.

SEBI regulations permit investment by venture capital funds in equity or

equity related instruments of unlisted companies and also in financially

weak and sick industries whose shares are listed or unlisted.

At least 80% of the funds should be invested in venture capital companies

and no other limits are prescribed. SEBI Regulations do not provide for any sectoral restrictions for investment

except investment in companies engaged in financial services.


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Contd

A VCF is not permitted to invest in the equity shares of any companyor institutions providing financial services.

The securities or units issued by a venture capital fund shall not belisted on any recognized stock exchange till the expiry of 4 years fromthe date of issuance .

A Scheme ofVCF set up as a trust shall be wound up :(a) when the period of the scheme if any, is over

(b) If the trustee are of the opinion that the winding up shall be in the

interest of the investors(c) 75% of the investors in the scheme pass a resolution for winding up

or,

(d) If SEBI so directs in the interest of the investors.


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Rules by income tax regulations

The Income Tax Act provides tax exemptions to the VCFsunder Section 10(23FA) subject to compliance with IncomeTax Rules.

Restrict the investment byVCFs only in the equity ofunlisted companies.VCFs are required to hold investment for a minimumperiod of 3 years


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Top cities attracting venture capitalinvestments

CITIES SECTORS

MUMBAI Software services, BPO, Media,Computer graphics, Animations,

Finance & BankingBANGALORE All IP led companies, IT & ITES,

Bio-technology

DELHI Software services, ITES ,

Telecom

CHENNAI IT , Telecom

HYDERABAD IT & ITES, Pharmaceuticals

PUNE Bio-technology, IT , BPO


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Successful Stories of VC


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venture cap , regulation & development in india .

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