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Lovekesh Phutane
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VENTURE CAPITAL - January 29th, 2007

VENTURE CAPITAL

Introduction

Venture capital is a growing business of recent origin in the area of industrial financing in India. The various financial institutions set-up in India to promote industries have done commendable work. However, these institutions do not come upto the benefit of risky ventures when they are undertaken by new or relatively unknown entrepreneurs. They contend to give debt finance, mostly in the form of term loan to the promoters and their functioning has been more akin to that of commercial banks. The financial institutions have devised schemes such as seed capital scheme, Risk capital Fund etc., to help new entrepreneurs. However, to evaluate the projects and extend financial assistance they follow the criteria such as safety, security, liquidity and profitability and not potentially. The capital market with its conventional financial instruments/ schemes does not come much to the benefit or risky venture. New institutions such as mutual funds, leasing and hire purchase Company’s have been established as another leasing and hire purchase Company’s have been established as another source of finance to industries. These institutions also do not mitigate the problems of new entrepreneurs who undertake risky and innovative ventures.

India is poised for technological revolution with the emergence of new breed of entrepreneurs with required professional temperament and technical know how. To make the innovative technology of the entrepreneurs a successful business venture, support in all respects and more particularly in the form of financial assistance is all the more essential. This has necessitated the setting up of venture capital financing Division/ companies during the latter part of eighties.

Concept of venture capital

The term ‘Venture Capital’ is understood in many ways. In a narrow sense, if refers to, investment in new and tried enterprises that are lacking a stable record of growth.
In a broader sense, venture capital refers to the commitment of capital as shareholding, for the formulation and setting up of small firms specializing in new ideas or new technologies. It is not merely an injection of funds into a new firm, it is a simultaneous input of skill needed to set up the firm, design its marketing strategy and organize and manage it.
It is an association with successive stages of firm’s development with distinctive types of financing appropriate to each stage of development.

Meaning of Venture Capital

Venture capital is long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth. Venture capitalist pool their resources including managerial abilities to assist new entrepreneur in the early years of the project. Once the project reaches the stage of profitability, they sell their equity holdings at high premium.

Definition of the Venture Capital Company

A venture capital company is defined as “a financing institutions which joints an entrepreneur as a co-promoter in a project and shares the risks and rewards of the enterprise.”

Features of Ventures Capital

Some of the features of venture capital financing are as under:
Venture capital is usually in the form of an equity participation. It may also take the form of convertible debt or long term loan.

Investment is made only in high risk but high growth potential projects. Venture capital is available only for commercialization of new ideas or new technologies and not for enterprises which are engaged in trading, booking, financial services, agency, liaison work or research and development.

Venture capital is joins the entrepreneur as a co-promoter in projects and share the risk and rewards of the enterprise. There is continuous involvement in business after making an investment by the investor.
Once the venture has reached the full potential the venture capitalist disinvests his holding either to the promoters or in the market. The basic objective of investment is not profit but capital appreciation at the time of disinvestments.





Venture capital is not just injection of the money but also an input needed to set-up the firm, design its marketing strategy and organize the manage it. Investment is usually made in small and medium scale enterprises.

Disinvest Mechanism

The objective of venture capitalist’s to sell of the investment made by him at substantial capital gains. The disinvestments options available developed countries are :
Ø Promoter’s buy back.
Ø Public issue
Ø Sale to other venture capital Funds.
Ø Sale in OTC market and
Ø Management buy outs.

In India, the most popular investment route is promoter’s buy back this permits the ownership and control of the promoter in tact. The Risk capital and Technology Finance Corporation, CAN-VCF etc. in India allow promoters to buy back equity of their enterprises.
The public issue would be difficult and expensive since first generation entrepreneurs are not know in the capital market. The option involves high transaction cost and also less feasible for small ventures on account of high listing requirements of the stock exchange.

The OTC Exchange in India has been set up in 1992. It is hoped that OTC1 would provide disinvestments opportunities to venture capital firms. The other investment options such as management buy out or sale to other venture capital fund and not considered appropriate in India.

Scope of Venture Capital

Venture capital may take various forms at different stages of the project. There are four successive stages of development of a project viz. development of a project idea, implementation of the idea, commercial production and marketing and finally large scale investment to exploit the economics of scale and achieve stability. Financial institutions and banks usually start financing the project only at the second or third stage but rarely from the first stage. But venture capitalists provide finance even from the first stage of idea formulation. The various stages in the financing of venture capital are described below:

Development of an Idea: In the initial stage venture capitalists provide seed capital for translating an idea into business proposition. At this stage investigation is made in-depth which normally takes a year or more.
Implementation Stage – Start up Finance : When the firm is set up to manufacture a product or provide a service, start up finance is provided by the venture capitalists. The first and second stage capital is used for full scale manufacturing and further business growth.

Fledging Stage – Additional Finance : In the third stage, the firm has made some headway and entered the stage of manufacturing a product but faces teething problems. It may not be able to generate adequate funds and so additional round of financing is provided to develop the marketing infrastructure.

Establishment Stage – Establishment Finance : At this stage the firm is established in the market and expected to expand at a rapid pace. It needs further financing for expansion and diversification so that it can reap economies of scale and attain stability. At the end of the establishment stage, the firm is listed on the stock exchange and at this point the venture capitalist disinvests their shareholding through available exit routes.

Before investing in small, new or young hi-tech enterprises, the venture capitalist look for percentage of key success factors of a venture capital project. They prefer project that address these problems.

After assessing the viability of projects, the investors decide for what stage they should provide venture capital so that it leads to grater capital appreciation.
All the above stages of finance involve varying degree of risk and venture capital industry, only after analysing such risk, invest in one or more. Hence they specialize in one or more but rarely all.








Nature and Scope

Merchant hankers can assist venture proposals of technocrats, with high technology which are new and high risk, to seek assistance from venture capital funds for technology based industries which contribute significantly to growth process. Public issues are not available or such Greenfield ventures.

Venture capital refers to organize private or institutional financing that can provide substantial amounts of capital mostly through equity purchases and occasionally through debts offerings to help growth oriented firms to develop and succeed. The term venture capital denotes institutional investors that provide equity financing to young businesses and play an active role advising their managements.

Venture capital thrives best where it is not restrictively defined. Both in the U.S.A., the cradle of modern venture capital industry and U.K. where it is relatively advance venture capital as n activity has not been defined. Laying down parameters relating to size of investment, nature of technology and promoter’s background do not really help in promoting venture proposals. Venture capital enables entrepreneurs to actualize scientific ideals and enables inventions. It can contribute as well as benefit from securities market development. Venture capital is a potential source for augmenting the supply of good securities with track record of performance to the stock market which faces shortage of good securities to absorb the savings of the investors. Ventura capital in turn benefits from the rise in market valuation which results from an active secondary market.

VENTURE CAPITAL IN INDIA

Venture capital funds (VCFs) are part of the primary market. There are 35 venture capital funds registered with SEBI apart from one foreign venture capital firm registered with SEBI. Data available for 14 firms indicate that total funds available with them at the end of 1996 was Rs.1402 crores, which Rs.672.85 crores had been invested in 622 projects in 1996. Ventura capital which was originally restricted to risk capital has become now ‘private equity’.


Venture capital represent funds invested in new enterprises which are risky but promise high returns. VCFs finance equity of units which propose to use new technology and are promoted by technical and professional entrepreneurs. They also provide technical, financial and managerial services and help the company to set up a track record.
Once the company meets the listing requirements of OTCEI or stock exchange, VCF can disinvest its shares.

CHARACTERISTICS OF VENTURE CAPITAL

The three primary characteristics of venture capital funds which may them eminently suitable as a source of risk finance are :
(1) that it is equity or quasi equity investments;
(2) it is long-term investment; and
(3) it is an active from of investment.

First, venture capital is equity or quasi equity because the investor assumes risk. There is no security for his investment. Venture capital funds by participating in the equity capital institutionalize the process of risk taking which promotes successful domestic technology development.

Investors of venture capital have no liquidity for a period of time. Venture capitalist or funds hope that the company they are backing will thrive and after five to seven years from making the investment it will be large and profitable enough to sell its shares in the stock market. But a reward is thee for liquidity and waiting. The venture capitalists hope to sell their share for many times what they paid for. If the unit fails the venture capitalists losses everything. The probability distribution of expected returns for most venture capital investment is highly skewed to the right. The success rate is 10-20 percent.

Secondly, venture capital is long-term investment involving both money and time. Finally, venture capital investment involves participation in the management of the company. Venture capitalist participates in the Board and guides the firm on strategic and policy matters. The features of venture capital generally are, 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. These features of venture capital render it eminently suitable as a source of risk capital for domestically developed technologies.
New venture proposals in high technology area are attractive because of the perceived possibility of substantial growth and capital gains. Although venture capital evolved as a method of early sage financing it includes development, expansion and buyout financing for units which are unable to raise funds through normal financing channels. Units in developing countries need funds for financing various stages of development. Such a broad approach would help venture funds to diversify their investment and spread risks.

Origin

The origin of venture capital can be traced to USA in 19th century. After the second world war in 1946. the American Research and Development was formed as first venture organization which financed over 900 companies. Venture capital had been a major contributor in development of the advanced countries like UK, Japan and several European countries.

In USA, the venture capital funds got a boost after the creation of Small Business Investment Company under the Small Business Investment Act in 1958. Venture Capital funds are privately owned and constitute the largest source of equity capital. There are a number of venture capital firms in Greater Boston, San Francisco, New York, Chicago and Dallas. The electronic units in these areas got a start from these firms. The ventures financed were risky but carried more than proportionate promise of high return. The venture capital funds takes a good deal of interest in the units financed by them and assist the companies with several financial, managerial and technical services.

The sources of venture capital in the USA are several. Individuals make venture capital investments directly or indirectly. In direct investment individual or partnership of the individuals appraises the proposal. In the indirect approach, venture capitalist appraises the proposal and presents his evaluation to the investors.

Actually venture capitalist developers venture situations in which to invest. For his trouble, venture capitalist receive 20 to 25 percent of the ultimate profits of the partnership know as carried interest. He also collects an annual fee of 2 percent (of capital lent or invested in equity) to cover costs. Apart from individuals, investors include institutions such as pension funds, life insurance companies and even universities. The institutional investors invest about 10 percent of their portfolio in the venture proposals. Specialist venture capital funds in U.S.A., have about $30 billions on an annual basis to seek-out promising start-ups and take in them. In Japan there are about 55 active venture firms with funds amounting to $ 7 billions (1993). Venture capital funds are also extant in U.K., France and Korea.

SWEAT EQUITY

The concept is based on the conversion of the efforts for sweat put in by promoter into financial terms and counting it as equity. This is achieved by permitting promoters to have stake in the company at par value or even below it. It is a reward to the promoters for the sweat they have put in while setting up the project. Sweat equity concept played a major role for the growth of enterprises funded by venture capital. The entrepreneurs often used to feel that the terms and conditions laid down by the venture capitalist cover only the financial risk and did not compensate the ‘toil and sweat’ put in by the entrepreneur. The concept is likely to usher in a new era of mutual trust between the entrepreneur and venture capitalists.

Vijay Growth Financial Services have allowed the promoters in projects to have a stake in equity at par value while they invested at premium. APIDC-VLC and Gland Pharma’s (manufacturing prefilled syringes) US collaborator would pick up stock at Rs.35 and Rs.25 respectively while promoters of Grand Pharma are given an option to purchase the stock at par.
The sweat equity concept would grow faster if some flexibility is given in restricting the paid-up capital of the company. Elsewhere, it requires only a Board resolution. Promoters in US are often given a choice by venture capital to pick up equity even below par.

SWEAT EQUITY SHARES

The concept of sweat equity has a wider dimension in terms of rewarding intellectual capital contributed in venture. The issue of sweat equity hares by companies was allowed by Companies (Amendment) ordinance, 1999. The amendment does not specify the nature of intellectual property rights or value addition against which sweat equity shares can be issued. SEBI guidelines for issue of sweat equity shares by listed companies are yet to be issued.

VALUATION

The norms for valuation of intellectual property right/sweat in the case of the venture proposal and the extent to which it can be capitalized need to be specified objectively and should not be left to the arbitrary discretion of the company or management.


Credit rating agencies may help in devising appropriate methodology for evaluating sweat/intellectual property right. The evaluation by rating agencies may be made compulsory for companies, which propose to raise monies from capital market within a specific period, say, five years.

DISCLOSURES

Before issue of sweat equity it is necessary that adequate disclosures are made to share holders in terms of its usefulness to the operations of the companies, method of valuation, identified persons to whom it is to be issued and proportion in total equity.

VENTURE CAPITAL FUNDS (VCFS) IN INDIA

To finance venture proposal the Government of India created a venture capital fund to be administered by IDBI. The budget for 1986-87 imposed a research and development levy on all payments made for import of technology. The levy formed the source for funding venture capital fund.

In 1988, a scheme was formulated under which venture capital funds are enable to invest in new companies and be eligible for the concessional treatment of the capital gains available to non-corporate entities. Guidelines relating to their establishment have been issued. SEBI is authority to regulate to their establishment have been issued. SEBI is the authority to regulate this segment of financial services industry.

FORMS OF VENTURE CAPITAL ASSISTANCE

Venture capital in India is available in three forms viz equity, conditional loans and income notes. All venture capital funds (VCFs) in India provide equity upto a maximum participation of 49% of total equity capital of the firm under which the ownership of the firm remains with the entrepreneur.


A conditional loan is repayable in the form of royalty ranging between 2 percent and 15 percent after the venture is able to generate sales and no interest is paid on such loans. Income note has combinational features of conventional and conditional loans. The entrepreneur has to pay interest and royalty on sales at lower rates.

FINANCE FOR DIFFERENT STAGES

VCCs are interested to invest at three stages in a company’s development, (i) start-up, (ii) money to finance and launching of an enterprise, and (iii) growth capital for major expansion of the company. Among these three, the first is most risky but promises high returns. During the second stage VCC helps the entrepreneur develop his company to stage where she/he can secure capital or loans from the various external sources. Finally in growth stage VCC helps the company in major expansion to enjoy the benefits of economies scale.

INVESTMENT IN VENTURE CAPITAL BY BANKS

To encourage the flow of finance for venture capital commercial banks are allowed to invest in venture capital without any limit since April 1999. The monetary and credit policy for the year 1999-2000 provides that the overall ceiling of investment by banks in ordinary shares, convertible debentures of corporate and units of mutual funds which is currently at 5 per cent of their incremental deposits will stand automatically enhanced to the extent of banks’ investments in venture capital. Further, the Monetary and Credit Policy (1999-2000) provides for the inclusion of investment in venture capital under priority sector lending.

EVALUATION OF VENTURE PROPOSAL

Evaluation of the venture proposal is broadly, based on the characteristics of the entrepreneur product, market, managerial skill, and financial consideration. Here, only the entrepreneurial aspect is presented.

Characteristics of Entrepreneur

In India, the five characteristics, emphasized are integrity, urge to grow, commercial orientation, long-term vision, and strategy to stay ahead of competition. Among the advanced countries like USA, Japan and Singapore the five characteristics essential for entrepreneur are sustained and intense efforts, familiarity with the target market and ability to evaluate and handle risk well.

The different in emphasis on the trains of an entrepreneur arises out of economics environment, entrepreneurial development and sources of finance.

Until liberalization in 1992 industry and business were controlled by government through industrial licensing, procedural rules and regulations for establishing industry, and reservation of the industries exclusive for public sector to help government be in commanding heights of the economy. In such a regulated environment entrepreneurial attitudes are not fully developed and entrepreneurs do not have sound business practices. Entrepreneurs have not been able to develop commercial orientation and commitment towards their business.

They have operated too long under state regulation which also insulates them from competition. Protection which does not promote competitiveness is the highest in India among all the 49 countries surveyed by Indo German Investment Promotion Service in 1996. The government sponsored development finance institutions provided easy access to concessional funds. There was no development capital market which allocates funds on the basis of profitability and risk. The availability of funds at concessional rate did not enforce a discipline to perform and e accountable.

On the other hand the entrepreneurs were complacent and negligent with a widespread tendency to default. Venture capital is treated as another source of funds. In such an environment venture capitalist would not come forward to finance venture proposals of entrepreneurs with low motivation and commitment. In advanced countries the economies are open and the entrepreneurs have to face a clear market focus and capable of hard work and risk handling capacity, survival is doubtful let alone operation of enterprises profitably.

The Global Competitiveness Report (1999) published by the World Economic Forum which calculates competitive found that India has no competitive strength. On the overall ranking India comes in near the bottom oat 52 out of 59 countries. India also scores poorly in regard to costs, labour quality, use of infrastructure and management practice, Indian companies and management do not make optimal use of information technology, take a long time to innovate in products and take inordinately long to market products relative to foreign countries. The economy cannot sustain growth unless it is competitive.

The venture capitalist on the other had would like to ensure that the entrepreneurs they choose to finance have integrity, clarity of vision and well articulated strategy to face competition and handle risks. In developed countries these attitudes are widespread.

Venture capital funds follow an elaborate appraisal of the venture proposal which includes the background of the entrepreneur, project, cost, proposed means of finance, projected financial statements, technology, finding of market surveys, management structure and implementation schedule. The project as well as entrepreneur are appraised.

Evaluation of product risk, market risk and technology are undertaken. After financing the venture, monitoring is based on regular flow of information. VCFs have to be consulted on such matters as capital investment, appointment of key personnel and proposals for expansion and diversification. They have their nominees on the boards of assisted concerns.

The venture capitalists would like to disinvest to realize capital gains or to rotate funds to other ventures in need. The reduction of capital gains tax rate to ten per cent and introduction of buy-back should meet the exit problem faced by venture capital firms. Other avenues such as IPOs and sale of holding to another firm are already available promoting the exit of VCF from their investment.

VALUATION

There are no uniform rules for valuing investments by venture capital funds. The different risk periods cannot make comparable valuation in the absence of uniforms rules. They cannot also monitor the performance of the funds periodically. Investors have to wait until the exit period.

GUIDELINES FOR VENTURE CAPITAL FUNDS

The guidelines/ regulations are embodied in a Consultative Paper (XI) dated 13.2.1996 which have been approved by SEBI Board in principle as reported in Press on 3.7.1996. According to the Consultative Paper, Venture Capital investment are essentially equity investments in companies that are not sufficiently mature to access the general public through stock markets, but have sufficiently high growth prospects to compensate for the incremental risk, and where the venture capital investor expects to take an active role. Venture capital investment is defined as a vehicle for enabling pooled investment by a number of investors in equity and equity related securities o companies which will generally be private companies, and whose shares are not quoted on any stock exchange.

Establishment and Structure

Venture capital firms or entries are typically close-ended with a definite chartered life. According tot the guidelines they have the option to establish a venture capital fund either as a trust registered under the Indian Trust Act or as a company incorporated under the Companies Act, 1956. If truest form is chosen, a two tiered structure is considered desirable and necessary in which the trust is distinguished from the asset management company which picks stocks/investments and manages the individual portfolios.

SOURCES OF FUNDS

Venture capital funds should raise resources only from domestic-off-shore institutional investors, corporate bodies and high net worth individuals. Offshore investors have to conform to guidelines covering their investments issued on September 22, 1995.

Investment

Venture capital funds are permitted to invest upto 80 percent of their resources in unlisted companies. They can invest upto 20 percent (earlier it was five percent) of their corpus in the equity of any single company. (Budget 1997–98). VCFs could invest in sick units, turn around companies, research divisions of listed companies and provide loans, but not in non-banking non-finance companies.

Registration

An entry sponsoring a venture capital fund or the funds itself has to apply to SEBI and registration is granted subject to either a trust being formed and a trustee company incorporated or the venture capital company being incorporated. In case of a VCFs asset management company, there are no stipulations regarding minimum net worth. The have to however submit half-yearly results. To avail of tax benefits, the VCFs required to follow CBDT guidelines (July 1995).
Further it was specified that existing VCFs register with SEBI within three months of notification (February 1996). SEBI would have powers for inspection and inquiry into their operations.

EXIT

Pricing of the shares at the time of disinvestments by public issue or general offer of sales by VCF/VCC may be done on the basis of objective criteria like book value, profit earning capacity. The basis of pricing should be disclosed to public. However, venture capital companies as promoters have to meet the lock-in period of three years for unlisted shares. This provision prevents rollover of funds and divesting investment after the company has established itself.

TAX ASPECTS

VCFs/VCCs have been provided complete income tax relaxation (July 1995) and exemption from long-term capital gains tax after they are listed on stock exchanges. Shares have to be held for at least 12 months to enjoy tax exemption. A lock-in period of three years is however applicable for unlisted shares.

The Finance Act, 1995 provided [Section 10 (23 F) of the IT Act] income tax exemption on any income by way of dividends or long-term capital gains of a venture capital fund or a venture capital company from investments made by way of equity shares in a venture proposal. To enjoy tax exemption the venture capital company has to obtain approval and satisfy prescribed conditions.
The Central Board of Direct Taxes (CBDT) issued guidelines, on 18-7-1995 specifying that the prescribed authority for approval for exemption under Section 10 (23F) of Income Tax Act is Director of Income Tax (Exemption). The condition for approval are:

Ø it is registered with the SEBI (guidelines of 13.2.1996 discussed below);
Ø it invests 80 percent of its total monies by acquiring equity shares of venture capital undertakings;
Ø it invest 80 percent of its total paid-up capital in acquiring equity share of the venture capital undertakings;
Ø it shall not invest more than 20 percent (Budget for 1997-8 raised it from 5 to 20 percent.)
Ø it shall not invest more than 40 percent in the equity capital of one venture undertakings;
Ø it shall maintain books of account, and submit audited accounts to the Director, Income Tax (Exemption).

Operations of VCFs

Venture Capital funds have been clamoring for a widening of the definition fro high technology and small/new entrepreneur to provide of long-term growth capital. In 1994 IDBI shifted the focus to less technology oriented ventures. If the definition of venture capital is widened as suggested by the industry, the diving line between venture capital and project finance would become very thin.

DIMENSIONS OF VENTURE CAPITAL

Venture capital is associated with successive stage of a firm’s development with distinctive types of financing, appropriate to each stage of development. Thus, there are four stages of a firm’s development, viz. development of an idea, start up, fledgling and establishment.

The first stage of development of a firm is development of an idea for delineating precise specification for the new product or services and to establish as business plan. The entrepreneur needs seedling finance and skills for this purpose. Venture capitalist finds this stage as the most hazardous and difficult in view of the fact that majority of the business projects are abandoned at the end of the seedling phase.

Start-up stage is the second stage of the firm’s development. At this stage entrepreneur sets the enterprise to carry into effect the business plan, to manufacture a product or to render a service. In this process of development venture capitalist supplies start-up finance and skills.

In the third phase, the firm has made some headway, entered the stage of manufacturing a product or service, but is facing enormous teething problems. It may not be able to generate adequate internal funds. It may also find its access to external sources of finance very difficult. To get over the problem, the entrepreneur will need a large amount of fledgling finance from the venture capitalist.

In the last stage of the firm’s development when it stabilizes itself and may need, in some cases, establishment finance to exploit opportunities of scale, this is the final injection funds from venture capitalists.
It have been estimated that in the U.S.A. the entire cycle takes between 5 to 10 years.

FUNCTIONS OF VENTURE CAPITALIST

Venture capital is growingly becoming popular in different parts of the world because of the crucial role it plays in fostering industrial development by exploring vast and untapped potentialities and overcoming threats. Venture capitalist plays this role with the help of following major functions:

Venture capitalist provides finance as well as skills to new enterprises and new ventures of existing ones based on high technology innovations. It provides ‘seed capital funds’ to finance innovations even in the pre-start stage. In the development stage that follows the conceptual stage venture capitalist develops a business plan (in partnership with the entrepreneur) which will detail the market opportunity, the product, the development and financial needs. In this crucial stage, the venture capitalist has to assess the intrinsic merits of the technological innovation, ensure that the innovation is directed at a clearly defined market opportunity and satisfied himself that the management team at the helm of affairs is competent enough to achieve the targets of the business plan. Therefore, venture capitalist helps the firm t move to the exploitation stage, i.e., launching of the innovation. While launching the innovation the venture capitalist will seek to establish a time frame for achieving the predetermined development marketing, sales and profit targets.

In each investment, as the venture capitalist assumes absolute risk, his role is not restricted to that of a mere suppliers of funds but that of an active partner with total investment in the assisted projects. Thus, venture capitalist is expected to perform not only the role of a financier but also a skilled faceted intermediary supplying a broad spectrum of specialist services – technical, commercial, managerial, financial and entrepreneurial.

Venture capitalist fills the gap in the owner’s funds in relation to the quantum of equity required to support the successful launching of a new business or the optimum scale of operations of an existing business. It acts as a trigger in launching new business and as a catalyst in stimulating existing firms to achieve optimum performance.

Venture capitalist’s job extends even as far as to see that the firm has proper and adequate commercial banking receivable financing.

Venture capitalist assists the entrepreneurs in locating, interviewing and employing outstanding corporate achievers to professionalism the firm.

PRESENT STATE OF VENTURE CAPITAL IN INTERNATIONAL AREA.

The natural birth place of venture capital in the U.S.A. The development of the venture capital industry there has taken place over quite a long period. Venture capital industry in its present form started in 1949 – the year of the formation in Boston of the American Research and Development Corporation. The legislation used to spur venture capital was ‘Small Business Investment Companies’ with tax advantage and government loan money. By 1962, there were 585 such companies with 205 millions in capital between them. However, these companies ran into difficulties due to lack of understanding of venture capital principles on the part of the management land their inexperience. In the appropriate government legislation also contributed to the failures.

Learning from the experience of 60’s new venture capital companies were formed which were better structured and organized in 70’s. These were the years when venture capitalist became more involved in development financing both for their portfolios and for new investment. The pool of capital employed which stood at Rs.2.5 billions in 1975 surged significantly to $ 7.6 billions by the end of 1982 due to the tax reduction in 1978. In 1988 there were 587 active capital firms, of which 200 formed the core of the industry. There were $24.1 billion in funds under the management. The buoyancy in American venture capital activity was due to abundant technological opportunities for the creation and commercialization of new goods and services, freedom of foreign investment in the U.S.A. large potential gains associated with equity and management participation in high technology ventures and tax relief.

The most important features of American venture capitalist is that they are totally involved with firms based on high technological innovation right from the stage of conception of business ideas to the final stage of their establishment. They provide, in addition to risk capital, managerial, commercial, technical, financial and entrepreneurial services so as to enable the firm to achieve optimum performance. They are almost a full-fledged partner in the business along with the entrepreneur, sharing the risk and added value created in the process.

In the U.K., venture capital activity flourished in the years, since 1980. There were only 10 companies in the market supplying venture capital. In 1987 Britain had 140 such companies with total investments of £ 800 million. The major factors contributing to this phenomenal growth in venture capital activity in Britain were strengthening of the enterprise culture, i.e., public acceptability of being in business of taking risks for oneself, of starting a business, of trying to make a profit and development of the listed securities market.
Both these factors were the outcome of strong government support, the government loan guarantee scheme and business expansion scheme to render fiscal and financial incentives to venture capitalists.

The British venture capital funds have certain special characteristics. They have come into existence to fill a potential gap in the market unfilled by the banks or the various government schemes. That potential is for close involvement in the management of the Company being backed and in the panning and ownership of the company over a period of perhaps 5 to 7 years. Some venture capitalist provide funds even right from the research stage.

VENTURE CAPITAL IN DEVELOPING COUNTRIES

Venture capital as such as has not been a popular source of financing in developing countries. Only a few Asian countries made serious efforts to establish venture capital organization. These VC organizations were usually set up by development banks as subsidiaries or separately managed funds. Besides in some developing counties such as Philippines and Argentina, commercial banks constituted VCs organizations.

However, it is interesting to observe that private sector organizations did not take much interest in setting up venture capital firms until recently. In some countries, VC firm came into existing with the support of International Finance Corporation (IFC) since 1978. For example, IFC played crucial role in setting up SOFINNOVA in Spain, VIBES in Philippines, Brasilpai in Brazil, IPS in Kenya, KDIC in Korea and SEA VI in South East Africa.

In recent years few VC firms have come up in countries such as Korea, Taiwan and Malaysia on the initiative of some private sector institution. In Korea, for example, number of VC firms have been established with the help of Korea Technology Advancement Corporation (KTAC). KTAC is a venture Capital group set up in 1974 with the sole objective of investing in high tech business, especially by commercializing the R&D results from the Korean Advanced instituted for Services and Technology.
Foreign venture Capital firms have not been in existence in developing counties excepting Taiwan which has been able to attract foreign VC firms since the initiation of the venture capital in 1983.

Venture capital organizations in these countries have not been made much headway because of several factors. One such factor is dearth of funds available for funding high risk technology ventures. Another factor contributing to slow growth of VC firms is absence of entrepreneurial approach among development banks and commercial banks. These institutions have also been found lacking flexibility, drive and managerial skills needed for venture financing. Further, inefficient performance of the government, and sponsored VCFs have retarded the growth of venture capital companies. Absence of tax incentives is another crucial factor responsible for slow growth of the companies.
In a number of developing countries including. India tax laws favour debt against equity. Finally, disinvestments factor has hindered the progress of VC firms in developing countries. Investors are attracted towards equity investment only they are assured of making capital games by disposing off equity shares. Unfortunately financial markets in most of the developing countries are not properly developed to provide scope for sales of shares as and when desired by their holders.



VENTURES CAPITAL IN INDIA.

Venture capital as a source of the launch capital either of the American type or the slightly variant (in scope) British type is, by and large, conspicuous by its absence in India. There are, of course, some institutional venture capital funds/ schemes in operation in India. For instance, Industrial Finance Corporation of India set up the Risk Capital Foundation in 1975 with a view to providing special assistance to new entrepreneurs, particularly technologists and professionals for promoting medium-sized industrial projects. Further, with a view to assisting entrepreneurs who have skills but lack finance to bring in the requisite promoter’s contribution, Industrial Development Bank of India (IDBI) introduced two seed capital schemes, viz.,

State financial corporations’ special share capital schemes under which SFCs extend special share capital assistance to projects in the small-scale sector from their special class of share capital contributed jointly by the concerned state Government and IDBI and
IDBI’s own scheme for such assistance (operated mainly through State Industrial Development Corporation / State Financial corporation)_ in respect of medium-sized projects costing upto Rs.2 crores. In 1985 the IDBI introduced venture capital fund scheme to assist industry’s efforts for technological advancements. Most of the ventures assisted by the Bank have been sponsored by professionally qualified entrepreneurs and the process/technology involved a wide range of new and indigenously developed ones.

In 1986, Industrial Credit and Investment Corporation of India (ICICI) also launched a venture capital scheme to encourage new techno crafts in the private sector in new fields of high technology with inherent risk. Under this scheme ICICI assists projects, with initial investment not exceeding Rs.2 crores, in the form of equity or conditional loan with flexible charges and repayment period or conventional loan. Two new fund were launched recently.

The first one called India fund – floated by the International Division of Merrill Lynch with subscription by non-resident Indians living mainly in the UK and Western Europe is managed by the UTI.

The second one is the venture capital fund with an initial capital of Rs.10 crores established in December 1986 by IDBI to provide equity capital for pilot plants attempting commercial applications of indigenous technology and to adapt previously imported technology to wider domestic application.

To undertake the task on a continuous and systematic basis, the Industrial Credit and Investment Corporation set up with the UTI ‘The Technology Development and Information Company of India Ltd.’ (TDICI) in 1989. TDICT has started providing venture capital, R & D funds and technical and managerial services including Technology and Information. The ICICI also established in 1988 with UTI ‘venture capital fund’ with Rs.20 crores, subscribed equally by ICICI and UTI. The fund is being used for providing assistance mainly in the form of equity, conditional loans and convertible debenture, to set up technological ventures which have potential for fast growth.

In January, 1990 ICICI and UTI have jointly launched their second venture fund for Rs.100 crores. It is interesting to note that the commonwealth Development Corporation of the U.K. will also be participating in this fund. Among commercial banks, State Bank of India, Canara Bank and Grind lay’s Bank have shown interest in this area. SBI’s merchant banking subsidiary, ‘SBI capital markets invests in the equity shares of new and unknown companies. Canara Bank has also set up a venture capital fund through its subsidiary, viz., (as bank financial Services) Grind lay’s Bank launched India investment fund to provide venture capital assistance to high risk projects.

In July, 1990 The Gujarat Industrial Corporation Ltd., launched a venture capital finance scheme’ through a newly registered subsidiary with the help of the Capital Trust Fund worth Rs.24 crores to cater to projects which will enhance the growth of the national economy. The new subsidiary – Gujarat Venture Finance Ltd. – would financially support the entrepreneur having both indigenous and imported technologies not tried before in the country. This organization would finance venture capital entirely through equity participation.

In private sector a few venture capital funds have been established. One such fund is Indus Venture Capital Fund (IVCF). This venture capital has been set up with a capital of Rs. 21 crore contributed by several Indian and international institutions. The fund provides both equity capital as well as managerial support to entrepreneurs.
The other private venture capital firms set up in India are Credit Capital Venture Fund, Twentieth Century Finance Company and Infrastructure Leasing and Financial Services Ltd.

The above venture capital funds / schemes are essential in the nature of equity assistance funds/schemes. There are no full- fledged individual corporate or institutional venture capitalist in India offering a broad spectrum of multi-faced specialist services like the venture capitalist in the U.S. or U.K. Further, having regards to the mammoth task to be performed by venture capital finance in India, the size of the fund would appear to be too small.




REGULATORY FRAMEWORK FOR VENTURE CAPITAL IN INDIA.

In his budget speech for 1988-89, the finance minister declared that a scheme will be formulated under which Ventures Capital Companies / Funds will be enabled to invest in new companies and be eligible for the concessional treatment of capital gains available to non-corporate entities. Such companies will have to comply with the following guidelines.

The minimum size of a venture capital company would be Rs.10 crore. If it desires to raise fund from the public the promoter’s share shall be less than 10 per cent.
Venture capital assistance should go mainly to enterprises where the risk element is comparatively high due to the technology involved being relatively new, untried or very closely held, and/or the entrepreneur being relatively new and not affluent though otherwise qualified and the size being modest. The assistances should be mainly for equity support though loan support to supplement this may also be given.

Thus, venture capital assistance will be given to those entrepreneurs which satisfy the following parameters :
Total investment not to exceed Rs.10 crores.
New or relatively untried or very closely held or being taken from pilot to commercial state or which incorporate some significant improvement over the existing ones in India.

Relatively new, professionally or technically qualified with inadequate resources or banking to finance the project.
A venture capital is required to invest at least 75 per cent of its funds in venture capital activity. A venture capital is firm can raise funds through pubic issues and/or private placement to finance VCF/VCCs. Foreign equity upto 25 per cent multilateral / international financial organizations, development finance institutes, reputed mutual funds, etc., would be permitted provide these are management neutral and are for medium to long-term investments.

A venture capital fund will be managed by professional such as bankers, managers and administration and persons with adequate experience of industry, finance, accounts etc.

The changed financial and fiscal environment during post liberalization period hold out bright future of venture capital in India. With falling tax rates equity becomes attractive, and promoters want to put in maximum funds. In new companies today. The debt-equity ratio is generally 2:1. The promoter has to compulsorily contribute 25 percent of the projects cost, not just the equity. However because industry is more competitive today promoters are willing to contribute as much as 40 per cent of the project cost. Banks and other finance institutions being risk averse will fund a new venture.

Under the circumstances these entrepreneurs will be left with no option but to resort to venture capital firm, to fill the gap in their contribution to project cost. This is very likely to continue as professional start their contribution to project cost. This is very likely to continue as professional start their own units, ancillarisation takes place and large companies began sourcing their requirement rather than making every thing themselves.

FUTURE OF VENTURE CAPITAL IN INDIA

Rapidly changing economic environment accelerated by the high technology explosion, emerging needs of new generation of entrepreneurs in the process and inadequacy of the existing venture capital funds/schemes are indicative of the tremendous scope for venture capital in India and pointers to the need for the creation of a sound and broad-based venture capital movement India.
There are many entrepreneurs in India with a good project idea but no previous entrepreneurial track record to leverage their firms, handle customers and bankers. Venture capital can open a new window for such entrepreneurs and help them to launch their projects successfully.

With rapid international march of technology, demand for newer technology and products in India has gone up tremendously. the pace of development of new and indigenous technology in the country has been slack in view of the fact that several process developed in laboratories are not commercialized because of unwillingness of people to take entrepreneurial risks, i.e. risk their funds as also undergo the ordeal of marketing the products and process. In such a situation, venture financing assumes more significance. It can act not only act as a financial catalyst but also provide strong impetus for entrepreneurs to develop products involving newer technologies and commercialize them. This will give a fillip to the development of new technology and would go a long way in broadening the industrial base, creation of jobs, provide a thrust to exports and help in the overall enrichment of the economy.

In addition, venture capital will be needed urgently to solve the serious problems of sickness which has plagued many Indian Industries. There are large number o sick companies which offer opportunities for turn-around, either through a change in the product line or use of existing facilities in a different way or in any other manner. What is needed is the supply of equity to persons who have fertile ideas, necessary expertise and competence and who can bring about improvements in some units.

Another type of situation commonly found in our country is where the local group and a multi-national company may be ready to enter into a joint venture but the former does not have sufficient funds to put up its share of the equity and the latter is restricted to a certain percentage. For the personal reasons or because of competition, the local group may not be keen to invite any one in its industry or any major private investor to contribute equity and may prefer a venture capital company, as a less intimately involved and temporary shareholder. Venture capitalists can also lend their expertise and standing to the entrepreneurs.

A large number of smaller units serving as ancillaries to major industrial groups need capital, expertise and contacts of venture capitalist for upgradation of their technology in tune with the demands from the major industrial units. It is generally found that small suppliers are faced with a choice of going out of business, losing their major client, being acquired by the client or obtaining at an exorbitant rate from a source outside the industry. Venture capitalist can help these units and save them from the crisis.

In service sector, which has Immense growth prospects in India, venture capitalists can play significant role in tapping its potentiality to the full. For instance, venture capitalists can provide capital and expertise to organizations selling antique, remodeled jewellery, builders of resort hotels, baby and health care market, retirement homes and small houses.

In view of the above, it will be desirable to establish a separate national venture capital fund tow which the financial institutions and banks can contribute. In scope and content such a national venture capital fund should cover:
(i) all the aspects of venture capital financing in all the three stages of conceptual, developmental an exploitation phases in the process of commercialization of the technological innovation and
(ii) as may of the risk stages-development, manufacturing, marketing, management and growth as possible under Indian Conditions. The fund should offer a comprehensive package of technical, commercial, managerial and financial assistance and services to building entrepreneurs and be a position to offer innovative solutions to the varied problems faced by them in business promotion, transfer and innovation. To this end, the proposed national venture capital fund should have at its command multi-disciplinary technical expertise. The major thrust of this fund should be on the promotion of viable new business in India to take advantage of the on coming high technology revolution and setting up of high growth industries so as to take the Indian economy to commanding heights.

PREREQUISITES TO SUCCESS OF VENTURE CAPITAL IN INDIA.

The success of venture capital in India requires the following;

An entrepreneurial tradition must be more broad based and less family based. Attractive customer opportunities of high-technology type should be created. Tax policies need to be carefully scrutinized to eliminate those provisions which work heavily against the emergence of risk capital.

These has to be some institutional changes which offer the venture capitalist the opportunity to off load the investment. Disinvestments avenue have to be positively encouraged and in this both the government and the securities markets have to play a positive role. The association of venture capital with high technological and investment opportunities must be declined. There is need for venture capital for development of many products and services which are relevant to our country and which can be produced with less domestic technological innovation and smaller domestic markets.




Importance of venture capital

Venture capital is of great practical value to every corporate enterprises in modern times.

I Advantages to Investing Public:

The investing public will be able to reduce risk significantly against unscrupulous management, if the public invest in venture fund who in turn will invest in equity of new business. With their expertise in the field and continuous involvement in the business they would be able to stop malpractices by management.
Investors or have no means to vouch for the reasonableness of the claims made by the promoters about profitability of the business. The venture funds equipped with necessary skills will be able to analyze the prospect of the business.
The investors do not have
any means to ensure that the affairs of the business are conducted prudently. The venture fund having representatives on the Board of Directors of the company would overcome it.

S. No. Key Factors Developed Countries Developing Countries
V I LI NI V I LI NI
1 Management skills of entrepreneur 100 – – – 100 40 – –
2 Management skills of venture capital 14 72 14 – 40 40 40 –
3 Affinity of interests between the both parties 57 20 14 – 40 40 40 –
4 Financial commitment of entrepreneurs 57 29 – 14 60 40 –
5 Projects potential for rapid growth 57 14 29 – 80 40 –
6 Project’s potential to genera above average capital appreciation 72 28 – – 60 60 40 –
7 Project’s potential to generate current income 14 43 29 14 40 20 60 –
8 Availability of tech. Expertise 29 14 – 60 60 20 ––
9 Possibility of exit offered by project 14 72 14 – 40 80 60 –
10 Value of underlying assets 14 72 29 28 – 0 80 –
11 Strength of credit backing 43 14 29 40 60 60 –
12 Involvement of a multilateral institutions (e.g. IC) 14 43 – – – – 60 12

Keys :

VI Absence of this constitutes an insurmountable obstacle for an institution to develop venture capital activities in the countries.
I The presence of this factor constitutes a clear to an incentive to an institution for developing venture capital activities in the countries.
LI The presence of this factor may influence favourable the decisions of an institution for but doe not constitute a decisive factor.
NI Not important


II. Advantages to Promoters
1. The entrepreneur for the success of public issue is required to convince tens of underwriters , brokers and thousand of investors but to obtain venture capital assistance. he will be required to sell his idea to justify the officials of the venture fund.

2. Public issue of equity shares has to be proceeded by a lot of efforts viz. necessary statutory sanctions, underwriting and broker arrangement, publicity of issue etc. The new entrepreneurs find it very difficult to make underwriting arrangements require a great deal of effort. Venture fund assistance would eliminate those efforts by leaving entrepreneurs to concentrate upon bread and butter activities of business.


3. Cost of public issues of equity share often between 10 percent to 15 percent of nominal value of issue of moderate size, which are often even higher for small issues. The company is required, in addition to above, to incur recurring costs for maintenance of share registry cell, stock exchange listing fee, expenditure on printing and posting of annual reports etc. These items of expenditure can be ill afforded by the business when it is new. assistance from venture fund does not require such expenditure.

III. General:

1. A developed venture capital institutional set-up reduces the time between a technological innovation and its commercial exploitation.

2, It helps in developing new processes/products in conductive atmosphere, free from the dead weight of corporate bureaucracy, which helps in exploiting full potential.

3. Venture capital acts as a cushion to support business borrowings, bankers and investors will not lend money with inadequate margin of equity capital.

4. Once venture capital funds start earning profits , it will very easy for them to raise resources from primary capital market in the form of equity and debts. Therefore, the investors would be able to invest in new business through venture funds and, at the same time,, they can directly invest in existing business when venture funds dispose its own holding,. This mechanism will help to channelise investment in new high=tech business of the existing sick business. these business will take-off with the help of finance from venture funds and this would help in increasing productivity, better capacity utilisation.

5. The economy with well developed venture capital networks, induces the entry of large number of technocrafts in industry, help in stablising industries and in creating a new set of trained technocrafts to build and manage medium and large industries, resulting in faster industrial development.

6. A venture capital firm serves as an intermediary between investor looking for high returns for their and entrepreneurs in search needed capital for their start ups.

7. It also paves the way for private sector to share the responsibility with public sector.

INITIATIVE IN INDIA

Indian tradition for VC for industry goes back more than 150 years when many of the managing agency houses acted as venture capitalist providing both finance and management skill to risky projects. It was the managing agency system through which Tata Iron and Steels and era press mills were able to raise equity capital from the investing public. The Tata also initiated a managing agency house, named Investment Corporation of India in 1937 which by acting as venture capitalist, successfully promoted bi-tech enterprises such as enterprises such as CEAT Tyres .

Associated Bearings National Rayon' the early form of venture capital enables the entrepreneurs to raise large amount of funds and yet retain management control. After the mobilizing of managing agency system, the public sector term lending institutions s meet a part of venture capital requirements through seed capital and risk capital for hi-tech industries which were not able to meet promoters contribution. However all these institutions supported only proven and sound technology while technology development remanded largely confirmed to government labs and academic institutions . Many hi-tech industries, thus found it impossible to obtain financial assistance from banks and other financial institutions due to unproven technology conservative attitude, risk awareness and rigid security parameters.

Venture capital's growth in India passed through various stages. In 2973m R.S. Bhatt Committee recommended formation of Rs. 100 crore venture capital fund, the Seventh Five Year Plan emphasis need for developing a system of funding venture capita. The Research and Development Cess Act was enacted in May 1986 which introduced a cess of 5% on all payments made for purchase of technology from abroad. The levy provided the source for the venture capital fund,

United Nations development Programme in 1987 on behalf of Government examined the possibility of developing venture capital in private sector. Technology Policy Implementation Committee in the same year also recommended the same provisions. Formalised venture capita book roots when venture capital guidelines were by Comptroller of Capital Issues in November,1988.

GUIDELINES

The following are the guidelines issued by the Government of India

1. The public sector financial institutions, State Bank of India, scheduled banks, foreign banks and their subsidiaries are eligible for setting the venture capital funds with a minimum size of Rs.10 crore and a debt equity ratio of 1:15 they desire to raise funds from the public, promoters will be required to contribute a minimum of 40 percent of capital. Foreign equity upto 25 percent subject to certain conditions would be permitted.

The guideline provided for Non-Resident Indians investment upto 74 percent on a reportorial basis and 25 percent to 40 percent on non repatriable basis. It should invest 60 percent of its funds in venture capital activity. The balance amount can be invested in new issue of any existing or new company in equity, cumulative convertible performance shares, debenture bonds or any other security approved by controller of Capital issues.

2. The venture capital companies and venture capital funds can be set up as joint venture between stipulated agencies and non institutional. promoters but the equity holding of such programmes should not exceed 20 percent and should not be largest single holder.

3. The venture capital assistance should go to enterprises with a total investment of not more than Rs. 10 crore.

4. The venture capital company (VCC) /Venture Capital Fund (VCF) should be managed by professionsls and should be independent of the parent organization.

5. The VCC/VCF will not be allowed to undertake activities such trading, brooking money market, bills discounting, inter corporate lending. They will be allowed to invest in leasing to the extent 15 percent of the total funds development. The investment on revival of risk units will be treated as a part of venture capital activity.

6. Listing of VCCs/VCF can be according to the prescribed norms and underwriting of issues at the promoter's discretion.

7.A person holding a position of full time chairman/president, chief executive, managing director or executive director/whole time director in a company will not be allowed to hold the same position simultaneously in the VCC/VCF.

8.The venture Capital assistance should be extended to
(i) The enterprise having investment upto Rs. 10 crores in the project.
(ii) The technology involved should be new and untried or it should incorporate significant improvement over the existing technology in India.,
(iii)The promoters should be new, professional or technically qualified with inadequate resources.
(iv)The enterprise should be established in the company form employing professionally qualified person for maintenance accounts.

9. Share practicing at the time of disinvestments by a public issue or general sale sale offer by the company or fund may be done subject to this being calculated an objective criteria and the basis disclosed adequately to the public.

THE INDIAN SCENARIO

Methods of Venture Financing

Venture capital is available in four forms in India :
1. Equity Participation
2. Conventional Loan
3. Conditional Loan

1.Equity Participation: Venture Capital firms participate in equity through direct purchase of shares but their stake does not exceed 49% .These shares are retained by them till the assisted projects making profit. These shares are sole either to the promoter at negotiated price under by back agreement or the public in the secondary market at a profit.

2. Conventional Loan: Under this form of assistance, a lower fixed rate of interest is charged till the assisted units become commercially operational, after which the loan carries normal or higher rate of interest. The loan has to be repaid according to a predetermined schedule of repayment as per terms of loan agreement.

3. Conditional Loan : Under this form of finance, an interest free loan is provided during the implementation period but it has to pay royalty on sales. The loan has to be repaid according to the a pre determined schedule as soon as the company is able to generate sales and income'

At present several venture capital firms are incorporated in India and they are promoted either by all India Financial Institutions like IDBI, ICICI, IFCL, State level financial institutions like Indus venture capital fund. The present venture capital players can be broadly classified into the following four categories.

1. Companies Promoted by all India FIs:
Venture capital Division of IDBI
Risk Capital and technology Finance corporation Ltd., (RCTC)(Subsidiary of IFCI) Technology Development and information Company of India Ltd.(TDICI ),(Promoted by ICICI & UTD)

2.Companies Promoted by State FIs:
Gujarat Venture Finance Ltd. (promoted by GUC)
Andhra Pradesh Industrial Development Corporation Venture Capital Ltd. (Promoted by APIDC)

3. Companies Promoted by Banks:
Can bank venture capital Fund (Promoted by Canfina and Canara Bank)SBI Venture Capital Fund (promoted by SBI caps )Indian Investment Fund (promoted by Grind lays Bank)Infrastructure Leasing (promoted by Central Bank of India )

4. Companies in Private Sector :
Indus Venture Capital Fund (Promoted by Mafatlal and Hindustan Lever )Credit Capital Venture Fund (India) Ltd., 20th century Venture Capital Corporation Ltd., Venture Capital Fund promoted by V.B. Desai & Co.A brief account of major ingredients of Indian venture capital industry is presents here.


1. IDBI Venture Capital Fund

The initial impetus was given by IDBI's Technology Division when venture capital fund was set up in 1986 for encouraging commercial application of indigenously developed technology and adopting imported technology for wider domestic application.

The salient features of the scheme are :

1. Financial assistance under the scheme is available to projects whose requirements range between Rs.5 lakhs and 2.5 crores. The promoters stake should be at least 10% for the venture below Rs. 50 lakhs and 15% for those above Rs. 50 lakhs.

2. Assistance was extended in the form of unsecured loan involving minimum legal formalities. Interest at a confessional rate of 9% is charged during technology development and trial production and 17$ once the product is introduced in the market.

3. The fund extend financial assistance to venture such as chemicals. computer software, electronics. bio-technology, non-conventional energy/food processing, medical equipment etc.

4. The project does not succeed ,IDBI,, can insist on transfer of technology to some other promoter designated by it on mutually agreed terms and conditions. It has assisted 70 projects with a net sanction of Rs.46.80 crores upto March,1993.

2. The Risk capital and Technology FinanceCorporation

The Risk Capital and Technology Finance corporation Ltd., (RCTC) the subsidiary of IFCI provided venture capital through technology - finance and development scheme to meet the specific needs of such technology development. The RCTC , apart from providing assistance in the form of risk capital, is expected to finance high tech projects in the form of venture capital for technology up gradation and development. The assistance is provided in the form of short term conventional loan or interest free conditional loans allowing profit and risk sharing with the project sponsors or equity participation. Through its Technology Finance Development Scheme, it has assisted 23 project committing funds of the order of Rs.13 crores and under venture cap[ital fund scheme, it has assisted 17 projects with a sanction of Rs. 16 crores as on 31st March 1993.




3. Technology Development and Information Company of India Limited (TDIC – 1998).

The venture capital fund was jointly created by Industrial Credit and Investment Corporation of India (ICICI) and Unit Trust of India (UTI) to finance projects of professional technocrats in the small and medium size industries who take initiative in designing and developing indigenous technology in the country. TDIC’s first venture capital fund of Rs.20 crores was subscribed equally by ICICI and UTI under the new Venture Capital Unit Scheme I of UTI. Under the scheme TDICI sanctioned financial support of Rs.20 croes to 40 projects which include computer hardware, computer integrated manufacturing system, tissue culture, chemicals, food and feed technology, environmental engineering etc.

The TDIC’s second venture Fund of Rs. 100 croes has been contributed by UTI, ICICI, other financial institutions, banks, corporate sector etc. By March 31, 1993, TDICI has disbursed Rs. 25.81 crores to 42 companies under scheme I and Rs. 79.29 croes to 79 companies under scheme II in a variety of industries such as computer, electronics, biotechnology, medical, non-conventional energy etc. Many of these projects are set-up by first generation entrepreneurs.

TDICI invests in companies with attractive growth and earnings potential with a view to achieving long terms capital gain. TDICIO involves in seed, start-up and growth stage companies in a wide spectrum of industrial sub-sectors.

The Scheme seeks to assist technocrats involve in developing commercially viable technologies or products, implementing indigenously developed yet untested technologies on commercial scale, and adapting innovative technologies for domestic applications.

The assistance per project may be up to Rs.2 crore in the form of equity and/or conditional loan (with flexible interest rates and repayment period).

The equity in the project would be held for a period of 5-8 years and thereafter sold to the promoter (at a mutually price) or disposed in the secondary market.

During the development phase, the conditional loan would carry no interest; during the post-development phase the interest rate on it would depend on the commercial viability of the project.

4. Gujarat Venture Finance Ltd (GUFL)

The Gujarat Industrial Investment Corporation promoted Gujarat Venture Finance Ltd., the first stage level venture finance company to begin venture finance activities since 1990. It provides financial support to the ventures whose requirements range between 25 lakhs and 2 crores. GUFL provides finance through equity participation and quasi equity instruments. The firm engaged in bio-technology, surgical instruments conservation of energy and good processing industries are covered by GUFL. Total corporation of Rs.24 crores of the fund was co-financed by GIIC, IDBI, state level fiancé corporation, some private corporate and the World Bank.

5. Andhra Pradesh Industrial Development Corporation’s Venture Capital Ltd. (APIDC-VCL).

The APIDL-VCL was launched in June 1990 with a fund of Rs.13.5 crores of which Rs.4.5 crore was contributed by the World Bank, Rs.3 crores by IDBI and Rs.1.5 crore was committed by Andhra Bank. APIDC-VCL has a few proposal for venture capital financing in the sphere of biotechnology and computer software applications. Assistance toe ach venture is in the range of Rs/25 lakhs to Rs.1 crores and does not exceed 49 percent of the total equity of a project. Assistance is normally in the form of equity but depending on the circumstances loans may also be provided.

6.Canara Bank

Canara Bank has set up a venture capital fund called canbank venture capital fund worth Rs.10 crore. It has sanctioned Rs.10 crore to 33 projects on March 1992 in the diverse fields like chemicals, machines, food stuff etc.

7.State Bank of India Capital Markets Ltd. (SBAICAP)

The State Bank of India’s subsidiary SBI Capital Markets Ltd., extend venture capital assistance to technical entrepreneurs who have good technique ability but lack financial strength. The support is by way of either direct subscription or by way of underwriting support to the company. In any case direct participation will not be in excess of 49% of the total paid up capital of the assisted unit. The projects in high priority, thrust areas such as import substitute, high export potential, hi-tech options are preferred. The equity holdings of assisted companies are generally disinvested in a period of three years either by way of sale to public, sale in the OTC exchange of India, sale by private realty or by buy back arrangements with promotes or their nominees. SBICAP as on September 30, 1992 assisted 17 companies with investment of Rs.812 lakhs.

8.Indus Venture Capital Fund

Indus venture capital fund is one of the noteworthy private sector venture companies. It has been promoted with a starting corpus of Rs.21 crores contributed by several Indian and international institutions and companies. Indus venture Management Limited has been entrusted to manage the fund of Indus venture capital fund. It provides equity and management support to the firms. Financial assistance is given to those firms who confine their commercial operations in areas of health care products, electronics and computer technology. Investment strategy of the equity funds is not to invest more that 10% of its corpus in one project and equity stake in a company may be upto 50%. The basic objective is to earn capital gains through equity liquidation after certain reasonable time span.

The leading leasing company, 20th Century Finance Corporation has launched venture capital fund worth Rs.20 crores to cater to the needs of small businessman.

9.Credit Capital Venture Fund Limited

The first private sector venture capital fund called, Credit Capital Venture Fund (CVF) was set up by Credit Capital Corporation Limited (CVF) in April 1989 with an authorized capital of Rs.10 lakhs. Rs.6.5 crore was subscribed by International financial agencies. The CVF went to public in January 1990 to raise Rs.3.5 crore. It provides entrepreneurs who have ideas and ability, but no finance, with equity capital for new green fields projects., It main thrust area would be export oriented industries and technology oriented projects, the presents portfolio of the fund consists of investment in six units worth Rs.25 lakhs. CVF launched a new venture fund of Rs.10 crore called The Information Technology Fund to provide direct equity support to projects in the technology information field .
Present Position

The were 20 venture capital companies in India both in private and public sector in 1994. These companies assisted 350 projects to the tune of Rs.250 crore upto 1993-94 the form of assistance in these projects are follows :

Equity 62%
Convertible debentures 14%
Debt. 24%
Out of the 350 projects assisted 62% belongs to new entrepreneurs.

At the end of 1996, according to the Venture Capital Association of India, 14 of its members had set up 17 funds. They had access to Rs. 1402 crore. A major part of the deployment has been in equities- around 61 per cent of the total investment of Rs. 673 crore. Another 21 per cent was deployed in convertible instruments at 6 per cent in debt. The fast growing software sector has not found favour with venture capital companies. Industrial products and machinery accounted for 29 per cent of the total venture capital investment followed by 13 per cent of the total in consumer related industries, 8 per cent in food processing and only 7 per cent in software and service sector.

Suggestions for the growth of venture capital Funds

Venture capital industry is at the take off stage in India. It can play a catalytic role in the development of entrepreneurship skill that remains unexploited among the young and energetic technocrats and other professionally qualified talents. It can help promote new technology and hi-tech industries, which involve high risk but promises attractive rate of return. In order to ensure success of venture capital in India, the following suggestions are offered:

(i) Exemption/Concession for Capital Gains:
Capital gains law represents a hurdle to the success of venture capital financing. The earnings of the funds depend primarily on the appreciation in stock values. Further, the capital gains may arise only after 3 to 4 years, of investment and that the projects, being in new risky areas, may not even succeed. Capital gains by corporate bodies in India are taxed at a much investment risk and long gestation period this is a deterrent to the development of VCFs.

The benefit of the capital gains, under section 48 of the Act is not significant. Hence, it would be advisable that all long term capital gains earned by VCCs should be exempted from tax or subject to concessional flat rate. Further, capital gains reinvested in new venture should also be exempted from tax. Section 52(E) of the Act should be amended to give effect to this.

(ii) Development of Stock Markets:
Guidelines issued by finance ministry provides for the sale of investment by way of public issue at the price to be decided on the basis of book value and earning capacity. However, this method may not give the best available prices to venture fund as it will not be able to consider future growth potential of the invested company.

One of the major factors which contributed to the success of venture funds in the West is development of secondary and tertiary stock markets. These markets do not have listing requirements and are spread over all important cities and towns in the country. These stock markets provide excellent disinvestments mechanism for venture funds. In India, however, stock market is not developed beyond a few important cities.

Success of venture capital fund depends very much upon profitable disinvestments of the capital contributed by it. In US and UK secondary and tertiary markets helped in accomplishing the above. However, in India, promotion of such maker is not feasible in the prevailing circumstances as such laissez faire policy may attack persons with ulterior motives in the business to the determent of general public. However, stock market operation may be started at man by more big cities where, say, the number of stock exchanges can be increased to 50. Further, permission to transact in unlisted securities with suitable regulation will ensure firsthand contact between venture fund and investors.

(iii) Fiscal Incentives:
Fiscal incentives may be given in the form of lowering the rate of income tax. It can be accomplished by :
(i) Application of provisions applicable to non-corporate entities for taxing long term capital gains.
(ii) An allowance to funds similar to section 80-CC of Income Tax Act, say 20 percent of the investment in new venture which can be allowed as deduction from the income.

(iv) Private Sector Participation

In US and UK where the economy is dominated by private sector, development of venture fund market was possible due to very significant role played by private sector which is often willing to put money in high risk business provided higher returns are expected. The guidelines by finance ministry provide that non- institutional promoter’s share in the capital of venture fund cannot exceed 20 percent of total capital; further they cannot be the single largest equity holders. The private sector, because of this provision, may not like to promote venture fund business.

Promotion of venture funds by private sector, in addition to public financial institution and banks, is recommended as:

Private sector is in advantageous position as compared to financial institutions and banks to provide managerial support to new ventures as leading industrial house have a pool of experienced professional managers in all fields of management viz. marketing, production and finance.
The leading business houses will be able to raise funds from the investing public with relative ease.

(v) Review the Existing Laws

Today’s need is to review the constrains under various laws of the country and resolve the issue that could come in the way of growth of the innovative mode of financing. Suitable exemption should be given from Section 43 A of the companies Act to venture capital finance companies so that they are not required to comply with several provisions of the Act applicable to public limited companies.

Amendment of Section 77 of the Companies Act is required to enable the new venture capital companies to buy back their shares at the time of disinvestments by VC Finance Companies.

Ceiling on interoperate loans and investment as specified in Section 370 and 372 of the companies Act should be relaxed in case of VC Finance Companies and Venture Capital Companies to enable them to invest suitable in newly promoted companies. The only investment available to the VC Finance company for investment is equity shares. This restriction should be relaxed so that VC Finance Company can finance through preferential issues and conditional loans. The scope of VC should not only be confirmed to start up finance but also be broadened to development finance, expansion and growth, buyouts, mergers and amalgamation. The restriction on investment of 80% of the entire funds within a period of 3 years should be removed.

(vi) Limited Partnership

The Practice of the limited partnership as in vogue in UK should be permitted in order to promote integration of object between the managers and contributors for the success of venture capital projects.

(vii) Public Issue through OTCEI

The suggestion of Malagam Committee regarding making the public issue through OTCEI should be implemented in case of certain specified industries.
The initiative on the part of the Government in the direction would see rapid growth of a new breed of venture capital assisted entrepreneurs.




























SEBI Regulations


A venture capital fund means a fund established in the form of a trust or a company including a body corporate and registered under these regulations which-

i. has a dedicated pool of capital,
ii. raised in a manner specified in the regulations, and
iii. invests in venture capital undertaking in accordance with the regulations.

Venture capital undertaking means a domestic company:-

i. whose shares are not listed on a recognized stock exchange in Indian;
ii. which is engaged in the business for providing services, production or manufacture of article or things or does not include such activities or sectors which are specified in the negative list by the Board with the approval of the Central Government by notification in the Official Gazette in this behalf.

Negative List

1. Real Estate
2. Non-banking financial services
3. Gold financing
4. Activities not permitted under industrial policy of Government of India.
5. Any other activity which may be specified by the Board in consultation with Government of India from time to time.”


Associate in relation to venture capital fund means a person:-

i. who, directly or indirectly, by himself, or in combination with relatives, exercises control over the venture capital fund; or
ii. in respect of whom the venture capital fund, directly or indirectly, by itself, or in combination with other persons, exercises control; or
iii. whose director, is also a director, of the venture capital fund.

Equity linked instruments includes instruments convertible into equity shares or share warrants, preference shares, debentures compulsorily convertible into equity.

Investible Funds means corpus of the fund net of expenditure for administration and management of the fund.

Unit means beneficial interest of the investors in the scheme or fund floated by trust or any other securities issued by a company including a body corporate.


Application for grant of certificate

Any company or trust or body corporate proposing to carry on any activity as a venture capital fund must apply to SEBI for grant of a certificate of carrying out venture capital activity in India. An application for grant of certificate must be made in from A and must be accompanied by a non-refundable application fee of Rs 25,000/- payable by bank draft in favor of the Securities and Exchange Board of India at Mumbai. Registration fee for grant of certificate is Rs 500,000.

Eligibility criteria

For the purpose of grant of certificate by SEBI, the following conditions must be satisfied:-

A. If the application is made by a company

1. The main object of the company as per its Memorandum of Association must be the carrying on of the activity of venture capital fund.
2. It is prohibited by its Memorandum and Articles of Association from making an invitation to the public subscribe to its securities.
3. None of its directors or its principal officer or employee is involved in any litigation concerned with the securities market which may have an adverse bearing on the business of the applicant. The directors or the principal officer or employee must not have been at any time convicted for an offence involving moral turpitude or any economic offense and is a fit and proper person to act as director or principal officer or employee of the company.

B. If the application is made by a trust

1. The instrument of trust (Trust Deed) is in the form of a deed and has been duly registered under the provisions of the Indian Registration Act, 1908.
2. The main object of the trust is to carry on the activity of a venture capital fund.
3. None of its trustees or directors of the trustee company, if any, is involved in any litigation connected with the securities market which may have an adverse bearing in the business of the venture capital fund.
4. The directors of its trustee company or the trustees have not at anytime being
Convicted of an offense involving moral turpitude or any economic offense.

In both cases, the applicant must not have already applied for certificate from SEBI or its certificate must not been suspended by SEBI or cancelled by SEBI and the applicant must be a fit and proper person.

Furnishing of information and clarification

SEBI may require the applicant to furnish such further information as it considers necessary for processing the application. An application, which is not complete in all respects, shall be rejected by SEBI. However, before rejecting any application, the applicant will be given an opportunity to make representation before SEBI and to remove any defect in the application within 30 days of the date of receipt of communication from SEBI regarding the defect. SEBI may extend the period of 30 days for up to another 90 days on being satisfied that it is necessary and is equitable to do so.








Procedure for grant of certificate\

If SEBI is satisfied that the application is eligible for grant of certificate, it shall send Intimation to the applicant of its eligibility. On receipt of intimation, the applicant. Must pay to SEBI, registration fee of Rs 500,000 and on the receipt of such fees, SEBI shall grant a certificate of registration in form B.

Conditions of certificate

The certificate granted shall be subject to the following conditions

1. The venture capital fund shall abide by the provisions of the SEBI Act and these regulations.
2. The venture capital fund shall not carry on other activity other than that of a venture capital fund.
3. The venture capital fund shall inform SEBI in writing of any
information or details previously submitted to SEBI which have changed after grant of the certificate.
4. If this formation or details submitted are found to be false or are misleading in any particular manner, suitable penal action can be taken.

After considering any application, if ASEBI is of the opinion that the certificate cannot be granted under law, it may reject the application after giving the applicant a reasonable opportunity of making its representation. The decision of SEBI to reject the application shall be communicated to the applicant within 30 days.

Effect of refusal to grant certificate

Any applicant whose application is rejected cannot carry out any activity as a venture capital fund.








Investment conditions and restrictions

A venture capital fund may raise money from any source, whether Indian, foreign or non resident Indian by way of issue of units. No venture capital fund shall accept any investment from any investor less than Rs500,000. However this condition is not applicable to :-

a. employees or the principal officer or directors of the venture capital fund has been established as a trust
b. the employees of the fund manager or asset management company for the purpose of the se regulations, fund raised means actual money raised from investors for subscribing to the securities of the venture capital fund and includes money that is raised from the author of the trust ( in case the venture capital fund has been established as a trust ) but does not include the paid up capital of the trustee company, if any.

Each scheme launched or fund set up by a venture capital fund shall have firm commitment from the investors for contribution by the venture capital fund.

All investment made or to be made by a venture capital fund shall be subject to the following conditions, namely:-

a. venture capital fund shall disclose the investment strategy at the time of application for registration;
b. venture capital fund shall not invest more than 25% corpus of the fund in one venture capital undertaking ;
c. shall not invest in the associated companies; and
d. venture capital fund shall make investment in the venture capital undertaking as enumerated below:-

i. at least 75% of the investible funds shall be invested in unlisted equity shares or equity linked instruments. However, if the venture capital und seeks avail of benefits under the relevant provisions of the Income Tax Act applicable to a venture capital fund, it shall be required to disinvest from such investments within a period of one year from the Date on which the shares of the venture capital undertaking are listed. In a recognized stock Exchange.
ii. Not more than 25% of the investible fund may be invested by way of:

a. subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed subject to lock-in period of one year;

b. debt or debt instrument of a venture capital undertaking in which the venture capital fund has already made an investment by way of equity.

Prohibition on listing

No venture capital fund shall be entitled to get its securities or units listed on any Recognized stock exchange upto the expiry of three years from the date of issue of Securities or units or units by the venture capital fund.

General obligations and responsibilities

No venture capital fund shall issue any document or advertisemant inviting offers from the public for the subscription of the purchase of any of its securities or units

Private placement

A venture capital fund may raise money only through private placement of its securities or units. The venture capital fund be four issuing any securities or units. Must file with SEBI a placement memorandum.

Placement Memorandum or Subscription Agreement

The venture capital fund must:-

issue a placement memorandum which shall contain detain details of the terms and condition subject to which monies are proposed to be raised from investors; or enter into contribution or subscription agreement with the investors which shall specify the terms and condition subject to which monies are proposed to be raised the venture capital fund must file with the board for information the ,copy of the placement memorandum or copy of the contribution or subscription agreement entered with the investors along with a report of money actually collected from the investor.

The placement memorandum and/or subscription agreement must give the following details:

A. In case the venture capital fund is a trust

1. Details of the trustee or the trustee company and the directors or chief executives of the venture capital fund.
2. the proposed corpus of the fund and the minimum amount to be raised for the fund to be operational.
3. the maximum amount to be raised for each scheme and the provision for refund of monies to investor in the event of non receipt of minimum amount.
4. details of entitlement on the securities including units of venture capital fund for which subscription is being sought.
5. Tax implications that are likely to apply to the investor.
6. Manner of subscription to the units or securities of the Venture Capital Fund.
7. Period of maturity of the Fund.
8. Matter in which the fund is to be wound up.
9. Matter in which the benefits accruing to the investor in the units of the trust are to be distributed.
10. Details of the fund or asset management company if any, and the fees to be paid to such manager.
11. The details about performance of the fund, if any, managed by the Fund Manager investment strategy of the fund any other information specified by the Board


Maintenance of books and records

Every venture capital fund must maintain for a period of 8 years books of accounts, records and documents which must give a true and fair picture of state of affairs of the venture capital fund. The books of accounts, records and document relating to the venture capital fund.
Any of the following reason:-

1. To ensure that the books of accounts records and document are being maintained by the venture capital fund in the manner specified in these regulation .
2. To inspect or investigate into complaints received from investors, clients or any other person on any matter having a bearing on the activity of the venture capital fund .
3. To ascertain that the provision of the SEBI Act and these regulations are being complied with by the venture capital fund.
4. To inspect or investigate suo moto into the affairs of the venture capital fund in the interest of the securities market and the interest of investors.

Notice before inspection or investigation

Before ordering an inspection or investigation, SEBI shall give not less than 10 days. Notice to the venture capital fund. However, where SEBI is satisfied that in the interest of the investors, no such notice need be given, it may by order in writing not give such notice.

Obligation of venture capital fund on inspection or investigation

It shall be the duty of every officer of the venture capital fund in respect of whom an inspection or investigation has been ordered and any other associate person who is in Possession of relevant information pertaining to conduct and affairs of such venture Capital fund including fund manager or asset management company, if any to produce to the investigating or inspecting officer such books, account and other documents in his custody or control and furnish him with such statement and information as the said officer may require for the purpose of the investigation or inspection.

It shall be the duty of every officer of the venture capital fund and any other associate person who is in possession of relevant information pertaining to conduct and affair of the venture capital fund to give to he inspecting or Investigating officer all such assistance and shall extend all such co-operation as may be required in connection with the inspection or investigating and shall furnish such information sought by the inspecting or investigating officer in connection with the inspection or investigation.

The investigating or inspecting officer shall, for the purpose of inspection or investigation, have power to examine on oath and record the statement of any employees, directors or person responsible for or connected with the activities of venture capital fund or any other associates person having relevant information pertaining to such venture capital fund.

The Inspecting or Investigating officer shall, for the purposes of inspection or investigation, have power to obtain authenticated copies of documents, books account of venture capital funds, from any person having control or custody of such documents, books or account.

He inspecting or investigating officer in the course of inspection or investigation shall be entitled to exam or record the statement of any director, trustee, and officer or employee of venture capital fund.

It shall be the duty of director, trustee, officer or employee to reasonably assist the inspecting or investigating officer in connection with the inspection or investigation.

Submission of the report to SEBI

The inspecting or investigating officer shall soon as possible on completion of the inspection submit his inspection or investigation report to SEBI. He may also submit an interim report if so required.

SEBI shall after consideration of inspection or investigation report or the interim report communicate the finding of the inspecting officer to the venture capital fund and give. It an opportunity to make a representation. On receipt of the reply if any, from the venture capital fund, SEBI may call upon the venture capital fund to take such measures as the board may befit in the interest of the securities market or for due compliance with the provision of the SEBI act.

The board may after consideration of the investigation or inspection report and after giving reasonable opportunity of hearing to the venture capital fund or its trustees, directors issue.
Such direction as it deems fit in the interest of securities market or the investors including




Directors in the nature of:-

a. requiring a venture capital fund not to launch new schemes or raise money from investors for a particular period;
b. prohibiting the person concerned from disposing of any of the properties of the fund or scheme acquired in violation of these regulations;
c. requiring the person connected to dispose of the assets of the fund or scheme in a manner as may be specified in the regulation;
d. requiring the person concerned to refund any money or the assets to the concerned investors along with the requisite interest or otherwise, collected under the scheme;
e. prohibiting the person concerned from operating in the capital market or from accessing the capital market for a specified period.

Suspension of certificate

SEBI may suspend, without prejudice to issue of directions or measure as about, the certificate granted to a venture capital fund if the venture capital fund contravenes any of the provision of the SEBI or of the regulation made there under or required by SEBI or false or misleading information or does not submit periodical returns or reports as required by SEBI or does not co-operate with any enquiry inspection or investigation conducted by SEBI or fail to reduce the complaints investor or fail to give a satisfactory reply to SEBI in this behalf.

Cancellation of certificate

SEBI may cancel he certificate granted to venture capital fund where the venture capital fund where the venture capital fund is guilty of fraud or as been convicted of any offence involving moral attitude or where the venture fund has been guilty of repeated default under regulation.

No order of suspension or cancellation shall be made by except after holding an enquiry in accordance with the following procedure:-

For he purpose of holding an enquiry, SEBI may appoint one or more enquiry officer.
The enquiry, officer shall issue to venture capital fund at registered office or principal place of business a notice stating the ground on which the action proposed to be taken and shown cause why such action need not be taken within a period of 14 days from the date of receipt of notice.

The venture capital fund may within 14 days from the date of receipt of such notice, furnish enquiry officer its reply ad make its representation before him a venture capital fund may appear through any person duly authorized by it. He enquiry officer shall after talking into account all relevant facts and circumstance, submit a report to SEBI and recommend penal action, if any, to be taken against the venture capital fund as also the ground on which such action is justified.

On receipt of the report from he enquiry officer ,SEBI shall consider the same and may issue to venture capital fund a shown cause notice as to why such penal action as proposed by enquiry officer or such appropriate action should not be taken against it. The venture capital fund ,within 14 days from the date of receipt of such cause notice sends a reply to SEBI. after considering the reply, if any of the venture capita SEBI shall pass an order as it deems fit.

On and from the data of suspension of certificate, he venture capital fund shall cease to carryon any activity as a venture capital fund during the period of suspension and shall be subject to such direction of SEBI with regards to any records documents securities as may be in its custody or control relating into its activity as a venture capital as SEBI specifies. On and from the date of cancellation of certificate ,the venture capital fund with immediate effect shall cease to carry on activity of he venture capital fund and shall be subject to such direction 0of SEBI with regards to transfer of records documents and securities that may be in its custody or control relating to the activities of the venture capital fund as SEBI may specify.

The order of suspension or cancellation of certificate may be published by SEBI in least two newspaper.

Action against intermediaries

The board may initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration who fails to exercise due diligence in the performance of its function or fails to comply with its obligations under this regulation. However no such certificate of registration shall be suspended or cancelled unless the procedure specified in the regulation applicable to such intermediary is complied with.

Appeal to the central government

Any person aggrieved by an order of the board under these regulation may prefer an appeal to securities appellant tribunal.

Perform from A & from B is given below

From A

From B

From A

First schedule-from

From A
Securities and exchange board of India

(Venture capital funds) regulation ,1996
(see regulation)

Application for grant of certificate of registration as venture capital fund

Securities and exchange board of India

Mittal court, (B) wing ,first floor Nariman point, Mumbai400021

India


Instruction:

This form is meant for use by the company or trust (hereinafter referred to as the applicant ) for application for grant of certificate of Registration as venture capital fund.

The application should complete his form and submit it along with all supporting documents to board at its head office at Mumbai.
This application shall be considered by board provided it is complete in all respect. All answer must be legible.

Information which needs to be supplied in more detail may give on separate sheets which should be attracted to the application form.

The application must be signed and all signatures must be original.

The application must be accompanied by an application fee as specified the second Schedule to these regulation.

1. Name, address of the registered office, address for corresponding telephone number(s), telex number(s), fax number(s), of application and the name of the contact person.
2. Please indicate to which of the following categories he application belongs.

· A company established under the companies act, 1956 (1 of 1956)
· A trust set up under the Indian trust act, 1882 (2 of 1882)

3. Date and place of incorporation or establishment and date of commencement if business (enclosed certificate of incorporation, memorandum and articles of associate or trust deed in terms of which incorporated or established).
4. a. Detail of member of the board of trustee or directors of the trustee company, as the case may be, in case the application has been set up as a trust
b. Details of member of bard of directors of venture capital fund I case the application has been sent up as accompany.
5. Please state whether the applicant, his partner, director or principal officer is involved in any litigation connected with the securities market which has an adverse bearing on business of applicant; or has at any time has been convicted for any moral turpitude or at any time has been found guilty of any economic offence. In case the application is trust, the above information should be provided for the member of the board of trustee or of the above mentioned person connected with the Trustee company .if yes, the details thereof.
6. Please also state whether there has been any instance of violation or non-adherence to the securities laws, code of ethics/conduct, code of business rules, for which the applicant, or its parent or holding company or affiliate may have been subject to economic, or criminal, liability, or suspended
7. Details of asset management company, if any. (enclose copy of agreement with the asset management company).
8. Declaration statement(to be given as below).

We hereby agree and declare that the information supplied in the application, including the attachment sheets, is complete and true.
AND we further agree that, we shall notify the Securities and Exchange Board of India immediately any change in the information provided in the application.
We further agree that, we shall notify the securities and Exchange board of India Act,1992,and the securities and Exchange board of India (venture capital fund) Regulation, 1996,and Government of India guidelines/ instruction as may be announced by the securities and Exchange board of India from time to time.

We further agree that as a condition of registration, we shall abide by such operational instructions/ directives as may be issued by the securities and Exchange board of India from time to time.

For and on behalf of…………………………… (Name of the applicant)

Authorized signatory …………………………...(Name) (Signature)

Place:

Power to call for information

SEBI may at anytime call upon the venture capital fund in respect to any matter relating to its activity as a venture capital fund. Such information must be submitted within the time specified by days to SEBI .

Submission of reports to SEBI

SEBI may at any time call upon the venture capital fund to file such report as it deems fit with regards to the activity carried out by venture capital fund.


Winding- up
A scheme of venture capital fund setup as a trust shall be wound up:-
1. When the period of the scheme as mentioned in the placement memorandum is over; or
2. if, in the opinion of the trustees or the trustee company, it is in the interest of the investors that be wound-up ; or
3. If 75% of the investors in the scheme pass a resolution at a meeting of unit holder Of the scheme that the scheme be wound up; or
4. If SEBI so directs, in the interest of investors.
The venture capital fund setup as a shall be wound up according to provision of the Companies Act, 1956.

A venture capital fund set up as a body corporate shall be wound up in accordance with the provision of the statute under which it is constituted.

The trustees or trustee company of the venture capital fund is set up as a trust or the board of director in the case of the venture capital fund is set up as a company (including body corporate) shall intimate the board and investors of the circumstance leading to the winding up of the fund scheme.

Effect of winding up

On and from the date of intimation of the winding up, o further investment shall be made on behalf of the scheme to be wound up. Within three months from the date of intimation, the assets of the scheme shall be liquidated and the proceeds accruing to the investors in the scheme distributed to them after satisfying all liabilities.

Inspection and investigation

SEBI may appoint one or more person, suo-moto or upon receipt of information or complaint, as inspecting officer for inspection or investigation of securities and exchange board of India (Venture capital funds) Regulation,






1996
Certificate of registration as venture capital fund

I. In exercise of the powers conferred by sub-section (1) of section 12 of the securities
And exchange Board of India Act, 1992, (15 of 1992 ) read with the regulation made
There under, the board hereby grants a certificate of registration to -------------------------
------------------------------------------------as a venture capital fund subject to the
conditions specified in the Act and in the regulations made there under.
II. The Registration Number of the venture capital fund is IN/VC/ /

Date:

Place: MUMBAI

By order
Sd/-

For and on behalf of
Securities and Exchange Board of India

Income Tax benefits
In order to encourage the development of venture capital funds, the income Tax Act, 1961 exempts the income of a venture capital fund from Income Tax.

Income of a venture capital fund [section 10(23FB)] (on and from Financial Year
1999-2000)

Any income of a venture capital fund (VCF ) or a venture capital company ( VCC ) set up to raise funds for investment in a venture capital undertaking ( VCU ) is exempt.

VCC means a company which has been granted a certificate of registration by SEBI and which fulfils the conditions laid down by SEBI with the approval of the Central Government.

VCU means a domestic company whose share are not listed in a recognized stock exchange in India and which is engaged in the business for producing services, production or manufacture of an article or thing but does not include activities or sectors which are specified by SEBI with a approval of the Central Government.
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Re: VENTURE CAPITAL - January 30th, 2007

thanks for ur project u have done good work it is very helpful keep it up
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Re: VENTURE CAPITAL - February 2nd, 2007

hie.. thnks fro ur project it helped me a lot .. if any mre matter or inf on this then do pass it on.... thnxs via mail
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Re: VENTURE CAPITAL - February 5th, 2007

do u have any matter related to venture capital for entrepreneurs and business financing including venture capital finance
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Re: VENTURE CAPITAL - March 21st, 2007

thank you very much , if you have any financial figures please pass them on to me
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Re: VENTURE CAPITAL - March 21st, 2007

hi if u have any more info
do pass it on.... thnxs via mail
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Re: VENTURE CAPITAL - May 28th, 2007

hi ,
a very detailed and good content. thnks for throwing light on VC
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Re: VENTURE CAPITAL - June 27th, 2007

too good stuff

Thanx a lot!!!!1
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Thumbs up Re: VENTURE CAPITAL - March 30th, 2008

tHANK YOU VERY MUCH.......i WAS SEARCHING SOME TOPIC ON vc BUT COULDN'T GET ELSEWHERE !!ONCE AGAIN THANK YOU.
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Re: VENTURE CAPITAL - June 5th, 2008

hiiiiiiiiiiiiiiiiiiiiiiiii
plz do fwd me dis project
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