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Venture Capital Industry in India

There is a tide in the affairs of men, which taken at the flood, leads on tofortune...

And we must take the current when it serves, or lose our ventures."- William Shakespeare

Growth is the process that only happens when the untread is tried and theundone is materialized. For any new venture we undertake there is alwaysapprehension of misses than hitting the bulls eye and this apprehension foryears has curbed the entrepreneurs from innovating and growing. VentureCapital is the conduit for giving the entrepreneurs wings to fly when they are

willing to jump of the cliff.Simply put, Venture Capital is a term coined for the capital required by anentrepreneur to venture into something new, promising and unconventional.Investing in a budding company has always been a risky proportion for anyfinancier. The risk of the business failure and the apprehensions of an alltogether new project clicking weighed down the small entrepreneurs to get thestart-up fund. The Venture Capitalists or the angel investors then came to theforefront with an appetite for risk and willingness to fund the ventures.

How does it work?Venture Capital financing is a process whereby funds are pooled in for a periodof around 10 years and investing it in venture capital undertakings for a periodof 3 to 5 years with an expectation of high returns. To protect the funds of theinvestors against the risk of losses, venture capital fund provides its expertise,undertake advisory function and invest in the patient capital of the undertakingequities. Venture Capital financing had been a popular source of funding inmany countries and served as a lucrative bait to create a similar industry in Indiaas well.

Historical Evolution

The development of the organised venture capital industry in India, as is inexistence today, was slow and belaboured, circumscribed by resourceconstraints resulting from the overall framework of the socialistic economicparadigms. Although funding for new businesses was available from banks andgovernment owned development financial institutions, it was provided as

collateral-based money on project-financing basis, which made it difficult formost new entrepreneurs, especially those who were technology and services

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based, to raise money for their ideas and businesses. Most entrepreneurs had torely on their own financial resources, and those of their families and wellwishers or private financiers to realise their entrepreneurial dreams.

Early Beginnings

In 1972, a committee on Development of Small and Medium Enterpriseshighlighted the need to foster venture capital as a source of funding newentrepreneurs and technology. This resulted in a few incremental steps beingtaken over the next decade-and-a-half to facilitate venture capital funds intoneedy technology oriented small and medium Enterprises (SMEs), namely:

Risk Capital Foundation, sponsored by IFCI, was set-up in 1975 topromote and support new technologies and businesses.

Seed Capital Scheme and the National Equity Scheme were set up byIDBI in 1976.

Programme for Advancement of Commercial Technology (PACT)Scheme was introduced by ICICI in 1985.

These schemes provided some succour to a limited number of SMEs but theactivity of venture capital industrydid not gather momentum due to the

following reasons:

The funding was based on investment evaluation processes that remainedlargely collateral based, rather than being holistic, and the policyframework remained unaltered, without the instruments to injectdynamism in the VC industry.

There was no policy in place to encourage and involve the private sectorin the venture capital activity.

Setting-up of TDICI and Regional Funds: 1987-1994

For all practical purposes, the organised venture capital industry did not exist inIndia till almost 1986. The role of venture capitalists till then was played byindividual investors and development financial institutions. The idea of venturecapital gained momentum after it found mention in the budget of 1986-87.Later, a study was undertaken by the World Bank to examine the possibility ofdeveloping venture capital in the private sector, based on which the Governmentof India took a policy initiative and announced guidelines for venture capitalfunds (VCFs) in India in 1988.Soon many other funds followed. The pioneers of the Indian venture capitalindustry were largely government-owned banks and financial institutions, with

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some contribution from the financial services companies in the private sector.The following VC funds were the pioneers which laid the foundations of IndiasVC industry:

Venture Capital Funds Set Up during 1987-1994

S no. V C Fund Set up by Year Size(million)

1 Venture Capital Fund Scheme IDBI 1987 Rs. 543.6

2 India Investment Fund Grindlays 3i Invest.Services Ltd.

1987 US$ 7.5

3 Venture Capital Unit Scheme I TDICI 1989 Rs. 300

4 Canbank Venture Capital Fund Canbank FinancialServices Ltd.

1989 Rs. 156

5 All Industry Fund Credit CapitalVentureFund (I) Ltd.

1990 Rs. 120.6

6 Second India Investment Fund Grindlays 3i Invest.Services Ltd.

1990 US$ 13.5

7 Venture Capital Unit Scheme II TDICI 1990 Rs. 1000

8 APIDC Venture capital Fund

1990

APIDC Venture

CapitalLtd.

1990 Rs. 135

9 Gujarat Venture Capital Fund Gujarat VentureFinanceLtd.

1990 Rs. 240

10 Fund20th Century Fund 20th Century VentureCapital Corp.Ltd.

1991 Rs. 287

11 Indus Venture Capital Fund I Indus VentureManagementLtd.

1991 Rs. 210

12 IL&FS Venture IL&FS VentureCorporation Ltd.

1991 Rs. 500

13 Venture Capital Unit Scheme III RC&TF Corporation 1991 Rs. 300

14 FB Venture Capital I IFB Venture FinanceLtd.

1992 Rs 100

15 Information Technology Fund Credit CapitalVentureFund (I) Ltd.

1993 Rs 100

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Entry of Foreign Venture Capital Funds: 1995-1998Thereafter, the Government of India issued guidelines in September 1995 foroverseas investment in venture capital in India. For tax-exemption purposes,guidelines were also issued by the Central Board of Direct Taxes (CBDT) and

the investments and flow of foreign currency into and out of India was governedby the Reserve Bank of Indias (RBI) requirements. Further, as a part of its mandate to regulate and to develop the Indian capital markets, the Securitiesand Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds).

Policy Support1999 OnwardsWith globalisation policies and practices resulting in India getting increasinglylinked with the world, the policy framers realised the tremendous potential ofventure capital activity and its resultant impact on the countrys growth.In his

1999 budget speech, the finance minister of India announced that forboosting high-tech sectors and supporting first generation entrepreneurs,there is an acute need for higher investment in venture capital activities.Healso announced that the guidelines for registration of venture capital activitywith the Central Board of Direct Taxes would be harmonized with those forregistration with the Securities and Exchange Board of India (SEBI).The Government of India constituted a SEBI committee headed by K. B.Chandrasekhar to make recommendations to facilitate the growth of VCindustry in India. This committee submitted its report in July 2000 with the

following salient recommendations, all of which were accepted andimplemented:

SEBI should be the nodal regulator for VC funds in India providing asmooth, single window, problem-free regulatory framework for quick andefficient flow of money into VC funds in India.

Tax pass-through status should be granted to all regulatory compliant VCfunds, similar to that which is provided to mutual funds, ensuring that at thepool-level (VC Fund) profits are tax exempt.

Foreign venture capital investors (FVCI) should also be registered withSEBI. This registration should enable them to have the same facilities as theforeign institutional level of easy investments and disinvestments withoutany FIBP/RBI approvals.

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INDUSTRY LIFE CYCLE:

From the industry life cycle we can know in which stage we are standing. On

the basis of this management can make future strategies of their business.

Figure: 4.1 Industry life cycle

The growth of VC in India has four separate phases:

Phase I - Formation of Technology Development and Information Company ofIndia (TDICI) in the 80s and regional funds as GVFL & APIDC in the early

90s.The TDICI may provide financial assistance to venture capital undertakings

which are set up by technocrat entrepreneurs, or technology information and

guidance services.

Phase II - Entry of Foreign Venture Capital funds (VCF) between 1995 -1999

Phase III - (2000 onwards) - VC becomes risk averse and activity declines

Phase IV2004 onwards - Global VCs firms actively investing in India

INTRODUCTION GROWTH