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
Companys have been established as another leasing and hire purchase Companys 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 firms 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 capitalists to sell of the investment made by him at substantial
capital gains. The disinvestments options available developed countries are :
Promoters buy back.
Public issue
Sale to other venture capital Funds.
Sale in OTC market and
Management buy outs.

In India, the most popular investment route is promoters 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 promoters 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 Pharmas
(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 companys 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 199798). 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:

it is registered with the SEBI (guidelines of 13.2.1996 discussed below);
it invests 80 percent of its total monies by acquiring equity shares of venture capital
undertakings;
it invest 80 percent of its total paid-up capital in acquiring equity share of the venture
capital undertakings;
it shall not invest more than 20 percent (Budget for 1997-8 raised it from 5 to 20 percent.)
it shall not invest more than 40 percent in the equity capital of one venture undertakings;
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 firms development with distinctive
types of financing, appropriate to each stage of development. Thus, there are four stages of a
firms 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 firms 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 firms 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 owners 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 capitalists 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 60s new venture capital companies were formed which
were better structured and organized in 70s. 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 promoters
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
IDBIs 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
industrys 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 lays Bank have shown interest in this area. SBIs 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 lays 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 promoters 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 Projects potential to genera above average capital appreciation 72 28 60 60 40
7 Projects 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. TDICs 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 TDICs 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 fianc corporation, some private corporate and the
World Bank.

5. Andhra Pradesh Industrial Development Corporations 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 Indias 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 promoters 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

Todays 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.