COMPREHENSIVE STUDY OF INDIAN MARKET

6.1 VENTURE CAPITAL: A RISING PHENOMENA

The development of venture capital is a recent miracle in India. It is still in a nascent

stage, and needs advertising efforts as well as policy creativities for a fast growth. India is
one of the primogenital civilizations in the world, and it has always been a nation that
covers up most of the percentage of the population. In this chapter, the researcher has
described the need for venture capital in India in the situation of the importance of small
scale enterprises (SSEs), the structure and growth of the venture capital industry and the
missions and purposes of the venture capital firms (VCFs).

The 60’s: The growing phase

During the mid-1960s, the Indian economy was facing major challenges after successive
monsoon failures, and the people were in need of food aid from abroad and for successive
40 years, the country was being spoken of as one of the „BRIC Four‟ (Brazil, Russia,
India and China)-four vibrant economies projected to make a global mark over the
remaining part of the century.

Government Obligation and the Areas of Concern

Attention then turns to the financial system, with obvious focus on the financial
institutions that support SMEs. Government support for smaller enterprises is identified
as an area of concern.

With the help of the references provided in this chapter, we are about to cover up
assessment of the history, current status and prospects of the VC and private equity
industry in India

Back to the Past: A Lot to Confess

India had always been ruled by various dynasties at different times but the two major
rulers were the Mughals and the British. The Mughal dynasty held power over the
majority of the country between 1570 and 1707 then lost control in most territories.

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British rule spanned nearly two centuries from 1757 until 1947, but nearly a third of the
country was nominally under the control of native princes.

The British Period: A roller-coaster ride

Under the control of the British administration, the country experienced a gem of eco-
political developments. However, the era since the nation became an independent
sovereign state in 1947 has seen a transformation in its economic fortunes.

Post 1947: The Eon of Independent Thoughts

After the Independence in 1947, India adopted a consolidated agenda of planning and set
up a Planning Commission in March 1950. The Commission has verbalized a series of
Five-year Plans. The Commission had classified growth, employment, self-reliance and
social justice as its major objectives (Dutt and Sundharam, 2000, p.241). Although India
firmly believes in mixed economy concepts (Balasubramanyam, 1984),

Unnecessary Interference : The Road Blocker

A lot of analysts suggest that official interference has affected the progress in key areas.
As an example of which Desai (2003) resists that India‟s textile industry which was
considered as the best of the world has been muted by policies that preserve employment
in small scale, low technology firms. India has showed constantly positive growth rates in
the years since 1947often over six per cent per annum (Government of India, 1999-2000).

Other Factors Affecting the Growth Rate

Growth has been affected by the following factors over the past years-

 Monsoon failures
 Social instability

In the case of social instability two major drawbacks were:

 1965-66, during the India-Pakistan conflicts

 1979-80 Post the emergency rule

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Agriculture Sector: The Grass Root of Indian Economy

Traditionally, Indian economy is always been based on agriculture; the share of the
output of this sector in GDP has now calmed at around 30 percent (around half of the
1950 level), while over 60 percent of the labor force is still involved in agriculture (Dutt
and Sundharam, 2000).

The Other Sectors: The Balancing Act

The other two sectors i.e. manufacturing and services sectors make up the balance of
GDP. Strong advances in the services sector have commanded economic growth.

IT Sector: A Star Is Born

Now the Information Technology (IT) sector is internationally popular but prior to 1984,
trade barriers were extensive in the early stages of the Indian IT industry (Dossani and
Kenney, 2002); Indian engineers then had the opportunity to learn about the latest
software techniques and developments from the West.

STPIs: The Prime Plot

IT sector has profited from the activity of the Software Technology Parks of India
(STPI). Established in 1991, the STPI is exclusive to the general rule which certifies that
official agencies in India are rather clumsy and bureaucratic. The STPI has functioned as
a licensing agency while it has also confirmed that a modern IT infrastructure is in place
(notably the availability of broadband) and that suitable fiscal motivations are offered to
firms involved in IT activity.

BPOs: The Boon from the IT sector

The growth in services has been predominantly in business process outsourcing (BPO).
This wide-ranging term is evidently linked with the production in call-centres; however it
also incorporates support for the complex back office operations of investment banks and
major healthcare delivery systems.

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Ample amount of the IT activity is based on low value added services. The nation‟s
overflowing supply of software engineers and its vast pool of English speakers work on
projects that are delivered to clients in the US and elsewhere; this represents a classic
reworking of the supply chain to reduce costs yet maintain quality.

Indian IT Firms: The Genuine Contractors

Indian software firms have a secure market for contract programming work but there is
always a need of little motivation to develop „hard‟ high technology products for the
global market. The expansion in this are also carries a much greater degree of risk.
Therefore the developer has to conduct hypothetical R&D, and also he has to believe that
this investment will result in a worthwhile product that meets the needs of challenging
customers, in both the market i.e. global and domestic.

The Tech Giants: The Major Beneficiaries

Through on-going focus on basic software development and support, firms such as Wipro
and Infosys Technologies have developed speedily and enjoy a world-wide reputation.
Both of these companies are cited on US stock markets and were swapping at high
earnings multiples in 2004. More willingly than moving into the development of „hard‟
technologies, they (and other companies) are now opposing forcefully to win contracts in
the area of management consultancy. As an example of this Infosys had launched a
technology consultancy division and increased its total headcount from 5,500 to around
33,000 over the period 2000-2004.

Indian Dominance in BPOs: Will it continues?

Some reviewers have interrogated “whether India will be able to conserve its
comprehensive supremacy of offshore BPO”. Conversely, Luce and Merchant (Luce, E.
and Merchant, K., Financial Times [FT], 28 January 2004) advocate reasons why India is
well placed to survive any isolationist moves from the western countries.

The Reasons given by them are as follows:

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Size of Cost Saving

The size of cost savings is momentous, and they will remain so because India has the
youngest demographic profile of any big country in the world.

A Range of English Speakers

The stock of good quality, English-speaking graduates keeps wage rise down and
confirms that an elastic workforce is available, many of whom have degrees in
engineering or telecommunications.

India has established a world lead in BPO however the percentage of its workforce
employed in this sector is relatively low and growth can only continue if it is raise, take
the account of US venture capitalists insist that investee companies outsource some of
their IT requirements to India.

The Pharmacy Sector: Another Arc of Indian Dominance

Another business field in which India has drawn the attention of the world leader is the
pharmacy sector take an example of Ranbaxy and Dr. Reddy‟s Lab, these are world-class
pharmaceutical companies that value from an ample supply of graduates in chemistry and
mathematics.

We Also Have the World Leaders

Reliance Industries and the Tata Group are corporations that are regarded among the
world‟s most respected companies, and there are a mass of businesses that compete
globally in the industries which includes cars, motorcycles, cement and steel.

Stock Markets: Just for the Daredevils

The supporters of the optimistic role of stock market development in encouraging the
economic growth include Atje and Jovanovic (1993) and Murinde (1996). Stock Markets
have the potential to assign funds to the most eligible projects by lecturing the problems
of unequal information, ethical threat and opposing selection. Stock markets can also cut
the scope for general failure within a financial system by dipping the dependence upon

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the banking system. Some other reviews regarding the stock markets suggest that they
cheer investment in short-term projects (Stein, 1989) or operate as „casinos‟ that create
extremely instable share prices (Herms and Lensink, 2000; Scholtens, 2000). Singh
(1997, p.774) argues that: „even in developed economies, stock markets do not perform
the monitoring, airing and penalizing role that well‟.

Indian Stock Market: Welcomes the Opportunity Seekers

As far as the Indian Stock market is concern it also have the features alike the others. The
first Indian stock markets were established during British rule in the 19th Century
(Schrader, 1997), and a network of interactions was in place by the 1960s. In spite of its
socialist likings, the post-independence Government was intense to inspire individuals to
invest in shares and the reason being spread the ownership of organizations more broadly.
As a result of this thinking is that the capital structures of smaller initiatives in India are
very similar as compared to large corporations. The Government also enforced a 40 per
cent limit on the ownership of firms (domestic and foreign) wishing to borrow from the
banks; this cheered firms to sell the remaining 60 per cent of shares on the stock markets
(Dossani and Kenney, 2002).

The 90s: The Game Changing Era for Stock Market

The value of shares on the equity markets bred swiftly during the early 1990s, as the
markets perceived a rage of activity. Many companies held a citation on the back of over-
optimistic or fake claims, enticing far higher values than could be warranted by the
central value of the business. As the result of this instability the number of IPOs almost
split from around 1,400 in 1995-96 to 750 in 1996/7. Between the periods of 1997-2004
the number of IPOs has failed significantly, the peak point was 124 IPOs in 2000/2001
and the deepest valley point was 14 IPOs in 2002/3 which could be consider as
negligible. Nevertheless, market capitalization rose quickly after the global collapse in
share prices following the „technology meltdown‟ in the early 2000s. Share values had
almost trebled in value by 2004 but the number of IPOs has not risen at the same rate.

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Trading: Open Up the Knots

Indian bourses have positively made much progress in refining their trading and
clearance practices which is further supported by a tougher regulatory administration.
Trading is transformed to be mechanical and the open uproar system has been eliminated.
For many years, quoted companies inclined to be manufacturing companies that depend
on assets in order to enhance shareholder confidence and to protect additional bank
funding. Regardless of the domestic problems of the mid-1990s and the global despair in
technology stocks afterwards, high-technology firms in India are now stimulated to look
for a listing; the prerequisite for a prevailing profit record has been relaxed and the
process for issuing new shares has been abridged.

Present Standards: Where do we stand?

India as per the market capitalization is standing among the top ten stock markets in the
world and it consist of the largest in relation to the number of registered companies, over
8,000. The investor base is huge something around 40–50 million individuals; yet, a
noticeable fund manager confers that retail involvement of unquoted equities remains
„shockingly low‟ relative to other Asian markets (Milind Barve, cited in Merchant, K.,
FT, 9 December 2003). This situation will change only when individuals observe that the
return on equities surpasses that available on other securities (mainly Government-issued)
resounding less risk. Meanwhile, the foreign investors are progressively prepared to put
in medium-sized companies cited on Indian exchanges (companies with a market
capitalization of less than $US2bn), and they function through a variety of sectors, from
consumer goods and energy to banking and commodities.

The Tier System: Determining the Level of Involvement

First Tier: The Level of Conditions

The first tier stock markets in India have open only limited chances for well-known
businesses to advance long-term capital and subsequent funding. The number of IPOs has
been near to the ground for some years (1997-2004) and as a result of which fund raising
remains restricted to public sector bodies or large corporate. To see whether current

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variations will open up the stock markets for smaller enterprises or provide a path
whereby venture capitalists can exit their investments gainfully and resourcefully.

Second Tier: The Level of Backing up

Second tier stock markets in other countries have broadened the fund raising options of
SMEs and it has also provided an exit route for venture capitalists, this gives smaller
enterprises the chance to meet the requirements for a listing and current profitability is
generally not taken as a requirement.

OTCEI: The Replica of NASDAQ

The Over the Counter Exchange of India (OTCEI) was founded in 1994. It was based on
the model of the NASDAQ market in the US. Similar markets have been in Europe and
other parts of the worlds but their rate of continued existence has been unwarranted. This
experience has been recurred in India.

The inauguration of OCTEI was discouraging and several of the primary participants
proved to be high-profile failures. The market was capably on its last legs for a number of
years after the launch of OCTEI. The position has gradually improved and as on 2005. It
stands at 115 and also some of popular local brands are among the enterprises, for
example Sonora Tiles. Only just the OTCEI has permitted primary stage companies to
trade unpublished securities with the help of its Growth Equity Market (GEM) initiative.
It is very early to scale whether this initiative will be a triumph or a failure, but it is clear
that it precisely directed at enhancing venture capital activity by on condition of an exit
chance for investors.

Private Investors: The Idol of Small Firms

Keeping the formal stock markets aside, private investors in India have a long ritual of
equity investment in smaller initiatives. Actually, Cobham and Subramanium (1998)
proposed that Indian small firms generate equal or sometime even more use of equity
finance than large firms unlike the other parts of the world (Berger and Udell, 1998). The
equity investors are mostly of familiar networks i.e. family, friends and contacts. Still, the

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financiers and their „angel‟ investors do not have the ability to fund businesses with rapid
growth as it carries high levels of risk. Here role of VC become more significant.

VC OR ALTERNATIVE FINANCING: Whom will you prefer?

Venture capitalist cannot be our mate if we are looking for a financer and we have a
small business idea in our mind because venture capital is not for every Tom, Dick, and
Harry. For starters, venture capitalists tend to be very picky about where they invest.

Private Placement, IPO, Vendor Financing,

State Funding, Strategic Alliance, Parent Venture Capital
Company Finance.

Bat Strapping (Factoring, Trade Credit,

Angel Investment, Licensing, Self Funding,
Leasing), Micro Loans, Financing Debt,
Friends, Family, Community Bank.
Sell some Assets, Business Credit Card.

Low High

VCs are looking for a big pool to dump a lot of money into (usually no less/ than $1
million) with the assurance that it will pour even more money right back at them in a
short amount of time (typically3-7 years). The small entrepreneurs just like we are
presuming to be generally planned for a steady growth rate instead of the booming or
sudden success that venture capitalists be likely to gravitate toward. And as the size is
small, we may not be capable to bring up a profit they are looking for in quick enough
time.

So conclusion is that the venture capital is not the right fit for our business and we can
move toward the other options available when it comes to finding capital for a business
of ours size.

6.1.1 Initial Stage Financiers: The Helpers in Need

1. Angel Investors: Straight from Heaven

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The time, when the venture capital funds decline to invest in anything $1 million to $2
million, these informal investors come up with funds. Though, Angels are rich folks who
will provide capital for a start up business. They are usually former entrepreneurs and
business managers who have earned a lot of money from these activities and moreover
there advice can be as beneficial as their financial support. Alternatively angels generally
have a shorter investment limit than VCs and hence they have less easiness for fatalities.

2. Investment Banks: The Adjusting Mechanism

By means of assigning our unregistered securities with qualified investors, an investment

bank or agent has become one of our sources to raise equity for our company.
Nevertheless, one should be conscious of the fact that the fees and expenses related with
this preparation are generally higher as compared to above mentioned. Also the
entrepreneur does not receive any guidance regarding to the business from private unlike
angels but the level of loss tolerance is mostly similar to the angels.

3. IPO: A Pricey Way

Initial public offering (IPO) can be an operative source to raise the capital but in order to
achieve this we have to gain access to public equity markets. While the public markets
provide eye-catching benefits such as high valuations, abundant capital and liquidity
characteristics. The transaction costs are usually higher and the other related legal
expenses linked with public disclosure requirements also lies with it.

6.1.2 The Later Stage Financing: Wrap it up well

1. Bootstrap Financing: Right From the Start Point

To advance groundwork for your business from mark, this method of financing is
proposed. Financial management is vital to start-up this effort. If an entrepreneur has
linked with bootstrap financing it simply means that he/she is building a business from
nothing, which implies there no margin for error in the finance department. The
department has to keep an inflexible account of all transactions.

Two major methods of bootstrap financing involve-:

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Factoring: Taken into Account

In this method cash flow is generated by the means of the sale of your accounts
receivable to a factor at a discounted price for cash.

Trade Credit: Time that Matters

It is a method that is obtainable if one is able to find a vendor who will allow him/her to
order goods on net 30, 60 or 90 day terms. Uncertainty the entrepreneur can sell the
merchandises before the bill comes due. This allows the generation of cash flow without
spending any money.

2. Operational Funds: Simple In and Out Planning

If the person becomes able to reduce the cash flowing out and increase the cash flowing
in funding found in such operations come free of finance charges. Also it can reduce
duties regarding to financing in the coming period and hence the value of business
increases. Time to time operating shows that business process is well planned, it also
shows that optimization is at its best. It encourages the entrepreneur to plan for new
investments and possibilities.

3. Licensing: Permission Granted

This method consists of selling the licenses of non-essential technology the company or
the endowment of limited license to indispensable technology that can be shared. Up-
front fees, access fees, royalties‟ payments can generate revenue during the course of
licensing the firm.

4. Vendor Financing: The Giants Game

This type of financing is just similar to the trade credit related to bootstrap financing.
Building vendor relationships through our trade association and strike deals to offer their
product and pay for it at a date in the near future. What we have to do is just to sell our
product. Perhaps vendors also are keen to configure an arrangement if we need to finance
equipment or supplies just to keep customer relationship with us. Stability should be

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checked before you sign any kind of agreement. One has to keep in mind that several
major providers‟ particular financial companies are here to help you.

5. Self-Funding: Find Out what else you have!

If you don‟t want to be in all this criss-cross just move your eyeballs around and find the
dough of your own and invest it into your business. Apparently it will not be enough for
extra business funding, nevertheless there could be several other piggy banks lying there,
check out your savings, investment portfolio, retirement funds etc. It is always better to
put your money in your idea because you would not have to contract with any other
resource and the return you get on your investment is all yours.

But as matter of fact it also carries several ill fortune and to avoid them, make sure that
you consider the risks involved when you are putting your own resources, Check out
market competition, investment period, chances of getting fruitful returns and above all
your own risk absorbent capabilities.

6. SBIR and STTR: The Promoters of Innovation

The programs like SBIR (Small Business Innovation Research) and STTR (Small
business Technology Transfer) propose reasonable centralized funding in order to
motivate technological innovation and idea. In this manner they provide opportunities for
small businesses.

7. State Funding: Always there to help

Ones failure in funding from the federal government could lead him/her take a look at
what the state is offering. There is a list of associations to state development agencies that
propose a range of allowances and financial assistance for small businesses.

Some Other Sources of Finance: Just Take A Look On Us

There are some other source which are interested in financing new businesses, they all
have their own particular term and conditions which one have to check before the
agreement. We will take a look at each of them in rapid fire.

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Community Banks: Small But Not At Heart

Community banks may be consider as smaller banks and there is probability of them to
have fewer products than others they are so good at building banking relationships. There
flexibility with payment plans and interest rates can also work in their favor.

Microloans: Tip Tap and Top

The range of Microloans varies from hundreds of dollars to hundred thousands of dollars.
Yet Microloans are regarded as a waste of time as the amount is so low as compared to
the others but these can be a actual advantage for a start up business.

Finance Debt: Exclusive to go far

This option of financing can be expensive than purchasing for the business of long run ,
but it may liberate cash in the short term and can also reduce the sum of money one need
to collect.

Friends: Whatever is yours is mine!

When no one come up for help a friend always there. Similarly in case of financing the
new business one can ask his/her friends for any extra money that they would like to
invest. But keep them in confidence that will get better returns and your humble regards.

Family: We are all together

Check out your family tree one more time, perhaps on any branch you will found any
relative who would help you by loaning you some money to keep your business on its
feet. Do not forget to offer them the promise of healthy returns and sufficient shares in
profit.

Strategic Alliance: Unbreakable Bond

To form an alliance find a capable corporation with you will be able to generate funding
from openly in return of milestone payments and royalties. Such partners can also help
research funding, loans and equity investments that will enhance the value of business.

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Sell Some Assets: To gain, something has to be loose

What else one can do arrange some money….. And the idea comes up in the mind “Sell
It”. All you have to do is to look for an interested party to buy your assets i.e. real estate‟s
properties; cars etc. and take back all these on rent if you need to. With this you will be
on the go with cash in your hands and also some assets of more use.

Business Lines of Credit: Support from the Fraternity

Business Lines of Credits offers it funding help to someone with a business that has
positive cash flow and the one who is certified that it will cover its debts. If you fulfill
these requirements then you are qualified to take this service offered by most business
banks and serves as business capital.

Personal Credit Cards: Be Careful while Consuming

Personal credit cards can be a way to finance a business but a risk factor is always lies
here. But one can avoid it with the right approach. The entrepreneur should only
consider for financing for acquiring assets and working capital, never think of doing this
long-term.As the company grow forget clear the records and forget about them.

Business Credit Cards: Familiar to PCC but safer

Business credit cards just like personal credit cards also involve risk but they are regarded
as a safer substitute. The main advantage of such cards is that one can separate the
personal and financial expenses easily and also manage the tax records without a hassle.

6.2 PEST ANALYSIS: Nuisance needs to be taken under control

6.2.1 Political factors: No one bigger than Law & Order

Venture Capital has always been a subtle topic thanks to the high-risk nature of its
investments. It was needed from the government to avoid its harmful effect on the
venture capitalists. As a result of which a range of rules and regulation implied in this
field some of them are mentioned below:

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The Company Act 1956

It is a reproduction of “The Indian Trust Act, 1882” which works subject to whether the
fund is set up as a trust or a company.

RBI: The monetary governance

RBI works along with FIPB in case of an offshore fund. Such funds are allowed under
taken permission of the FIPB during their setting up process India and a clearance from
the RBI for any banishment of income is needed.

The Central Board of Direct Taxation (CBDT): An eagle eye is on you

The CBDT administrates the matters belong to income tax on the progress from VC
funding activity. In India the long term capital gain tax is something nearby 10% and one
can found the applicable sections to VC in Section 10(sub section 23).

Table 6.1

Major regulatory for VC Industry

VC & FVCI

SEBI RBI FIPB TAX

 SEBI  FEMA, 1999  FDI policy  IT Act,

(VCF) 1961
Reg. 1996
 SEBI  Transfer or issue of  Investment  DTAA
(FVCI) security by a person approvals  Singapore
Reg. 2000 resident outside India  Mauritius
regulation 2000  Others

 SEBI  Transfer or issue of  Investment  DTAA

(FVCI security by a person approvals  Singapore

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 ) Reg. resident outside India  Mauritius
2000 regulation 2000  Others

 SCR Act  Press notes

1956

 SEBI
(SASI)
Reg. 1997

 SEBI
(DIP)
guidelines
2000
 SEBI Act,
1992

Some honorable mentions are given below-

1. The amount of minimum investment in a Venture Capital Fund is classified as

from now on no investor will put in less than Rs. 5 lacs and the least possible
quantity of the fund is set to be at least Rs. 5 crores before it start to work.
2. Rate of tax on short term capital gains is increased to 15 per cent from 10%
under Section 111A & Section 115AD.

Investment Criteria: Invest but show up your cards

A new investment criterion which has the following requirements is implemented:-

 There must be a disclosure of investment strategy prior to the investments.

 The maximum investment in single venture capital enterprise is blocked at 25%
and the investor is restricted from investment in the associated companies.

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  The investible funds must be at least 75% that is released to be invested in
unlisted equity shares.
 Also the way of investing the above mentioned investable funds is given in
following manner:
1. The lock-in period is given as one year for the subscription to preliminary public
offer of a venture capital enterprise whose shares are proposed.
2. The venture capital fund has already made an investment by the means of equity
in debt instruments.

Disclosure and Facts: Keep it in Mind if you are an Investors

SEBI: The Security Personal of Investors

The requirement to fill the Placement letter with SEBI is dish out with and as an
alternative the fund will be required to submit a copy of contribution agreement entered
with the investors also mentioning the details of the fund collected, this is implemented in
order to simplify and accelerate the procedure of fund raising. The contents of the
Placement Memorandum are reinforced to provide satisfactory disclosure and
information to investors. SEBI will also advocate appropriate reporting requirement on
their investment activity.

 QIB status: Clearance is must

The VC funds will be qualified to join in the IPO from side to side book building route as
Qualified Institutional Buyer subject to compliance with the SEBI (Venture Capital
Fund) Regulations.

 Moderation in Buyout Code: Level of Conspiracy

The acquirement of shares by the company from the Venture Capital Fund shall be cured
on the same basis just as the acquisition of shares by promoters or companies from the
state level financial institutions and this is going to be released from making an open
offer to others.

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Reserves by Mutual Funds: It could be adjusted

Mutual funds are legalized to invest up to 5% of its amount in the case of open ended
outlines with the intention of increase the resources for domestic venture capital funds
and in the case of close ended schemes it is equipped 10% of its amount. This would
offer an opportunity to small investors to take part in Venture Capital activities over
mutual funds separately from raising the resources for Venture Capital Funds.

Guiding principle of Government of India: Right on the Topmost Place

Rules for Overseas Venture Capital Investment in India outmoded September 20, 1995
will be repealed by the MOF on notification of SEBI Venture Capital Fund Regulations
as per the guidelines of Government of India.

 GUIDELINES FOR OVERSEAS VENTURE CAPITAL INVESTMENT IN

INDIA: Just Look and Follow

The Venture Capital is rapidly growing phenomena in India mainly for the smaller
unlisted companies. Hence the Government has proclaimed a policy governing the
formation of domestic Venture Capital Companies.

A modification has also been carried available in the SEBI Act permitting it to register
and regulate Venture Capital Funds (VCFs) and Venture Capital Companies (VCCs) by
specific regulations.

The Government has definite to permit overseas venture capital investments in India
depending on the following guidelines:

FIPB approval is required for the foreign investment could invest in approved domestic
Venture Capital Companies set up under the new policy. There is no limit to the scope of
foreign input to a domestic venture capital company/ fund.

Therefore an offshore or foreign venture capital company may contribute 100% of the
capital of domestic venture capital fund

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It requires the FIPB authorization for the launch of an asset management company with
foreign investment to manage such funds that is subject to the existing rules for foreign
investment in non-bank financial services companies.

1. The FIBP approval is not needed further process. Such investments will be limited
only by the common limits related to venture capital companies such as the
following.-
a) The least lock-in period is set to be of three years for all such investments.
b) It is given that both the above mentioned shall
invest only in private companies and their investment shall be restricted to 40% of
the paid up capital of the company. The relevant equity investment limits may
perhaps be in force from time to time related to areas held in reserve for the Small
Scale Sector.
c) The Guideline Mentioned the limit for VCF/VCC and that shall not exceed 20%
of the paid- up amount of the domestic VCF/VCC in any single company.
2. Section10(23F) of the Income Tax Act, 1961

Tax discharge offered to domestic VCFs and VCCs under this act will also be
stretched to domestic VCFs and VCCs which interest overseas venture capital
investments only if these VCFs/VCCs conform to the guidelines pertinent
for domestic VCFs/VCCs.

Note-VCF/VCC would be within its rights to invest in any sector if it prepared to

sacrifice the Tax exemption

3. VCFs/VCCs will be answerable to tax as per the normal rates valid to foreign
investors on income paid to offshore investors from Indian.
4. There is provision for the offshore investors that they can invest directly in the
equity of unlisted Indian companies without going by the means of a local
VCF/VCC. Still, each investment will be treated as a distinct act of foreign
investment as far as such cases are concern and it will require distinct approval as
required for the norms.

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  Entry and Exit for foreign VC firm: a Pressure Free Task

Foreign Venture Capital Investors shall be allowed to invest on an instinctive way inside
the complete sectorial upper limit of foreign investment if it registered with SEBI under
Annexure III of Statement of Industrial Policy without any approval from FIPB. Further,
FVCIs registered with SEBI be about to be allowed a general permission from the
exchange control angle for inflow and outflow of funds. RBI approval is not necessary
for pricing but there would be ex-post reporting requirement for the amount transacted.

DTAT: The Amusement Ride

The projected amendment does not harm foreign funds which are investing directly into
Indian portfolio companies. These types of funds generally have been set up in tax
neutral jurisdictions the tax exemption on capital gains tax under the Double Tax
Avoidance Agreements is a pleasing thing for them.

Controller of Capital Issue: The Serious Checker

Assessing of the capital issue was hooked on Controller of Capital Issues (CCI)
regulations before being liberated. Hence several of the issues were left to be under-
priced and small companies avoided from BSE/NSE register.

FREEDOM IN IPO RULES: Relief is given

The SEBI has given a fair bit of freedom in its rules concerning the IPO by a Venture
Capital company. The condition such as the necessity of having three years track record
should be dropped for a VC company so that they would generate resources nearby.

Taxes on evolving sector: Pay and Develop

In the Union Budget 2007, Government planned to bound pass-through rank to VCFs
investing in nine areas. These nine areas are as follows-

 Biotechnology
 Nanotechnology
 R&D for pharmacy sectors and agriculture

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  Dairy industry
 Poultry industry and
 Production of bio-fuels

Liberalization: Breath Freely, Grow Freely

India has been displaying amazing growth in the economy in the past 10 to 12 years after
the arrival of liberalization. The government is encouraging growth inability,
consumption of available and acquired resources which further results in
entrepreneurship development. They had done so by relaxing the rules regarding venture
capital.

The ministry of finance, with reason to promote VC and to increase job creation,
proclaimed the liberalization of tax treatment for venture capital companies. They did it
with a firm belief that it will give a strong boost to the NRI located in the other parts of
the word to invest some of their capital, experience in such companies.

6.3 Economic Factors: It’s Money That Matters

The Merging and Acquisition Marvels

Venture-Backed Liquidity Events by Year/Quarter, 2006-2013

Table 6.2

Venture backed liquidity events by year 2004-2013 through M&A

Quarter/ Year Total M&A M&A Deals Total Disclosed Average M&A
Deals with Disclosed M&A values ($ Deal Size ($M)
Values M)

2004 339 186 15,440.6 83.0

2005-1 81 45 4,351.9 96.7

2005-2 81 34 4,725.0 139.0

2005-3 101 48 18,056.0 376.2

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2005-4 87 39 2,594.0 66.5

2005 350 166 29,727.0 179.1

2006-1 107 52 5,607.5 107.8

2006-2 105 40 4,018.5 100.5

2006-3 94 42 3,894.8 92.7

2006-4 62 26 5,616.8 216.0

2006 368 160 19,137.6 119.6

2007-1 82 29 4,540.3 156.6

2007-2 87 36 3,972.3 110.3

2007-3 100 52 10,810.0 207.9

2007-4 86 43 9,084.1 211.3

2007 355 160 28,406.7 177.5

2008-1 109 42 4,983.2 118.7

2008-2 85 26 3,267.9 125.7

2008-3 89 33 3,235.2 98.0

2008-4 65 18 2,390.9 132.8

2008 348 119 13,877.2 116.6

2009-1 81 19 830.5 43.7

2009-2 79 15 1,982.4 141.6

2009-3 100 30 2,224.3 74.1

2009-4 100 45 7,327.7 162.8

2009 360 109 12,364.9 114.5

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2010-1 149 36 4,945.1 137.4

2010-2 108 30 2,681.4 89.4

2010-3 141 36 4,140.9 115.0

2010-4 145 48 5,939.8 123.7

2010 543 150 17,707.3 118.0

2011-1 139 51 5,966.8 117.0

2011-2 95 37 6,202.3 167.6

2011-3 142 43 6,934.5 161.3

2011-4 123 38 4,989.6 131.3

2011 499 169 24,093.2 142.6

2012-1 114 28 3,671.0 131.1

2012-2 123 34 6,304.4 191.0

2012-3 125 37 8,437.6 228.0

2012-4 126 32 4,031.1 126.0

2012 488 131 22,444.2 172.6

2013-1 85 10 984.3 98.4

2013-2 96 19 3,405.3 179.2

2013-3 116 30 4,856.7 161.9

2013-4 81 31 5,283.6 170.4

2013 377 90 14,529.9 161.4

Source: - Thomson Reuters & National Venture Capital Association

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 Fig. 6.1 :Venture-Backed Liquidity Events by Year

 CURRENT CONDITION OF M&A: Least from Last Four Years

Initial Public Offerings (IPOs) upraised $5.3 billion throughout the fourth quarter of
2013. There was a minor decay from the third quarter of this year compared to the
previous quarter as reported by the Exit Poll report by Thomson Reuters and the National
Venture Capital Association (NVCA). Moreover this quarter noticeably became the third
consecutive quarter to see 20 or more venture-backed IPOs; it was last seen in the fourth
quarter of 2004.

Some noted points from the above given table are follows-

 For the duration of the year 2013, 82 venture-backed establishments went public
in the United States which marked the most durable sum for the number of new
venture-backed listings straight after 2007 and within the year‟s third quarter
deals reported were 81, 31 out of 81 had an aggregate deal value of $5.3 billion.

275
  As a result of this a nine per cent increase is noted in disclosed value from the
third quarter of the working year making it the strongest quarter for M&A
disclosed value since the third quarter of 2012.
 The year 2013 is ended up to be the slowest since 2009 with just 377 acquisitions
of venture-backed companies during the year.

The head of research for the NVCA John Taylor also suggested that “Signs of
improvement has been seen in IPO activity for venture-backed companies and the sector
that emerged notably is biotech as it covered over half of the 2013 IPOs that surpasses the
sum of last five year”

He further added that “The major back-bone to this change is the on-ramp provision of
the JOBS Act and the industry is hoping that IPO and M&A levels, as the swelling tube
of mature companies awaits favorable market conditions, it will make it stronger”.

Table 6.3

No. Of IPOs during 2006-2013

Total Offer Amount Average IPO Offer

Quarter/Year No. Of IPO‟s Amount

($M) ($M)

2006 57 5,117.1 89.8

2007 87 10,960.6 126.0

2008-1 5 282.7 56.6

2008-2 0 0.0 0.0

2008-3 1 187.5 187.5

2008-4 0 0.0 0.0

2008 6 470.2 78.4

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2009-1 0 0.0 0.0

2009-2 6 827.4 137.9

2009-3 2 465.4 232.7

2009-4 4 349.3 87.3

2009 12 1,642.1 136.8

2010-1 9 936.3 104.0

2010-2 18 1,382.7 76.8

2010-3 15 1,558.0 103.9

2010-4 32 3,555.6 111.1

2010 74 7,432.5 100.4

2011-1 14 1,375.8 98.3

2011-2 22 5,454.2 247.9

2011-3 5 442.9 88.6

2011-4 12 2,648.9 220.7

2011 53 9,921.9 187.2

2012-1 19 1,682.8 88.6

2012-2 12 17,227.9 1435.7

2012-3 10 1,140.7 114.1

2012-4 8 1,408.4 176.1

2012 49 21,459.9 438.0

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 2013-1 8 716.9 89.6

2013-2 23 2,436.9 106.0

2013-3 27 2,781.4 103.0

2013-4 24 5,312.6 221.4

2013 82 11,247.7 137.2

Conclusion from the Table Given Above

As we saw there were 24 venture-backed IPOs valued at $5.3 billion in the fourth quarter
of 2013. The quarterly volume of number of deals declined 11 per cent from the third
quarter of the year but in the count of dollars it is recorded a 91 per cent increase
compared to the previous quarter. Apart from the record $16.0 billion Facebook IPO, the
final quarter of 2013 could be named as the strongest quarter for dollars raised by
venture-backed companies since the second quarter of 2011 and the growth can be
understood clearly.

6.3.2 Inflation Rate: Touching the sky or Getting down to the pocket

The pressure from the public sector to fund large government budget shortages and it
result in the confrontation with relatively high levels of inflation for many temporary
economies. (Herms and Lensink, 2000).

The Indian Price Index and the Anxiety of Government

To avoid such state a suitable study of price movements and the value of the rupee since
1950-51 is started in India. It needed the presence of wholesale price index (WPI) of all
commodities with 1950-51 as the base year (Agarwal, 2000). While in the mid-sixties the
Government of India abandoned it in order to start a new series with 1960-61 as the base
year.

As a matter of fact Dutt and Sundaram, (2000) suggested that „In its nervousness to
prevent people from making a real comparison of the frequently rising price level and

278
quickly decreasing purchasing power of the rupee since 1950-51, the Government has
been varying the base year every decade from 1950-51 to 1960-61, later to 1970-71 and
as a final point to 1981-82‟ (p. 419)

The habitual request to the Government was that the new series must has a significantly
follow the given perquisites-

 More exposure of items

 Large coverage of Grades and markets
 Based on a large number of quotations.

It becomes unsound to make any valid and wide-ranging comparison of price movements
as economic planning was bring together in 1950-51 primarily.

First Plan and Its Aims

Major objectives of the First Plan were to fight inflationary burdens and it was almost
succeeded in attaining this objective. This cheered the Government to unveil more
elegant plans and so that it could take on the motionless degree of deficit financing.

Condition of Subsequent Plans

The prices rise gradually during the course of the Second Plan period; the price level rose
by 20 percent by 1965 (Agarwal, 1997). The price position throughout the Third Plan
declined seriously.

Table 6.4

Price Movements since 2003

(Annual Inflation Rate based on WPI)

Year Inflation Rate (%)*

2003-04 5.5

2004-05 6.5

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 2005-06 4.3

2006-07 6.5

2007-08 4.8

2008-09 8.0

2009-10 3.6

2010-11 9.6

2011-12 8.9

2012-13

Source: Economic Survey 2012-13

Reasons for Increased Inflation Rate: War, Conflicts and More

 Near the end of 1962 the Chinese Army attacked on India

 In 1965 India faced another war only this time with Pakistan
 The second Indo-Pak war in 1971
 Bulky inflow of Bangladeshi refugees

Subsequently both these war result in hike in defense expenses which ultimately
cause the serious food shortage of 1965-66, hence a rapid rate increased prices was
seen which continue all the way through the Fourth Plan till the year 1974.

The other major reasons were related to the Agricultural Sector which include the
following-

 Extensive failure of crops thanks to lower than average monsoon, and

 Increase in crude oil prices

280
Agricultural Failure: The problem needed to be sort out

As we saw above the reason for hiked up inflation in India are somehow related to the
farm, field and crops. The reason of continuous disappointment in this sector were
noted as follows-

 Dependency over Monsoon

 Still rate of production
 Disorganized markets with control of middle men

All these above mentioned factors lowered down the supply of food articles for the
increasing demand.

We should not forget some of the below mentioned factors accountable for Price Hiking-

 Population Growth
 Increment in the income of working class
 Urbanization

Effect on Overall Economy and Other Sectors

As we saw that the agricultural sector is the back-bone of Indian economy and its failure
resulted in economical set back. The inflation in the category of food articles can cause
harm to other categories and as a result of which inflationary price become viral in the
economy.

For Country like India, where huge part of the population comes under the line of poverty
and people spend a large part of their income to buy food grains, a crop failure in
agriculture causes as food-shortage inflation (Gupta 1974).

This scenario shows its effect on other sectors particularly on manufacturing sector as
higher income is demand to acquire these necessary commodities as a result of which
production cost goes up and consequently the prices of industrial products also
increase(Sengupta).

281
Increments in prices mean additional non-developmental public expenditure in case of
India. (Mithani 1993). Though table 6.8 shows the price movement during the Sixth Plan,
table 6.9 replicates the price movement since 1990. Therefore we can admit that by rising
food grain prices the economy would face the viral inflation rate in price of other
products of other sectors.

Picking out one factor for the determined price rises in India should not be our way of
thinking as there are some other factors effecting the price rise which include-

 Expenses of Government
 Deficit financing
 Increment in money supply
 Black money.

Let us discuss each of the item one by one, The total expenditure of both Central and
State Governments had mounted from nearly Rs. 7.40 billion in 1950- 51 to Rs. 370
billion in 1980-81 and nearly Rs. 3,812 billion in 1997-98 (Dutt and Sundaram,
2000).

References for the study of other reasons are-

1. Table 6.5 for deficit financing in India since 2003-04

2. Table 6.6 for money supply and monetary resources with the public.

Although the criticizing Indian currency due to persistent inflation is making India
exports competitive it is also somewhat responsible for keeping long-term investors
capable of bringing in Foreign Direct Investment (FDI).

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 Table 6.5:

Deficit Financing in India Since 2003

(As percent of GDP)

Year Revenue Deficit Fiscal Deficit

2003-04 3.5 4.3

2004-05 2.4 3.9

2005-06 2.5 4.0

2006-07 1.9 3.3

2007-08 1.1 2.5

2008-09 4.5 6.0

2009-10 5.2 6.5

2010-11 3.2 4.8

2011-12 (BE) 3.4 4.6

2011-12 (P) 4.3 5.7

2012-13 (BE) 3.5 5.1

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 Table 6.6

Money Supply and Monetary Resources with the Public

Year Money Supply with the Aggregate Monetary

Public (M1) Resources (M3)

2003-04(in crores) 43,390 2,42,450

2004-05 40,797 2,06,106

2005-06 58,248 3,38,081

2006-07 70,352 5,09,754

2007-08 85,556 6,20,701

2008-09 97,953 6,51,665

2009-10 1,02,043 7,07,607

2010-11(in billions) 1,46,704 7,50,239

2011-12 1,108.1 1,220.9

2012-13 7,507.4 8,946.8

Source: Reserve Bank of India, Report on Currency and Finance

6.3.3 GDP and the Role of Each Sector: Holding the Hands

India or one can named it as the third largest economy in the world in terms of
purchasing power. Percolations have been made that the coming years are good for our
economy. Goldman Sachs an American Multinational Investment Banking firm predicted
that India would be the third largest economy of the world just after US and China. It will
grow to 60% of size of the US economy.

But there are several breakers in its way of achieving the landmark of 9% GDP. From the
year 1950 to 1980 the average rate of growth of net national product per annum was 3.5

284
per cent which was ahead of the annual population growth rate of around 2 per cent at
ease (Balasubramanyam, 1984).

Growth Rate of India: A close review

As shown in figure 6.2, GDP at factor cost has failed to reveal any specific growth
pattern. The movement goes like as it start from 2.3 per cent in 1951-52 and reached a
high node of 7.6 per cent in 1958-59 following the enormous decline to -3.7 per cent in
1965-66 and we all know the reason for this.

Yet again, in 1975-76, it registered a growth rate of 9 per cent and then drop down to -5.2
percent in 1979-80, the reason behind this huge fall imposition of emergency rule by the
Congress government led by former Prime Minister Mrs. Gandhi., certainly a bad period
for economy. The all-time highest growth was witnessed in 1988-89 of 9.6%. The
consistency in growth rate remained from 1993 to 1996 but in 1997-98 and it declined to
5 per cent after showing good increment up to 7.8 percent in 1996-97 and then improving
marginally in 1999-2000 to 5.9 percent.

Welcome To the New Century

The entry of Indian economy in the new century started on a good note. The Tenth Plan
started in 2002-03 this year conceived an annual growth of 7.0 per cent. The industrial
and service sector worked together to bring overall growth of the economy on track. In
the next six years between 2000-01 and 2005-06 service sector increased its share in GDP
from 49.8 per cent to 54.1 per cent. Thru the same time increased its share in GDP from
25.9 per cent to 26.2 per cent.

The Recession Period- We Fight It Out

The entire world faced financial crises in 2008-09 but the Indian economy impressed
everyone as it respond strongly to fiscal and monetary spur. In that session our economy
got a growth rate of 8.2 per cent and which further increase to 9.6 per cent respectively in
2009-10 and 2010-11. On the other hand the Reserve Bank of India (RBI) started raising
policy rates in March 2010. This along with policy restrictions badly obstructed
investment as a result of this the growth rate slowed to 6.9 per cent and 5.0 per cent

285
respectively in 2011-12 and 2012-13.Still, despite this slowdown, the compound annual
growth rate (CAGR) for gross domestic product (GDP) at factor cost is 7.9 per cent over
the decade.

We have to discuss the reasons of this slow down and in course of that some are as
follow-

 Increase to demand given by monetary and fiscal stimulus. Closing consumption

rose at an average of over 8 per cent annually between 2009-10 and 2011-12.
 Investment blocks and the tighter monetary policy starting in 2011-12
 Catastrophe in the European countries and uncertainties about fiscal policy in the
United States. (Economic Survey 2012-13)

Fig. : 6.2

286
Race between the Three Sectors

Agriculture sector has played a vital role in Indian economy and the share of its output
dominated the GDP structure. But there has been a drop down in it in recent years as
illustrated in Table 6.7 the GDP structure between 2003-2013 drops mainly because
agriculture and industry. Agriculture growth rate reduced from 9.05 percent in 2003-04 to
1.42 percent in 2012-13 thanks to lower-than-normal rainfall. In the same way, the
growth rate of Industrial sector reduced from 7.32 percent in 2003-04 to 2.08 percent in
2012-13 because of the covering done in the mining and quarrying, manufacturing,
electricity, gas type of areas.

The decline is also seen in the services sector as its growth rate drops to 7.89 percent in
2003-04 and 7.11 per cent in 2012-13 after accomplishing double-digit growth
continuously for five years. Activities in this sector involve banking, hospitality etc. tends
to grow at a slower rate, and economic activity in the industry and agriculture sectors also
slows down in direct proportion.

The following Table 6.7 shows major sector vise growth rates from the year 2004

Table 6.7
Percentage Distribution of GDP Composition (2004-2013)

Year Agriculture Industry Services

Growth Growth Growth
2003-04 9.05 7.32 7.89
2004-05 0.18 9.81 8.28
2005-06 5.14 9.72 10.91
2006-07 4.16 12.17 10.06
2007-08 5.80 9.67 10.27
2008-09 0.09 4.44 9.98
2009-10 0.81 9.16 10.50
2010-11 8.60 7.55 9.67
2011-12 5.02 7.81 6.57
2012-13 1.42 0.96 6.96
Source: The Economy Survey of India (2003-2013)

287
 Fig. 6.3

Table 6.8

International Comparison of GDP Composition (2012)

Country Agriculture Industry Services

*
U.S.A. 1 20 79
Belgium 1 22 77
U.K. 1 21 79
*
Japan 1 26 73
China 10 45 45
India 18 26 56
Pakistan 24 22 54
Sri Lanka 11 31 57
Figures of GDP Distribution are for 2011; World Bank, WDRs (2009) and (2013)

Key points driven from the above shown data are as follows-

 As seen above growth has come more and more from the services sector with
contribution of 65 per cent in the last decade to overall growth of the economy

288
 and that of the industry and agriculture sectors has been 27 per cent and 8 per cent
respectively.
 Agriculture has separate years of strong overall growth from years of more
sensible growth.
 In the high growth years of 2005-06 to 2007-08 along with in 2009-10 and 2010-
11, the rate of growth of both the industry and services sectors was finished at 9
percent.
 The manufacturing sector outdone most other sectors of the economy in the year
mentioned just above. Its growth been in the region of 11.6 per cent between
2005-06 and 2007-08 and 10.5 per cent for the years 2009-10 and 2010-11.

Conclusion- What is needed to be done?

It suggests that for achieving an annual growth rate of 9 per cent or higher it is
necessary for all the three major sectors to perform well and growth in the
manufacturing sector has to increase in the coming year for overall benefits. This is
also important from the point of view of engrossing extra labor from the sector related
to crops and field.

Fig. : 6.4

289
Position of Privatization: If good, Why not?

Indian economy is remains to be strongly put forward over and done with privatization
but these initiatives have been one of the biggest failures of Indian economic changes
(Gouri, 1996). Table 6.9 shows that privatization labors have dropped way beneath
annual targets. Five Public Sector Enterprises Central budgets 2012-13 kept back for
partial privatization, visualizing raising Rs.30 million but due to political uncertainty only
the amount raised up to 31.12.2012 was Rs. 21.504 million.

Table 6.9

Disinvestment in Public Sector Undertakings (in crores)

Year Target Achievement

2003-04 14,500.00 15,547.41

2004-05 4,000.00 2,764.87

2005-06 No Target Fixed 1,569.68

2006-07 No Target Fixed ----------

2007-08 No Target Fixed 4,181.39

2008-09 No Target Fixed ----------

2009-10 No Target Fixed 23,552.93

2010-11 40,000.00 22,144.21

2011-12 40,000.00 13,894.05

2012-13 30,000.00 21,504.32

Source: Economic Survey of India 2003-2013

290
 Table 6.10

THE INDUSTRY SECTOR: The Inspiring Way of Get Going

Items 2004- 2005- 2006- 2007- 2008- 2009- 2010- 2011-

05 06 07 08 09 10 11 12

Industry 48.4 49.0 51.8 54.9 42.5 47.5 50.4 44.4

Mining 3.7 4.4 4.4 4.3 3.6 3.6 3.8 3.8

Manufacturing 34.1 34.2 34.8 38.1 26.8 32.9 34.7 27.9

Electricity 5.3 5.5 5.6 5.4 6.3 6.2 6.6 6.8

Construction 5.4 4.9 7.0 7.2 5.7 4.8 5.3 6.0

Source: Central Statistics Office (CSO)

Industrial sector consist of manufacturing, mining, electricity and construction sectors.

Some notable points of the above table are mentioned below-

 The sector gets better and attained a growth of 9.2 per cent in 2009-10 and 2010-
11.
 The Progression slowed to 3.5 per cent in 2011-12 and to 3.1 per cent in the year
2012-13.
 The manufacturing sector stands as the leading sector among the other,
 The manufacturing sector perceived a drop in growth from 2.7 per cent in 2011-
12 to 1.9 per cent in 2012-13.
 The electricity sector grown gradually in the year 2012-13.
 The progress of the mining sector in is projected at 0.4 per cent in the discussed
year.
 The mining sector recorded a negative growth of 0.63 per cent in 2011-12

We can admit on the fact that with improved business ideas and investor awareness,
the growth of this sector will improve with the passing of time in developing
countries.

291
 Table 6.11
THE SERVICE SECTOR: Secrets behind the Success

Items 2000- 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012-
01 06 07 08 09 10 11 12 13

Services 50.8 53.1 52.9 52.7 53.9 54.5 54.4 55.7 56.5

Trade, Hotels, 14.6 16.7 17.1 17.1 16.9 16.5 17.2 18.0 25.1#
& Restaurants

Transport, 7.6 8.2 8.2 8.0 7.8 7.7 7.3 7.1

Storage, &
Communication

Financing, 13.8 14.5 14.8 15.1 15.9 15.8 16.0 16.6 17.2
Insurance, Real
Estate, &
Business
Services

Community, 14.8 13.5 12.8 12.5 13.3 14.5 14.0 14.0 14.3
Social, &
Personal
Services

Source: Central Statistics Office (CSO)

The service sector is widely regarded as the “Helping Hand”. It basically consist of a
wide range of business areas as mention below-

 Services like telecommunications, satellite mapping comes under it.

 It also encompasses simple services such as those executed by the barber, the
carpenter, and the plumber.

292
  Activities like civil aviation and shipping to employment-oriented activities like
tourism, real estate, and housing are all performed within this sector.
 Railways, roadways, and social segment activities like health and education are a
major part of this sector.
 Services sector also includes trade, hotels, and restaurant in its widespread range.

The growth in this sector is improving as most of the venture capital industry puts in
their money in its activities and will do so in future.

6.3.4 Small Scale Industries: Don’t Count us Apart

Table 6.12

Small Scale Industries

Year Total Working Enterprises Employment

(in lakhs) ( in Lakh)

2003-04 113.95 271.42

2004-05 118.59 282.57

2005-06 123.42 294.91

2006-07 361.76 805.23

2007-08 377.37 842.23

2008-09 393.70 881.14

2009-10 410.82 922.19

2010-11 428.77 965.69

2011-12 447.73 1012.59

Source: Government of India Micro Small and Medium Enterprises-Annual Report

(2012-13)

293
 Fig. 6.5: Total Working Enterprises and employment

The sector of micro, small and medium industries collectively known as “MSME”,
throughout the last five decades it has developed as a highly energetic and self-motivated
sector of the Indian economy.

The advantages of MSME sector are as follows-

 It plays a key part in providing large employment opportunities.

 Minor capital cost than large industries
 Industries have reached the ruler areas

Entrepreneurs Condition: From the Views of Business Brains

Entrepreneurs are very much optimistic about the visions ahead in one of the world‟s
fastest growing economies but in India their fraternity has to face a variety of challenges

294
in setting up their businesses. It is unexpected that in a country of over 1billion
population, the rate of new business registrations is reasonably low still it did not affect
its ability to have some of the world‟s most successful business projects and firms.

Fields for Improvements

Some major areas in which the entrepreneurs want improvement are given below-

 Modernized Controlling System

 Reduce the Red Taping
 Light Rules over the export of goods
 Less Complicated Tax System

Image Factor for Entrepreneurs

The image of entrepreneurs is improving in India thanks to the Government‟s national

programs which act as a lift for technical start-ups. But what needs to be done is the
improvement of educational standards and also research and development (R&D) activity
should be promoted by the government.

The World Bank report of 2011 showed that only 5,168 patents were approved in India,
which is much lower than that of China. Instead of this India is quickly emerging as a
leader in innovation in economical ways. Aakash tablet and First Energy Stove are the
specimens of Indian attitude of making technology affordable.

VC Assistance: A major prerequisite

It is needed for the growing MSME to get support from the much mature and wealthy VC
industry. On this approach the “Package for Promotion of Micro and Small Enterprises”
includes the following-

 Procedures addressing concerns of credit

 Monetary support,
 Cluster-based development
 Infrastructure, technology, and marketing
 Capacity building of MSME Associations
 Provision for women entrepreneurs

295
MSMEs have been permitted to manage their direct/indirect introduction to foreign
exchange risk by booking or cancelling or rollover of forward contracts and they do not
have to seek RBI‟s approval.

Apart from this another big challenge is faced by the entrepreneurs in accessing the
finance. The Domestic credit is low to the private sector as a percentage of GDP out here
but we have discussed earlier venture capital and private equity has been the finance
sources for Indian entrepreneurs.

Recently the venture capital and private equity firms toned-down their activity in India
but their trust is still there in the long term, the reason behind this is said to be the
economic slowdown.

The Central Bank has decided to refinance an amount of 7000 crore to the Small
Industries Development Bank of India in order to enhance the micro and small firms. It is
also working on a parallel refinance facility for the National Housing Bank of an amount
of Rs4, 000 crore.

6.3.5 INTEREST RATE

Table 6.13
Growth Rate of deposits credit and investments (y-o-y %)

2010- 2011- 2011-12 2012-13

11 12

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Aggregate 15.69 16.51 17.92 17.59 16.25 14.51 14.62 13.91 12.87
Deposits

Bank 21.27 18.71 21.73 19.63 17.61 16.37 18.07 16.79 16.49
Credit

Food Credit 15.85 33.02 24.72 42.52 35.64 29.80 56.99 35.28 33.76

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Non-Food 21.36 18.48 21.69 19.29 17.32 16.14 17.45 16.46 16.17
Credit

Investments 9.42 14.26 10.26 15.45 15.46 15.74 16.09 14.45 15.18
in approved
securities

Source: Economic Survey 2012-13

Fig. 6.6 : Growth Rate of deposits credit and investments

How Banks Becomes Boosters?

We have to understand the fact that banks use their deposits for progressing credit; they
are also keen to make investment in government and other securities. The ratio of their
investment in sanctioned securities to aggregate deposits has been something around 30%
which is ominously higher than the minimum required.

297
The reason for this generosity may be a higher risk awareness or non-availability of
quality lending opportunities to the private sector

Nevertheless, the ratio of credit to deposits increased from 74.3 per cent in the first
Quarter 1of 2011-12 to 76.7 per cent in third quarter of 2012-13. This lets the banks to
maintain a higher credit growth.

Generally VC firms borrow from banks at this very moment but interest rates are
increasing hence the interest cost of venture capital firms will also increase. This will
direct the profitability to go down. As one will show interest in investing only if he/she
got fair returns which would not be possible if they will sustain their own profits it will
make them to search for other opportunities..

6.3.6 Foreign Direct Investment: Money Bags from Abroad

In recent times the governments are looking interested to provide friendly environment
for foreign investors. FDI is comparatively safer then Portfolio Investment (PI) as far as
attracting the capital is concern as it is durable compared to PI. Mutual Funds perpetually
invest in PI but Venture Capital is always in the form of FDI. The following table 6.19
directs that everyone is interested about service sector because what the sector need is
educated manpower. The second best option is secondary or industry sector. This
difference occurs as the later one need large infrastructure facilities while the service
sector can manage under limited resources.

Table 6.14

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS IN INDIA

Ranks Sector 2010-11 2011-12 2012-13 Cumulative % age to

Inflows total Inflows
(in terms of
US$)

1 Services Sector** 15,054 24,656 25,367 1,71,345 20%

(3,296) (5,216) (4,660) (37,063)

2 Construction 7,590 15,236 6,562 1,00,363 12%

Development:

298
 Townships, (1,663) (3,141) (1,206) (21,954)
Housing, Built-up
Infrastructure

3 Telecommunicati 7,542 9,012 507 57,555 7%

ons (radio paging,
cellular mobile, (1,665) (1,997) (93) (12,645)
basic telephone
services)

4 Computer 3,551 3,804 2,382 52,500 6%

Software &
Hardware (780) (796) (435) (11,640)

5 Drugs & 961 14,605 5,389 48,257 5%

Pharmaceuticals
(209) (3,232) (1,008) (10,202)

6 Chemicals (other 10,612 18,422 1,466 40,366 5%

than fertilizers)
(2,354) (4,041) (268) (8,857)

7 Power 5,796 7,678 2,871 36,085 4%

(1,272) (1,652) (526) (7,825)

8 Automobile 5,864 4,347 4,916 35,702 4%

Industry
(1,299) (923) (895) (7,653)

9 Metallurgical 5023 8,348 7,439 34,375 4%

Industries
(1,098) (1,786) (1,385) (7,426)

10 Hotel & Tourism 1,405 4,754 17,401 32,884 4%

(308) (993) (3,190) (6,562)

Source: As per DIPP‟s FDI data base

**
Note: Services Sector Includes Financial, Banking, Insurance, Non-Financial/
Business,Out Sourcing, R&D, Courier, Tech. Testing & Analysis.

The latest approximations of RBI given in the following table

Key notes given in the Table 6.14 are as follows-

299
  FDI inflows in percentage growth were highest in the year 2006-07. 2001-02,
2007-08
 The peak amount of FDI inflows was in the period 2011-12 after the rescue from
recession period showing a dip of -10% during the year 2009-10 and -8% in 2010-
11 that is to say 46,553 in US $ million approx.
 In the 2012-13 there is a negative growth percentage.

Table 6.15

Foreign Direct Investment in India inflows for the period 2003-2013 (In US $
million)

Year Amount in USD % Growth Cumulative %

million Growth

2003-04 4,322 -14% -14%

2004-05 6,051 40% 26%

2005-06 8,961 48% 74%

2006-07 22,826 155% 229%

2007-08 34,843 53% 281%

2008-09 41,873 20% 301%

2009-10 37,745 -10% 292%

2010-11 34,847 -8% 284%

2011-12 46,553 34% 318%

2012-13 30,824

Source: As Per DIPP‟s FDI Database.

RBI Bulletin March, 2013 dt.11.03.2013 (Table No.34-FOREIGN INVESTMENT
INFLOWS).

300
Figures updated by RBI up to January, 2013. (P) All figures are provisional. “+” Data in
respect of „Re-invested earnings & „Other capital for the years 2009- 10, 2010-11 &
2012-13 is estimated as average of previous two years.

The global financial and economic rescue remains crumbly. As it is threatened by the
followings-

 Developing Risks

 Restrictions in public investment

 Hesitation about financial controlling reforms

 Instability of the stock and foreign exchange markets

Low level of FDI acts for a disturbed Balance of Payments situation in India. In the
1990s a remarkable expansion made Mauritius as a source country for FDI in India.

In the course of the year 2011-12, the amount funded by Mauritius was a whopping
$9942 million which was around 5% of the total FDI inflows. In the year 2013-14
Singapore, UK, Japan, USA and Netherlands contributed a sum of 11%,9%,7%,6%and
5% individually this reduce Mauritius percentage. But the country remains at number one
spot if we take aggregate percentage.

In the year 1982 India and Mauritius agreed on The Double Taxation Avoidance
Agreement. Yet, it was used by the investors only after Mauritius altered its laws which
control the offshore business activities. Subsequently it is known that Mauritius does not
levy tax on capital gains on the regional companies. Moreover the firm interested in
pooling investment in India is free from paying any tax on capital gains as Indo-Mauritius
Contract has no such clause.

301
 Table 6.16

STATEMENTS ON COUNTRY-WISE FDI INFLOWS

Amount in Rs. crores (US$ in millions)

Ranks Country 2010-11 2011-12 2012-13 Cumulative %age to

(April- ( April - (April – Inflows total
march) March) Jan.) Inflows
(in
terms
of US $)
1 MAURITIUS 31,855 46,710 44,508 3,33,729 38%
(6,987) (9,942) (8,175) (72,343)
2 SINGAPORE 7,730 24,712 9,968 87,556 10%
(1,705) (5,257) (1,823) (18,976)
3 U.K. 12,235 36,428 5,625 80,286 9%
(2,711) (7,874) (1,048) (17,517)
4 JAPAN 7,063 14,089 9,308 67,159 7%
(1,562) (2,972) (1,693) (14,006)
5 U.S.A. 5,353 5,347 2,726 50,615 6%
(1,170) (1,115) (500) (11,064)
6 NETHERLANDS 5,501 6,698 8,219 40,544 5%
(1,213) (1,409) (1,517) (8,626)
7 CYPRUS 4,171 7,722 2,365 32,035 4%
(913) (1,587) (435) (6,835)
8 GERMANY 908 7,452 3,204 24,032 3%
(200) (1,622) (587) (5,208)
9 FRANCE 3,349 3,110 3,159 16,536 2%
(734) (663) (585) (3,512)
10 U.A.E. 1,569 1,728 940 11,260 1%
(341) (353) (171) (2,414)
Total FDI Inflows from all 1,65,146 1,21,907 39,931 9,36,844 -------
countries (35,121) (22,423) (7,053) (2,00,457)
Source: As per DIPP‟s FDI data base

302
Conclusion: What should one prefer?

It is advised that the developing countries must prefer FDI over PI as it will provide more
enduring growth and employment in comparison to the later one. The drawbacks like
maltreatment by investors make the capital markets unbalanced.

6.3.7 Balance of Payments:

The classification of balance of payments can be done as follow-

 On current account
 On capital account.

The Capital Account encompasses the following-

1. Surplus and the shortage of the current account

2. Foreign exchange reserves
3. International payments

We will discuss the last one which comprises:

1. Evident trade concerning to imports and exports

2. Too small to see items i.e. receipts and payments for services like shipping,
banking, insurance, travel etc.
3. One-sided transfers such as donations.

The following table 6.17 shows an instant of India‟s balance of payments history since
2007-

303
 Table 6.17

Balance of Payment Summary

S. Item 2007-08 2008-09 2009-10 2010-11PR 2011-12P 2011-12 H1( 2012-13

No. April-Sept.
2011)PR H1 (April-
Sept. 2012)P

I Current
Account

1) Exports 1,66,162 1,89,001 1,82,442 2,56,159 3.09,774 1,58,202 1,46,549

2) Imports 2,57,629 3,08,520 3,00,644 3,83,481 4,99,533 2,47,739 2,37,221

3) Trade Balance -91,467 -1,19,519 -1,18,203 -1,27,322 -1,89,759 -89,537 -90,672

4) Invisibles (net) 75,731 91,604 80,022 79,269 1,11,604 53,103 51,699

A Non factor 38,853 53,916 36,016 44,081 64,098 30,409 29,572

Services

B Income -5,068 -7,110 -8,038 -17952 -15,988 -7,587 -10,510

C Transfers 41,945 44,798 52,045 53,140 63,494 30,281 32,637

5) Goods and 52,614 -65,603 -82,187 -83,241 -1,25,661 -59,128 -61,100

Services
Balance

6) Current -15,737 -27,914 -38,181 -48,053 78,155 -36,433 -38,973

Account
Balance

II Capital 1,06,585 7,395 51,634 63,740 67,795 43,490 39,989

Account
Balance

I External 2,114 2,439 2,890 4,941 2,296 640 15

Assistance
(net)

ii External 22,609 7,861 2,000 12,160 10,344 8,388 1,726

304
Commercial
Borrowings
(net)

iii Short-term 15,930 -1,985 7,558 12,034 6,668 5,940 9,511

debt

iv Banking 11,759 -3,245 2,083 4,962 16,226 19,714 14,899

capital (net)

Of which:

Non-Resident 179 4,290 2,922 3,238 11,918 3,937 9,397

Deposits (net)

Foreign 43,326 8,342 50,362 42,127 39,231 17,087 18,068

Investment
(net)

of which:

A FDI (net) 15,893 22,372 17,966 11,834 22,061 15,741 12,812

B Portfolio 27,433 -14,030 32,396 30,293 17,170 1,346 5,796

(net)

vi Other Flows 10,847 -6,016 -13,259 -12,484 -7,008 -8,278 -4,769

(net)

III Errors and 1,316 -12 440 -2,636 -2,432 -1,338 -653
Omission

IV Overall 92,164 13,441 -20,080 13,050 -12,831 5,719 363

Balance

V Reserves -92,164 -13,441 20,080 -13,050 12,831 -5,719 -363

change
[Increase (-) /
Decrease (+)]

Source: RBI, where PR: Partially Revised, P: Preliminary

305
Noted points from the above table are given below-

 The trade deficit to more than 10 per cent of GDP

 The CAD overpass 4 percent of GDP in 2011-12

Current condition will become clear from following mentions-

 The net invisible balance reduced the need for financing

 The growth invisible is inadequate to slender the growing trade deficit
 Instable capital flows funded the CAD, it resulted in instability rupee exchange
rate

Short Run Firms: Want a piece of FDI’s Cake

The short run business firms are limited in terms of resources as they are in need of the
recovery and growth of partner countries in industries in particular which is a really time
taking task. So they have to drift their attention on shortening imports in oil and gold.
Simultaneously financing needs could be reduce by the inflow of transfers.

If suitable weightage is given FDI, it will help to make financing safe. The movements
need to be directed in the direction of longer term rupee instruments in order to diminish
the capital reversal all through the risk-off periods. Also the exterior commercial
borrowing needs to be supervised carefully.

Drop PI, Get FDI: But is it really happening?

The PI again becomes instable thanks to Foreign Institutional Investors (FIIs) and Euro
equities while FDI movement into the country appears more stable. Hence it is quite clear
that developing markets should focus on outlining more eye-catching rules for FDI.
However the scenario is completely different in reality as rich FIIs is welcomed more
vigorously by the developing countries. It is so because they take an immediate view of a
particular market and tip it with smallest of economic unpredictability. It is needed for
the developing countries to create strong regulatory structure is needed to attract FDI in
the form of venture capital.

306
Difficulties Faced by Entrepreneurs in India: Government is facilitating

The slow growth of Indian economy is matter of concern for the Entrepreneurs. The
average growth rate has been around 8% a year between 2003 and 2011 and after that it is
on falling note till now.

The need for action has been sensed by the government. It uncovered a series of
modifications to boost the economy. Few of them were as follows-

 Allowance of 51% FDI in multi-brand retail

 Allowance of 100% FDI in single-brand retail.

The Indian Government is on its way to finalize the fate FDI in sectors like defence with
the hopes that it will create jobs, improve supply chains and lift productivity across the
country. If this happens then there will be wide-ranging opportunities for Indian
industrialists.

The Entrepreneurs also tussle to access commercial sources of financing. To free them
from this Government should provide more credit guarantees and support mechanism,
this will also promote loaning.

(Note: The World Bank reported that the ratio of domestic credit to GDP in India was
48.2% compared to an average of 99.0% across the G20 countries in the period of 2008
to 2010).

However in recent phase entrepreneurs find ease of access to the capital. The local
entrepreneurs mention progresses in various sources of funding; i.e. microfinance, private
equity, business angels and bank loans. This will surely rise number of incubators in
India in the coming decade and make it in the count of 1000 or more as suggested by the
report of Planning Commission.

Solutions Provided

The Indian Government encouraged VC funds. More than 60% entrepreneurs in India
recognized that access to venture capital has upgraded, this tell the success story of the

307
government. SIBI Venture Capital Limited, an organization that co-finances state-level
funds and can co-invest with private sector venture capital firms on the basis of cases is a
good example of the improvement.

Entrepreneurs are now getting financial support from private along with public sector
banks. Take an example of State Bank of India; it has introduced schemes such as the
SME security free loan and the SME Credit Card.

Also, India‟s Credit Guarantee Fund for Small and Micro Enterprises has invested
US$8.8b in small ventures since its debut in 2000.

The Finance Ministry has permitted entrepreneurial businesses and start-ups to be

registered on the SME Exchange and for this they do not require an IPO so that to raise
equity at the growth-stage would become stress-free for firms.

6.4 Geographical distribution of investments: To locate the battle field

6.4.1 Regional Distribution: South is cruising

The Southern region is ruling in this particular case, one can see it in table 6.23 given
below. It accounts for 65% of the total investment, 55% of the total deals, and 48% of the
total companies that have received investment. This region also has the maximum ratio
from the other regions concerning with number of deals to number and that is 2.84. The
dominance of south region can be seen in the terms average investment per deal as it is
30% ahead from the second highest west region.

Hence one can easily admit on the fact that in the Southern region there are encouraging
conditions for business, entrepreneurship, and investment and then comes the region with
states like Gujrat and Maharastra, yes, the Western Region.

308
 Table 6.18
Distribution of Impact Investments by region

Total % of Average
investment % of total No. of No. of
Region total investment/deal
investment deals companies
($ , million) deal ($ , million)

East 61.47 5% 30 6% 2.20 17

North 181.85 14% 109 21% 1.96 42

South 847.93 65% 290 55% 3.29 102

West 212.03 16% 94 18% 2.55 51

Total 1303.28 100% 523 100% 2.82 212

It could be seen in the above given table that in the impact investments segment,
Southern region is more protuberant as compared to the total trends. Western region
encounters major parts of the VCPE investment while Southern region accounted for the
largest share in terms of number of investments. But the difference between South and
West is not as high as what is seen in the case of impact investments. Nevertheless, the
Southern region seem to be stronger in case of incubation support,

6.4.2 City-wise Distribution

The ordering of cities in this section is done in two types given below

 Metropolitan and
 Non-metropolitan cities.

The First one includes cities like Bangalore, Chennai, Delhi, Hyderabad, Kolkata, and
Mumbai. The later one comprises all the remaining cities.

309
Now we will analyse the Investments on the type of city in which the enterprises are
sited.

Table 6.19
Distribution of Impact Investments by type of city

City Total
% of Average
Type Investment % of total No. of No. of
total investment/deal
($ , investment deals companies
deal ($ , million)
million)

Metro 1056.43 81% 389 74% 3.05 144

Non- 246.85 19% 134 26% 2.13 68

Metro

Type 1303.28 100% 523 100% 2.82 212

Source: - Indian Venture Capital and Private Equity Report-2013

Conclusion: Who is winning here?

The enterprises are generally located in the large metropolitan cities while the target
customer segment for most of the enterprises would be in smaller cities in general terms
thanks to the underprivileged quality of business support infrastructure in smaller cities.
Hence no matter what area they would like to work on but they would work from only
the metropolitan cities.

Key points from the Table 6.19 are as follows-

 The average investment per deal in metropolitan city is higher by 43% as

compared to that of in a non-metropolitan city.
 The deals to companies‟ ratio are on the higher side for metropolitan cities (2.70)
as in comparison with the same for non-metropolitan cities (1.97).
 The share of metro cities in impact investments is similar to the movements
perceived in overall VCPE investment and angel investments.

310
  Non-metropolitan cities are high on incubation support.

Reason for the later mentioned drift is given that venture funds invest in highly
capable entrepreneurs which used to locate their enterprises in the metropolitan cities.

6.4.3 City tier based distribution

In this system of distribution cities were classified into three tiers given as follows-

 Tier I cities
 Tier II cities
 Tier III cities

(The above classification is done on the basis population of the city as per Census 2011)

The first tier consist of seven cities with more than 5 million population and these are
Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad, Kolkata, and Mumbai while the
second tier comprises with a population between 1 to 5 million, some of them are
Allahabad, Aurangabad, Coimbatore, Jaipur, Jodhpur, Kanpur and the last tier consist of
the all the cities with less than 1 million population,

Table 6.20

Distribution of impact investments by city tier

Total
% of Average
City Investment % of total No. of No. of
total investment/deal
Tier ($ , investment deals companies
deal ($ , million)
million)

Tier 1 1100.59 85% 40 77% 3.07 152

Tier II 78.43 6% 49 9% 1.91 24

Tier
124.26 10% 73 14% 2.00 36
III

Tier
1303.28 100% 523 100% 2.82 212
IV

Source: - Indian Venture Capital and Private Equity Report-2013

311
In order to make it illustrative we have added only 43 cities in the table 6.20 given above.

Points to be noted from the table are following-

 More than five-sixths of the total investments and more than three-fourth of the
total deals are in companies that are set in Tier 1 cities.
 The average investment per deal is the highest for deals in Tier 1 cities.
 The ratio of Number of deals to Number of companies is maximum for Tier 1
cities.

Conclusion pop-out from these trends could be following-

 The investors are keen to look for quality investment opportunities in the larger
cities, where the environment is more helpful for business as the impact
investment activity is in the initial years. The trend might change in the coming
time as the investors will look for the other option.
 There is a need for more and better inputs for private enterprise development in
Tier 2 and Tier 3 cities
 Social entrepreneurs in the smaller cities could have difficulties in retrieving
impact investors.
 Repetition of the opportunity available in the BOP segment in urban area.
 Known the size of their catchment one will encounters difficulties in ascending in
Tier 2 and Tier 3 cities

Investment via Industry

On the basis of industry investments are classified into eight categories or sector we will
discuss each of them in the given table.

The points comes out of the table 6.26 are as follows-

 Nearly two-thirds of the total investment has been in the BFSI segment mainly
credited to the micro-finance segment.

312
  Agriculture & Healthcare and Nonfinancial Consumer Services are the other
sectors which shown some rational investments that is 90% of the total
investments.

 Proportion of BFSI is on higher sight for the number of investments and number
of deals, yet it does not account for as large a proportion as it does when the
analysis was based on investment value.

 The top three sectors sums up at 77% in number of deals.

 The total numbers of companies that have received investment in the BFSI sector
is 34% that is lower as compared to the proportion accounted for by the BFSI
sector when the analysis was in terms of investment amount or the number of
deals.

 The three major sectors get a overall for 73% of the total companies that have
received venture investments reducing the rule of BFSI.

 The ratio of number of deals to number of companies is the highest for BFSI
sector (3.98) among all the sectors.
(Reason for the last trend is that the investors are more upbeat about the prospects
of companies in the BFSI sector).

Table 6.21
Impact investments in different sectors

Total %
No. Average
Investment % of total of No. of
Industry of investment/deal
($ , investment total companies
deals ($ , million)
million) deal

Agriculture
& wealth 156.69 12 54 10 3.48 35
care

BFSI 835.3 64 287 55 3.02 72

Engineering 29.08 2 40 8 1.04 16

&

313
construction

IT & ITES 59.64 5 34 7 2.39 19

Manufacturing 1.39 0 7 1 0.28 5

Travel &
1.2 0 1 0 1.20 1
transport

Other services 39.07 3 35 7 1.56 17

Non-financial
consumer 180.91 14 65 12 3.23 47
services

Total 1303.28 100 523 100 2.82 212

Source: - Indian Venture Capital and Private Equity Report-2013

Fig. 6.7 : Impact investments in different sectors

314
  BFSI segment sums up for only 24% of the overall VCPE investment.
 In terms of number of investments, IT&ITES and Manufacturing sector were
the top two sectors in the overall VCPE investments.
 Analysis of incubation investments shown that IT&ITES sector is set for the
highest proportion of hatches, whereas BFSI contribution was just 1% the
drifts continues in angel investments.
 51 Impact investments are considered in the BFSI segment thanks to the
micro-finance sector.

Conclusion: Threatened BFSI

It can be expected that the supremacy of BFSI segment will reduce in the coming years as
investments are gradually increasing in other industry sectors.

Impact Investments vs. VCPE investments

Interestingly, the average investment per deal in impact investments works out to be
$2.82 million lower than the overall average deal size ($32million) seen in VCPE
investments and even from the average deal size seen in early stage VCPE investments
($12.6 million).

These drifts give us two conclusions that are as follows-

 Impact investments are in relatively earlier stage in social enterprises as compared

to the overall industry trends indicating the importance the investors in providing
early stage capital to firms in the social sector.
 Social enterprise investing is continues to be in an emerging phase. The
companies will attract larger and larger investments, which would then increase
the average deal size as they grow up.
6.4.4 Study of Investments Year-Wise-A series of analysis

The investment activity has been on the edge for the first five years till 2005 representing
that the impact investment as a sector is in the very early stages. The investment activity
picked up only after 2006 in the course of 13 years i.e. from 2000-2013.

315
The visible fall in investment activity during 2011 and 2012 was due to the micro-finance
crisis and also to the general slowdown in the VCPE industry.

The Study covers up some interesting facts some of them are given below-

 The number of annual investments that occur in the impact segment is only a part
of the overall VCPE investments.
 The average amount of impact investments made in a year is around $180 million
(based on the investments during the seven year period 2006-12), however the
average yearly VC investment in India during the same period is way above,
about $812 million.
 The average annual PE investment with an exception of real estate is about $9.1
billion from 2006-2012.
 Impact investments account for about 22% and 2% of the total VC and PE
investment in the country.
 In terms of number of deals, there is an average of about 69 impact investments in
a year during 2006-12, but in the case of VC and PE investments, it is about 354
and 878 correspondingly.
 Impact investments are about 20% and 8% of the deals in the VC and PE
investments respectively in terms of deals.

The above study gives us following conclusions-

 Subsequently the impact investments are at a much lower percentage of the

overall VCPE investments, when compared in terms of investment amount as
compared to that of number of deals.
 The average investment size is much smaller in comparison with the overall
VCPE industry. The trends will swing when a greater number of companies
that have obtained early stage funding start getting late stage funding, the
average investment per deal can also be projected to rise as the segment grow
up,.

316
 Table 6.22
Distribution based on the year of investment

Year No. of
Average
Total Cumulative No. Cumulative No. of deals/
investment/
Investment % of total of % of total compan No. of
deal ($ ,
($ , million) investment deals deal ies compani
million)
es

2001 7.82 1% 8 2% 0.98 5 1.6

2002 18.02 2% 2 2% 9.01 2 1.0

2003 0.67 2% 2 2% 0.34 2 1.0

2004 1.25 2% 6 3% 0.21 4 1.5

2005 8.52 3% 19 7% 0.50 14 1.4

2006 121.04 12% 42 15% 3.10 28 1.5

2007 273.39 33% 83 31% 3.75 37 2.2

2008 162.77 45% 83 47% 2.09 52 1.6

2009 277.79 66% 98 66% 3.02 58 1.7

2010 235.62 84% 82 81% 3.57 58 1.4

2011 160.27 96% 70 95% 2.72 39 1.8

2012 36.12 99% 28 100% 1.81 17 1.6

2013# 7.82 100% 8 100% 0.98 5 1.6

Total 1303.28 523 2.82 212

(# 2013 investments are only for the January - June 2013)

Source: - Indian Venture Capital and Private Equity Report-2013

317
 Fig. 6.8: Total investments and deals in different years

Figure 6.8 & 6.9 provide a graphical illustration of the total investments and deals in
different years and give us following ideas about the trends-

 With a correlation ratio of 0.96 it becomes quite clear that Total investments and
deals are strongly linked.
 The investments are more instable than the number of deals indicating that even
when the funding environment goes hostile, the number of deals that gets funding
does not reduce higher amount than investment.

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Fig. 6.9: Average investment per deal and deals to company ratio in different years

 There is an inverse relationship between average investment per deal and deals to
companies‟ ratio but the relationship is negligible (a correlation of -0.16).
 The instability in average investment per deal is much higher as compared to
deals to company ratio which displays the investors‟ interest in a company does
not change.

6.4.5 Investments by means of type of business

Companies were categorized into two categories on the basis of their business model:-

 B2B -this category comprises the Enterprises that only supply to other
businesses. For example Vortex Engineering Limited, a company that produces
low cost ATM's for use in rural areas. It sells those banks and other organizations,
which in turn set up them in rural areas, in that way profiting those living in those
areas. Vortex does not sell their products to end users directly.
 B2C- this category encompasses the enterprises that directly deal with the end
consumers. For example Servals Engineering Private Limited (Servals), a
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 company that manufactures energy efficient fuel burners for use by poor families.
The company sells its products directly to the end-users. In the same way,
microfinance enterprises directly deal with the borrowers, hence classified as B2C
enterprises.

B2B vs. B2C

Round 1: Investment risk

B2C businesses are normally observed to have a higher level of risk as compared to B2B
businesses. Nevertheless, since B2C businesses unswervingly create an influence at the
level of end-users, they can distress impact more effectively as compared to B2B
businesses, which have to hinge on other agents in the value chain

Round 2: Impact Investments

One can easily see the split of impact investments between B2B and B2C businesses and
also that the majority of the investment has been in B2C businesses. All the credit cannot
be given to the dominance of micro-finance investments as though the entire portfolio of
investments from the BFSI is left out; the investments in B2C companies were higher
than that of the investments in B2B companies. It can also be seen that B2C companies
have obtained more investment ($6.98 million) as compared to that of B2B businesses
($3.52 million).

Round 3: Average investment per deal

The average investment per deal is higher in B2B enterprises as compared to that of in
B2C enterprises. Contrariwise, the ratio of the number of deals to number of companies is
higher for B2C (2.75) as compared to that of B2B (1.59).

Round 4: Number of Investors

More number of investors is involved per dollar of investment in a B2C enterprise that
directs to a higher degree of syndication in B2C businesses. The higher level of
syndication could be due to the larger capital requirements in B2C businesses and the

320
need to broadening the horizons for the relatively higher risks in these businesses (i.e.,
risk management motive).

Final Verdict: Who won!

We can declare that the dominance of B2C investments indicates that most SVC
investments are in companies that are directly creating an impact at the BOP and the
higher levels of syndication is a response by the venture funds to manage the risk allied
with investment strategy of this type.

Table 6.23
Distribution of impact investments by type of business

Total
% of Average
Business Investment % of total No. of No. of
total investment/deal
Type ($ , investment deals companies
deal ($ , million)
million)

B2B 179.75 14% 81 15% 3.02 51

B2C 1123.53 86% 442 85% 2.72 161

Total 1303.28 100% 523 100% 2.82 212

Source: - Indian Venture Capital and Private Equity Report-2013

6.4.6 Social positioning Classification

It is possible to classify businesses different categories on the basis of source of inputs

and areas of selling the outputs. In the next segment will discuss the four categories of
social enterprises.

Rural Supply and Sourcing (RSS): Deliver and Get from the same

this category consist of those Companies whose primary input and primary target
consumers both are located in non-urban and rural areas. Take an example of company
Husk Power which intakes plant husk as raw material for power generation and supplies

321
the power generated to the mills located in rural areas. Another example would be Water
life India which uses underground water in rural areas to supply clean drinking water to
the local population. It also gets and delivers at same place.

Rural Supply (RSU): The Urban Merchant

In this category those companies are categorized whose primary input sources are from
the urban areas but main target consumers are sited in non-urban and rural areas.

For example, microfinance companies provide facility mainly to customers in rural and
non-urban areas, but their main input the loan capital comes from urban areas.

Rural Sourcing (RSO): Marching Towards Towns

Companies whose prime input sources are from the non-urban and rural areas, but whose
target consumers are located in non-rural areas belong to this category. Take an example
of a company naming DesiCrew, a rural BPO company that uses the talent from smaller
towns to provide record and other business process services to large firms. It has been
kept in this category as it is using local talent from the smaller cities, while servicing its
customers across the globe. Rural Tourism Network Enterprise and Industry can be some
other examples since they also follow the same route.

Non-Rural (NRU): Pleased from where we are!

Companies whose primary input sources and primary target consumers both are located
in non- rural areas fall in this category. These elements are socially relevant.

For example AyurVaid Hospitals, this provides ayurvedic healthcare. The hospital is
currently targeting patients in urban regions but it has the potential to carry social bearing
from side to side facilitating to non-urban patients in the coming years. Your Kids R Our
Kids, which providing education and child care services is also another example of this
category. It also has the potential to create impact in child education even in the lower
sections of the society in near future.

Given the poverty levels at the BoP, it is observed that investments that provide income
prospects among the low income and the BoP would be able create a higher degree of

322
impact if compared by those investments that make various products and services
available for intake at the BoP. Basically, investments that permit the BoP to be a net
producer would be anticipated more as compared to those that assist the BoP to be a net
consumer. The type of trades at the top of attraction digging order would be RSO and
RSS followed by RSU while NRU would rank the last because of their social relevancy
which indeed is much needed.

Table 6.24
Distribution of impact investments by the social orientation of business

Total
% of Average
Business Investment % of total No. of No. of
total investment/deal
Type ($ , investment deals companies
deal ($ , million)
million)

NRU 369.74 28% 133 25% 3.39 92

RSO 35.92 3% 34 7% 1.56 23

RSS 28.54 2% 16 3% 2.04 5

RSU 869.08 67% 340 65% 2.75 92

Total 1303.28 100% 523 100% 2.82 212

Source: - Indian Venture Capital and Private Equity Report-2013

The table 6.24 given above provides the torn up of investments in terms of their social
positioning. If largest amount of investments are being put in RSO and RSS businesses
than it would have been the best possible case, but it didn‟t happened unfortunately.

The Table 6.24 shows the following trends-

 RSS industries have acquired the lowest investments and account for the lowest
number of deals.

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  RSO charges marginally better than RSS, both these categories have low average
investment per deal.

 The ratio of number of deals to number of companies is also lower than the usual.

 RSU has fascinated two-thirds of the total investment, and accounts for 65% of
the total deals.

 The ratio of number of deals to number of companies is the highest among the all
the four categories at 3.7 indicating a high degree of interest among the investors
for businesses in this segment.

 NRU accounts identical number of companies as that of RSU.

 The investment in NRU trades is just 43% of the investment in RSU businesses.

 The average investment in a NRU business enterprise is $5.13 million which is

inferior to that of a RSU business enterprise. It is manipulated that the path of the
trend in impact investments should modify in such a way that more businesses in
the RSO and RSS category are financed.

 RSO and RSS together accounts for just 5% of the total investment, 10% of the
total deals, and 13% of the total companies that have expected some form of
impact investment.

Conclusion: Something needs to clarify

It is clear from above discussion that RSO and RSS businesses are vital for employment
generation and thus creating added incomes at the BOP as compared to other models that
would provide amplified capacity to those at the BOP to consume new products and
services.

6.5 VENTURE CAPITAL INDUSTRY IN INDIA: How to find the

success?

The key factors that would work in the favor of Venture Capital firms and grant them
vital success are as following-

324
  Government Varying Policies: A valuable piece of knowledge

Venture capital investments have indeed come from individuals with full money bag and
in this way they certainly have risk taking capacity. Due to the involvement of high risk
in venture financing the investors comprehensively look for investment and exit on very
elastic terms that in a manner provides them with firm levels of protection.

The dream exit should be done with IPOs and M&A on an overall basis and not just
within India. In this perspective the judgement of the judiciary levitating doubts on
treatment of tax on capital gains made by firms listed in Mauritius which subsequently
shows important varying policies with reflective effects. For VC firms it is certainly
acting as a dampener to fresh fund raising.

 Response time: As faster as it could be

Quicker decision making is a key aspect in the success of any. The entrepreneur must
know the disturbances he has to deal with a funding institution. They have a very clear
mind-set for defined decision making process that works with clock like accuracy, which
means entrepreneur have to set an alarm once they reach a decision on a funding
schedule.

 Global Environment: Be acquainted with what is going on

It is vital for the Indian venture capital firms and venture financed enterprises to find
opportunities for investment abroad because global integration is increasing along with
the flexibility of capital. This would improve their ability to generate better returns and
gift them with the global working experience.

 Human Resource: Must be a worthy one

Venture capital ought to become an institutionalized industry that should be financed and
managed by successful entrepreneurs, professional and cultured investors. Venture
capitalist are not just finance providers but are also meticulously involved with the
investee enterprises They also provide knowledge via management and marketing
support and in its way generated the beliefs and culture of the industry. Venture capital

325
has only one common aspect that grazes across geography that is risk capital financed by
experts in the field. Venture capital should be allowed to grow by means of professional
and institutional management particularly in Indian sub-continent.

Balancing Game among the Three Factors

Regardless of success stories like Apple, FedEx of Microsoft a fair number of deals fail
but it is expected that Venture Capital supported companies can provide high returns the
success ratio is marginal. Thus every deal has a component of potential profit and an
element of risk depending upon its size.

Financial markets and the

industries to invest in

Knowledge

Risk management Possible investees

skills and contacts to and external expertise
investors

Figure 6.10: Frame work for key success factor

It is essential for Venture Capital Firms to manage the balance between these three
factors in order get the success just as the above given examples.

Knowledge: The crucial aspect to win the balancing game

Getting the correct balance in the “Magic Triangle” is not a child play but with
appropriate knowledge about the following features-

326
  Financial markets and industries to invest in;
 Risk management skills and
 Associates to investors, probable investees
 External expertise.

For the VC firms, high profit is important as it generate good track record and it also
act as a vibrant argument to attract funds for larger deals yet the larger is the deal the
higher is the threats of losses. However careful portfolio management lowers down
the risk element. A number of Venture Capital firms have refused to invest in e-start-
up and reason is given as it is too dangerous.

Innovation: A criteria for classification

The firms have been classified into three categories on the basis of prime form of
innovation.

Channel and Process Businesses

The companies which provided supply chain solutions or access to new markets were
classified in “Channels and process” category. For example, a firm that is sourcing the
rural crafts to be sells in urban markets.

System integration or Service innovation Businesses

This category consists of those Companies that provided solutions by integrating

different components or provided new service offering. For example a firm supplying
safe drinking water or setting schools.

Technology Innovation Businesses

Companies that were based on new technology development were fallen in this category
and the range of examples is growing of such firms.

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 Table 6.25
Distribution of impact investments by the form of innovation

Invested % of total Average

Forms of Investor No. of
amount amount investment per
innovation deal companies
($,million) invested deal

Channels and
205.53 16% 132 2.10 77
Process

System
integration/
1031.73 79% 364 3.02 122
service
innovation

Technology
66.02 5% 27 3.00 13
innovation

Grand total 1303.28 100% 523 2.82 212

Source: - Indian Venture Capital and Private Equity Report-2013

Key notes of the above given table 6.25 are as follows-

 About four-fifths of the investments have been made in companies of the “System
integration / service innovation” category.
 58% of the companies were present their in “System integration / service
innovation” category.
 The average investment per deal is also on peak for above discussed category.
 Companies of “Channels and process” category account for 16 percent of the total
investment,
 “Channels and process” businesses faced the lowest average investment per deal.
 “Technology innovation” category accounts for the least percentage of
investment.

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Conclusions: Innovations works out or not!

 It is sensed that execution skills are mainly needed for the companies in the
“System integration / service innovation” category. In this category largely the
BoP market is treated as a consuming market and enables to provide various
products and services to that market. It will help in a supply guarded state and
provide income generating opportunities at the BoP.

 Investments shown in the “channels and process” category help in increasing the
income levels of the BOP segment, and enable them to put away products and
services offered by the “System integration / service innovation” companies.

 In the just discussed category investors would have to largely depend on the
execution skills of the entrepreneur for the success of the investment.

 “Technology innovation” category has objectives such as to develop products

exactly suitable for the BOP segment in this way it will make a stronger influence
on the scale of impact and it will act as catalyst for both income generation and
consumption.

 On the whole if investors would like to create a stronger impact at the BOP, they
must make additional investments in both the “Technology innovation” and
“Channels and process” categories.

 After getting the profit probably the investors would slowly move towards
making more investments in the above discussed two in order to create a stronger
impact at the BOP.

6.6 Investments Timing: Look for the precise horoscope

6.6.1 Rounds of Funding

A firm usually goes through many rounds of VC funding to meet their financing
requirements. It is beneficiary for the investors and entrepreneurs to work in rounds to
raise the capital.

329
In a particular round, there can be more than one investor investing jointly. We
considered any successive funding as a separate round if there is a gap of three months or
more from the prior round.

The following Table 6.26 gives facts of the investment done in different rounds. It is to
be informed that 173 companies are used in this analysis.

Key Notes from the following table are as follows-

 It is cleared that only about 10% of the companies have successfully raised more
than three rounds of funding showing that most impact investments have been
fresh.
 70% of the investment has been done in the first three rounds out of the total
investments.
 The average investment per round also demonstrations an increasing drift with
increasing round number.
 The funding requirements also increase as the company size increase.

The added details regarding the distribution are as follows

 Total number of funding rounds was 297.

 Out 173 companies 117 have raised only one round of funding about 68% of the
total.

Note: It is a matter of concern that only after one round of funding how the companies
would be able to achieve self nourishment.

330
 Table 6.26

Investment details in different rounds

Tota Invested Average Average

Round No. of No. of % of total
l amount inv./round inv./deal
Numbe companie investor investmen
deal ($,million ($,million ($,million
r s s t
s ) ) )

1 173 80 223 531.25 41% 3.07 2.38

2 56 42 93 209.79 16% 3.75 2.26

3 30 32 57 171.01 13% 5.70 3.00

4 18 26 40 165.09 13% 9.17 4.13

5 9 17 23 99.98 8% 11.11 4.35

6 4 9 9 39.36 3% 9.84 4.37

7 3 4 5 38.70 3% 12.90 7.74

8 2 4 4 13.30 1% 6.65 3.33

9 1 6 6 25.50 2% 25.50 4.25

10 1 2 2 9.00 1% 9.00 4.50

Total 173 103 462 1303.28 100% 4.39 2.82

Source: - Indian Venture Capital and Private Equity Report-2013

331
 Table 6.27

Distribution of companies by number of funding rounds

Invested Average Average

Round No. of Total % of total
amount inv./round inv./deal
Number companies deals investment
($,million) ($,million) ($,million)

1 117 146 1402.38 31% 3.44 2.76

2 26 85 199.15 15% 3.83 2.34

3 12 56 145.02 11% 4.03 2.59

4 9 60 193.19 15% 5.37 3.22

5 5 43 116.45 9% 4.66 2.71

6 1 10 32.27 2% 5.38 3.23

7 1 16 108.52 8% 15.50 6.78

8 1 12 26.57 2% 3.32 2.21

10 1 34 79.73 6% 7.97 2.35

Total 173 462 1303.28 100% 4.39 2.82

Source: - Indian Venture Capital and Private Equity Report-2013

6.6.2 Round First: The Round of Incorporation

It is precarious for a social enterprise to perceive early stage funding. We all are aware of
the fact that lack of early stage funding is one of the biggest obstacles faced by
entrepreneurs in India. The extent between date of incorporation and first round of
funding has already been discussed. It could be a sign of early access to outside funding.

332
 Table 6.28
Duration (in months) between date of incorporation and first investment

Duration in Amount
Average Average
months (inc. No. of No. of
duration (in $, inv./deal ($,
Date of 1st companies deals
(months) million) million)
investment)

<24 months 52 71 14 119 195

<48 months 40 48 36 79 1.88

<96 months 34 41 67 62 1.94

>96 months 8 9 131 20 2.5

overall 134 169 39 280 1.96

Source: - Indian Venture Capital and Private Equity Report-2013

The given table 6.28 will discuss about this topic statistically and following are the
outcomes-

 Out of the total investment of $280 million in the first round about 42.5 % of the
same occurred within 24 months.
 Also 42 % of deals occurs within 24 months from incorporation
 The average duration has been 14 months for deals within 24 months from
incorporation.
 The average investment per deal in the first round is also inferior than the average
investment per deal which is about $2.82 million

It could be understood that the initial funding requirement would be lower than the
requirement in the later stages of the enterprise. Although the trends for average duration
and the average investment per deal are indicating that there is a possibility for growth in
aggregate proportion of first round of funding that is taking place within 24 months.

333
Conclusion: First Round Showdown

 It is quite clear that a major proportion of impact investments occur in the interior
of two years from the date of incorporation of the enterprise.
 Impact investments are invented to facilitate early stage investments in those
companies that are expected to create a social impact. They also enabled the
accessibility of lower investment ticket sizes.
 The investment sizes of conservative VCPE investors are much larger, which
might not be suitable for early stage funding for social enterprises.
 Further study fund focus indicated that social investors have gone through the first
round investments in more companies as compared to mainstream investors as in
the numbers it has been 72 for social investors and less than 50 for mainstream
ones.
 SVC funds have financed in 32 companies although mainstream out of those
companies that have received their first round investment within 24 months from
the date of incorporation while VC funds have invested only 18 such companies.
Thus we can admit that the emergence of SVC funding has been beneficiary to
social enterprises.

6.6.3 Interval among consecutive rounds of funding: Take some rest and
continue

The process of multiple rounds funding is also known as staging. Staging of investments
can be beneficial for both the investor and the investee company.

Investors Viewpoint-

In accordance to investors staging is an effective mechanism to monitor the progress

achieved. If the investee company is not able to show satisfactory progress the chances of
failure the in next round of funding might be possible. This loops progress will help the
investors to conserve rare capital by not making further investments in non-performing
companies.

334
Investee Company Viewpoint

The investee companies have to show progress from their previous round in order to
claim higher valuation in the successive round. It also specifies a certain degree of
success-as without evidence of success; investors would not have made an investment in
the next round while the investee company will be capable to raise a succeeding round of
funding

In Statistical Words

As the stats shows that. 32% of the companies have had more than one round of funding.
This ratio is quite acceptable as close to one-third of the companies have been able to
show a degree of progress, which has empowered to draw the next round of funding.

This associates satisfactorily with the investment trends in the overall VCPE industry
where only 19% of the companies possessed more than one round of funding.

The following Table 6.29 provides the details about the trends in duration between
successive rounds of funding.

Table 6.29
Duration between successive funding rounds
Duration No. of Pairs of Average duration between successive rounds
in months companies rounds (in months)
Less than 12 19 4
6 months
Less than 49 85 13.47
24 months
Less than 18 19 31
48 months
48 months 6 6 82.66
or more
Total 67 129 17.88
Source: - Indian Venture Capital and Private Equity Report-2013

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Key notes from the above mentioned table are follows-

 Nearby 66% of the total 129 round-pairs, the average funding duration was 13.47
months indicating that on an average the firm is able to raise the next round of
funding in a little more than a year after the previous round.
 The overall average funding duration is 17.88 months which is reasonably higher
than the 10 - 15 month duration seen in the total VCPE investments

Conclusions: The Ultimate Verdict

 It would have been perfect that the companies are able to raise sufficient capital
that would meet the requirements for the next two years, which may be because of
the awareness of investors about the risk investment.
 The Investors are investing smaller amounts in each round in this manner making
the investee companies to look for funding at shorter intervals.
 One of the reasons for the higher duration for social enterprises could the higher
scaling taken as compared with mainstream enterprises.
6.7 Classification of Investors: In a comprehensive way

Two main bases for the classification of the investors are as follows-

 Focus
 Origin.

Based on their focus investors were further classified as following-

a) Social Fund Investors

b) Mainstream Fund Investors

Based on their origin the two categories of investors are following-

a) Domestic Fund Investors

b) Foreign Fund Investors

Statistical Analysis of the Discussed Classification

336
From the Table 6.30 given below, following facts are popped out-

 Foreign investors account for 61% of the total sample though it seems to be high
but it is lower than the overall proportion of foreign VCPE investors (71%).
 Mainstream investors account for 61% of the total sample.
 Domestic investors account for one-third of the sample while foreign investors
account for the remaining two-third

Conclusions

The facts mentioned above indicates the following details-

 The mainstream VCPE investors are curious to invest in social sector

enterprises as these enterprises are proficient of meeting the return and exit
measures of mainstream venture funds.
 As a matter of fact we all know that India could attract investment on account
of the large market size but not to forget that it is one of the leading
performers in the impact investment segment.
 India is to achieve leadership as a source of capital up till now.

Table 6.30
Number of Investors in different categories

Investor focus
Investor Origin Total
Mainstream Social

Domestic 29 15 44

Foreign 40 30 70

Total 69 45 114

Source: - Indian Venture Capital and Private Equity Report-2013

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Noted Points from the table 6.31 given below are as follows-

 Number of funded companies is roughly equal for domestic and foreign investors
 Social investors have invested in 35% more number of companies as compared to
main stream investors.
 The Amount Invested by mainstream investors is more than that of social
investors.
 As seen below on an average domestic and social investors invest in more number
of companies while foreign and mainstream investors make higher investment per
deal.

Table-6.31
Investment by fund type
Investors by fund origin Investor by fund focus
Sample
Domestic Foreign Social Mainstream

No. of
165 100 103 112 82
Companies

Amount
Invested 1221.01 444.50 757.49 462.88 739.11
($,million)

Deals 404 181 201 243 139

No. of
96 38 55 32 61
Investors

Source: - Indian Venture Capital and Private Equity Report-2013

Conclusion: The outcome of the study

 Domestic and social investors frequently invest in the early stages of the business,
where the funding requirement is lower.
 It would not have been conceivable for so many social enterprises to get venture
funded in the truancy of keen SVC funds

338
Statistical Analysis: Number of Investors along with Number of Deals

 The average number of deals by a social investor is 7.1 that are more than double
that of the mainstream investors that stands at 2.5.
 The average number of deals by a domestic investor is 5.2 while it is 3.8 for a
foreign investor.
 The social fund, domestic funds have invested in more number of deals in about
11.6 while the number for foreign is 4.8.

Conclusion: An addition to the former one

 We all know that the social and domestic investors are more active in funding
social enterprises.
 More number of social enterprises could be funded by setting up of domestic
social VC funds.

Table-6.32
Cross Tabulation of no. of investors and deals
Fund Type Mainstream Social Grand Total

Domestic [29,53] [15,174] [44,227]

Foreign [40,119] [30,144] [70,263]

Grand Total [69,172] [45,318] [114,490]

Source: - Indian Venture Capital and Private Equity Report-2013

6.8 Likings of the investors: The Investor’s choice of Industry

6.8.1 The Targeted Sectors: It’s the matter of preference

The investors usually specify the industries of their preference to invest. In this way we
can separate them as-

 One with specific number of targeted sectors.

 One with large number of targeted sectors.

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Statistical Analysis: Number of Interested Investors in the Different Sectors

Note-It should be kept in mind that the investors do not always invest in the sectors of
their interest.

For this study the industries have been categorized in eight types. Also the given table
6.33 is divided in two panels as follows-

Panel A- It shows the investor interest across the eight different industry categories. The
Key Points of this panel are as follows-

 The largest numbers of investors have shown an interest in investing in the BFSI
sector.
 The Industries with second high investor interest are Agriculture & Healthcare,
Engineering & Construction, and Non-financial consumer services.
 The investors highly prefer BFSI sector in the case of dedicated SVC funds.
 BFSI accounts for a similar percentage of total investors as in SVC category on
the whole
 Non-financial consumer services, Agriculture & Healthcare, and IT & ITES are
the other sectors having about one-third investors interested from the sample.
 Only 36% of the total investors have recognized the manufacturing sector as an
area of interest.

Table-6.33
Investor interest in different industry categories
Industry No. of
Investors by fund origin Investor by fund focus
Investors

Domestic Foreign Social Mainstream

Panel A: Investor interest in different industry categories

Agriculture &
52 23 29 3 49
Healthcare

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 BFSI 71 27 44 29 42

Engineering &
46 18 28 10 36
Construction

IT & ITES 55 22 33 14 41

Manufacturing 32 16 16 5 27

Travel &
9 7 2 1 8
Transport

Other services 22 10 12 9 13

Non-financial
consumer 52 26 26 11 41
services

Panel B: Investor Interest in select sub-categories

FMCG 3 1 2 - 3

Advertising &
4 2 2 - 4
Marketing

Food &
19 13 6 - 19
Beverages

Media &
17 10 7 - 17
Entertainment

Hotels &
10 4 6 - 10
Resorts

Shipping &
10 6 4 - 10
Logistics

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 Telecom 6 2 4 - 6

Mining &
2 2 0 - 2
Minerals

Diversified 2 1 1 - 2

Total 114 44 70 45 69

Source: - Indian Venture Capital and Private Equity Report-2013

Panel B- It shows the number of investors interested in some of the sector sub-categories
under the eight broad categories. Key points from this panel are following-

 Mainstream investors have shown interest in the sector subcategories.

 Surprisingly none of the social investors have shown any interest to invest in
these sector sub-categories.

Conclusion: The resolution about the industry

 It is clear that sector specificity is somehow linked with social venture

investments.
 Subsequently some sectors really have the potential to fascinate investment from
the SVC fund as their progressive impact higher than the others.

6.8.2 The Invested Sectors: Who Fetched the most of it?

Statistical Analysis

The analysis is done with the purpose to find whether there are differences intent and
actual investment

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 Table-6.34
Number of investors who have made at least one investment in the various sectors
Industry No. of
Investors by fund origin Investor by fund focus
Investors

Domestic Foreign Social Mainstream

Agriculture &
32 13 19 11 21
Healthcare

BFSI 57 20 37 27 30

Engineering &
16 5 11 9 7
Construction

IT & ITES 22 9 13 13 9

Manufacturing 4 2 2 4 0

Travel &
1 1 0 1 0
Transport

Other services 16 6 10 0 7

Non-financial
consumer 38 18 20 12 25
services

Total 114 44 70 45 69

Source: - Indian Venture Capital and Private Equity Report-2013

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 Fig.6. 11: Number of investors who have made at least one investment in the various sectors
Key Points driven out of the above given table 6.34 are as following-

 50% of the investors have made an investment in the BFSI sector indicating that
social investors are more active in investing in the BFSI sector as compared to the
mainstream investors.
 The percentage of social investors having interest to invest is pretty close to that
of who have actually invested.
 20% of the social investors had shown interest to invest in a excess of sectors that
could not be grouped under the remaining seven sector categories.

Conclusion: Why the interest followed?

 The high activity of social investor in BFSI sector may be due to the investments
in the microfinance companies.
 The financial insertion is an important theme in social or impact investments.

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  The large interest to invest in the BFSI sector can be seen in the number of
investors who have actually made an investment in the other sectors.

6.9 Likings of Investors: The Choice of Stage

The timing is vital in the case of making investment and subject to the life cycle stage of
the investee company investments have been classified into seven categories.

6.9.1 Statistical Analysis-The Preference of different Stages

The following tables 6.35 give details the interested investor and the number of investors
who have actually invested in different stages

Note-If the investors have shown an interest to invest in more than one stage, then they
would be counted in both the categories

.Table-6.35

Number of investors who have expressed interest to invest in different stages

Investor by fund origin Investor by fund focus

Investment No. of

stage Investors

Domestic Foreign Social Mainstream

Early 90 39 51 35 55

Growth 81 30 51 25 56

Late 70 28 42 22 48

Other 21 8 13 10 11

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Buyout 15 9 6 3 12

Pre-IPO 21 8 13 0 21

PIPE 26 8 18 2 24

Total 114 44 70 45 69

Source: - Indian Venture Capital and Private Equity Report-2013

60

50

40

Domestic
30 Foreign
Social
Mainstream
20

10

0
Early Growth Late Other Buyout Pre-IPO PIPE

Fig 6.12: Number of investors who have expressed interest to invest in different
stages

Noted points of the above table are following-

 Nearby 79% of the 114 investors are interested to invest in the early stage of the
business, which is highest than the other but not all of them are interested in only
this stage

346
 Now we will discuss about the fund focus investments-

 With 89% the domestic investors have shown an objective to invest in the early
stage while foreign investors stand at 73%.

 The percentage of social investors and mainstream investors invested in early

stage of the business is almost equal at 78%.

 Subsequently the share of social investors drops down as we move through other
stages.

 The percentage of social investors who invest in the growth stage is 56%, in the
case of mainstream investors it is 81%.

Conclusions

SVC Funds: Perfect for early stage

The factors behind the success of SVC funds could be the following-

 SVC funds invest largely in the early stages of the business.

 Their fund management team is more used to with the ground realities

 They used to be in a better position to calculate and take up the risks.

SFC funds might not be able to fully meet the growth and late stage funding requirements
of the investee company; here comes the role of Mainstream investors.

Mainstream Funds: Better for successive stages

The mainstream funds are larger enough in size to support the larger funding
requirements of the enterprise in the successive stages.

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6.9.2 Statistical Analysis: The actual investment ensued

Table-6.36

Number of investors who have actually made an investment in different stages

Investor by fund origin Investor by fund focus

Investment No. of

stage Investors Domestic Foreign Social Mainstream

Early 71 30 41 35 36

Growth 57 20 36 23 34

Late 42 15 27 19 23

Other 9 5 4 7 2

Buyout 4 2 2 3 1

Pre-IPO - - - - -

PIPE - - - - -

Total 114 44 70 45 69

Source: - Indian Venture Capital and Private Equity Report-2013

Key Points of the above given table are following-

 62% of the total numbers of investors have made at least one early stage
investment.
 Percentage of domestic investors and social investors making an early stage
investment is 68% and 77% respectively.
 Foreign and mainstream investors investing in early stage stands at 59% and 52%
respectively.
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Conclusion-where the actual investments stands

 We can admit on the fact no high difference is found among the fund types in the
percentage of investors who have made no less than one investment in the growth
stage.
 Domestic and social investors play a major role in the early stage financing. So in
order to assist early stage of funding the thinking unit should set up more
domestic SVC funds.
6.10 Investment’s Nature: On the basis of fund type

Statistical Analysis: Distribution of deal size

Table-6.37
Distribution of deal size by fund type
Investment by fund type Investment by fund focus
Size of the Total
($, million) ($, million)
deal investment

($, million) ($, million)

Domestic Foreign Social Mainstream

<1 29.32 33.13 47.29 15.16 62.45

<3 104.60 113.21 155.49 62.33 217.82

<8 167.10 206.11 165.48 207.73 373.21

<13 88.71 180.73 54.68 214.77 269.45

≥13 54.76 224.30 39.95 239.12 279.07

Total 444.50 757.49 462.88 739.11 1202.00

Source: - Indian Venture Capital and Private Equity Report-2013

Noted points that popped out from the table given above are as follows-

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  Domestic Investors invested $29.32 million in those deals where the investment

was below $1 million.

 The sum of amount invested by domestic and foreign investors $62.45 million in

the having investments under 1 million.

 The ratio of investment made by foreign investors to that of done by domestic

investors increases as the investment range increases.

 The proportion of investment made by mainstream investors increase

significantly with the increase of investment range.

 The fraction of investment by mainstream investors to social investors is 0.32 for

investment under less than one million dollars

 The fraction discuss above increases to 3.93 when the range is in between $8 -

$13 million

 The same ratio increase further to 5.98 when the investment more than $13

million.

 The investment from SVC funds decrease with the decrease of deal size

Conclusion: To be continued

We can now accept the fact that SVC funds pursue to invest in early stage investing at
low to reasonable investment amounts while larger mainstream venture funds moves in
other manner.

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 Graphical Representations

Number of deals in different deal sizes: Domestic and Foreign investor

Fig. 6.13: Investment amount by fund type

 The profane decline could be seen in the deals size as the investment amount
increases.
 Domestic investors have made a little more number of investments where the deal
value was less than one million dollars.
 The numbers of investments made by foreign investors are higher for all the
enduring investment ranges.

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 Number of deals in different deal sizes: Social and Mainstream Investors

Fig. 6.14: Investment amount by fund focus

 There has been an earthly decline in the number of deals in conjunction with
increase in investment amount.
 SVC funds have invested in extra number of deals at inferior investment ranges,
 SVC fund investments grow slowly with increase in the investment amount.
 At the heights of investments mainstream investors have made more number of
investments with lower deal size.

6.11 Exit and Extent: It is better to be on time

6.11.1 Exit from Investments: The end should be perfect

The vital ingredients to perceive healthy returns on the investments made by venture
funds also include a perfect exit.

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Statistical Analysis: The exit task

Note: The sample used for the analysis includes 36 exit deals in 20 companies containing
26 investors.

Table-6.38

Type of exits by investors

Type of exit Total exit Investor by fund origin Investor by fund focus

deals

Domestic Foreign Social Mainstream

IPO 9 2 7 1 8

M&A 27 11 16 12 15

Overall exits 36 13 23 13 23

Source: - Indian Venture Capital and Private Equity Report-2013

Key points of the above given table are as follows-

 The share of companies that have provided an exit to their investors is 9.4%.
 The proportion perceived for the overall VCPE investments in the country is
15.1%.
 The foreign investors and mainstream investors have been able to grasp more
exits as than domestic and social investors

Conclusion: Reasons behind the drift

 Domestic and Social investors need more time to exit as they invest in early
stages.
 There number of mainstream or foreign investors in a firm is higher than that of
numbers of social or domestic investors.

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  The form of exit is not very different between the different investor types, M&A
is the most frequent mode of exit in all groupings

Additional Information regarding both types of exits is shown in the following table-

Table-6.39
Number of companies and investors with exits
Type of exit Total Investor by fund origin Investor by fund focus

Domestic Foreign Social Mainstream

IPO [3, 9] [2, 2] [2, 7] [1, 1] [3, 8]

M&A [18, 19] [10, 8] [8, 11] [12, 8] [9, 11]

Overall exits [20, 26] [12, 10] [9, 16] [12, 8] [12, 18]

Source: - Indian Venture Capital and Private Equity Report-2013

6.11.2 Extent of Investment: The appropriate period

Statistical Analysis: What is Investment duration?

Three tables are used to show the pattern in investment duration and average duration of
investment for different fund types before exit.

Actually Investment duration is that time for which the investor had remained invested in
the company.

Key points from following three tables are as follows-

 The first two tables shown that bulk of the exits have been seen in the category
where the investment duration is between 2 - 4 years.
 The third table cleared the fact that the average investment duration of a social
fund is 57 months and the same for a mainstream fund is 46.
 The mean duration of investment by domestic fund is 54 months while that of a
foreign fund is 47 months.

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  The average duration of investment concerned with social enterprises is 50 month.
 The average investment duration of VCPE investments in India is lower than the
above discussed ones and stands at 17 month.
 The average duration of investment for is 71% more than that of for domestic
mainstream investors.

Table-6.40
Duration of investment before exit (by fund focus)
Investment Total Exit IPO M&A
duration Deals
(months) Social Mainstream Social Mainstream
<24 8 2 1 5
<48 15 1 4 5 5
≥48 13 2 6 5
Total Exits 36 1 8 12 15
Source: - Indian Venture Capital and Private Equity Report-2013

Table-6.41
Duration of investment before exit (by fund origin)
Investment Total Exit IPO M&A
duration
Deals
(months)
Domestic Foreign Domestic Foreign

<24 8 2 6

<48 15 1 4 5 5

≥48 13 1 1 6 5

Total Exits 36 2 7 11 16

Source: - Indian Venture Capital and Private Equity Report-2013

355
 Table-6.42
Average investment duration before exit (in months)
Fund type Mainstream Social Average

Domestic 38 65 54

Foreign 48 45 47

Average 46 57 50

Source: - Indian Venture Capital and Private Equity Report-2013

Conclusions: Flawless piece of time

 Social enterprises would need investors who can stay invested in the company for
a longer duration as they are estimated to take more time in climbing up.
 Another requirement for the above discussed are the investors who would not
excessively pressure the entrepreneurs for a quick exit.
 Social venture funds have been able to provide the tolerant capital that is needed
by entrepreneurs of social sector.

6.11.3 Extent of Investment: For investments still standing there

Statistical Analysis: Duration of Existing Investments

Table-6.43
Fund Type and existing environment
Fund type Mainstream Social Total

Domestic [36, 25] [92, 15] [119, 40]

Foreign [63, 34] [80, 29] [124, 63]

Average [89, 59] [145, 44] [203, 103]

Note: In [a, b], a indicates the number of companies and b indicates the number of
investors

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Key points of the above given table are as follows-

 145 out of 201 existing companies have received investment from SVC funds.
 Mainstream venture fund have invested in only 44% of the companies.

Another table is mentioned here showing the average duration for same purpose

Key points from the table 6.42 given below are as follows-

 SVC funds have a higher average invested duration as compared to other

types of investors.
 The average duration of investment in existing investments is 38 months just
about three years.
 The average investment duration of existing investments is lower than that of
for exited investments which is so far so good otherwise it represent an
unhealthy case making it hard for the companies to provide an exit to
investors.

Table-6.44
Average invested duration in the existing investments
(In months)
Fund type Mainstream Social Average

Domestic 33 43 41

Foreign 35 37 36

Average 34 40 38

Conclusions: Timings for exit or to be continue

 A lesser investment duration in current investments shows that most of the

investments are fresh and the poor health of current investments is invisible.
 The above mentioned investments delivered an exit to their investors somehow.
 The social investing has been quite a spectacle in India.

357
 Graphical Representation

Fig. 6.15: Duration of investment in current portfolio companies

The duration of investment in the current set of companies is shown in the figure given
below which gives the following details-

 Social investors and domestic investors have a high share of deals about 73% and
76% respectively in case of 24 months or more.
 Both mainstream and foreign investors have equal proportion of deal is 68%.
 SVC investors account for the largest deals where the investment duration has
been six years or more. Out of the total 36 deals, where the investment duration
has been six years or more, 30, i.e., 83% are pertaining to investments by SVC
investors.

6.12 Impact investors: The promoter of Investments

SVC funds are able to assist added investments from larger mainstream investors.

The companies having investment from both SVC and mainstream venture funds were
included in the analysis and categorized as follows-

 Companies that had received investment from SVC funds and then from
mainstream venture funds

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  Companies that had received investment from both social and mainstream
venture funds at the same time.

Table-6.45
Social venture funds as financial catalysts
No of Mainstream investor Social investor Total amount
companies (% of Amount (% of Amount ($ million)
invested ) invested)
69% 31% 607.49
Mainstream investor Social investor Total
41
(Deals, No. of (Deals, No. of (Deals, No. of
investors) investors) investors)
102,39 129,31 231,70

Table 6.50 gives the results of the analysis. It was seen that 41 companies out of the
sample of 212 companies had investment from both social and mainstream investors that
met the criteria listed above. The total investment in these 41 companies was $607.49
million. 31% of the investment ($188 million) was from social investors, and the
remaining 69% ($419 million) was from the mainstream investors. Thus, on the whole, a
dollar of investment from

Key points from the above given table are as follows-

 SVC funds are related through an investment of 2.2 dollars from mainstream
investors.
 31 social investors had make possible the investments from 39 mainstream
investors concerning the terms of number of deals and number of investors.
 The average investment per deal by a social investor was $1.46 million.
 In the case of a mainstream investor the average investment per deal was $4.11
million.

Conclusion- Making way for each other

The investments by mainstream venture funds are larger because of the SVC funds that
make smaller investments per deal leading to a guarantee of favorable outcome.

359