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VENTURE CAPITAL

CHAPTER 1
1.1. INTRODUCTION OF VENTURE CAPITAL

Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning e uity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, !T and software. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as "eries # round) in the interest of generating a return through an eventual reali$ation event, such as an !%& or trade sale of the company. Venture capital is a subset of private e uity. Therefore, all venture capital is private e uity, but not all private e uity is venture capital !t is also a way in which public and private sectors can construct an institution that systematically creates networks for the new firms and industries, so that they can progress. This institution helps in identifying and combining pieces of companies, like finance, technical e'pertise, know-how of marketing and business models. &nce integrated, these enterprises succeed by becoming nodes in the search networks for designing and building products in their domain.

1.2.1. ORIGINS OF VENTURE CAPITAL


(efore )orld )ar !!, money orders (originally known as *development capital*) were primarily
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the domain of wealthy individuals and families. !t was not until after )orld )ar !! that what is considered today to be true private e uity investments began to emerge marked by the founding of the first two venture capital firms in +,-./ #merican 0esearch and 1evelopment Corporation (#01C) and 2.3. )hitney 4 Company. #01C was founded by 5eorges 1ariot, the *father of venture capitalism* (former dean of 3arvard (usiness "chool and founder of !6"7#1), with 0alph 8landers and 9arl Compton (former president of :!T), to encourage private sector investments in businesses run by soldiers who were returning from )orld )ar !!. #01C;s significance was primarily that it was the first institutional private e uity investment firm that raised capital from sources other than wealthy families although it had several notable investment successes as well. #01C is credited with the first trick when its +,<= investment of >=?,??? in 1igital 7 uipment Corporation (17C) would be valued at over >@<< million after the company;s initial public offering in +,.A (representing a return of over +B?? times on its investment and an annuali$ed rate of return of +?+C). 8ormer employees of #01C went on and established several prominent venture capital firms including 5reylock %artners (founded in +,.< by Charlie )aite and (ill 8leers) and :organ, 3olland Ventures, the predecessor of 8lagship Ventures (founded in +,AB by 2ames :organ). #01C continued investing until +,=+ with the retirement of 1ariot. !n +,=B, 1ariot merged #01C with Te'tron after having invested in over +<? companies. 2.3. )hitney 4 Company was founded by 2ohn 3ay )hitney and his partner (eano "chmidt. )hitney had been investing since the +,@?s, founding %ioneer %ictures in +,@@ and ac uiring a +<C interest in Technicolor Corporation with his cousin Cornelius Vanderbilt )hitney. (y far )hitney;s most famous investment was in 8lorida 8oods Corporation. The company developed an innovative method for delivering nutrition to #merican soldiers, which later came to be
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known as :inute :aid orange Duice and was sold to The Coca-Cola Company in +,.?. 2.3. )hitney 4 Company continues to make investments in leveraged buyout transactions and raised >=<? million for its si'th institutional private e uity fund in B??<.

1.2.2. Early venture cap tal an! t"e #r$%t" $& S l c$n Valley.
# highway e'it for "and 3ill 0oad in :enlo %ark, California, where many (ay #rea venture capital firms are based &ne of the first steps toward a professionally-managed venture capital industry was the passage of the "mall (usiness !nvestment #ct of +,<A. The +,<A #ct officially allowed the E.". "mall (usiness #dministration ("(#) to license private *"mall (usiness !nvestment Companies* ("(!Cs) to help the financing and management of the small entrepreneurial businesses in the Enited "tates. 1uring the +,.?s and +,=?s, venture capital firms focused their investment activity primarily on starting and e'panding companies. :ore often than not, these companies were e'ploiting breakthroughs in electronic, medical, or data-processing technology. #s a result, venture capital came to be almost synonymous with technology finance. #n early )est Coast venture capital company was 1raper and 2ohnson !nvestment Company, formed in +,.BF+BG by )illiam 3enry 1raper !!! and 8ranklin %. 2ohnson, 2r. !n +,.<, "utter 3ill Ventures ac uired the portfolio of 1raper and 2ohnson as a founding action. (ill 1raper and %aul )ythes were the founders, and %itch 2ohnson formed #sset :anagement Company at that time. !t is commonly noted that the first venture-backed start-up is 8airchild "emiconductor (which produced the first commercially practical integrated circuit), funded in +,<, by what would later
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become Venrock #ssociates. Venrock was founded in +,., by Haurence ". 0ockefeller, the fourth of 2ohn 1. 0ockefeller;s si' children as a way to allow other 0ockefeller children to develop e'posure to venture capital investments. !t was also in the +,.?s that the common form of private e uity fund, still in use today, emerged. %rivate e uity firms organi$ed limited partnerships to hold investments in which the investment professionals served as general partner and the investors, who were passive limited partners, put up the capital. The compensation structure, still in use today, also emerged with limited partners paying an annual management fee of +.?IB.<C and a carried interest typically representing up to B?C of the profits of the partnership. The growth of the venture capital industry was fuelled by the emergence of the independent investment firms on "and 3ill 0oad, beginning with 9leiner, %erkins, Caulfield 4 (yers and "e uoia Capital in +,=B. Hocated in :enlo %ark, C#, 9leiner %erkins, "e uoia and later venture capital firms would have access to the many semiconductor companies based in the "anta Clara Valley as well as early computer firms using their devices and programming and service companies. Throughout the +,=?s, a group of private e uity firms, focused primarily on venture capital investments, would be founded that would become the model for later leveraged buyout and venture capital investment firms. !n +,=@, with the number of new venture capital firms increasing, leading venture capitalists formed the 6ational Venture Capital #ssociation (6VC#). The 6VC# was to serve as the industry trade group for the venture capital industry. Venture capital firms suffered a temporary downturn in +,=-, when the stock market crashed and investors were naturally wary of this new kind of investment fund. !t was not until +,=A that venture capital e'perienced its first maDor fundraising year, as the industry raised appro'imately >=<? million. )ith the passage of the 7mployee 0etirement
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!ncome "ecurity #ct (70!"#) in +,=-, corporate pension funds were prohibited from holding certain risky investments including many investments in privately held companies. !n +,=A, the E" Habour 1epartment rela'ed certain of the 70!"# restrictions, under the *prudent man rule,* thus allowing corporate pension funds to invest in the asset class and providing a maDor source of capital available to venture capitalists.

1'()*+ ,
The public successes of the venture capital industry in the +,=?s and early +,A?s (e.g., 1igital 7 uipment Corporation, #pple !nc., 5enentech) gave rise to a maDor proliferation of venture capital investment firms. 8rom Dust a few do$en firms at the start of the decade, there were over .<? firms by the end of the +,A?s, each searching for the ne't maDor *home run*. The number of firms multiplied, and the capital managed by these firms increased from >@ billion to >@+ billion over the course of the decade. The growth of the industry was hampered by sharply declining returns, and certain venture firms began posting losses for the first time. !n addition to the increased competition among firms, several other factors impacted returns. The market for initial public offerings cooled in the mid+,A?s before collapsing after the stock market crash in +,A= and foreign corporations, particularly from 2apan and 9orea, flooded early stage companies with capital. !n response to the changing conditions, corporations that had sponsored in-house venture investment arms, including 5eneral 7lectric and %aine )ebber either sold off or closed these venture capital units. #dditionally, venture capital units within Chemical (ank and Continental !llinois 6ational (ank, among others, began shifting their focus from funding early stage companies toward investments in more mature companies. 7ven industry founders 2.3. )hitney 4 Company and )arburg %inups began to transition toward leveraged buyouts and growth capital investments.
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1.2.-. T"e venture cap tal .$$/ an! t"e Internet 0u..le 11''2 t$ 2)))3 (y the end of the +,A?s, venture capital returns were relatively low, particularly in comparison with their emerging leveraged buyout cousins, due in part to the competition for hot startups, e'cess supply of !%&s and the ine'perience of many venture capital fund managers. 5rowth in the venture capital industry remained limited throughout the +,A?s and the first half of the +,,?s, increasing from >@ billion in +,A@ to Dust over >- billion more than a decade later in +,,-. #fter a shakeout of venture capital managers, the more successful firms retrenched, focusing increasingly on improving operations at their portfolio companies rather than continuously making new investments. 0esults would begin to turn very attractive, successful and would ultimately generate the venture capital boom of the +,,?s. Jale "chool of :anagement %rofessor #ndrew :etric refers to these first +< years of the modern venture capital industry beginning in +,A? as the *pre-boom period* in anticipation of the boom that would begin in +,,< and last through the bursting of the !nternet bubble in B???.FB?G The late +,,?s were a boom time for venture capital, as firms on "and 3ill 0oad in :enlo %ark and "ilicon Valley benefited from a huge surge of interest in the nascent !nternet and other computer technologies. !nitial public offerings of stock for technology and other growth companies were in abundance, and venture firms were reaping large returns.

VENTURE CAPITAL

1.- O04ECTIVE OF STU56

K To understand and e'plain the concept of Venture Capital. K To e'plain the 0egulation for Venture Capital. K To understand and e'plain #!8 (#lternative !nvestment 8unds) K To give &verview of Venture Capital.

1.7. ROLES
)ithin the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to as *venture capitalists* or *VCs*. Typical career backgrounds vary, but, broadly speaking, venture capitalists come from either an operational or a
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finance background. Venture capitalists with an operational background (operating partner) tend to be former founders or e'ecutives of companies similar to those which the partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds tend to have investment banking or other corporate finance e'perience. #lthough the titles are not entirely uniform from firm to firm, other positions at venture capital firms include/ L Venture partner+ M Venture partners are e'pected to source potential investment opportunities (*bring in deals*) and typically are compensated only for those deals with which they are involved. L Pr nc pal M This is a mid-level investment professional position, and often considered a *partner-track* position. %rincipals will have been promoted from a senior associate position or who have commensurate e'perience in another field, such as investment banking, management consulting, or a market of particular interest to the strategy of the venture capital firm. L A++$c ate M This is typically the most Dunior apprentice position within a venture capital firm. #fter a few successful years, an associate may move up to the *senior associate* position and potentially principal and beyond. #ssociates will often have worked for +IB years in another field, such as investment banking or management consulting. L Entrepreneur, n,re+ !ence (7!0) M 7!0s are e'perts in a particular domain and perform due diligence on potential deals. 7!0s are engaged by venture capital firms temporarily (si' to +A months) and are e'pected to develop and pitch start-up ideas to their host firm although neither party is bound to work with each other. "ome 7!0s move on to e'ecutive positions within a portfolio company.
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C3#%T70 B
VENTURE CAPITAL FIR8S AN5 FUN5S
2.1. VENTURE CAPITALISTS , # venture capitalist is a person who makes venture investments, and these venture capitalists are e'pected to bring managerial and technical e'pertise as well as capital to their investments. # venture capital fund refers to a pooled investment vehicle (in the Enited "tates, often an H% or HHC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. These funds are typically managed by a venture capital firm, which often employs individuals with technology backgrounds (scientists,
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researchers), business training andNor deep industry e'perience. # core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. (y definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital, thereby differentiating VC from buy-out private e uity, which typically invest in companies with proven revenue, and thereby potentially reali$ing much higher rates of returns. !nherent in reali$ing abnormally high rates of returns is the risk of losing all of one;s investment in a given start-up company. #s a conse uence, most venture capital investments are done in a pool format, where several investors combine their investments into one large fund that invests in many different start-up companies. (y investing in the pool format, the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.

2.2. FINANCING STAGES , There are typically si' stages of venture round financing offered in Venture Capital, that roughly correspond to these stages of a company;s development. L "eed funding/ How level financing needed to prove a new idea, often provided by angel investors. Crowd funding is also emerging as an option for seed funding. L "tart-up/ 7arly stage firms that need funding for e'penses associated with marketing and product development L L 5rowth ("eries # round)/ 7arly sales and manufacturing funds "econd-0ound/ )orking capital for early stage companies that are selling product, but
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not yet turning a profit L 7'pansion / #lso called :e$$anine financing, this is e'pansion money for a newly profitable company L 7'it of venture capitalist / #lso called bridge financing, -th round is intended to finance the *going public* process (etween the first round and the fourth round, venture-backed companies may also seek to take venture debt.

2.-. STRUCTURE OF VENTURE CAPITAL FIR8S , Venture capital firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. Venture capital firms in the Enited "tates may also be structured as limited liability companies, in which case the firm;s managers are known as managing members. !nvestors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called funds of funds.

2.7. T6PES OF VENTURE CAPITALIST FIR8S , Venture Capitalist firms differ in their approaches. There are multiple factors, and each firm is different. "ome of the factors that influence VC decisions include/
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(usiness situation/ "ome VCs tend to invest in new ideas, or fledgling companies. &thers prefer investing in established companies that need support to go public or grow.

L L L

"ome invest solely in certain industries. "ome prefer operating locally while others will operate nationwide or even globally. VC e'pectations often vary. "ome may want a uicker public sale of the company or e'pect fast growth. The amount of help a VC provides can vary from one firm to the ne't.

2.2. FUN5ING ,
&btaining venture capital is substantially different from raising debt or a loan from a lender. Henders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business. Venture capital is invested in e'change for an e uity stake in the business. #s a shareholder, the venture capitalists return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist *e'its* by selling its shareholdings when the business is sold to another owner. Venture capitalists are typically very selective in deciding what to invest inO as a rule of thumb, a fund may invest in one in four hundred opportunities presented to it,F citation neededG looking for the e'tremely rare, yet sought after, ualities, such as innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team. &f these ualities, funds are most interested in ventures with e'ceptionally high growth potential, as only such opportunities are likely capable of providing the financial returns and successful e'it event within the re uired timeframe (typically @I= years) those venture capitalists e'pect. (ecause investments are illi uid and re uire the e'tended timeframe to harvest, venture capitalists are e'pected to carry out detailed due diligence prior to investment. Venture capitalists
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also are e'pected to nurture the companies in which they invest, in order to increase the likelihood of reaching an !%& stage when valuations are favourable. Venture capitalists typically assist at four stages in the company;s development/ +. !dea generation B. "tart- up @. 0ump I up -. 7'it (ecause there are no public e'changes listing their securities, private companies meet venture capital firms and other private e uity investors in several ways, including warm referrals from the investors; trusted sources and other business contactsO investor conferences and symposiaO and summits where companies pitch directly to investor groups in face-to-face meetings, including a variant known as *"peed Venturing*, which is akin to speed-dating for capital, where the investor decides within +? minutes whether he wants a follow-up meeting. !n addition, there are some new private online networks that are emerging to provide additional opportunities to meet investors. This need for high returns makes venture funding an e'pensive capital source for companies, and most suitable for businesses having large up-front capital re uirements, which cannot be financed by cheaper alternatives such as debt. That is most commonly the case for intangible assets such as software, and other intellectual property, whose value is unproven. !n turn, this e'plains why venture capital is most prevalent in the fast-growing technology and life sciences or biotechnology fields. !f a company does have the ualities venture capitalists seek including a solid business plan, a good management team, investment and passion from the founders, a good potential to e'it the
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investment before the end of their funding cycle, and target minimum returns in e'cess of -?C per year, it will find it easier to raise venture capital.

2.9. CO8PENSATION Venture capitalists are compensated through a combination of management fees and carried interest (often referred to as a *two and B?* arrangement)/ L :anagement fees M an annual payment made by the investors in the fund to the fund;s manager to pay for the private e uity firm;s investment operations.FB,G !n a typical venture capital fund, the general partners receive an annual management fee e ual to up to BC of the committed capital. L Carried interest M a share of the profits of the fund (typically B?C), paid to the private e uity fundPs management company as a performance incentive. The remaining A?C of the profits are paid to the fund;s investorsFB,G "trong limited partner interest in top-tier venture firms has led to a general trend toward terms more favourable to the venture partnership, and certain groups are able to command carried interest of B<I@?C on their funds. (ecause a fund may run out of capital prior to the end of its life, larger venture capital firms usually have several overlapping funds at the same timeO doing so lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. "maller firms tend to thrive or fail with their initial industry contactsO by the time the fund cashes out, an entirely-new generation of technologies and people is ascending, whom the general partners may not know well, and so it is prudent to reassess and shift industries or personnel rather than
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attempt to simply invest more in the industry or people the partners already know.

2.9. STRUCTURE OF THE FUN5S , :ost venture capital funds have a fi'ed life of +? years, with the possibility of a few years of e'tensions to allow for private companies still seeking li uidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an e'isting portfolio. This model was pioneered by successful funds in "ilicon Valley through the +,A?s to invest in technological trends broadly but only during their period of ascendance, and to cut e'posure to management and marketing risks of any individual firm or its product. !n such a fund, the investors have a fi'ed commitment to the fund that is initially unfunded and subse uently *called down* by the venture capital fund over time as the fund makes its investments. There are substantial penalties for a limited partner (or investor) that fails to participate in a capital call. !t can take anywhere from a month or so to several years for venture capitalists to raise money from limited partners for their fund. #t the time when all of the money has been raised, the fund is said to be closed, and the +?-year lifetime begins. "ome funds have partial closes when one half (or some other amount) of the fund has been raised. The vintage year generally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison. This shows the difference between a venture capital fund management company and the venture capital funds managed by them.
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8rom investors; point of view, funds can be/ (+) traditionalMwhere all the investors invest with e ual termsO or (B) asymmetricMwhere different investors have different terms. Typically the asymmetry is seen in cases where there;s an investor that has other interests such as ta' income in case of public investors.

CHAPTER A5VANTAGES AN5 5ISA5VANTAGES OF VENTURE CAPITAL

#dvantages/
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K They can provide large sum of e uity finance K #ble to bring wealth and e'pertise to your company K 7asier to secure future funding from other sources K The business is not obligated to repay the money

1isadvantages/ K Hengthy and comple' process (needs detailed business plan, financial proDections and etc.) K !n the deal negotiation stage, you will have to pay for legal and accounting fees K !nvestors become part owners of your business - founder loss of autonomy or control

CHAPTER 7
ALTERNATIVE INVESTMENT FUNDS (AIF) REGULATIONS, 2011

7.1. INTRO5UCTION TO AIF : 10#8T !61!C#T!V7 075EH#T!&6" "7CE0!T!7" #61 7QC3#657 (&#01 &8 !61!# (#HT706#T!V7 !6V7"T:76T 8E61") 075EH#T!&6", B?++ (7) !n e'ercise of the powers conferred by subsection (+) of "ection @? read with Clause (c) of sub section (B) and sub section +(b) of section +B of the "ecurities and 7'change (oard of !ndia #ct, +,,B (+< of +,,B), the "ecurities and 7'change (oard of !ndia
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3ereby makes the following guidelines namely I (+) These regulations may be called the "ecurities and 7'change (oard of !ndia (#lternative !nvestment 8und) 0egulations, B?++. (B) They shall come into force on such date as may be specified by the (oard by notification in the &fficial 5a$ette.

7.2. 5EFINITIONS OF AIF :

K R#ctS means the "ecurities and 7'change (oard of !ndia #ct, +,,B (+< of +,,B). K T#lternative !nvestment 8unds (#!8)P means pooling or raising of private capital from institutional or 3igh 6et worth !nvestors with a view to investing it in accordance with a defined investment policy for benefit of those investors and includes private pool of capital such as K %rivate e uity funds, Venture Capital 8und, %!%7 8unds, !nfrastructure 1ebt 8und, 0eal 7state 8unds, "ocial Venture 8und, "trategic 8unds, ":7 8und etc. such other similar funds as may be specified by (oard, presently not covered under the "7(! (:utual 8unds) 0egulations, +,,., and "7(! (Collective !nvestment "chemes) 0egulations, +,,, or any other regulations of "7(! to regulate fund management activities. K RT(oardS means the "ecurities and 7'change (oard of !ndia established under section @ of the #ct. K S%rivate 7 uity 8undS means pooled funds raised privately from institutional or 3igh 6et worth !nvestor for making investments primarily in various unlisted e uity or unlisted debt securities of companies re uiring medium to long term capital to develop and grow.
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7.-. AIF an! VCF Re#ulat $n , (!i) 1ebt "ecurities of Histed Company (!i) 8or &btaining 0egistration with "7(!, the 8und )ould K (!i) 5old 8inancing (7'cluding 5old 8inancing 8or 2ewelry) K (!i) 3edge 8und :anagersN#dvisers )hich #re 0e uired To 0egister "hould #lso (e K (!i) :aking Clear 1istinction among the Various Types of %rivate %ooled !nvestment K (!i) 6egotiated Contractual #greement with 7ach !ndividual !nvestors "tipulating K (!i) %!%7 (%rivate !nvestment in %ublic 7 uity) K (!i) %!%7 8unds K (!i) The %!%7 8und "hall (e %rohibited 8rom "elling &r 1ealing

7.7. AIF an! FVCI Re#ulat $n , #!8: to provide to their investors, initially and on an ongoing basis, a clear Contractual agreement with investors would stipulate the material terms e uity shares of unlisted company where debt fund has !nvestors should be disclosed of new investment activity, a break down both %rime brokers and banks which provide funding to hedge funds should be %rivate 7 uity 8und 0eal 7state. The investee company and the %!%7 fund shall disclose. The proposal intends to regulate private pools of capital where institutions or 3igh #ny alteration to the fund strategy shall be made with the consent of at Contractual re uirement for each fund to maintain an investor advisory 1ebt 8unds 1isclosures and reporting to the competent authority
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on a regular basis. 7.2. S$c al Venture Fun!+ 1SVF+3 : The alternate investment vehicle such as %7 fund is raised privately rather than at the hori$on, winding down of the fund would be started. )inding down "trategy 8und (0esidual Category, including all varieties of funds such as the investors may be locked in the fund for a minimum period of three R0eal 7state 8undS means a private pooled investment #!8 or managers shall not engage in selling individualism 8undsS means a private pooled investment vehicle.R"ocial Venture 8undS means funds targeted towards (0egulation) #ct, +,<. or the Companies #ct, +,<..

7.9. SE0I 1ALTERNATIVE INVEST8ENT FUN5S3 REGULATIONS , To create regulations for alternative investment funds under the title "7(! (#lternative !nvestment 8und) 0egulations which would register and regulate the 8ormation of investment funds which raises capital from a number of 3igh 6et )orth investors with a view to investing in accordance with a defined investment %olicy for the benefit of those investors, inter alia in the following categories/ K Venture Capital 8und K %!%7 8unds
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K %rivate 7 uity 8und K "ocial Venture 8unds

ELIGI0ILIT6 AN5 REGISTRATION (+) !t would be mandatory for all types of private pools of capital or investment funds to seek registration with "7(!. (B) The funds could be formed as companies, trusts or body corporate including HH% "tructure. (@) The regulations would re uire that the fund managerN asset management Company or trustees of the fund be specified, and change of such entities be reported to the regulator. (-) #t the time of application, the fund would specify the category under which it is "eeking registration, the targeted si$e of the proposed fund and its life cycle and the target investor.

FUN5 STRUCTURE (+) 8unds shall be close ended. (B) 8und si$e can be revised upward up to QQC giving "7(! suitable reasons. :inimum investment amount would be specified as ?.+C of fund si$e subDect to a minimum floor of 0s.+crore. (The minimum investment criterion would prevent retail investors straying into funds
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and the granularity would ensure a ma'imum number of investors as +??? precluding the possibility that some funds might disguise themselves as private pools while approaching a large number of retail investors.) !n case of an #!8 constituted as company or HH% the number of shareholders or partners shall not e'ceed fifty. The si$e of units issued will not be less than 0s.+? Hakhs. (@) 8unds may be raised only through private placement through information memorandum.

SETTING UP OF FUN5 (i) The 8und may be set up as a trust settled by a sponsor or as an HH% with designated partners. The report of Committee on Technology !nnovation and Venture Capital by %lanning Commission has recommended permitting also HH% structure for Venture Capital 8unds. (ii) 8or obtaining registration with "7(!, the fund would/ a) "pecify its purpose and strategy b) "pecify proposed si$e of fund c) 1etermine hori$on of the fund, and duration for winding up d) 1raw up the draw down schedule. (iii) "7(! registration would be obtained for each type of fund scheme as per the regulation. (iv) !nvestors would be sought who are interested in investing in such funds for a given hori$on
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for a given si$e of commitment. !nvestments would be made as per the obDectives of the fund. (v) #t the hori$on, winding down of the fund would be started. )inding down of funds would have to be completed within the duration promised. :ethod of distribution would be stated in the information memorandum. !f any of the investments remain un li uidated at the end of the period, they would be taken up by the 1esignated %artners or "ponsors as the case may be.

INVEST8ENT RESTRICTIONS The investment restrictions on different types of #!8s would be specified separately for each category of fund, as these would be the main differentiating criteria between the different types of funds. 8or instance, !n case of VC8s, the investment restrictions and obligations which are presently applicable the VC8 regulations would be specified, with some additional restrictions to ensure that funds flow to between the different types of funds. 8or instance, in case of VC8s, the investment restrictions and obligations which are presently applicable the VC8 regulations would be specified, with some additional restrictions to ensure that funds flow to early stage ventures only. 8or other types of funds, the investment restrictions would be on the lines given below/ a. !n the case of %!%7 funds, investments would be restricted to shares of small si$ed listed companies which are not in any of the market indices. %!%7 funds may be allowed access to non public information while carrying out due diligence for %!%7 transactions under a confidentiality agreement with restriction in dealing in securities for a particular time frame. b. !n %7 funds there would be mainly in unlisted companies or companies %roposed to be listed. 8or strategy funds, the fund would be guided by the strategy it specifies at the time of registration with no other restrictions. #ny fund operating as 3edge 8und shall be re uired to be
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registered as "trategy 8und under #!8 regulation. c. 8or "ocial Venture 8unds will be targeted towards social investors who are willing to accept muted returns. !nvestments would be made primarily in the social enterprises such as micro finance sector. d. ":7 funds would be for investing in unlisted entities in the ":7s in manufacturing services sector as also businesses providing infrastructure or other support to ":7s or ":7 companies which are listed or proposed to be listed in ":7 e'change or ":7 segment of 0"7. CONCESSIONS; E<E8PTIONS FOR AIF :

+. 1ue diligence done by funds prior to investing in listed companies would not attract %rovisions of "7(! !nsider Trading 0egulations. B. #!8s such as %!%7 funds or ":7 funds or VC8s would be considered as U!(s for the %urpose of U!%s under the !C10 0egulations @. !nvestments in 6(8Cs which are Core !nvestment Companies, #sset 8inance Companies, !nfrastructure 8inance Companies or companies engaged in :icro 8inance #ctivities would be permitted for all types of #!8s (other than strategy funds). -. The re uirement of lockin period of one year for pre!%& investments would not be applicable in respect of investments made by %7 8unds, "V8 and ":7 8unds on the same lines as for VC8s.

CON5ITIONS FOR OPERATING AS AIF , The regulations would provide for, inter alia, the following/ (i) There would be mandatory registration of all private pools of funds Nschemes.
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VENTURE CAPITAL

(ii) #de uate disclosures at the time of fund raising though a information memorandum and continuous disclosures to investors of the fund at periodic intervals as provided in contractual agreement. The relationship between the investor and the fund would be governed by the contractual agreement between them. "tandard disclosure documents would be provided by the respective industry associations. #ny departure from the documents will be re uired to be highlighted. (iii) Contractual agreement with investors would stipulate the material terms and conditions of the fund including the fundPs structure, its investment strategy, the allocation of fees and costs, allocation of investment opportunities, any firm coinvestment arrangements, the allocation and distribution of profits, the content and fre uency of investors reportingO mechanisms for conflict and dispute resolution, etc. (iv) #ny alteration to the fund strategy shall be made with the consent of at least =<C of unit holders. (v) Compensation arrangement on the basis of performance related remuneration plus a cost of fund management. 0elated disclosures will be on the lines of present %:". (vi) 0esponsibilities of the fund managerN #:C N designated partners or trustees shall be clearly defined. (vii) !dentification of conflicts of interest and establishment of mechanism for managing these conflicts of interest. (viii) The #!8 shall pool the money from 36!, institutional investors or corporate through private placement and shall not solicit money from retail investors. The minimum contribution from the investors will be 0s.+ crore or such higher amount as may be specified for a particular type of fund.
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VENTURE CAPITAL

(i') The investors may be locked in the fund for a minimum period of three years or such higher period depending upon nature and tenure of fund and transfer of units of funds may be allowed after lockin period and trading of units of funds to be limited to amongst institutional N 36! investors. (') Enits may not be transferable immediately or only after lock in period amongst institutionalN36! investors which may be listed after lock in period or after specific duration at the choice of the funds. ('i) 7nabling provisions for issuing of guidelinesN circulars for each type of fund containing investment restriction, minimum corpus, minimum contribution, period of lockin etc.

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VENTURE CAPITAL

CONCLUSION

K #ccording to me the :indset of the investor should change and they should go for Venture Capital 8unding. K The #!8 should have "eminars to educate the investor. K # developed and stable stock e'change can help Venture Capital grow in !ndia. K The public as well as the %rivate "ector should participate in Venture Capital 8unding. K The 0egulations let down by #!8 and "7(! should be strictly followed.

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VENTURE CAPITAL

SU88AR6

This proDect aims at e'plaining the underdeveloped concept of Venture Capital .3owever now this concept is growing in !ndia under the 0egulation of #!8 and "7(!. This proDect gives and overall view of how the Concept of Venture Capital functions and the advantages and disadvantages of it.

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VENTURE CAPITAL

0I0LIOGRAPH6 (ooks I
K The (usiness management of Venture Capital I (y :ahendra 0amsinghani. K The masters of Venture Capital and %rivate 7 uity - (y 0obert 8inkel.

)ebsite I
K http/NNwww.google.com K http/NNwww.sebi.com K http/NNwww.wikipedia.com K http/NNwww.scribd.com

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