Venture capital means funds made available for startup firms and small businesses with exceptional growth

potential. Venture capital is money provided by professionals who alongside management invest in young, rapidly growing companies that have the potential to develop into significant economic contributors.

Venture Capitalists generally:

Finance

new and rapidly growing companies equity securities

Purchase

ssist in the development of new products or services dd value to the company through active participation.

!he "#$% has defined Venture Capital Fund in its &egulation '(() as *a fund established in the form of a company or trust which raises money through loans, donations, issue of securities or units as the case may be and ma+es or proposes to ma+e investments in accordance with the regulations,.

-ong -ac+ /igh

time hori.on of liquidity ris+ participation in management

#quity

Participation

 %t

in0ects long term equity finance which provides a solid capital base for future growth. venture capitalist is a business partner, sharing both the ris+s and rewards. Venture capitalists are rewarded by business success and the capital gain. venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations.

!he

!he

!he venture capitalist also has a networ+ of contacts in many areas that can add value to the company. !he venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth. Venture capitalists are experienced in the process of preparing a company for an initial public offering 1%P23 of its shares onto the stoc+ exchanges or overseas stoc+ exchange such as 4 "5 6. !hey can also facilitate a trade sale.

'. "eed 7oney: -ow level financing needed to prove a new idea. 8. "tart9up: #arly stage firms that need funding for expenses associated with mar+eting and product development. :. First9&ound: #arly sales and manufacturing funds. ;. "econd9&ound: <or+ing capital for early stage companies that are selling product, but not yet turning a profit .

=. !hird9&ound: lso called 7e..anine financing, this is expansion money for a newly profitable company ). Fourth9&ound: lso called bridge financing, it is intended to finance the >going public> process

Financial Stage

Period (Funds locked in years) ?9'@

Risk Perception

Activity to be financed For supporting a concept or idea or &A5 for product development %nitiali.ing operations or developing prototypes "tart commercials production and mar+eting

"eed 7oney

#xtreme

"tart Bp

=9(

Very /igh

First "tage

:9?

/igh

Financial Stage

Period (Funds locked in years) :9=

Risk Perception -arge funds, "ufficiently high

Activity to be financed #xpand mar+et and growing wor+ing capital need 7ar+et expansion, acquisition A product development for profit ma+ing company Facilitating public issue

"econd "tage

!hird "tage

'9:

7edium

Fourth "tage

'9:

-ow

receipt of proposal ppraisal of plan investment Provide value added services #xit Plan

!he financing pattern of the deal is the most important element. Following are the various methods of venture financing: #quity Conditional loan %ncome note Participating debentures 6uasi equity

%nitial

public offer1%P2s3 Promoter buy bac+ cquisition by another company

 !he

concept of venture capital was formally introduced in %ndia in '(C? by %5$%. government levied a = per cent cess on all +now9how import payments to create the venture fund. started VC activity in the same year

!he

%C%C% -ater

on %C%C% floated a separate VC company 9 !5%C%

VCFs in %ndia can be categori.ed into following five groups:

'3!hose

promoted by the Central Dovernment controlled development finance institutions. For example: 9 %FC% Venture Capital Funds -td 1%VCF3 9 "%5$% Venture Capital -td 1"VC-3

83 !hose promoted by "tate Dovernment controlled development finance institutions. For example: 9 Pun0ab %nfotech Venture Fund 9 Du0arat Venture Finance -td 1DVF-3 9 Eerala Venture Capital Fund Pvt -td. :3 !hose promoted by public ban+s. For example: 9 Canban+ Venture Capital Fund 9 "$% Capital 7ar+et -td

;3!hose promoted by private sector companies. For example: 9 %-AF" !rust Company -td 9 %nfinity Venture %ndia Fund 9 %C%C% Venture Funds -td 9 /5FC Venture Pvt -td =3!hose established as an overseas venture capital fund. For example: 9 <alden %nternational %nvestment Droup 9 /"$C Private #quity management 7auritius -td

" P#& "#$% " P#& %4C27# ! F

C!,'()'

VCF are regulated by the "#$% 1Venture Capital Fund3 &egulations, '((). !he following are the various provisions:

venture capital fund may be set up by a company or a trust, after a certificate of registration is granted by "#$% on an application made to it. 2n receipt of the certificate of registration, it shall be binding on the venture capital fund to abide by the provisions of the "#$% ct, '((8.

VCF may raise money from any investor, %ndian, 4on9resident %ndian or foreign, provided the money accepted from any investor is not less than &s = la+hs. !he VCF shall not issue any document or advertisement inviting offers from the public for subscription of its security or units

"#$%

regulations permit investment by venture capital funds in equity or equity related instruments of unlisted companies and also in financially wea+ and sic+ industries whose shares are listed or unlisted

 "#$%

&egulations do not provide for any sectoral restrictions for investment except investment in companies engaged in financial services.

VCF is not permitted to invest in the equity shares of any company or institutions providing financial services. securities or units issued by a venture capital fund shall not be listed on any recogni.ed stoc+ exchange till the expiry of ; years from the date of issuance .

!he

"cheme of VCF set up as a trust shall be wound up 1a3 when the period of the scheme if any, is over 1b3 %f the trustee are of the opinion that the winding up shall be in the interest of the investors 1c3 ?=G of the investors in the scheme pass a resolution for winding up or, 1d3 %f "#$% so directs in the interest of the investors.

!he %ncome !ax ct provides tax exemptions to the VCFs under "ection '@18:F 3 sub0ect to compliance with %ncome !ax &ules. &estrict the investment by VCFs only in the equity of unlisted companies. VCFs are required to hold investment for a minimum period of : years.

!he %ncome !ax &ule until now provided that VCF shall invest only upto ;@G of the paid9up capital of VCB and also not beyond 8@G of the corpus of the VCF. fter amendment VCF shall invest only upto 8=G of the corpus of the venture capital fund in a single company. !here are sectoral restrictions under the %ncome !ax Duidelines which provide that a VCF can ma+e investment only in specified companies.

%t was established in '((: and is based in 5elhi, the capital of %ndia %t is a member based national organi.ation that 9 represents venture capital and private equity firms 9 promotes the industry within %ndia and throughout the world 9 encourages investment in high growth companies and 9 supports entrepreneurial activity and innovation.

%VC

members comprise venture capital firms, institutional investors, ban+s, incubators, angel groups, corporate advisors, accountants, lawyers, government bodies, academic institutions and other service providers to the venture capital and private equity industry. represent most of the active venture capital and private equity firms in %ndia. !hese firms provide capital for seed ventures, early stage companies and later stage expansion.

7embers

Venture capital firms typically source the ma0ority of their funding from large investment institutions. %nvestment institutions expect very high &2% VC,s invest in companies with high potential where they are able to exit through either an %P2 or a mergerHacquisition. !heir primary &2% comes from capital gains although they also receive some return through dividend.

Percentage
9.03 3.36 12.92 6.94 7.73 IT & ITES Energy Manufacturing 11.5 Media & Ent. BS I 4.32 11.43 4.82 27.95 S !i""ing& #$gi%tic% Eng. & &$n%t. Te#ec$' (ea#t! care )t!er%

Percentage calculated on the total VC investment- 14,234 USB (fig of 2!1!"

CITIES 7B7$ %

SECT RS "oftware services, $P2, 7edia, Computer graphics, nimations, Finance A $an+ing ll %P led companies, %! A %!#", $io9technology "oftware services, %!#" , !elecom %! , !elecom %! A %!#", Pharmaceuticals $io9technology, %! , $P2

$ 4D -2&#

5#-/% C/#44 % /I5#& $ 5 PB4#

!he regulatory, tax and legal environment should play an enabling role as internationally venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability. &esource raising, investment, management and exit should be as simple and flexible as needed and driven by global trends. Venture capital should become an institutionali.ed industry that protects investors and investee firms, operating in an environment suitable for raising the large amounts of ris+ capital needed and for spurring innovation through start9up firms in a wide range of high growth areas.

%n view of increasing global integration and mobility of capital it is important that %ndian venture capital funds as well as venture finance enterprises are able to have global exposure and investment opportunities %nfrastructure in the form of incubators and &A5 need to be promoted using government support and private management as has successfully been done by countries such as the B", %srael and !aiwan. !his is necessary for faster conversion of &A5 and technological innovation into commercial products.

 !he

down mar+et virtually closed the %P2 mar+et for emerging companies. less opportunities for getting &2% investors tend to scale bac+, ad0ust their investment focus andHor get more pic+y in funding companies. investors that put money into their funds became less aggressive during recession so it was harder for the VCs to raise money.

<ith

!he

Venture capital 1VC3 and private equity 1P#3 funds are li+ely to ta+e up to two years to regain their 8@@=9@? level. <ith %ndia,s economy bouncing bac+ and the country on trac+ to achieve an ( G D5P growth, interest in the %ndian mar+et is re9emerging. !he VCHP# fund inflow into the country in the last five and half years has been to the tune of over J;;.C billion with investments flowing into around ':,@@@ domestic companies. !he mar+et regulator, "#$%, has to start loo+ing at a different regulatory framewor+ for this +ind of capital, which is essentially ris+ capital

!he

increase in weighted deduction of in house &A5 will boost up investment in health care. of the total investment is going to infrastructure development which is a positive sign for investors.

;)G

 VC

can help in the rehabilitation of sic+ units. VC can assist small ancillary units to upgrade their technologies VCFs can play a significant role in developing countries in the service sector including tourism, publishing, health care etc. !hey can provide financial assistance to people coming out of universities, technical institutes, etc thus promoting entrepreneurial spirits

$y

sectors

o $an+ing A financial services o Customer services o #nergy o #ngineering o /ospitality o %nternet o %!H%!#" o -ogistics o 7anufacturing o &etail o !extiles