Role of Foreign Venture Capital Funds in India

Group 3

Venture Capital

Venture Capital is a form of "risk capital". In other words, capital that is invested in a business where there is a substantial element of risk relating to the future creation of profits and cash flows. Risk capital is invested as shares (equity) rather than as a loan and the investor requires a higher "rate of return" to compensate him for his risk.

Venture Capital in India

History of Venture Capital in India dates back to early 70's when Govt. of India appointed a committee laid by Late Shri R. S. Bhatt to find out the ways to meet a void in conventional financing for funding start-up companies based on absolutely new innovative technologies. In mid 80's three all India financial institutions viz IDBI, ICICI, IFCI started investing into the equity of small technological companies. In Nov 1988, Govt of India decided to institutionalize Venture Capital Industry and announce guidelines in the parliament. Controller of Capital issues implemented these guidelines known as CCI for VC. At the same time World Bank selected 6 institutions to start VC investment in India. This included TDICICI (ICICI), GVFL, Canbank Venture Capital Fund, APIDC, RCTC (now known as IFCI Venture Capital Funds Ltd.) and ILF (now known as Pathfinder). In 1995, Govt of India permitted Foreign Finance companies to make investments in India and many foreign VC private equity firms entered India. In 1996, government announced guidelines to regulate the VC industry. Though there were many shortcomings these guidelines were the starting point.

Contd...
In 1997, IT boom in India made VC industry more significant. Due to symbiotic relationship between VC and IT industry, VC got more prominence as a major source of funding for the rapidly growing IT industry. The recession during 1999 - 2001 took the wind out of VC industry. Most of the VC either closed down or wound-up their operations. Currently, just a few firms are taking the risk of investing into the start-up technology based companies.

The SEBI (Foreign Venture Capital Investor) Regulations, 2000

Eligibility criteria
In order to determine the eligibility of an applicant, SEBI would consider, inter alia, the applicants track record, professional competence, financial soundness, experience, whether the applicant is regulated by an appropriate foreign regulatory authority or is an income tax payer or submits a certificate from its banker of its or its promoters track record where the applicant is neither a regulated entity nor an income tax payer. The applicant can be a pension fund, mutual fund, investment trust, investment company, investment partnership, asset management company, endowment fund, university fund, charitable institution or any other investment vehicle incorporated and established outside India.

Contd...
Investment conditions and restrictions The investment restrictions applicable to FVCI are similar to those applicable to VCFs under the VCF Regulations (as listed above) except for the following: no minimum corpus or capital commitment requirement for FVCIs; no minimum individual contribution prescribed under the FVCI Regulations; no mandatory exit clause in respect of investments by an FVCI in unlisted securities; and for determining the maximum investment in a single VCU (i.e. 25% of the corpus), the funds earmarked for India will be taken into consideration.

Role of Foreign Venture Capital Funds in India

The concept of venture capital was formally introduced in India in 1987 by IDBI.
The government levied a 5 per cent cess on all know-how import payments to create the venture fund.

ICICI started VC activity in the same year

Later on ICICI floated a separate VC company TDICI A flourishing venture capital industry in India will fill the gap between the capital requirements of technology and knowledge based startup enterprises and funding available from traditional institutional lenders such as banks. Along with this finance came smart advice, hand-on management support and other skills that helped the entrepreneurial vision to be converted to marketable products.

Conclusion
The ever growing Indian economy and the potential to grow further definitely makes India one of the most liked destination also strong fundamentals comprising of favorable demographic profile, human capital, trade openness, increasing urbanization and rising consumer spending has made India one of the fastest growing markets in the world. Almost all the sectors are open for FVCIs except few like apart from a few sectors like non-banking financial services, gold financing and activities not permitted under the industrial policy of the Government of India. Although lot have already been done yet the lot still requires to be done like clarification in taxation system of FVCI, rationalization in investment limits etc. As such the overall environment in India is conducive for venture capitalists and will get better in the coming years.

ANKUR(04) PANKAJ MOR(12) SUMITRA MOHANTY(14) C.M. PRASHANT(16) MANISH TIRKEY(25)