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Venture capital means funds made availablefor startup firms and small businesses withexceptional growth potential.

Venture capital is money provided byprofessionals who alongside management investin young, rapidly growing companies that have thepotential to develop into significant economic

contributors.

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Venture Capitalists generally:

Finance new and rapidly growing companies

Purchase equity securities

Assist in the development of new products orservices

Add value to the company through active

participation.

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The SEBI has defined Venture Capital Fundin its Regulation 1996 as a fundestablished in the form of a company ortrust which raises money through loans,

donations, issue of securities or units asthe case may be and makes or proposesto make investments in accordance withthe regulations.

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Long time horizon

Lack of liquidity

High risk

Equity participation

Participation in management

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It injects long term equity finance which providesa solid capital base for future growth.

The venture capitalist is a business partner,

sharing both the risks and rewards. Venturecapitalists are rewarded by business success andthe capital gain.

The venture capitalist is able to provide practicaladvice and assistance to the company based onpast experience with other companies which werein similar situations.

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The venture capitalist also has a network of contactsin many areas that can add value to the company.

The venture capitalist may be capable of providing

additional rounds of funding should it be required tofinance growth.

Venture capitalists are experienced in the process ofpreparing a company for an initial public offering

(IPO) of its shares onto the stock exchanges oroverseas stock exchange such as NASDAQ.They can also facilitate a trade sale.

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1. Seed Money:

Low level financing needed to prove a new idea.

2. Start-up:

Early stage firms that need funding for expensesassociated with marketing and productdevelopment.

3. First-Round:

Early sales and manufacturing funds.

4. Second-Round:

Working capital for early stage companies thatare selling product, but not yet turning a profit .

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5. Third-Round:

Also called Mezzanine financing, this isexpansion money for a newly profitable

company6. Fourth-Round:

Also called bridge financing, it is intended

to finance the "going public" process

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Financial Stage Period (Fundslocked in years)

Risk Perception Activity to befinanced

Seed Money 7-10 ExtremeFor supporting a

concept or idea or

R&D for productdevelopment

Start Up 5-9 Very HighInitializing

operations ordevelopingprototypes

First Stage 3-7 HighStart commercials

production andmarketing

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Financial Stage Period (Fundslocked in years)

Risk Perception Activity to befinanced

Second Stage 3-5 Sufficiently highExpand marketand growing

working capitalneed

Third Stage 1-3 Medium

Marketexpansion,

acquisition &product

development forprofit making

company

Fourth Stage 1-3 Low Facilitating publicissue

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Deal origination

Screening

Due diligence(Evaluation)

Deal structuring

Post investmentactivity

Exit plan

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The financing pattern of the deal is themost important element. Following are thevarious methods of venture financing:

EquityConditional loanIncome noteParticipating debentures

Quasi equity

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Initial public offer(IPOs)Trade salePromoter buy backAcquisition by another company

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The concept of venture capital was formallyintroduced in India in 1987 by IDBI.

The government levied a 5 per cent cess on all

know-how import payments to create the venturefund.

ICICI started VC activity in the same year

Later on ICICI floated a separate VCcompany - TDICI

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VCFs in India can be categorized intofollowing five groups:

1)Those promoted by the Central

Government controlled developmentfinance institutions. For example:

- ICICI Venture Funds Ltd.- IFCI Venture Capital Funds Ltd (IVCF)- SIDBI Venture Capital Ltd (SVCL)

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2) Those promoted by State Government

controlled development financeinstitutions.For example:- Punjab Infotech Venture Fund

- Gujarat Venture Finance Ltd (GVFL)- Kerala Venture Capital Fund Pvt Ltd.

3) Those promoted by public banks.

For example:- Canbank Venture Capital Fund- SBI Capital Market Ltd

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4)Those promoted by private sector

companies.For example:- IL&FS Trust Company Ltd- Infinity Venture India Fund

5)Those established as an overseas venture capitalfund.For example:

- Walden International Investment Group- HSBC Private Equity

management Mauritius Ltd

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AS PER SEBI

AS PER INCOME TAX ACT,1961

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VCF are regulated by the SEBI (VentureCapital Fund) Regulations, 1996.

The following are the various provisions:

A venture capital fund may be set up by acompany or a trust, after a certificate ofregistration is granted by SEBI on anapplication made to it. On receipt of thecertificate of registration, it shall be bindingon the venture capital fund to abide by theprovisions of the SEBI Act, 1992.

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A VCF may raise money from anyinvestor, Indian, Non-resident Indian orforeign, provided the money accepted

from any investor is not less than Rs 5lakhs. The VCF shall not issue anydocument or advertisement inviting offersfrom the public for subscription of its

security or units

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SEBI regulations permit investment byventure capital funds in equity or equityrelated instruments of unlisted companies

and also in financially weak and sickindustries whose shares are listed orunlisted

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At least 80% of the funds should beinvested in venture capital companies andno other limits are prescribed.

SEBI Regulations do not provide for anysectoral restrictions for investment exceptinvestment in companies engaged in

financial services.

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A VCF is not permitted to invest in theequity shares of any company orinstitutions providing financial services.

The securities or units issued by a venturecapital fund shall not be listed on anyrecognized stock exchange till the expiry

of 4 years from the date of issuance .

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A Scheme of VCF set up as a trust shall bewound up

(a) when the period of the scheme if any, isover

(b) If the trustee are of the opinion that thewinding up shall be in the interest of theinvestors

(c) 75% of the investors in the scheme pass

a resolution for winding up or,(d) If SEBI so directs in the interest of the

investors.

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The Income Tax Act provides taxexemptions to the VCFs under Section10(23FA) subject to compliance withIncome Tax Rules.

Restrict the investment by VCFs only in

the equity of unlisted companies.

VCFs are required to hold investment for aminimum period of 3 years.

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The Income Tax Rule until now providedthat VCF shall invest only upto 40% of thepaid-up capital of VCU and also notbeyond 20% of the corpus of the VCF.

After amendment VCF shall invest onlyupto 25% of the corpus of the venturecapital fund in a single company.

There are sectoral restrictions under theIncome Tax Guidelines which provide thata VCF can make investment only inspecified companies.

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It was established in 1993 and is based inDelhi, the capital of India

It is a member based national organizationthat- represents venture capital and private

equity firms

- promotes the industry within India andthroughout the world- encourages investment in high growth

companies and- supports entrepreneurial activity and

innovation.

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IVCA members comprise venture capitalfirms, institutional investors, banks,

incubators, angel groups, corporateadvisors, accountants, lawyers,government bodies, academic institutionsand other service providers to the venture

capital and private equity industry.

Members represent most of the activeventure capital and private equity firms in

India. These firms provide capital for seedventures, early stage companies and laterstage expansion.

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Venture capital firms typically source the majorityof their funding from large investment institutions.

Investment institutions expect very high ROI

VCs invest in companies with high potential wherethey are able to exit through either an IPO or amerger/acquisition.

Their primary ROI comes from capital gainsalthough they also receive some return throughdividend.

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.666

.666

.666

.444

.6666.444

.6666

.6666

.666

.444

Percentage

IT & ITES

Energy

ManufacturingMedia & Ent.

BFSI

Shipping & logistics

Eng. & Const.

Telecom

Health care

Others

Percentage calculated on the total VC investment- 14,234 USB (fig. of 2007)

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CITIES SECTORS

MUMBAI Software services, BPO, Media,Computer graphics, Animations,Finance & Banking

BANGALORE All IP led companies, IT & ITES, Bio-technology

DELHI Software services, ITES , Telecom

CHENNAI IT , Telecom

HYDERABAD IT & ITES, Pharmaceuticals

PUNE Bio-technology, IT , BPO

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The regulatory, tax and legal environment should play anenabling role as internationally venture funds haveevolved in an atmosphere of structural flexibility, fiscalneutrality and operational adaptability.

Resource raising, investment, management and exit should

be as simple and flexible as needed and driven by globaltrends.

Venture capital should become an institutionalized industrythat protects investors and investee firms, operating in anenvironment suitable for raising the large amounts of risk

capital needed and for spurring innovation through start-upfirms in a wide range of high growth areas.

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In view of increasing global integration and mobilityof capital it is important that Indian venture capitalfunds as well as venture finance enterprises are ableto have global exposure and investment opportunities

Infrastructure in the form of incubators and R&D needto be promoted using government support andprivate management as has successfully been doneby countries such as the US, Israel and Taiwan. This

is necessary for faster conversion of R&D andtechnological innovation into commercial products.

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The down market virtually closed the IPO marketfor emerging companies.

With less opportunities for getting ROI investors

tend to scale back, adjust their investment focusand/or get more picky in funding companies.

The investors that put money into their funds

became less aggressive during recession so it washarder for the VCs to raise money.

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Venture capital (VC) and private equity (PE) fundsare likely to take up to two years to regain their2005-07 level.

With Indias economy bouncing back and thecountry on track to achieve an 9 % GDP growth,

interest in the Indian market is re-emerging. The VC/PE fund inflow into the country in the last

five and half years has been to the tune of over$44.8 billion with investments flowing into around

13,000 domestic companies. The market regulator, SEBI, has to start looking ata different regulatory framework for this kind ofcapital, which is essentially risk capital

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The increase in weighted deduction of inhouse R&D will boost up investment inhealth care.

46% of the total investment is going toinfrastructure development which is apositive sign for investors.

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VC can help in the rehabilitation of sick units.VC can assist small ancillary units to upgrade

their technologiesVCFs can play a significant role in developing

countries in the service sector includingtourism, publishing, health care etc.

They can provide financial assistance topeople coming out of universities, technical

institutes, etc thus promoting entrepreneurialspirits

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By sectorso Banking & financial services

o Customer services

o Energy

o Engineering

oHospitality

o Internet

o

IT/ITESo Logistics

oManufacturing

o Retail

o

Textiles

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