A GRAND PROJECT REPORT ON Venture capital financing in India In Partial fulfillment of Post Graduate Diploma in Management

(Full Time Programme) Prepared By Jadhav Kinjal (Roll No.12)

Batch (2008-2010) Parul Institute of Management PO Limda, TA:Waghodia Dist: Vadodara, Gujarat-391760
(Approved by AICTE, MHRD, Govt. Of India, New Delhi

(JANUARY 2010)

Acknowledgement
Completing a task is never a one man effort. It is often the result a valuable contribution of a number of individuals in direct or in director indirect manner that helps in shaping and achieving an objective. I express a sense of gratitude to my guide. I would like to express my thankfulness to our Director sir N.K.Kapoor for granting me permission to carry on my project on Venture capital. And for taking deep interest in my project work ensuring at each stage that target are achieved as per schedule. Also he gives me good knowledge about the venture capital. and he provides all guidance as per requirement of my project. I sincerely hope that this project would strive to answer need of the corporate world. The project need gave a challenging. and exhilarating experience in doing research study.

DECLARATION
We do hereby solemnly declare that this project VENTURE CAPITAL FINANCING IN INDIA is original and bonafied work done by us is being submitted in fulfillment of the requirement for the PGDM Program of Parul Institute of Management. This project is our own and is not submitted to any other institution or published any where before.

Place: Vadodara Date:

Preface
In India, a revolution is ushering in a new economy, wherein major investment are being made in the knowledge based industry with substantial low investments in land, building, plant and machinery. The asset/ collateral backed lending instruments adopted for the hard for the hard core manufacturing industries, are proving to be inadequate for the knowledge based industries that very often start with just an idea. The only way to finance such industries is through venture capital. Venture capital is instrumental in bringing about industrial development, for it exploits the vast and untapped potentialities and promotes the growth of the knowledge based industries worldwide. In India too, it has become popular in different parts of the country. Thus, the role of venture capitalist is very crucial , different, and distinguishable to the role of traditional finance as it deals with others money. In view of the globalization; Venture capital has turned out to be a boon to both business and industry. There is, thus an intense need to be exploit to the maximum its potential as a new means, This report deals with the concept of venture capital with particular reference to India. The report includes all facts, rules and regulations. Regarding venture capital and its written in very comprehensive manner.

INDEX Serial No 1 2 3 4 4.1 4.2 4.3 4.4 4.5 5 6 6.1 7 8 8.1 9 10 11 12 13 14 Title Introduction Objective Methodology Data Collation and Analysis Meaning of Venture Capital History of Venture Capital Notion of Venture Capital Feature of Venture Capital Stages of Venture Capital Business plan Process of Venture Capital Financing Methods of Venture Financing Objectives and vision for venture Capital in India SEBI Regulation Recommendation Venture Capital in Micro Finance ICICI Venture Recommendation Conclusion Bibliography Annexure Page No 5 6 7 8 9 10 11 12 13 14 18 20 31 33 34 40 44 45 46 47

INTRODUCTION
Capital is one of the most important factors of production. No economic entity can start functioning without requiring capital as this helps the entrepreneurs in acquiring machinary,equipment and other productive facilities purely in functional terms, capital to company is like blood in human body. Here capital refers to financial capital and not exactly produced means of production in the version of economics. The companies entrepreneurs engaged in traditional line of business can easily procure necessary financial capital from conventional capital market. Whose vital ingredients are public issue, financial institution, commercial banks, mutual funds, lease entrepreneurs, face great difficulty while venturing out to procure financial capital for newly floated enterprise as at the initial stages of business risk is very high and the return, quit uncertain Common investors hesitate to invest their saving in such companies even though they lead to high industrial growth and economic development, because it is difficult to trade off between risk returns. Move specifically, rate of return normally remains disproportionate to the degree of risk associated with newly floated companies this is much more true in the case of such companies whose business feature is based on the foundation of high technology or unproved technology having no time tested foundation in the commercial world. Particularly this is true in the arena of electronics and computer application industries, medical instruments and bio-technology application industries where the change is very fast with rapid advancement of global science and technology However, lack of finance the new entrepreneurs and technocrats from starting new venture though they may very well have innovative ideas and requisite technological knowledge. Hence the arises that how these type of firms shall them
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be financed ? under the circumstances the concept of venture capital fund was born with a fundamental objective to provide initial capital and support in building capital base to the entrepreneurs, having a sound background of professional education, expertise and initiative to launch the business based on fast changing technology.

OBJECTIVES

To understand concept of venture capital To understand VC industry in global scenario To study the evaluation and need of venture capital industry in India To understand the legal framework formulated by SEBI to encourage activity in Indian economy. To know the impact of political and economical factors on VC investment

METHODOLOGY

I collected data from two sources

Primary source of data These data were collect from the financial institution like ICICI venture that provides venture capital for the new projects in different sectors.

Secondary source of data These datas are collected through internet, books and magazines. I have also gone through the different reference book and through internet. The data used are fully guidance oriented and not mean for the coping of product.

VENTURE CAPITAL
Venture capital is means of financing fast-growing privet companies. Finance may be required for the startup, development /expansion or purchase of a company via a mechanism. Such as in management buyout. Venture capital is capital typically provided by outside investors for financing of new, growing or struggling business. Venture capital investments generally are high risk investments but offer the potential for average returns. Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience. VENTURE CAPITALIST A venture capitalist is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments.

VENTURE CAPITAL FUND Venture capital fund is a pooled investment vehicle (often a partnership) the primarily invests the financial capital of third party investors in enterprise that are too risky for the standard capital market or bank loss.
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HISTORY OF VENTURE CAPITAL

USA is the place of venture capital industry as we know it today. During most its historical evolution, the market for arranging such financing was fairly informal relying primarily on the resource of wealthy families. In 1946 American research and development Corporation (ARD). A publicly treaded, closed-end investment company was formed. ARDs best known investment startup financing it provided in 1958 for computer maker digital equipment crop. ARD was eventually profitable providing its original investors with 15.8 percent annual rate of return over its twenty five years an independent firm. The number of such specialized investment firms eventually to be called venture capital firms began to boom in the late 1950s the growth was aided in large part by the creation in 1958 of the federal of the federal small Business Investment Company program. Hundreds of SBICs were formed in the 1960s , and remain in operation today.

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NOTION OF VENTURE CAPITAL

Venture capital is significant innovation of the twentieth century. It is generally considered as a synonym of risky capital. Venture capital is ofetn thought of as the early stage financing of new and young enterprise seeking to grow rapidly. In broad terms, venture capital is the investment of long-term equity finance where the venture capitalist earns his return primarily in the form of capital gains. The underlying assumption is that the entrepreneur and the venture capitalist would act together in the interest of the enterprise as partners. The true venture capital finances any risky idea. in fact, venture capital can prove to be a powerful mechanism to institutionalize innovative entrepreneurship. It is a commitment of capital for the formation and setting up of small-scale enterprise specializing in new ideas or new technologies. The venture capitalist focuses on growth. He would like to see small business growing into larger ones. The venture capitalists management approach differs significantly from that of a conventional banker or a lender. The banker does not involve directly in the operation and management of the company. He plays safe, keeps off management, remain passive and insist on security(collateral). Of course, when bankers stake is very high, he may get his nominee appointed on the board of the company to safeguard hi interest. The venture capitalist is also not exactly like the stock market investor who merely trades in the shares of a company without any relations with or knowledge of its management. In fact venture capitalist combines the qualities of banker, stock market investor and entrepreneur in one. In India, the securities and exchange board of India (SEBI) guidelines govern the operations of venture capital funds (VCFs).

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FEATURES OF VENTURE CAPITAL

Following are the main attributes of venture capital:-

Equity participation Venture financing is actual or potential equity participation through direct purchase of shares, options or convertible securities. the objective is to make capital gains by selling-off the investment once the enterprise becomes profitable Long-term investment Venture financing is along term illiquid investment; it is not repayable on demand. It requires long-term investment attitude that necessitates the venture capital firms to wait for a long period, say 5-10 years, to make large profits. Participation in management Venture financing ensures continuing participation of the venture capitalist in the management of the entrepreneurs business. This hands-on management approach helps him to protect and enhance his investment by actively involving and supporting the entrepreneur. More than finance, venture capitalist gives his marketing, technology, planning and management skills to the new firm.

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STAGES IN VENTURE CAPITAL

Following are the stages in venture financing:-

1.Early stage financing - Seed financing for supporting a concept or idea. - R&D financing for product development. - Start-up capital for initial production and marketing - First stage financing for full scale production and marketing. 2. Expansion financing - Second stage financing for working capital and initial expansion. - Development financing for facilitating public issue. - Bridge financing for facilitating public issue. 3. Acquisition/ buyout financing growth - Acquisition financing for acquiring another firm for further. - Management buyout financing the enabling operating group to acquire firm or part of its business. - Turnaround financing for turning around a sick unit.

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BUSINESS PLAN
The first step for a company (or an entrepreneur) proposing a new venture in obtaining venture capital is to prepare a business plan for the consideration of a venture capitalist. The business plan should explain the nature of the proposed ventures business. what it wants to achieve and how it is going to do it. The ventures management should prepare the plan setting challenging but achievable goals. The length of the business plan depends on the particular circumstances but, as general rule, it should not be very long. It should use simple language and technical details should be explained without jargons.

Essential Elements of a business plan:1. Executive summary 2. Background on the venture 3. The product or service 4. Market analysis 5. Marketing 6. Business operations 7. The management team 8. Financial projections 9. Amount and use of finance required and exit opportunities

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PROCESS OF VENTURE CAPITAL FINANCING

The venture capital activity is a sequential process involving the following six steps. Deal origination A continuous flow of deal is essential for the venture capital business.deals may originate in various ways: (a) referral system (b) active search and(c) intermediaries. Screening Venture capital is a service industry, and VCFs generally operate with a small staff. In order to save on time and to select the best ventures, before going for an in-dept analysis, VCFs carry out initial screening of all projects based on some broad criteria. Due Diligence Once a proposal has passed through initial screening. It is subjected to a detailed evolution or due diligence process. The evaluation of ventures by VCFs in India includes the following steps: Preliminary evaluation Detailed evaluation

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VCFs in India expect the entrepreneur to have: Integrity Long-term vision Urge to grow Managerial skills Commercial orientation

Deal structuring Once the venture has been evaluated as viable, the venture capitalist and the venture company negotiable the terms of the deal, viz, the amount, form and the price of investment. This process is termed as deal structuring. The agreement also includes the venture capitalists right to control the venture company and to change its management if needed, buyback arrangement, acquisition, making initial public offering (IPOs), etc. Earned-out arrangements specify the entrepreneurs equity share and the objectives to be achieved. Venture capitalists generally negotiate deals to ensure protection of their interests. The venture companies like deal to be structured in such a way that their interests are protected. Post-investment Activities Once the deal has been structured and agreement finalized, the venture capitalist generally assumes the role of a partner and collaborator. He also gets involved in shaping the direction of the venture. If a financial or managerial crisis occurs, the venture capitalist may intervene, and even install a new management team.
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Exit plan Venture capitalist typically aims at making medium to long-term capital gains. The play a positive role in directing the company towards particular exit routes. A venture may exit in the following ways: Initial public offering(IPOs) Acquisition by another company Purchase of the venture capitalists share by the promoter Purchase of the venture capitalists share by an outsider.

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VENTURE CAPITAL INVESTMENT PROCESS

Venture Capital Investment Process

Screening

Market

Product

Entrepreneurial (managed)

Product

Evaluation Expected Return Expected Return

Approval Decisions

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METHODS OF VENTURE FINANCING

Equity All VCFs in India provide equity. Generally , their contribution may not exceed 49 percent of the total equity capital. Thus, the effective control and majority ownership of the firm may remain with the entrepreneur. when a venture capitalist contributes equity capital, he acquires the status of an owner, and becomes entitled to a share in the firms profits as much as he is liable for losses. The advantage of the equity financing for the company seeking venture finance is that it does not have the burden of serving the capital, as dividends will not paid if the company has no cash flow. Conditional loan A conditional loan is repayable in the form of a royalty after the venture is able to generates the sales. No interest is paid on such loans in India, VCFs charged royalty ranging between 2 and 15 percent; actual rate depend on other factors of the venture such as generation period, cost-flow patterns, risk and other factors of the enterprise. Income note A unique way of venture financing in India was income note it was a hybrid security which combined the features of both conventional loan and conditional loan. The entrepreneur had to pay both royalty on sales and interest, but at substantially low rates. Funds were made available in the form of unsecured loans at a lower rate of interest during development phase and at a higher rate after

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development. In addition to interest charges, royalty on sales could also be charged.

Other financing methods A few venture capitalist, particularly in the privet sector, introducing innovative financial securities. The participating debenture is an example of innovative venture financing. VCFs in India provide venture finance through partially or fully convertible debenture and cumulative convertible preference shares.

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OBJECTIVES AND VISION FOR VENTURE CAPITAL IN INDIA

1. Venture Capital funding is different from traditional sources of financing. Venture capitalists finance innovation and ideas which have potential for high growth but with inherent uncertainties. This makes it a high-risk, high return investment. Apart from finance, venture capitalists provide networking, management and marketing support as well. In the broadest sense, therefore, venture capital connotes risk finance as well as managerial support. In the global venture capital industry, investors and investee firms work together closely in an enabling environment that allows entrepreneurs to focus on value creating ideas and venture capitalists to drive the industry through ownership of the levers of control in return for the provision of capital, skills, information and complementary resources. This very blend of risk financing and hand holding of entrepreneurs by venture capitalists creates an environment particularly suitable for knowledge and technology based enterprises.

2.

Scientific, technology and knowledge based ideas properly supported by

venture capital can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner. In various developed and developing economies venture capital has played a significant developmental role. India, along with Israel, Taiwan and the United States, is recognized for its globally competitive high technology and human capital. The success India has achieved
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particularly in software and information technology of success against several odds such as inadequate infrastructure, expensive hardware, restricted access to foreign resources and limited domestic demand, is a pointer to the hidden potential it has in the field of knowledge and technology based industry. India has the second largest English speaking scientific and technical manpower in the world. Some of the management (IIMs) and technology institutes (IITs) are globally known as centers of excellence. Every year over 200,000 engineers graduate from Government and private-run engineering colleges. Many also specialize through diploma courses in computers and other technical areas. Management institutes produce 40000 management graduates annually. Given this quality and magnitude of human capital Indias potential to create enterprises is unlimited.

3. In Silicon Valley, these very Indians have proved their potential and have carved out a prominent place in terms of wealth creation as well as credibility. There are success stories that are well known. They were backed by a venture capital environment in Silicon Valley and elsewhere in US which supports innovation and invention. This also has a powerful grip over the nations collective imagination. At least 30% of the start-up enterprises in Silicon Valley are started/backed by Indians. Back home also, as per NASSCOM data, the turnover of software sector in India has crossed Rs 100 billion mark during 1998. The sector grew 58% on a year to year basis and exports accounted for Rs 65.3 billion while the domestic market accounted for Rs 35.1 billion. Exports grew by 67% in rupee terms and 55% in US dollar terms. The strength of software professionals grew by 14% in 1997 and has crossed 160000. The global software sector is expected to grow at 12% to 15% per annum for the next 5 to 7 years. With the inherent skills and manpower that India has, software exports will thrive with an estimated 50%
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growth per annum. The market capitalization of the listed software companies is approximately 25% of the total market capitalization of around US$ 200 billion as of December,1999.There is also greater visibility of the Indian companies globally. Given such vast potential which is not only confined to IT and software but also in several other sectors like biotechnology, telecommunications, media and entertainment, medical and health etc., venture capital industry can play a catalyst role in industrial development.

4. It is important to recognize that while India is doing well in IT and software, it is still a low cost developer and service provider. Though it has the advantage of English-speaking, skilled manpower and cheap labor, its leadership is on a slipping edge as other countries such as Philippines, China and Vietnam are moving to occupy Indias position as the premier supplier of low end software and support services. Many such countries have superior supplies of power, telecom and internet connections compared with India. As the US did in the semiconductor industry in the eighties, it is time for India to move to a higher level in the value chain. This will not happen automatically. The sequence of steps in the high technology value chain is information, knowledge, ideas, innovation, product development and marketing. Basically, India is still at the level of knowledge. Given the limited infrastructure, low foreign investment and other transitional problems, it certainly needs policy support to move to the third stage i.e. ideas and towards innovation and product development. This is very crucial for sustainable growth and for maintaining Indias competitive edge. This will need capital and other support which can be provided by venture capitalists.

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5. India has a vast pool of scientific and technical research carried out in research laboratories, defense laboratories as well as in universities and technical institutes. A conducive environment including incubation facilities can help a great deal in identifying and actualizing some of this research into commercial production.

6. Development of a proper venture capital industry particularly in the Indian context is important for bringing to market high quality public offerings (IPOs). In the present situation, an individual investor becomes a venture capitalist of a sort by financing new enterprises and undertaking unknown risk. Investors also get enticed into public offerings of unproven and at times dubious quality. This situation can be corrected by venture capital backed successful enterprises accessing the capital market. This will also protect smaller investors. A study of US markets during the period 1972 through 1992 showed that venture-backed IPOs earned 44.6% over a typical five year holding period after listing compared with 22.5% for non-venture backed IPOs. The success of venture capital is partly reflected by these numbers since 80% of firms that receive venture capital are sold to acquiring companies rather than coming out with IPOs, in which the return multiple vis--vis non-venture funded companies is much higher. This potential can also be seen in sales growth figures for the U.S. where, from 1992 to 1998, venture capital funded companies sales have grown by 66.5% per annum on average versus 5% for Fortune 500 firms. The export growth by venture funded companies was 165%. All the top 10 sectors measured by asset and sales growth in USA were technology related.

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7. Thus, venture capital is valuable not just because it makes risk capital available at the early stages of a project but also because of the expertise of venture capitalist that leads to superior product development. The big focus of venture capital worldwide is, technology. Thus, in 1999, around $30 bn of venture capital has been invested in the U.S. of which technology firms reportedly got around 75%. Besides this huge supply from organized venture funds there is an even larger pool of "angel" funds provided by private investors. In 1999, it was expected that angel investment would be of the order of $90 bn, thus making the total "at-risk" investment in high technology ventures in a single year of $120 bn. By contrast, in India, cumulative disbursements to date are not more than $500m, of which technology firms have received only 36%.

8. The other successful experience is that of Taiwan: Hsinchu Science-based Industrial Park is the showpiece of Taiwans success. Forty percent of the firms established in this government promoted park, which currently accommodate 3,000 expatriates, were begun by entrepreneurs from the United States. The revenue of firms located at Hsinchu Park alone was $14 billion in 1998. Facilities at Hsinchu include English language teaching for the children of its expatriate entrepreneurs. The Hsinchu experiment has benefited from the generally high quality of education in Taiwan, whose institutes produce 50,000 engineers annually. Taiwan has 74 technical schools, 36 colleges and 24 universities, two of which are located near Hsinchu Park. The venture capital environment has also been a favorable factor. There are 110 venture capital firms in Taiwan, including 38 begun in 1998. By the end of 1997, these firms had invested $1.32 billion in 1,839 ventures, mostly in high technology.

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9. Taiwans government has been particularly successful in promoting its hardware industry through tax incentives, low tariff barriers, credit at cheap rates, good infrastructure facilities and establishment of research institutes. The Industrial Research Institute, owned by the government, started with semiconductor technology purchased from RCA Records. The technology subsequently developed at the Institute led to two very successful integrated chip firms. United Micro land Corporation (UMC) and Taiwan Semiconductor Manufacturing Corporation (TSMC), which were initially promoted by the government and ultimately privatized.

10. Taiwan has benefited from close ties with Silicon Valley. A transnational community of Taiwanese venture capitalists has fostered a two-way flow of capital, skills and information between Silicon Valley and Taiwan. There is also an emerging trend of grouping of Taiwanese and Indian high technology talents in Silicon Valley. India can learn important lessons from the Taiwanese governments focus on education and encouragement of small enterprises, via facilities such as Hsinchu Park, as well as a U.S. style legal, regulatory, tax, and institutional environment.

11. Similarly the venture capital industry in Israel has grown from one firm with a corpus of $30 million in 1991, to eighty firms with a corpus of $3 billion by 1998. Further, Israels IT speciality is developing technology rather than software or products. This focus has meant that new Israeli ventures are most typically

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acquired by larger technology firms, and IPO route in the U.S. markets has also been successful. In fact, Israeli companies are the second largest group of companies listed on the Nasdaq markets after American companies, a remarkable achievement for a country of 6 million persons.

12. Like Taiwan, Israel is another country in which government policy fostered a successful, highly diversified, self-reliant industry. In the early 1990s, Israel restructured its legal, accounting and regulatory framework to mimic that of the United States. The new Israeli framework guarantees U.S. investors parity with U.S. tax rates. In 1984, the Israeli government passed a law to encourage industrial research and development (R&D) and created the Office of the Chief Scientist to implement government policy related to this area. The laws strategy is to encourage private companies to invest in R&D projects with the government sharing the business risk. Under the law, a Research Committee appointed by the Chief Scientist approves proposals for anywhere from 30 to 66 percent of given projects funding (up to $250,000). These proposals, when funded, also receive tax exemptions for up to ten years. As an additional incentive to entrepreneurship, the Israeli government has created twenty six technology incubators designed to allow start-ups to convert their ideas into commercially viable products.

13. Israels government participates in international cooperation, seeking to match the nations technical skills with global markets, and to share start-up risks up front with later-stage activities such a marketing. The most successful of these ventures has been the Bilateral Industrial Research and Development Foundation (BIRD), a joint venture with the U.S. government. The Israeli high technology industry
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enjoys the same kinds of transnational ties that has helped Taiwan. Similarly, the Israeli venture capital industry has strong U.S. connections. Several of Israels experiences have relevance for India. Government policy on incubators, the funding of R&D projects, and the BIRD project provide useful object lessons for the Indian government and business alike.

14. Venture capital has played a very important role in U.K., Australia and Hong Kong also in development of technology growth of exports and employment.

15. India certainly needs a large pool of risk capital both from home and abroad. Examples of US, Taiwan and Israel clearly show that this can happen provided there is right regulatory, legal, tax and institutional environment. It is also necessary that start-ups have access to R&D flowing out of laboratories and universities with infrastructure support such as telecom, technology parks etc. Steps are being taken at the level of Government, Ministry of Information and Technology, and CSIR for improvement in infrastructure and R&D. Certain NRI organisations are taking initiatives to create a corpus of US$500m to strengthen the infrastructure of IITs. More focused attempts will be required in all these directions.

16. Recent phenomena, partly ignited by success stories of Indians in US and other places abroad, provide the indications of a growing number of young, technically qualified entrepreneurs in India. There are success stories within India also. At the same time increasing number of internationally savvy, senior managers
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have been leaving established multinationals and Indian companies to start new ventures. The quality of enterprise in India is on an ascending curve. The atmosphere thus is ripe for creating the right regulatory and policy environment for sustaining the momentum for high-technology entrepreneurship. The Indians abroad have leapfrogged the value chain of technology to its highest levels. By bringing venture capital and other supporting infrastructure this can certainly happen at home also.

17. Another important area is the need for multi country integration. Information Technology and Internet have brought about the trend of what can be called the "death of distance" and operation across the countries can be seamlessly integrated. In the Indian context with developing IT and internet technology coupled with close linkages of Indian technocrats and entrepreneurs located in India and abroad, there are interesting possibilities. This will of course need further regulatory and policy support to provide operational flexibility, easy entry-exit and ownership patterns to suit global needs. It is also to be noted that the quality and quantity of research conceptualized in startups competes favorably with research undertaken by big firms. This phenomenon is seen even in India.

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What could all this mean in terms of employment generation within India?

There is probably no industry as employment intensive in productivity and numbers as high technology. In US venture funded companies have grown jobs by 40% per annum since 1992. Conversely Fortune 500 jobs shrank by 2.5% per annum during the same period. 60% of the jobs created by venture funded companies were engineers/skilled jobs. Further in 62% of the venture funded
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companies, stock options covered 100% of the employees. India today produces over 60000 new computer science graduates annually and over 2 lakh more enroll annually in computer training institutes. Besides, about 200,000 engineering graduates come out from engineering colleges in addition to the substantial number of persons doing diploma and certificate courses in technology related areas. By contrast, in Taiwan, the total number of engineering graduates is around 50000 and in US it is 30000 per annum. According to available estimates there are about 3,50,000 unfilled jobs of computer scientists in the US with the growth rate of 100,000 job requirement each year. Achieving even a reasonable fraction of US scale of development in information technology and other knowledge based areas, there is going to be a big employment generation in India. Additionally, given Indias lower labour cost, the potential for employment is even larger than what appears from these estimates.

19. It also needs to be noted that with other areas of business and industry getting more and more technology oriented, there will be requirement of jobs all around. Indications are already emerging, as firms in India which are being outsourced by foreign organizations to provide services are recruiting hundreds of employees within one year of their existence. Several such firms are getting located around Delhi, Bangalore and Hyderabad. With proper venture capital support, there can be a phenomenal increase in start-up enterprises which would generate further employment potential.

20. Given the right environment, large flows of risk finance and venture capital can flow into the country. Apart from the foreign investment, substantial venture
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capital is likely to come from overseas Indian community in Silicon Valley. This is particularly so as some of the Indian technocrat entrepreneurs in Silicon Valley have strong Indian linkages at professional level and are enthused to invest in India. There are at least 300 such entrepreneurs with individual wealth exceeding $5 million and total wealth of about $25 US billion. Another 1000 are believed to have wealth in the range of $ 1-5 million. Currently, about 20% of their wealth is reinvested in new ventures which will rise as vesting schedules mature. The risk capital with Indian entrepreneurs is around $6 billion and even if 15% to 20% comes to India annually, there is a ready pool of around $1 billion available for annual venture capital investment in India. Further, larger venture capital firms in the United States with a combined corpus of around US$ 35 billion have reportedly set aside up to 20% of their funds for investment offshore. India along with Ireland and Taiwan is a favored destination for investments by these offshore venture funds.

21. The net FII investment in Indian markets is around US $10 billion and the flows for the last few years have generally been positive. With enhanced interest in India as compared to some of the other emerging and Asian markets, given the right environment good amount of money would flow as venture capital investment. This is more so because India has already acquired credibility particularly in the area of information technology and sectors like media, pharmaceuticals etc. While the proportion of offshore to local capital which is around 80% foreign and 20% domestic, may remain same for the first few years, the recycling of entrepreneurial wealth and skills within the industry will gradually lead to greater presence of domestic venture capital industry .

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SEBI REGULATIONS
As in the case of FIIs, SEBIs primary role in the venture capital fund is envisaged as of a facilitator for growth rather than that of a regulator. SEBI Regulations should encourage more venture capital investments in a hassle free manner. The multiplicity of regulations, as far as possible, should be avoided and one set of regulatory guidelines may be issued under the aegis of one nodal agency for interface with the venture capital investors which could be SEBI. SEBI Regulations should focus more on adequate disclosure as investors in venture capital activities are institutions or high net worth individuals who are expected to have the capability of taking an informed decision based on the disclosures. The regulatory requirement of seeking approval of the placement memorandum from SEBI may be dispensed with by strengthening the disclosure requirements. The SEBI Regulations also provide in the case of a VCF incorporated as a trust for compulsory registration of instrument of trust under the Indian Registration Act. As per the provisions of Indian Registration Act, the registration of trust document is optional. There are operational problems in the case of existing VCFs (in existence before SEBI Regulations were notified) to register the document of trust after lapse of four months period. It should be left to the choice of the applicant whether to register the trust document and there should not be any compulsion for registration of documents under the Indian Registration Act under the SEBI Regulation. The venture capital activity is in nascent stage in India as of today and many dimensions of it are still to be unfolded. SEBI Regulations therefore should not curtail the flexibility of investment by a VCF.

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The present regulatory framework permits the investment by VCF in sick industrial undertaking needs a review. There are various agencies who are engaged in restructuring, financing to sick industries and there is no acute necessity for venture capital funds to invest mainly in sick industrial undertakings. The VCF should focus on investment in green shoe high technology oriented, knowledge based, research oriented industries, however, VCFs may also be provided flexibility to participate in the restructuring process of sick industries as and when required

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RECOMMENDATIONS
The following amendments are recommended under the existing SEBI Venture Capital Regulations: The definition of VCF should be amended to include any other structures and also the funds set up, scheme floated by a trust, company, body corporate or other legal entities. The Regulation should make provisions for registration of Foreign Venture Capital Investors (FVCI). The investment criteria needs to be redefined to permit investment by VCF primarily in equity or equity related instruments or securities convertible into equity of VCUs and also by way of subscription to IPO and preferential offer in case of companies to be listed or already listed. The limit of at least 80% of the funds raised by the VCF may be dispensed with and new investment criteria as dealt under the heading Investment related issues may be incorporated. The relaxations for venture capital undertaking/funds under SEBI Takeover Code and SEBI (Initial Public Offer) guidelines as dealt under the heading of Exit related issues may also be incorporated. The provision for investment in sick companies and financial assistance in any other manner may be dispensed with. The existing provisions for approval of placement memorandum by SEBI may be dispensed with but the content of placement memorandum may be strengthened to include all the significant information necessary for an investor to arrive at a fair decision.

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VENTURE CAPITAL IN MICRO FINANCE

following is the example of venture capital in micro finance

Aavishkaar India Micro Venture Capital Fund (AIMVCF)

Aavishkaar India Micro Venture Capital Fund (AIMVCF) is a fund created to promote inclusive development in rural and semi-urban regions in India. The funds mission is based on the premise that promising micro, small to medium sized enterprises (MSMEs) will help drive positive changes in the underserved regions of the country. Aavishkaar was incorporated in the form of a Trust in October 2001 and was registered with SEBI as a Venture Capital Fund in May 2002. The fund achieved its First closing in August 2007 at USD 6 mn followed by a Final closing in January 2009 at USD 14 mn. Aavishkaar helps establishment of entrepreneurial ventures by providing equity financing in the range USD 50,000 and USD 500,000. Aavishkaar has received subscriptions from both domestic and global financial and development institutions like CARE Enterprise Partners, CORDAID, NABARD etc. The key investment criteria for the fund are scalability and the potential to make strong positive social impact on rural or semiurban India. The fund management team further provides active operational & strategic support in growing the businesses. Aavishkaars investments create sustainable changes by increasing economic activity at the bottom of the pyramid, boosting entrepreneurial spirit and establishing socially motivated VC- funding as a new financing mechanism in India. These efforts were recently acknowledged when Aavishkaar received the World Business Award 2006 sponsored by the International Chambers of
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Commerce, United Nations Development Program (UNDP) and Prince of Wales Foundation in recognition of service towards fulfillment of the Millennium Development Goals, L-Ramp Awards of Excellence 2007 presented by Dr. A.P.J. Abdul Kalam, Former President of India. Aavishkaar along with social benefit to the society aims to provide returns to its investors in the range of 12-15% IRR over 10 year investment horizon. Aavishkaar generally adopts innovative modes of financing that facilitate reducing the risk of dilution in promoters equity, while protecting Aavishkaars interests in the ventures. The various instruments made use of normally are: Common equity, CCPS (Compulsorily Convertible Preference Shares), Mezzanine funding, bridge loans, working capital loans etc. Investment portfolio of Aavishkaar Aavishkaar has made 16 investments across industries, which include renewable energy, waste management, information and communications technology, agrobased technology, handicrafts, healthcare and rural innovations. The funds first investment was in 2002 - in a Chennai-based firm called Servals Automation that has developed innovative new products to serve the rural markets. Servals blockbuster product is a stove burner that uses 30% less kerosene than traditionally used stove burners. One of the funds recent investments is in Vortex Engineering that has developed a pioneering cost-effective ATM suited to rural markets. Vortex, with its tie-up with various banks will serve rural markets across India by rolling out these cash machines. Aavishkaars portfolio companies today have the potential to generate direct employment for thousands of people in addition to providing value for the endbeneficiaries.

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Investee Portfolio
Aavishkaar has made 22 investments 17 of which are from AIMVCF, 5 from AGIMDC. Following are the brief introduction of companies.

Energy Solutions for the Poor Servals encourages rural innovations that contribute towards energy selfsufficiency. Its flagship products include a stove burner that saves up to 27% kerosene and a straight vegetable oil stove. In recognition of its achievements, the company has received many awards including the L-Ramp Award for Excellence in 2007 and the "most energy efficient burner by the Paraffin Safety Association of South Africa (PASASA). Aavishkaar invested in to the company in 2002.

Building Transparency and Efficiency Shree Kamdhenu Electronics Private Limited (SKEPL), a company based in the town of Vallabh Vidyanagar, Gujarat, India, develops products and systems that help bridge the technology gap in the dairy industry and make milk-production more transparent for the farmers involved. Aavishkaar invested into the company in 2003.

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Tide Technocrats Private Limited Tide Technocrats operates in the energy space. It supports Carbon Emission Reduction project development, designs composting facilities for municipal solid waste management and undertakes biomass assessment for renewable energy projects. Aavishkaar invested into the company in 2003.

Bringing

India's

Traditional

Arts

And

Crafts

To

Wider

Market

Craftsbridge is a venture focused on adding value to the informal handicrafts sector in India. It aims to do so by introducing design & corporate merchandising to artisans/vendors and by acting as the 'bridge' between craftsmen and consumers. Aavishkaar invested into the company in 2004.

Pioneering

Language

Technologies

In

India

CK technologies develops affordable bilingual office software aimed at users who do not speak or write English. Its flagship product is a Bilingual Office Suite called "Shakti Office, which has both English and an Indian language (Hindi or Tamil). The bi-lingual software means that a vast population has the benefits of

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computerized systems, such as in court houses, police stations, banks etc. Aavishkaar invested into the company in 2006.

Share Microfin Ltd. (SML) is a MFI that aims to grow its client base to 15 million members and its outstanding portfolio to about INR 16,382 crore by 2012-13. It is the first MFI in India to obtain a Non Banking Financial Company (Non Deposit) license and also the first Indian MFI to carry out a microfinance securitization transaction. SML also provides collateral free loans to Joint Liability Groups. Aavishkaar Goodwell invested into the company in 2007.

Funds
Aavishkaar Venture Management Services provides investment advice and support to the following three funds: AIMVCF (Micro Equity Fund) Aavishkaar India Micro Venture Capital Fund intends to raise US$ 14 Million for investment into Micro and Small Enterprises (MSMEs) that have rural and social focus. With an average ticket size of US$ 50,000 - 500,000, the fund expects to make 30-35 investments. This fund has been operational since May 2002, and is registered as a Private Trust under the Indian Trust Act of 1882, and with the Securities and Exchange Board of India (SEBI).

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AGIMDC (Micro Finance Fund) Aavishkaar Goodwell India Microfinance Development Company Ltd is a US$18 Million fund, raising funds and dedicated to micro finance institutions (MFIs). With an average ticked size of US$ 500,000 - 2,000,000, the company expects to make 15-20 investments. The company has been operational since December 2006, and is registered as a Global business license company under the Laws of Mauritius. BYST Growth Fund Growth Fund is the first fund launched in year 2007 in India to provide equity like financing for businesses run by young entrepreneurs from socially disadvantaged population. With an average ticket size of US$ 10,000 - 250,000, the fund expects to make 30-35 investments. The fund has been operational since March 2008 and is registered as a Private Trust under the Indian Trust Act of 1882, and with the Securities and Exchange Board of India (SEBI).

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ICICI VENTURE
ICICI Venture is one of the largest and most successful private equity firms in India with funds under management in excess of USD 2 billion. ICICI Venture, over the years has built an enviable portfolio of companies across sectors including pharmaceuticals, Information Technology, media, manufacturing, logistics, textiles, real estate etc thereby building sustainable value. It has several "firsts" to its credit in the Indian Private Equity industry. Amongst them are India's first leveraged buyout (Infomedia), the first real estate investment (Cyber Gateway), the first mezzanine financing for a acquisition (Arch Pharmalabs) and the first 'royalty-based' structured deal in Pharma Research & Development (Dr Reddy's).

Following are the different sectors where ICICI venture made investment:-

Banking & financial services Centurion bank of Punjab Karvy stock broking ltd

Consumer services PVR Deccan Aviation Tops Securities

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Energy Reliance Petroliam Kalapataru Power

Engineering Services Nagarjuna Construction Action Construction Equipment

Hospitality Mass restaurant

Internet Naukri.com

IT/ITES Geogmetric software Infowavz Rel Q Bill Junction/Techprocess

Life Science Arch Pharmalabs Malladi Drugs

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 Bharat Biotech I-Ven Pharma (Dr reddys labs) RFCL Metropolis

Logistics Gateway Distri parks

Manufacturing Samtel color Tebma Shipyards Ltd ACE Refractories

Media Infomedia India TV Today(Aaj tak) Miditech

Real Estate I-Ven Reality I-Ven Township Integreted township at Tellpur Jublee Hills Landmark Projects TSI Business Parks Corolla Ralty
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Retail Home Solution Shoppers stop Crossword Pantaloon Retail

Textiles Welspan India Sangam

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RECOMMENDATION
As the entrepreneur want to start up there own firm so it is very difficult for the new entrepreneur for paying the interest. As the interest rate charged by the venture capitalist is too high. As the market is uncertain so it very risky and create problem for the venture capital firms. Because nobody is trying to come up with IPO and IPO is the exit rout for venture capitalist High taxes on emerging sector such as biotechnology, pharma, IT etc pass through status means that the income earned by these firms are highly taxable. Government equity funds have been widely used to pump prime private venture capital and reduce imbalances in the allocation of funds across different financing stages, particularly in beginning the risk profile of seed and start up firms is generally too high to attract sufficient venture capital. Most of the foreign firms are doing venturing in India so as to earn profit. Due to this Indian venture capital firms had lost there identity.

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CONCLUSION
Venture capital can play a more innovative and developmental role in developing country like India. It could help the rehabilitation of sick units through people with ideas and turnaround management skills. A large number of small enterprises in India become sick even before the commencement of production. Venture capitalist could also assist small ancillary units to upgrade their technologies so that they could be in line with the developments taking place in their parent companies. Yet, another area where VCFs play a significant role in developing countries is the services sector including tourism,publishing,health care etc. they could also provide financial assistance to people coming out of the universities, technical institutes etc. who wish to start their own venture with or without high-tech content, but involving high risk. This could encourage entrepreneurial spirit. It is not only the initial funding which is needed from the venture capitalist, but they should also simultaneously provide management and marketing expertise a real critical aspect of venture capital in developing countries.VCFs can improve their effectiveness by setting up venture capital cells in R&D and other scientific organisation, providing syndicated or consortium financing and acting as business incubators.

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BIBLIOGRAPHY
Financial management by I.M.Pandy (9th Edition) Financial management by Ravi Kishor (3rd Edition) WWW.ICVA.com WWW.Aavishkar.com WWW.ICICI venture

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ANNEXURES

VENTURE CAPITAL INVESTMENT BY DIFFERENT INDUSTRY

venture capital Investment by Industry

24% 27%

IT&ITES MANUFECTURING REAL ESTATE HEALTHCARE & LIFESCIENCE BFSI SHIPPING & LOGISTICS

2% 8% 7% 1% 1% 12% 7%

12%

TRAVEL & LEISUR ENG &CONSTRUCTION FOOD &BEVERAGES OTHERS

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