05.07.

20

MITWPU, Kothrud, Pune

MITSOE – School of Economics – B.Sc. Economics
Year III – Trimester 7
Name of the subject: Venture capital & merchant banking
Name of the faculty: R. Balachandran
Faculty handout for the entire subject

Topic: Merchant banking & investment banking – Indian and global

Note: This handout by the faculty is to be treated as an adjunct to material in the form of articles,
statutory obligations by the MB, steps involved in IPO, PPT slides etc. Please use those materials too
as an adjunct.

Origin of merchant banking – Source: AMBI

ORIGINS AND EARLY HISTORY:

The origins of Merchant Banking go back to the middle of the 18 th.Century, when an epoch
making event – the Industrial Revolution - took place. Although man had invented machines
before, those designed during the Industrial Revolution had an important characteristic. For
the first time, man deliberately made machines, for which the raw materials to be used in
them, were not locally available. This represented a quantum jump in the history of industrial
evolution. It also marked the systematized beginning of the import-export trade. The impact
of the Industrial Revolution then has only been matched by the current developments in the
field of Information Technology.

Interestingly, at about the same time, there was an important development on the
theoretical front. Adam Smith’s pioneering effort, also acknowledged as the first major work
in the field of Economics, ‘ An Inquiry Into The Nature and Causes of the Wealth Of Nations’
made its appearance. What Adam Smith had propounded two centuries ago, namely - do
only what you can do best - technically called the Theory of  Advantage (later refined by
David Ricardo) is now being rehashed as the Core Competency theory by management gurus.

Then as now, the basic document for import-export, was the Bill of Exchange. However
importers found that the exporters were not willing to execute documents ‘accepted’ by
everyone. Only the ‘acceptances’ of a few established merchants were acceptable. Thus,
these established merchants, were signing documents on behalf of others - naturally for a
small fee. Soon these merchants found that this was a business that had immense potential
and established ‘Acceptance Houses’ exclusively to handle this activity. These Acceptance
Houses, set up by renowned names such as Hambros, Warburg, Rothschilds and others, were
the ancestors of the current merchant and investment banks.

From the foregoing, the main characteristics that still distinguish the merchant banking
business can be described.

1. Reputation, credibility and trust are the hallmarks of a merchant banker

2. A merchant banker rarely invests his own funds. If at all, it is only for a short
duration.
3. Merchant Banking is essentially a fee based business.

As the scope of what constituted business expanded, the products a merchant banker dealt
with increased. Soon another pre-requisite became vital – knowledge. This automatically
translated into the ability to research, evolve, design and forecast.

At this point, the term Investment Banking came into being, thus reflecting the diverse
activities that erstwhile merchant bankers took up. However, in India, both the terms are
commonly used as synonyms for the another, and in practical terms there is as much
difference between them as between an astronaut (American) and a cosmonaut (Russian)!
Henceforth, we would use only the term "Investment Banking", unless the context requires
that a differentiation be made.

The activities of investment banking have largely remained within what may be termed as
the economic sphere of business. Thus areas such as personnel, HRD, accounting and the
legal aspects of business have remained outside its purview. However given the synthesis
developing in other businesses, it may not be too far ahead in time, when an investment
banker takes on these activities also. At present, when necessary, investment bankers,
outsource these requirements. An illustrative, but not exhaustive list of activities, undertaken
by investment bankers, is given below. There may be variations from country to country,
depending on the legal framework obtaining therein.

 Acceptance Credit and Bill Discounting

 Bankers to the Issue (division of a commercial bank)
 Corporate Counseling
 Credit Syndication and Project Finance
 Fixed Deposit Broking
 International Finance
 Investment Research
 Issue Management
 Trustees/Sponsors of Mutual Funds
 Mergers & Acquisitions
 NRI Counseling and NRI Funds Management
 Pension Fund Management
 Portfolio Management
 Rehabilitation & Restructuring of Sick Companies
 Underwriting
  Venture Capital Financing

A DEFINITION FOR THE INDUSTRY:

At this point, it is tempting not to attempt to give a definition to investment banking. This is,
in view of the foregoing, a hazardous task. The perimeters of a definition impose several
restrictions. It must be brief, precise and yet encompass all the aspects of the subject. It must
be durable over a sufficiently long timeframe and also across different legal structures. Thus
the difficulty in arriving at a definition of "Investment Banking" is a result of the nature of the
activity itself, rather than the inadequacy of language. A verbose definition would wobble,
lose its balance and crash easily.

Setting up of a merchant banking unit in India – SEBI requirements

Registration of merchant bankers…

Registration with SEBI is mandatory to carry out the business of merchant banking in India.
An applicant should comply with the following norms:

 The applicant should be a body corporate

 The applicant should not carry on any business other than those connected with the
securities market
 The applicant should have necessary infrastructure like office space, equipment,
manpower etc.
 The applicant must have at least two employees with prior experience in merchant
banking
 Any associate company, group company, subsidiary or interconnected company of
the applicant should not have been a registered merchant banker
 The applicant should not have been involved in any securities scam or proved guilt
for any offence
 The applicant should have a minimum net worth of Rs.5 crores

Source: pitchbook.com/

Code of conduct for a merchant banker – source: AMBI

1.REGULATORY/STATUTORY COMPLIANCE:
The Members/Associates of AMBI are custodians of confidence and a bridge between
investors and investees. The role includes reporting obligations which have in essence a legal
requirement for meeting certain specific objectives. Accordingly, various Government
agencies on the local, state and federal level may require the filing of numerous records and
reports, which are designed to safeguard public interest. Members/Associates of AMBI are
expected to adhere to the code of conduct, regulations, guidelines, clarifications, rules,
circulars and press releases issued by SEBI from time to time. Special care must be taken to
ensure that all reporting to any branch or agency of the government is done without the
utmost accuracy and promptness. No attempt should be made to distort or disguise the true
nature of any procedure or transaction.
2.CONFIDENTIALITY:
Members/Associates may obtain financial and other "price sensitive" information,
information about their client and/or competitors. The success of a Merchant Banker
depends on the confidence of the clients that its Merchant Banker would maintain
confidentiality of the information obtain by it and the assurance that it would be utilized by
the Merchant Banker in a proper manner. It goes with assurance that such information shall
never be used for gain.

3.THE MEMBER/ASSOCIATE SHALL:

a. Request its clients, other members and others for only such information as may be
statutorily required or such information, as may be properly considered as necessary
for rendering professional service as a Merchant Banker.
b. Restrict the use of the information, knowledge, secrets only for the purpose of
discharging its functions as a Merchant Bankers.
c. Ensure that access to the information about the client and/or its competitors is
accessed only by the authorized employees/representatives of the Merchant
Bankers.
d. Ensure that the files contain only pertinent data used for advising the client.
e. Ensure that access to all sensitive or privileged informations is denied to others
unless for good cause and/or reason and in discharge of their duties.

3.ACCURATE RECORDS, REPORTING AND FINANCIAL RECORD KEEPING:

Merchant Bankers are required by Law to maintain financial and other records  that will
accurately present its activities and transactions.. All supporting documents, including
agreements, invoices, cheque requests and expense reports, are likewise required to fairly
and accurately reflect the information contained therein. No false or misleading entries
should be made in any books or records of the Members/Associates for any reason; either in
accounts or in accounts maintained for and on behalf of clients and no fund, assets or
account of the company should be established for any purpose unless it is accurately and
fairly recorded in the books and records of the company. All errors and adjustments should
be promptly corrected and recorded when discovered. Accounting information should be
prepared in conformity with the prescribed accounting standards and generally accepted
accounting practices. In the event of adherence causing any hardship the
Members/Associates could refer such situations to AMBI to enable it to examine the same.
No entries should be made which will conceal or differently portray the essence of a
transaction.

The need for accurate and proper recording of information is not restricted to the accounting
and financial functions of the Members/Associates.  Members/Associate are also expected to
maintain detailed records of all transactions, correspondence, meetings etc., with their
clients/prospective clients. In an evolving regulatory environment, the attempt should be to
lay down standards which will stand the test of time and avoid concealing the essence of a
transaction behind the legalities of compliance regulations.
4.CONFLICT OF INTEREST:
Members/ Associates shall always endeavour to avoid conflict of interest in performance of
its services as a Merchant Banker. Conflict of interest may be actual or apparent. All
situations which leads to a conflict of interest should be avoided. This would apply in relation
to other Members/Associates, clients, employees, group companies and dealings with other
regulatory authorities. Before accepting a new assignment from a prospective client, a
merchant banker is expected to conduct its own Due Diligence with the prospective clients'
bankers, merchant bankers and other capital market intermediaries with a view to arrive at a
decision whether to accept or reject the assignment.

5. ETHICS IN CONDUCTING BUSINESS :

Members/Associates shall in dealings with other members, clients, investors, institutions, the
public, employees and others comply with all applicable laws, rules and regulations both in
letter and in spirit. Where there appears any difficulty in interpretation of any law, rules,
regulation the Members/ Associates may refer such issues to AMBI.

6. POLITICAL CONTRIBUTIONS AND ACTIVITY:

Members/Associates may, on its absolute sole discretion make political donations and
participate in any political activity that are legally permitted. When expressing views on
political issues the Member/ Associates should make it clear that the views expressed rue
those of concerned Member/ Associates and not of AMBI.

7. COMMUNICATION:
Members/Associates are required to communicate with the Regulatory Authority,
Government departments and Agencies, Public etc.. The Members/Associates shall
communicate accurately in a manner which would ensure that the communication is truthful
and accurate. All communication by a member to the investor at the instance of a client or
based on information available with the client, should be made only if the member is fully
aware of the facts and contents of the matter.
Members/Associates would acknowledge the fact that they are an important link between
the listed companies and the investing public.
Opinions and recommendations required for from a Merchant Banker regarding any matter
within his professional scope of work may be provided by him. The merchant banker shall be
free to charge such fees for such professional service as he may deem fit. No incorrect or
misleading information should be given. Information regarding advisable investments and
update on investments should be given in a professional manner and should not be based on
any extraneous motive or consideration.

8. PUBLIC DISCLOSURE AND REPORTING:

Reporting of financial information to the investing stockholders, the SEBI and the financial
institutions requires the highest standards of fairness and honesty. Much harm can be
caused due to incorrect or fraudulent or misleading reporting. All advice which suppresses or
does not wholly disclose the material nature of a transaction should be avoided as being
prohibited.

9. DISPARAGEMENT OF COMPETITORS:
 a. Competition among Merchant Bankers is increasing day after day which is welcome
as public interest is best served by free and open competition. Any activity or
conduct that reduces or eliminates competition in the market place is not in the
interest of the development of a vibrant security market and investors. No Member/
Associate shall undertake any activity which tends to or is likely to result in any
restrictive trade practice or an unfair trade practice. One may choose not to discuss
fees, costs, commissions etc. earned/ incurred by him with a competitor as this may
lead to an unlawful agreement to determine prices or restrain competition.
However, a member is discouraged from entertaining client solely on the ground of
fees when matters may have reached advanced stages of negotiation with other
members.
b. In the ordinary course of business one may require information about a competitor,
his clients etc. However, a merchant Banker shall not acquire or seek to acquire
information through improper means such as industrial espionage, hiring an
employee of the competitor etc. Should any such instance come to light the same
should be reported to the SEBI & AMBI.

10.MARKETING & SALES:

Members/ Associates are encouraged to compete in the market place solely based on merits
and competitive positioning. Abiding by generally accepted practices and norms of   fair
competition and providing clients with accurate, adequate and prompt information is
expected. Business should be obtained on merits, avoiding compromising the loyalty of a
customer's employee in an effort to make a sale through misuse of business courtesies.

11.DISCRIMINATION:
No Member/ Associate shall discriminate in favour of or against any of its competing
customers. No client company shall by an agreement or otherwise be coerced into restoring
to the services of a particular Merchant Banker generally, it should in no circumstances be
considered as being a tool adverse to the interest of any client.

12.CONTRACTS WITH CLIENTS:

All agreements with clients shall be in writing and contain detailed scope of services to be
rendered by the Members/ Associates. The agreement shall include the amount of fees to be
charged and the manner of payment thereof. The agreement between the Member/
Associate and the client shall be entered into before any service as is rendered by the
Member/ Associate. A Member/ Associate before accepting any assignment from the client/
prospective client shall obtain information as to whether  the client/ prospective client has
already entered into an MOU/ Agreement with any other Merchant Banker in respect of the
same assignment and its status thereof.
Members/Associates shall ensure that their clients follow rules, regulations, guidelines etc.
issued by SEBI and other regulatory authorities from time to time. A Merchant Banker shall
exercise Due Diligence to ensure fair and true disclosures in the offer document so that the
investors are in a position to take well informed investment decisions. Apart from informing
SEBI, Members/Associates shall keep AMBI informed about the non- compliance, if any,
concerning such matters as reflect the interaction of the clients with the member.
Members/Associates shall also keep AMBI informed about the non payment of fees etc. by
the client as agreed.
13. EXPENSES REIMBURSEMENT:
It is customary for a client to reimburse its Merchant Banker for all reasonable and necessary
expenses actually incurred in the conduct of the client's business.
Members/Associates are expected to incur such expenditure as would normally have been
incurred by them in the discharge of their duties. Without making it mandatory in any
manner, Members/Associates are encouraged to confirm with clients the particulars of
expenses they would be incurring including the nature and class of travel, particulars
regarding stay and expected duration etc.

14. GIFTS, ENTERTAINMENT, FAVOURS AND OTHER ITEMS OF VALUE:

Members/Associates shall not accept or give any gift which may deem to influence the
making of any commercial decision by the recipient of the gift. A gift may take various forms
including money, tangible property, services free of cost or at concessional rate, discount,
credit etc. Members/Associates are required by needs of the profession to interact with a
cross section of the society. Members/Associates shall not make any illegal payment either
directly or indirectly to any person irrespective of the reason or motive. Even reasonable
gifts, be they received or given, should be avoided if to a reasonable observer, it might
appear to influence a decision.

15. PROCUREMENT/PURCHASING:
AMBI may, from time to time, indicate minimum fees for the services to be rendered by
members in certain select areas of merchant banking activities, e.g. Lead managers/joint
managers/ co-managers fees. While indicating such fees, AMBI shall keep in mind the cost
expected to be incurred in rendering such services.
No undercutting should be restored to in any circumstances much less in a manner which
may not be easily detected in the course of discharging responsibilities.
Similarly all deals for procuring investments, either short, medium or long term should not be
structured in a manner as not to be in keeping with the spirit and essence of this code.

16. INSIDE INFORMATION:

A Merchant Banker will be considered as an "insider" in accordance with the meaning of the
term as per the Securities and Exchange Board of India (Insider Trading) Regulations, 1992.
A Member/ Associate shall not:

a. either on his behalf, or on behalf of any other person, deal in securities of a company
listed on any stock exchange on
the basis of any unpublished price sensitive information.
b. Communicate any unpublished price sensitive information to any person except as
may be necessary to carry on the business ordinarly on or under any law;

c. Give advice, suggestions, recommendations, to any person to deal in securities of any

company on the basis of unpublished price sensitive information.

No Members/Associates or any of their employees shall indulge in " insider trading". This
may requires the Members/Associates to obtain from its employees, existing as well as to be
employed in their organisation in future to give suitable declarations that he/ she shall not
act or any unpublished price sensitive information. There should be mechanism by which the
Members/Associates are in a position to monitor the compliance. Employees should make
periodic disclosure of transactions in securities entered into by them and their dependent
relatives. Each Merchant Banker shall fix its own internal limit for transactions above which it
would be obligatory  for the employees to disclose the same to his employers. The Board/
Management Committee should take note of these disclosures for proper monitoring. Every
Member/ Associates shall co-operate in adopting such regulatory procedure as AMBI may
impose for ensuring that the code of Conduct, Articles of Association of AMBI and other
regulatory mandates issued by SEBI and AMBI from time to time are complied with, both in
letter and in spirit.

17. TRADE SECRETS:

During the course of employment, employees may work with innovative derivatives or other
tools for financial management. They may also learn valuable information and gather
materials relating to the business of the Member/Associate that are not otherwise known or
available outside. This information and materials are of great importance in the present day
highly competitive business; and to retain their value they must be kept confidential.
Any person taking up employment with a Member/Associate accepts a continuing moral and
legal obligation not to disclose any trade secrets to anybody including an earlier or
subsequent employer. The obligation to protect the secrets would continue, even after
ceasing employment for any reason.

18. COMPLIANCE RESPONSIBILITY:

Every Member/Associate is expected to be responsible for the conduct of its employees and
will be responsible for his or her compliance with this code of conduct. If there be any
questions of interpretation they should be directed to AMBI.

19. POWER OF AMBI TO CALL FOR CERTAIN INFORMATION:

AMBI may call for such information from members as it may feel necessary or appropriate.

20. QUALITY PERFORMANCE:

It should be the objective of every Member/ Associate, to encourage and develop high-
quality performance and excellence in all aspect of operations and fostering of those
characteristics in their employees.

21. CODE OF CONDUCT VIOLATIONS:

AMBI expects every Member/ Associate to assist in upholding the high traditions of the
profession. AMBI may investigate the cases of violation of the Code of Conduct by its
Members/ Associates and may take such action against the Member/Associate as it may
deem fit. The decision of AMBI Board in this regard shall be final.

22. POWER OF AMBI TO AMEND THE CODE:

AMBI reserves the right to modify/ alter, from time to time, any or all of the provisions of this
code of conduct.
Due Diligence

Introduction

Over the past few years, Capital Corp has developed expertise in conducting professional Due
Diligences connected with a wide variety of situations.

Why a Due Diligence?

The "Due Diligence" is a process whereby Capital Corp seeks sufficient information about a
business entity to reach an informed judgment as to its value for a specific purpose.

A Due Diligence can also be performed in a wide variety of other situations such as:

 A Firm considering a potential acquisition

 
 An Investment Banker considering underwriting a public security offering or
promoting a Private Placement
 
 A Banker considering the making of a loan
 
 A Lawyer preparing an offering statement or a merger proposal for a client
 
 An Appraiser who has been retained to estimate the value of a business unit
 
 A Business Broker offering a company for sale
 
 A Public Accounting Firm in conjunction with an audit performed at the request of a
potential buyer or in support of a security offering
 
 A Security Analyst preparing a buy, hold or sell recommendation on a public security

The Due Diligence investigation is normally carried out with the knowledge and cooperation
of the management of the entity being investigated. 

Should Capital Corp be mandated to execute a Due Diligence, either to realize an in-house
transaction or be appointed by a third party in connection with the situations above-
mentioned and/or other situations, Capital Corp will thoroughly review, without being
limited to, the following activities of the subject entity:

 Overview of entity
 Capitalization and ownership
 Organization and management
 Relationships with outside organizations
 Description of products and/or services
 Revenues and market share
 Marketing operations
 Customer service
 Inventory control and purchasing
 Production
 Physical distribution
 Computer, communications and information systems
 Financial management
 Legal affairs and litigation
 Security and safety
 Human resources
 Public relations
 Corporate development
 Description of fixed assets
o Land and buildings
o Vehicles, equipment and tooling
 Introduction to financial analysis
o Balance sheet analysis
o Current assets
o Non-current assets
o Liabilities
o Net worth
 Income statement analysis
o Revenues
o Cost of goods sold and gross margin
o Operating expenses
o Operating income
o Non-operating and nonrecurring items
o Income taxes
o Net income
o Capital expenditures
o Cash flow
o Financial ratio analysis
o Income statement projections
o Balance sheet projections

FREQUENTLY ASKED QUESTIONS ON IPO GRADING

All details regarding operational aspects of IPO grading like, grading methodology,
validity of grading, scope of grading etc, as given below are based on the
information obtained from the Credit Rating Agencies(CRAs) (including their FAQs)
and are meant only for general informational purpose regarding the overall
functioning of the IPO Grading system.
  

Specific details regarding IPO grading may be obtained directly from the respective
Credit Rating Agencies.

1.      What is ‘IPO Grading’?

IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial
public offering (IPO) of equity shares or any other security which may be converted into or
exchanged with equity shares at a later date. The grade represents a relative assessment of
the fundamentals of that issue in relation to the other listed equity securities in India. Such
grading is generally assigned on a five-point point scale with a higher score indicating
stronger fundamentals and vice versa as below.

IPO grade 1: Poor fundamentals

IPO grade 2: Below-average fundamentals

IPO grade 3: Average fundamentals

IPO grade 4: Above-average fundamentals

IPO grade 5: Strong fundamentals

 IPO grading has been introduced as an endeavor to make additional information available
for the investors in order to facilitate their assessment of equity issues offered through an
IPO.

2.        I am an issuer. By when am I required to obtain the grade for the IPO?

IPO grading can be done either before filing the draft offer documents with SEBI or
thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must
contain the grade/s given to the IPO by all CRAs approached by the company for grading
such IPO.

Further information regarding the grading process may be obtained from the Credit Rating
Agencies. 

3.        Who bears the cost of the IPO grading process?

 The company desirous of making the IPO is required to bear the expenses incurred for
grading such IPO.

4.        Is grading optional?

No, IPO grading is not optional. A company which has filed the draft offer document for its
IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO from at
least one CRA.

5.        Can the issuer company reject an IPO grade?

IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by
the rating agency acceptable or not, the grade has to be disclosed as required under the
DIP Guidelines. However the issuer has the option of opting for another grading by a
different agency. In such an event all grades obtained for the IPO will have to be disclosed
in the offer documents, advertisements etc.

 6.        Will IPO grading delay the process of issue?

IPO grading is intended to run parallel to the filing of offer document with SEBI and the
consequent issuance of observations. Since issuance of observation by SEBI and the grading
process, function independently, IPO grading is not expected to delay the issue process.

 7.        What are the factors that are evaluated to assess the fundamentals of the issue
while arriving at the IPO grade?

The IPO grading process is expected to take into account the prospects of the industry in
which the company operates, the competitive strengths of the company that would allow it
to address the risks inherent in the business(es) and capitalise on the opportunities available,
as well as the company’s financial position.

While the actual factors considered for grading may not be identical or limited to the
following, the areas listed below are generally looked into by the rating agencies, while
arriving at an IPO grade

 Ø    Business Prospects and Competitive Position

                                                   i.    Industry Prospects
                                                 ii.     Company Prospects
Ø    Financial Position
Ø    Management Quality
Ø    Corporate Governance Practices
Ø    Compliance and Litigation History
Ø    New Projects—Risks and Prospects
It may be noted that the above is only indicative of some of the factors considered in the IPO
grading process and may vary on a case to case basis.

8.        Does IPO grading consider the price at which the shares are offered in the issue?

No. IPO grading is done without taking into account the price at which the security is offered
in the IPO. Since IPO grading does not consider the issue price, the investor needs to make an
independent judgment regarding the price at which to bid for/subscribe to the shares
offered through the IPO.

9.        Where can I find the grades obtained for the IPO and details of the grading process?

All grades obtained for the IPO along with a description of the grades can be found in the
Prospectus. Abridged Prospectus, issue advertisement or any other place where the issuer
company is making advertisement for its issue. Further the Grading letter of the Credit Rating
Agency which contains the detailed rationale for assigning the particular grade will be
included among the Material Documents available for Inspection.

10.     Does an IPO grade, which indicates ‘above average or strong fundamentals’ mean
could subscribe safely to the issue?

An IPO grade is NOT a suggestion or recommendation as to whether one should subscribe to

the IPO or not. IPO grade needs to be read together with the disclosures made in the
prospectus including the risk factors as well as the price at which the shares are offered in
the issue.

11.     How do I interpret the IPO Grades?

The grades are allocated on a 5-point scale, the lowest being Grade 1 and highest Grade
5.The meaning of these grades have been explained under Question 1 in this FAQ.

 12.     How does IPO Grading help in deciding about investing in an IPO?

IPO Grading is intended to provide the investor with an informed and objective opinion
expressed by a professional rating agency after analyzing factors like business and financial
prospects, management quality and corporate governance practices etc. However,
irrespective of the grade obtained by the issuer, the investor needs to make his/her own
independent decision regarding investing in any issue after studying the contents of the
prospectus including risk factors carefully.

 13.    What is the role of SEBI in IPO grading exercise? 

SEBI does not play any role in the assessment made by the grading agency. The grading is
 intended to be an independent and unbiased opinion of that agency.

 14.     Will IPO Grading given by CRAs be a parameter for SEBI to issue its observations? 

The grading is intended to be an independent and unbiased opinion of a rating agency. SEBI
does not pass any judgment on the quality of the issuer company. SEBI’s observations on the
IPO document are entirely independent of the IPO grading process or the grades received by
the company.

Note:Grading of an initial public offer or IPO, which had earlier been made mandatory, is
now optional. Sebi recently came up with new guidelines upon the request of Investor
Associations and Association of Investment Bankers of India (AIBI). The decision came after
much debate on the grading system as it was argued that these ratings can't be a basis for
investment. Ratings only talk about the fundamentals of the listing company and have
nothing to do with the valuations.

Types of issue:
Public issue of equity shares, preference share, debenture, bonds etc.
Rights issue
Bonus issue and
Private placement
We shall see in short, the specific features of the above issues.

Public Issue
Types of public issue:
IPO – Maiden public issue for raising the paid-up capital by issuing further shares
By selling off a portion of promoters’ holding to make members of public as shareholders – divestment
of promoters’ holding – Example, I-Flex when it came to the market, Mukta Arts, sponsored ADR/GDR
when further capital is not raised but existing shares of promoters are being sold – ADR, example,
Infosys.
The same thing happens in the case of a public sector undertaking – this is called ‘disinvestment’. For
example, Maruti Suzuki in 2004 or 2005 went to public by GOI selling off its shares
FPO – Follow-on public issue – For further expansion of paid up capital by issuing more shares, of course,
with the explicit consent of existing shareholders, who have the prime right as per provisions of the CA,
2013 to shares in any expansion of capital base. This happens along with the Rights issue. Also known as
‘Composite issue’.
Modus operandi in the public issue of share capital and other instruments:
The provisions of the Companies Act and SEBI guidelines apply together for any public issue;

As per the provisions of Companies Act, any capital issue to be done by a limited company should
comply with the provisions relating to prospectus, allotment, issue of shares at premium/discount,
further issue of capital etc.

Under SEBI guidelines, the issues should be in conformity with the published guidelines relating to
disclosure and other matters relating to investors protection. SEBI does not make any appraisal of issue
but scrutinizes the prospectus that adequate disclosures have been made in the offer document to
enable the investors to take informed investment decisions.

• Unlisted public limited companies and private limited companies do not issue securities in the
market but go for ‘Private placement’

• Private placement comes only under the CA, 2013 and not under SEBI

• SEBI is in the picture only for public issues

• In the case of public issues, the primary statutory authority is SEBI while CA 2013 provisions are also
important. SEBI controls the issue process through its directives and guidelines for the issuer as well
as all the intermediaries involved in the issue

• Further all the intermediaries operating in the capital market, both primary and secondary markets
are also controlled and monitored by SEBI

• All the intermediaries have to obtain licence from SEBI for carrying out their operations in the capital
market

• There is no financial intermediary – means an intermediary dealing with money

• All the intermediaries are only service providers and hence they are non-financial intermediaries

• The primary market at the operations level is coordinated and controlled by merchant bankers –
internationally also known as ‘Investment bankers’

The intermediaries in the primary market and with their roles are:

• Merchant banker (M.B.) – overall responsibility for primary market and primary agent working with
all the other intermediaries and the issuing company.

• In case any default is committed by any of the intermediaries in the primary market, the legal
responsibility also rests with M.B.

• He is responsible for appointing other intermediaries as he advises the issuing company on the
intermediaries
• He is the ‘go between’ the issuing company and SEBI

• Responsible for getting the issue support instrument – the prospectus okayed by SEBI and other
statutory authorities

Other intermediaries:

• Other merchant bankers

• Bankers to the issue

• Brokers to the issue

• Registrar to the issue

• Underwriters to the issue

• Printers to the issue &

• Advertisement agencies and PR organization

• Depositories (NSDL & CDSL)

Let us take an overview of the roles of these intermediaries

The ‘Lead MB’ is appointed first. He appoints others as under:

1. Other merchant bankers – assists and coordinates with the Lead Merchant Banker in the issue
management

2. Underwriters to the issue – They underwrite to the extent they can subscribe (in case the issue
fails to gather the mandatory 90% of the total issue). This is expressed as a % of the issue size in
terms of number of shares

3. Registrar to the issue – Responsible for monitoring the collection of issue proceeds with the
bankers to the issue, keeping track of progress of Subscription and release of mandatory
advertisements in national as well as regional dailies as mandated by SEBI

1. Once the issue is closed, again mandatory advertisement

2. Allotment of shares to successfully applicants

3. Refund of money to unsuccessful applicants

4. Registration of the shares allotted with national depositories, NSDL or CDSL or both

5. Last responsibility is to get the shares and other securities listed on stock exchange/s

4. Bankers to the issue – Collecting money and keeping it in a special current account known as
‘ESCROW’ account till the process of allotment, payment to all service providers and refund is
over. Then the money gets transferred to the issuer’s bank account

5. Brokers to the issue – primarily working with underwriters to market the issue and get
subscription
 6. Depositories – two in all – NSDL (wholly owned by NSE) and CDSL (wholly owned by BSE)

1. The choice of depository depends solely on the issuer company. But most of them
choose to give this to both the depositories; let us not be concerned with how much
percentages of total number of shares

2. Primary responsibility of depositories:

3. To maintain the record of ownership of shares or any other securities on behalf of the
issuer company; if any changes are there due to secondary market operations, upon
receipt of list from DPs, alter the ownership records with them

4. With this, we have overviewed all the intermediaries in the primary market

SEBI regulation – any public issue should get a minimum of 90% subscription of the total issue;
otherwise the issue is deemed to have failed warranting refund of all the subscription money; that is
why underwriting is being done though not compulsory by SEBI

Public issue – The process

• Mandatory requirements: Both by SEBI & The CA, 2013

• The issuer should be a public limited company as per its registration

• In case it is a private limited company, it should get re-registered as a public limited company so
that it can go for public issue

• There is a prescribed minimum paid up capital to be eligible for public issue of securities

• The size of the issue should be within the authorized capital as per M & A of the company

• The rest of the steps in the issue process detailed in subsequent PPTs

Steps involved in public issue process

1. BOD resolution for the issue

2. General body resolution for the issue

3. Filing with the Registrar of Companies the certified copies of both the resolutions as well as with
SEBI

4. Appointment of Lead Manager for the issue

5. Appointment of other merchant bankers to the issue who are going to work with the Lead
Manager in consultation with the LMB or LM

6. Appointment of other intermediaries – Advisor LMB and appointed by the issuer

7. After detailed discussions between the issuer and the LMB, draft prospectus is prepared
containing all the details of the issue
8. It should be known as to whether the issue would be a priced issue or a ‘book-building’ issue
wherein the price is fixed later on; nowadays, most of the issues are on this basis.

9. Suitable agreements with all the intermediaries and copies of the agreements to be furnished
both to ROC & SEBI along with draft prospectus

10. The second important detail contained would be the issue opening date and closing date

11. The third important detail in the prospectus is the list of all intermediaries associated with the
issue

12. All the details or contents of the prospectus not listed here

13. Copy of the prospectus also filed with the intended stock exchanges and the project financing
banks

14. Objections would be raised by these authorities or semi-authorities like S.E.s

15. All these suggestions to be incorporated in the prospectus and resent to SEBI and others

16. After all the suggestions have been incorporated in the prospectus, it becomes the final
prospectus

17. This is filed with all of them again, including bankers and stock exchanges

18. Nowadays SEBI does not give approval; instead the issuer will have to wait for a period of 21
days and if nothing is heard from SEBI from the date of filing the final prospectus, the issuer can
go ahead with the issue

19. Of course, the opening date and closing date would get altered due to the time taken for getting
the final prospectus approved

20. All the material required for marketing the issue are getting printed by the appointed printers.
Includes:

1. Final prospectus

2. Abridged prospectus

3. Share application forms for distribution

4. Publicity material for the underwriters and brokers to market the issue

5. FAQs relating to the issue

6. Any others

21. Marketing of the issue by underwriters and brokers to the issue

22. Issue opens on the appointed day

23. Bankers to the issue receives the monies along with application forms in the ESCROW account
opened for this purpose
 24. Monitoring by Registrar to the issue of the subscription

25. Mandatory advertisements by Registrar

26. Issue closes – alternative 1 – successful

27. Registrar steps in and completes the allotment and refund before listing it on SE/SEs as the case
may be

28. Issue of shares in demat format

29. Suitable advice to the depositories for recording ownership of shares in their records; this is
very important as this is the very first document evidencing ownership of shares

30. Registrar gets the issue listed on stock exchange/s within the stipulated time prescribed by SEBI

31. The listing on the stock exchanges is done within 7 days from the finalization of the issue.
Ideally, it would be around 3 weeks after the closure of the book-built issue. In case of fixed
price issue, it would be around 37 days after closure of the issue.

32. With listing, the primary market ends and secondary market begins

33. In the case of debt securities, the number of days for listing from finalization of allotment, has
been reduced from 12 to 6 days

34. What if the issue fails to collect the mandatory 90%?

35. The LMB writes to the underwriters after determining the liabilities, asking for subscription

36. Most of the times, the subscription is collected and the issue is complete

37. Thereafter, the steps are the same as for a successful issue

38. The problem comes only if the underwriters don’t fulfill their obligations. Then the issue is a
failure and all the application money has to be returned to all the applicants

Here, the details or process of a book-built issue are not given.

The above steps are common in the case of all types of public issue, like for share capital, be it
equity or debentures etc.

Process of book-built issue & differences between a fixed price issue and
book-built issue
As per SEBI guidelines, an issuer company can issue securities to the public though prospectus in the
following manner:
 100% of the net offer to the public through book building process
 75% of the net offer to the public through book building process and 25% at the price
determined through book building. The Fixed Price portion is conducted like a normal public issue
after the Book Built portion, during which the issue price is determined.
 The concept of Book Building is relatively new in India. However, it is a common practice in most
developed countries.

There are two types of Public Issues:

Issue Type Offer Price Demand Payment Reservations

50 % of the shares
Price at which the Demand for the 100 %
offered are reserved for
securities are offered securities offered is Applications
applications below Rs.
Fixed Price Issues and would be allotted is known only after Supported by
2 lakh and the balance
made known in advance the closure of the Blocked
for higher amount
to the investors issue Amount
applications.
A 20 % price band is Demand for the
offered by the issuer securities offered ,
100 % 50 % of shares offered
within which investors and at various
Applications are reserved for QIBS,
are allowed to bid and prices, is available
Book Building Issues Supported by 35 % for Non Retail
the final price is on a real time basis
Blocked and 15% for Retail
determined by the issuer on the BSE website
Amount. Investors
only after closure of the during the bidding
bidding. period..

The merchant bankers handling book-built issues are known as book running lead managers or
BRLM in short. Just like the fixed price issue, here also, there will be co-book-running managers (the
assisting merchant bankers). All the other intermediaries would also be present just like in the case
of fixed price issues.

Right from inviting application through bids, on the day of opening, opening the bids in the presence
of prospective investors’ representatives (mostly brokers, investment advisors etc.), the syndicate
members (who are underwriters), the company representatives, the SE representatives etc. The
process is transparent. Prospective investors can sit outside and through electronic board see the
proceedings.

There is a floor and a cap price. The cap cannot exceed 20% of the floor price. Applications for less
than floor price or more than cap price are not accepted. Multiple applications are accepted. During
the process of conduct of book-building, the prospective investors can change their price through
their representative sitting inside. They cannot change the number of shares. If they feel that they
can purchase more, they will have to fill in a fresh application (additional).

Mostly the price that is fixed is the weighted average price of all the bids. This is known as ‘cut-off
price’. Priority is to be given to retail investors. At least 15% (minimum) for them. Qualified
institutional buyers (QIBs) reserved 50% of the size of the issue and non-retail investors, 35% of the
issue size reserved for them. Please see the differences between fixed price issue and book-built
issue as given above (Courtesy: BSE & NSE). All the applications are supported by ‘blocked accounts’
by a phenomenon known as ‘ASBA or Application supported by blocked accounts’.

SEBI adds:
 After the bidding process is complete, the ‘cut‐off’ price is arrived at based on the demand of
securities. The basis of Allotment is then finalized and allotment/refund is undertaken. The final
prospectus with all the details including the final issue price and the issue size is filed with ROC, thus
completing the issue process. Only the retail investors have the option of bidding at ‘cut‐off’.

Definition of retail investors – Those who apply up to I.Rs. 2 lacs (in value)

“Qualified Institutional Buyer” shall mean:

(i) a mutual fund, venture capital fund and foreign venture capital investor registered with the
Board;
(ii) a foreign institutional investor and sub-account (other than a sub-account which is a foreign
corporate or foreign individual), registered with the Board;
(iii) a public financial institution as defined in section 4A of the Companies Act, 1956;
(iv) a scheduled commercial bank;
(v) a multilateral and bilateral development financial institution;
(vi) a state industrial development corporation;
(vii) an insurance company registered with the Insurance Regulatory and Development
Authority;
(viii) a provident fund with minimum corpus of twenty five crore rupees;
(ix) a pension fund with minimum corpus of twenty five crore rupees;
(x) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23,
2005 of the Government of India published in the Gazette of India;
(xi) insurance funds set up and managed by army, navy or air force of the Union of India;
(xii) insurance funds set up and managed by the Department of Posts, India Page 16 of 32
Investors who do not fall within the definition of the above two categories are categorized
as “Non‐Institutional Investors”

Allotment to various investor categories is detailed below:

In case of Book Built issue (voluntary)

1. In case an issuer company makes an issue of 100% of the net offer to public through voluntary book
building process under profitability route:

a) Not less than 35% of the net offer to the public shall be available for allocation to retail individual
investors;

b) Not less than 15% of the net offer to the public shall be available for allocation to non‐institutional
investors i.e. investors other than retail individual investors and Qualified Institutional Buyers;

c) Not more than 50% of the net offer to the public shall be available for allocation to Qualified
Institutional Buyers.

2. In case of compulsory Book‐Built Issues

(a) at least 75% of net offer to public being allotted to the Qualified Institutional Buyers (QIBs), failing
which the full subscription monies shall be refunded.
b) Not more than 15% the net offer to the public shall be available for allocation to non‐institutional
investors

c) Not more than 10% the net offer to the public shall be available for allocation to retail individual
investors

In the case of fixed price issue

In case of fixed price issue The proportionate allotment of securities to the different investor categories
in a fixed price issue is as described below:

1. A minimum 50% of the net offer of securities to the public shall initially be made available for
allotment to retail individual investors.

2. The balance net offer of securities to the public shall be made available for allotment to:

Individual applicants other than retail individual investors, and b. Other investors including corporate
bodies/ institutions irrespective of the number of securities applied for.

Which are the investor categories to whom reservations can be made in an initial public issue on
competitive basis?

Reservation on competitive basis can be made in a public issue to the following categories:

i. Employees of the company

ii. Shareholders of the promoting companies in the case of a new company and shareholders
of group companies in the case of an existing company
iii. persons who, as on the date of filing the draft offer document with the Board, are
associated with the issuer as depositors, bondholders or subscribers to services of the
issuer.

For how many days an issue is required to be kept open?

The period for which an issue is required to be kept open is:

For Fixed price public issues: 3‐10 working days

For Book built public issues: 3‐7 working days extendable by 3 days in case of a revision in the price band

For Rights issues : 15‐30 days.

More About Book Building

Book Building is essentially a process used by companies raising capital through Public Offerings-both
Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) to aid price and demand discovery. It is a
mechanism where, during the period for which the book for the offer is open, the bids are collected
from investors at various prices, which are within the price band specified by the issuer. The process is
directed towards both the institutional as well as the retail investors. The issue price is determined after
the bid closure based on the demand generated in the process.
The Process:
 The Issuer who is planning an offer nominates lead merchant banker(s) as 'book
runners'.
 The Issuer specifies the number of securities to be issued and the price band for
the bids.
 The Issuer also appoints syndicate members with whom orders are to be placed
by the investors.
 The syndicate members input the orders into an 'electronic book'. This process
is called 'bidding' and is similar to open auction.
 The book normally remains open for a period of 3 days.
 Bids have to be entered within the specified price band.
 Bids can be revised by the bidders before the book closes.
 On the close of the book building period, the book runners evaluate the bids on
the basis of the demand at various price levels.
 The book runners and the Issuer decide the final price at which the securities
shall be issued.
 Generally, the number of shares are fixed, the issue size gets frozen based on
the final price per share.
 Allocation of securities is made to the successful bidders. The rest get refund
orders.

Guidelines for Book Building

Regulations governing Book building are covered in the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations.

1. BSE offers a book building platform through the Book Building software branded as iBBS
- Internet Book Building System
2. The software is operated by book-runners of the issue and by the syndicate members, for
electronically placing the bids on line real-time basis for the entire bidding period.
3. In order to provide transparency, the system provides visual graphs displaying price v/s quantity
on the BSE website as well as all BSE terminals.

In the case of debentures, there are further steps involved as under:

1. Appointment of “Debenture Trustees” is a pre requisite for all debenture issues;

2. There should be a “Debenture Trust Deed” as well as “Debenture Trusteeship Agreement” in
place;
3. The purpose for which the debenture is issued should be clear at the time of issue like, for fixed
assets, working capital etc. besides, the security offered to the debenture holders, whether
there is any buy back provision or provision for “roll over” for a specific period beyond the date
of redemption;
 4. Creation of debenture redemption reserves, up to 50% of the debenture issue at least one year
before the specified period from the date of redemption in the case of all debentures
redeemable 36 months and beyond;
5. Any public issue of debenture has to be approved by SEBI and
6. Any public issue of debenture beyond 18 months period has to be credit rated by an
independent Credit Rating Agency.

Rights issue:
• As per provisions of the Companies Act, 2013, whenever the capital base is to expand, the first offer
is to the existing shareholders; hence it is known as ‘Rights issue’

• Rights issue is without any complication if the existing shareholders take up the whole issue for
subscription – say the rights issue is 1:1 means for every share the shareholder has, he/she will be
offered two shares.

• Rights issue could be complicated when the issue is not taken up fully by the existing shareholders.
Say 2: 1 issue and the existing shareholders take up only 1:1. Then the BOD and management would
seek approval of the shareholders to go to public for the balance portion of 1, as they would be
requiring the entire target funds for their business activities and 1:1 is not sufficient

• In which case, the issue is partly offered to existing shareholders and the balance to members of
public. The existing shareholders are permitted to subscribe to the portion offered to public too but
at the same price as offered to public. No concession to existing shareholders in the public issue.
Such an issue is known as a ‘composite issue’ = Rights-cum-public issue with the explicit permission
of existing share holders

• FPO need not be a composite issue; it could be a pure public issue in which the existing shareholders
can also participate but the price will be uniform to everyone applying

Rights issue is always issued at a discount to the current market price just to make it attractive to the
shareholders to invest

• The shareholders choose not to subscribe to the rights issue (as individuals and not as a body of
shareholders). In which case, the rights can be sold off to any body in the market and he will get
compensation as per the market practice
Bonus issue:
1. Bonus issue is free of any cost and hence the paid-up capital does not increase. It is made out of free
reserves like general reserve and share premium reserve received in cash only and not in kind like
any capital asset belonging to the promoters’ group
2. Issued only to existing shareholders
3. No bonus issue to be made within 12 months of any public issue;
4. The issue is to be made only out of free reserves or share premium collected in cash and not out of
any committed or encumbered reserves;
5. Bonus issue cannot be made in lieu of dividend;
6. Bonus issue cannot be made unless the partly paid shares, if any, are made fully paid up;
7. The company should not have defaulted in payment of interest or principal amount in respect of
fixed deposits, debentures etc.;
8. The company should not be a defaulter in respect of statutory dues of the employees such as
contribution to provident fund, gratuity, bonus etc.;
9. The bonus issue should be completed within a period of 6 months from the date of approval of the
Board of directors and shall not have the option of changing the decision;
10. After the issue of bonus shares, there should be residual free reserves as per stipulation of
Companies Act and
11. The issue of bonus shares must be recommended by the Board of Directors and approved by the
General Body and the management’s intention of the rate of dividend on the enhanced capital base
is also to be included in the resolution passed by the General Body in this behalf.

Private placement:
It is marketing of the securities of a private or a public limited company, both shares and debentures,
with a limited number of investors like UTI, LIC, GIC, State Finance Corporations etc. The intermediaries
in such issues are credit rating agencies and trustees e.g. ICICI and financial advisors such as merchant
bankers etc. Private placement can be made out of promoters’ quota. Further, it should be noted that
unlisted public limited companies also resort to this.

Preference share capital issued by Private Sector Companies mostly belong to this category of private
placement as there will seldom be a public issue of such security.
Govt. securities and securities issued by Public Sector Undertakings (PSUs) are excluded here from study
under the “Capital Markets” as the private sector or a commercial business enterprise is not going to
benefit from these.

Preferential issue:
A preferential issue is an issue of shares or of convertible securities by listed companies to a select
group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor
a public issue. This is a faster way for a company to raise equity capital. This is subject to provisions of
the CA, 2013.
Preferential allotment:
In a public issue, a % of the issue is permitted by SEBI to be issued to employees, people very close to
promoters etc. Such an issue is known as ‘preferential allotment’. This is as per discretion of the
promoters subject to the ceiling prescribed by SEBI primarily and the CA, 2013 secondarily. This would
include allotment under ‘Employee Stock Options’ scheme too.
Private placement with institutional investors:
To meet urgent requirement of capital for a foreign collaboration or redemption of loans etc. this is
permitted strictly as per provisions of the CA, 2013 issue to be made only to institutional investors and
not to others.
On Investment Banking
Pitch Book: What is investment banking? How does it differ from other forms of banking?

Burns: "Investment banking" is a broad term that encompasses capital raising and strategic transaction
advisory services for companies. It includes debt and equity issuances, private placements of capital and
advisory on strategic transactions such as mergers, acquisitions and divestitures. That means we're
different than other forms of banking because we don't act as a depository, and we don't directly lend
to or invest capital in our clients.

By contrast, a retail bank serves individual consumers and small businesses, typically through the bank's
branch locations and online services with checking and savings accounts, mortgages, auto loans, safe-
deposit boxes and cashier's checks. Meanwhile, corporate banking (sometimes also referred to as
commercial banking) largely resembles retail banking, with a corporate bank's customers being medium
to large businesses. A primary function of corporate banks is to provide business loans. Beyond loans, a
corporate bank may offer other capabilities geared toward handling the day-to-day financial concerns of
corporations, such as treasury management, foreign currency exchange and retirement plan services.

What roles do investment banks play in M&A transactions? How do those services differ from, say,
work on an IPO?

The roles of the investment bank will differ depending on whether the bank is representing the seller of
a company ("sell-side") or advising a prospective acquirer ("buy-side").

On a sell-side engagement, the investment bank's responsibilities include:

 
 Keeping our fingers on the pulse of industry M&A trends to set valuation expectations for
client companies and helping them plan their timing and go-to-market strategies
 Deploying our knowledge of the client and its industry to craft a set of key points that form a
compelling investment thesis—then assembling marketing materials such as the "Information
Memorandum" to convey these points
 Identifying and contacting potential buyers, managing information flow and holding
strategic discussions with interested parties
 Establishing a formal bid process for the company, reviewing bids and helping select a buyer
 Setting up an online diligence "data room" and serving as the primary liaison between the
buyer (and/or its advisors) and seller during due diligence
 Helping negotiate the final terms of the deal
 
On a buy-side engagement, the investment bank's responsibilities include:
 
 Evaluating the potential target and its industry to set a preliminary valuation
 Assessing the strategic fit of a potential target with the client; identifying and, to the extent that
it's possible, quantifying synergy opportunities
 Crafting a bidding strategy and helping draft proposed terms of purchase
 Identifying potential issues in the diligence process and following up accordingly
 Analyzing the buyer's capital structure to determine the correct transaction financing; helping
the buyer find financing
 Helping negotiate the final terms of the deal
 
On an IPO, the investment bank's responsibilities are very similar to those on a sell-side M&A
transaction, insofar as it's responsible for positioning the company to prospective investors, drafting
marketing materials, conducting investor outreach and determining a reasonable valuation. However,
instead of appealing to only one buyer, there are several buyers, so a "road show" is conducted, where
management meets with and presents to several potential investors.

Extensive buyer-seller negotiations characteristic of an M&A transaction don't happen as part of an IPO.
There's also the extra step of the shares entering the market—they need to be distributed through the
bank's sales desk. IPO candidates will often enroll more than one bank to complete the actual sales and
distribution portion of the IPO process, thereby leveraging more investor relationships.

How does the size of the transaction impact the investment bank's role?

The responsibilities listed above will be the same regardless of the size of the transaction. From the
banker's perspective, though, some subtle differences generally hold true for public versus private deals.
For instance, on the sell-side of larger, publicly traded companies, there is a smaller universe of
prospective investors because financing is a constraint. Another difference is that for middle-market
deals, bankers rely a lot more on our industry connections to test the M&A market, while for public
company deals, information regarding corporate strategy, terms of precedent M&A transactions, and
financial performance are openly available and easily accessed via public filings and press releases.

As a banker working on middle-market transactions, you get to see and manage a greater part of the
overall process. Because the deals we do at Meridian are typically for private or family-owned
businesses, we're walking individuals through the process of selling a company that they built
themselves. So, there's definitely a human aspect and a sense of a private deal's impact that is different
from those involving publicly traded companies.

What are the different roles played by members of team as they work to source deals, perform due
diligence and bring a transaction to the finish line?

It's always a team effort, so it depends on the particulars of the situation and the transaction. But
generally, the division of work is as follows (in reverse order of seniority):

Analyst – the analyst is responsible for much of the legwork that goes into sourcing and executing
transactions. This includes putting together PowerPoint presentations and Excel models, organizing files
and information, doing industry research, taking notes on calls and meetings, and tracking and recording
sourcing and execution activity

Associate – the associate is responsible for checking the analysts' work, coordinating the creation of
PowerPoint presentations, talking to clients and executing on day-to-day transaction tasks

Vice President – the vice president supports business development efforts and manages deal execution.
 They take the lead on shaping messaging for pitchbooks and deal marketing efforts, and help handle
communications with clients and prospective investors

Managing Director – the managing director is responsible for business development and sourcing deals,
and also helps guide deal execution. Most of an MD's time is spent building relationships, meeting with
potential clients, and staying abreast of industry and transaction trends

How and why do firms come to specialize in certain sectors, such as aerospace, for example?

Sector-specific firms are formed based on the same logic that all businesses are: Somebody recognized a
market need and set out to fulfill it. Usually, these firms are founded by individuals that worked within
an industry group at a larger investment bank for several years and saw an opportunity to provide better
services that larger investment banks cannot offer. These firms differentiate themselves based on
independence, senior-level attention and thought leadership, among other factors.

What are the most commonly overlooked items by business owners when preparing to sell their
companies?
 
 Keeping good records. Due diligence is a key part of a transaction, and the ability to fulfill
requests and address potential issues will make the process go smoothly and could even increase
transaction value. First, financial records should be accurate and transparent. Identify and document
any material one-time fluctuations—for example, nonrecurring expenses related to opening a new
facility. Keep track of off-balance-sheet and contingent liabilities. It's also a good idea to have your
financials reviewed or audited by an accountant at least annually to verify their accuracy. Second, keep
all records and paperwork organized and in a safe place. As part of diligence, buyers will often ask to
review legal contracts, tax returns, patents and copyrights belonging to the business, and insurance
policies, among other items.

 Defining and being able to explain company strategy. The value of a business in a sale is based
on the buyer's expectations of future profitability, so it's important to showcase the company's
potential. It's helpful to have a roadmap of company strategy for the next few years. The plan should
include realistic opportunities to grow the business and increase profitability. It must also consider
current industry trends and competitive backdrop. Some of the opportunities within the roadmap may
be immediately actionable; many will require additional capital and resources to implement. To increase
value, a business can take steps to implement some of these strategies ahead of a sale. For instance,
could the company decrease raw material costs by switching suppliers? If so, switch suppliers now—a
forecast is more credible if there's tangible evidence of results. For the initiatives that can't be
implemented now due to resource constraints—such as acquiring a competitor or building another
factory—have a defensible estimate of how this would impact the financial statements and how much
up-front capital is required.

 Building a team of trusted advisors. Numerous professionals are involved in an M&A

transaction, including investment bankers, lawyers and accountants. A business looking to sell should
start assembling a team a couple of years in advance. Select an investment banker based on industry
expertise, advisory experience, and personal chemistry. It's essential that an advisor is trustworthy and
committed to a company's success. Even if a business is not yet ready to sell, a good investment banker
will still help prepare for a successful exit by providing insights on important considerations such as
valuation, transaction structure, timing, and go-to-market strategy.
 It is also important to have an investment banker ready to engage in case the company receives
an unsolicited acquisition offer. If this happens, it's a bad idea to negotiate with the potential buyer
yourself because you will almost certainly leave value on the table. If you're serious about accepting a
potential offer, your investment banker can evaluate the offer, help manage the diligence process
including confidentiality concerns and, most importantly, create a competitive process to ensure that
your business gets the best possible valuation. Another reason that it's not too early to start building a
relationship with a banker is that we are paid when we close transactions and not by the hour – our up-
front advice is free of charge and our goals are completely aligned with yours.

What one thing, above all, does an investment banker do that's indispensable on every single M&A
transaction?

Everything we do on a transaction is carefully designed to optimize the outcome for that particular
client. With sell-side M&A, that largely translates to obtaining the best sale price, but of course there are
other considerations with selecting a buyer that we help our clients weigh as well.

Giovanna Burns, a VP with Meridian Capital, plays an essential role in transaction execution and
supports the Seattle-based firm's business development initiatives. She has provided advisory services to
middle-market companies across various industries on transactions including buy-side and sell-side
engagements, IPOs, debt issuances and growth equity raises .

List of investment bankers in the world and India

Largest full-service investment banks – Source:

Wikipedia.com/ - Global
The following are the largest full-service global investment banks; full-service investment banks usually
provide both advisory and financing banking services, as well as sales, market making, and research on a
broad array of financial products, including equities, credit, rates, currency, commodities, and
their derivatives. The largest investment banks are noted with the following: [3][4]

1. JPMorgan Chase
2. Goldman Sachs
3. BofA Securities
4. Morgan Stanley
5. Citigroup
6. Credit Suisse
7. Barclays Investment Bank
8. Deutsche Bank
9. UBS
10. RBC Capital Markets
11. Wells Fargo Securities
 12. HSBC
13. Jefferies Group
14. BNP Paribas
15. Mizuho
16. Lazard
17. Nomura
18. Evercore Partners
19. BMO Capital Markets
20. Mitsubishi UFJ Financial Group
Many of the largest investment banks are considered among the "Bulge Bracket banks" and as
such underwrite the majority of financial transactions in the world.[5] Additionally, banks seeking more
deal flow with smaller-sized deals with comparable profitability are known as "Middle Market
investment banks" (known as boutique or independent investment banks).[6]

Investment Banking in India – List of AIBI Member Investment Banks: Source:

https://corporatefinanceinstitute.com/

 A.K. Capital Services Ltd.

 Ambit Corporate Finance Pvt.Ltd.
 Anand Rathi Advisors Ltd.
 Ashika Capital Ltd.
 Avendus Capital Pvt.Ltd.
 Axis Bank Ltd.
 Axis Capital Ltd.
 Barclays Bank Plc
 Bcb Brokerage Pvt.Ltd.
 Birla Capital & Financial Services Ltd.
 Bnp Paribas
 Bob Capital Markets Ltd.
 Boi Merchant Bankers Ltd.
 Canara Bank
 Central Bank Of India
 Centrum Capital Ltd.
 Chartered Finance Management Ltd.
 Choice Capital Advisors Pvt.Ltd.
 Citigroup Global Markets India Pvt.Ltd.
 Credit Suisse Securities (India) Pvt.Ltd.
 Deutsche Equities India Pvt.Ltd.
 DSP Merrill Lynch Ltd.
 Edelweiss Financial Services Ltd.
 Ernst & Young Merchant Banking Services Pvt.Ltd.
 HDFC Bank Ltd.
 HSBC Securities & Capital Markets (India) Pvt.Ltd.
 ICICI Securities Ltd.
 IDBI Capital Market Services Ltd.
  IDFC Securities Ltd.
 LIFL Holdings Ltd.
 Il&Fs Capital Advisors Ltd.
 Indian Overseas Bank
 Inga Capital Pvt.Ltd.
 Jefferies India Pvt.Ltd.
 JM Financial Institutional Securities Ltd.
 JP Morgan India Pvt.Ltd.
 Karvy Investor Services Ltd.
 Keynote Corporate Services Ltd.
 KJMC Corporate Advisors (India) Ltd.
 Kotak Mahindra Capital Co.Ltd.
 Lazard India Pvt.Ltd.
 Morgan Stanley India Co.Pvt.Ltd.
 Motilal Oswal Investment Advisors Pvt. Ltd.
 Munoth Financial Services Ltd.
 Pantomath Capital Advisors Pvt.Ltd.
 Religare Capital Markets Ltd.
 Rothschild (India) Pvt.Ltd.
 Saffron Capital Advisors Pvt.Ltd.
 SBI Capital Markets Ltd.
 SMC Capitals Ltd.
 Trust Investment Advisors Pvt.Ltd.
 UBS Securities India Pvt.Ltd.
 Union Bank Of India
 Vivro Financial Services Pvt.Ltd.
 Yes Bank Ltd

Differences between merchant banking and investment banking

Commercial banks offer services to the general public, but there are some banks which offer services to
the companies and investors but not to the public. They are investment bank and merchant bank. As the
two banks offer similar services to the clients, they are comonly misconstrued, however they are
different in the sense that an investment bank is a banking company that acts as an intermediary
between the Client and the investing public, by helping them in raising funds.

On the contrary, a merchant bank is a bank that undertakes international finance and underwriting of
securities. They provide services like fund raising, brokerage to the business houses and also acts as a
financial advisory to them.

So, in this article, you may find the substantial differences between the two banks in detail.

Content: Merchant Bank Vs Investment Bank

1. Comparison Chart
2. Definition
3. Key Differences
 4. Conclusion

Comparison Chart
BASIS FOR
MERCHANT BANK INVESTMENT BANK
COMPARISON

Meaning Merchant Bank implies a banking
institution, that fulfills capital
requirements of the companies in the
form of share ownership, rather than
granting loans.
Investment Banks are the middleman
between the issuer of securities and the
investing public, and also provides
various financial services to the clients.

Deals with International financing activities Underwriting and issuance of securities

Based on Fee based Fee based and fund based

Trade financing Offered to the clients Rarely provided

Deals with Small companies Large companies

Definition of Merchant Bank

Merchant Bank refers to a banking company engaged in international financing and offers end number
of services to its clients such as underwriting of new issue, management of securities, investment
banking, portfolio management, project promotion, advisory services, project promotion, corporate
investing, corporate counselling, loan syndication and so forth.

These banks have good knowledge and expertise in international trade, due to which they tactfully deal
with multinational companies. A merchant bank requires SEBI registration, as per SEBI (Merchant
Bankers) Regulation.

A merchant banker is a person that undertakes the business of issue management, by facilitating the
buying, selling and subscribing of securities as a manager or consultant or providing advisory services.

Some of the popular merchant banks are Barclays Bank PLC, Bajaj Capital Ltd., Axis Bank Ltd., Bank of
Maharashtra, etc.

Definition of Investment Bank

Investment banks are set up to help the clients, i.e. Companies, High net-worth individuals and
government in arranging capital. They act as a financial intermediary between the Company requiring
capital and the investors and in this way, the savings are turned into investments. Further, they generate
revenue from dealer and brokerage activities, corporate restructuring, financial engineering, speculation
and arbitrage, corporate finance and treasury management.

It provides a number of services to its clients such as underwriting of shares and bonds, selling and
trading of securities, advisory services for mergers and acquisitions, divestiture, IPO and managing the
assets.

Some of the major investment banks that are operating internationally are Goldman Sachs, Credit
Suisse, Morgan Stanley, Bank of America, Merill Lynch, Deutsche Bank, etc.

Key Differences Between Merchant Bank and Investment Bank

The difference between merchant bank and investment bank are explained clearly in the points given
below:

1. A merchant bank refers to a banking company whose key area is international finance, and so its
work is related to corporate investment, trade finance and real estate investment. The main
functions of merchant banks are issue management, portfolio management, corporate
counselling, etc. In contrast, an investment bank is a banking company that deals with
established firms and fulfils their long-term capital requirement, by acting as an intermediary
between the company and investors.
2. While merchant banks engage in international financing activities, investment banks are
concerned with underwriting and issuance of securities.
3. An investment bank is fee-based as it provides various services such as banking and advisory
services to the clients along with that it is fund based too because it earns income from interest
and lease rentals. On the other hand, a merchant bank is the only fee-based because it provides
banking, advisory and custodial services to its clients.
4. Merchant banks provide trade financing facility to their clients. Conversely, there are only a few
investment banks that provide trade financing services to its clients.
5. A merchant bank usually deals with the companies which are not so big that they can arrange
capital by making an IPO, so these banks use a relatively creative form such as private placement
of securities. In contrast, an investment bank works with large corporations, who are willing to
list their securities for sale to the general public.

Conclusion

In a nutshell, the two banks differ in the sense that a merchant bank assists companies in issuing shares
through private placement, whereas an investment bank underwrites and sell shares through initial
public offering to the general public.
 Part 2 – Venture capital in India and globe

Topic: Historical background of VCs globally and in India

Source: Anita Shantaram material

Invention and innovation drive the US economy. What's more, they have a powerful grip on the nations
collective imagination. Tales abound of against-all-odds success stories of Silicon Valley entrepreneurs.
In these sagas, the entrepreneur is the modern-day cowboy, roaming new industrial frontiers much the
same way that earlier Americans explored the West. At his side stands the Venture Capitalist, a trail-
wise sidekick ready to help the hero through all the tight spots - in exchange, of course, for a piece of
the action.

As with most myths, there’s some truth to this story. Arthur Rock, Tommy Davis, Tom Perkins, and
other early venture capitalists are legendary for the parts they played in creating the modem computer
industry. Their investing knowledge and operating experience were as invaluable as their capital. But as
the venture capital business has evolved over the past 30 years, the image of the cowboy with his side-
kick has become increasingly outdated. Today's venture capitalists look more like bankers, and the
entrepreneurs they fund look more like MBA’S.

The U.S. venture capital industry is envied throughout the world as an engine of economic growth.
Although the collective imagination romanticizes the industry, separating the popular myths from the
current realities is crucial to understanding how this important piece of the U.S. economy operates. For
entrepreneurs (and would-be entrepreneurs), such an analysis may prove especially beneficial.

Historical Evolution – Source: Shodhganga.com/

History of venture capital in India dates back to early 70’s when Government of India (GOI) appointed a
committee under Late Shri R.S. Bhatt to find out the ways to fill a gap in traditional financing available
for funding startup companies based on absolutely new innovative technologies. The committee
recommended starting of venture capital industry in India. VC financing was first introduced India during
year1975 with the setting up of Industrial Finance Corporation of India (IFCI) sponsored Risk Capital
Foundation (now known as IFCI Venture capital Fund Ltd.). In year 1976, a seed capital scheme was
introduced by The Industrial Development Bank of India (IDBI). Till year 1984, VC took the form of risk
and seed capital (Chary, 2005). A venture capital fund was set up by GOI in year 1985 for providing
equity capital for projects attempting commercial applications of the indigenous technology (Nigam,
2001). However, the concept of VC financing got statutory recognition for the first time in the fiscal
budget 1986-87 when a cess of 5% was levied on all know-how import payments to create a pool of
funds for venture capital activities initiated by IDBI (Pandey, 1996).

In March 1987, IDBI introduced venture capital fund scheme for financing ventures seeking
development of indigenous technologies/adaptation of foreign technology to wider domestic
application. Similarly, ICICI in association with UTI formed a venture capital subsidiary Technology
Development and Information Company of India (TDICI) for financing technology oriented innovative
companies. In mid-80’s all the three Indian financial institutions viz IDBI, ICICI, IFCI started investing into
the equity of small technological companies (Nagayya, 2005).

In November 1988, GOI decided to institutionalise venture capital industry and formulated first
comprehensive guidelines governing the venture capital funds. Controller of Capital Issues (CCI)
implemented these guidelines known as CCI for VC. These guidelines were very restrictive and following
a very narrow definition of VC (Varshney, 2006). Even under these guidelines, only national level
financial institutions and scheduled commercial banks were allowed to set up VC funds (Ramesh and
Gupta, 2005). An advisory committee led by Dr. Ashok Lahiri in its report on ‘Technology Innovation and
Venture Capital’ reported that internationally, the trend favoured venture capital being set up by
professionals, successful entrepreneurs and sophisticated investors willing to take high risk in the
expectation of high returns. Further, these guidelines required venture capital to be invested in
companies based on innovative technologies started by first generation entrepreneur (Verma, 1997).
This made VC investments highly risky and unattractive.

During this period (in 1989) World Bank organized a VC awareness seminar and selected 6 institutions
TDICICI (ICICI), GVFL, Canbank Venture Capital Fund, APIDC, RCTC (now known as IFCI Venture Capital
Funds) and ILF (now known as Pathfinder); to start VC investment in India (Varshney, 2006). World Bank
provided initial funding of US $45 million for starting VC funds in the country.

Subsequent to the liberalization of the economy, the office of CCI was abolished in May 1992 and the
powers were vested in Securities and Exchange Board of India (SEBI); the regulatory body for venture
capital funds. This was done in year 1996, through a government notification (Bowonder and Mani,
2002). The formalization of the Indian venture capital community began in 1993 with the formation of
the Indian Venture Capital Association (IVCA) headquartered in Bangalore, by some domestic venture
capital funds. IVCA followed up for streamlining the guidelines for venture capital in the country.
Thereafter, the GOI issued guidelines in year 1995 for overseas venture capital investments in India
(Report of K.B. Chandrashekhar Committee on Venture Capital, 2000). Following this many foreign VC
private equity firms entered India which resulted in an increased availability of foreign funds for
investments in India.

The series of activities, as discussed above, towards the formalization of venture capital industry, can be
viewed in terms of two remarkable phases i.e. the first phase from 1986 to 1995 and the second phase
from year 1995 to 1999. In first phase, the major development was World Bank’s interest that induced
GOI to institutionalise the structure for VC industry. During the second phase foreign investors started
making investments in the VC firms in India. The same coincided with the IT boom, which gave a major
thrust to the take off the VC industry in India (Dossani and Kenny, 2001).

Private equity investors may be considered as growth capital providers as against the VCs; the providers
of early stage capital for analyzing the investment trends in India. Here, the study considers the
combined investments made by these two groups over a period of time and makes the use of
information as published by certain standard research agencies such as Venture Intelligence.

Source: edupristine.com/
What is Venture Capital?
It is a private or institutional investment made into early-stage / start-up companies (new ventures). As
defined, ventures involve risk (having uncertain outcome) in the expectation of a sizeable gain. Venture
Capital is money invested in businesses that are small; or exist only as an initiative but have huge
potential to grow. The people who invest this money are called venture capitalists (VCs). The venture
capital investment is made when a venture capitalist buys shares of such a company and becomes a
financial partner in the business.
Venture Capital investment is also referred to risk capital or patient risk capital, as it includes the risk of
losing the money if the venture doesn’t succeed and takes medium to long term period for the
investments to fructify. Venture Capital typically comes from institutional investors and high net worth
individuals and is pooled together by dedicated investment firms.
It is the money provided by an outside investor to finance a new, growing, or troubled business. The
venture capitalist provides the funding knowing that there’s a significant risk associated with the
company’s future profits and cash flow. Capital is invested in exchange for an equity stake in the
business rather than given as a loan.
Venture Capital is the most suitable option for funding a costly capital source for companies and most
for businesses having large up-front capital requirements which have no other cheap
alternatives.  Software and other intellectual property are generally the most common cases whose
value is unproven. That is why; Venture capital funding is most widespread in the fast-growing
technology and biotechnology fields.
Features of Venture Capital investments
 High Risk
 Lack of Liquidity
 Long term horizon
 Equity participation and capital gains
 Venture capital investments are made in innovative projects
 Suppliers of venture capital participate in the management of the company

Methods of Venture capital financing

 Equity
 Participating debentures
 Conditional loan

Examples of venture capital funding

 Kohlberg Kravis & Roberts (KKR) , one of the top-tier alternative investment
asset managers in the world, has entered into a definitive agreement to invest
USD150 million (Rs 962crore) in Mumbai-based listed polyester maker JBF
Industries Ltd. The firm will acquire 20% stake in JBF Industries and will also invest
 in zero-coupon compulsorily convertible preference shares with 14.5% voting rights in
its Singapore-based wholly owned subsidiary JBF Global Pte Ltd. The funding provided
by KKR will help JBF complete the ongoing projects.
 Pepperfry.com, India’s largest furniture e-marketplace, has raised USD100
million in a fresh round of funding led by Goldman Sachs and Zodius Technology
Fund. Pepperfry will use the funds to expand its footprint in Tier III and Tier IV
cities by adding to its growing fleet of delivery vehicles. It will also open new
distribution centres and expand its carpenter and assembly service network. This is
the largest quantum of investment raised by a sector focused e-commerce player
in India.

Conclusion:
 Considering the high risk involved in the venture capital investments complimenting the high
returns expected, one should do a thorough study of the project being considered, weighing the risk
return ratio expected. One needs to do the homework both on the Venture Capital being targeted and
on the business requirements.

Source: cleartax.in
VC Funding – What. When. How.
External investment is an inevitable part of a growing business. Working capital is different from profit.
Even if your business is generating profit, it may still need capital funding in order to realise its full
potential. There are various sources of funding out of which venture capital funding is one of the most
widely acclaimed. Here is all you need to know about VC funding.
Who are Venture Capitalists?
People who invest capital in a promising venture are called venture capitalists. Venture capital can
either come from a single investor or from a group of institutional investors and high net worth
individuals who pool their resources together via dedicated investment firms.
What is Venture Capital funding?
Venture Capital funding is an external investment done in a startup or a small business that has
potential to grow. With the right financial help, when these businesses grow, the venture capitalist
enjoys massive returns on investment. Keeping the return on investment aside, VC funding can make a
huge difference in the growth span of the business.
A correct business plan, in most cases, includes external finance options to fill the financial gap and
ensure smooth business growth. Not only does VC funding add to the critical financial resources but the
business expertise of the experts ready to help with their connections, business knowledge, and
improvised decision-making, also helps the business.

Source: Slideshare.com
Venture capitalists generally finance:
1. New and rapidly growing companies
2. Purchase equity securities
3. Assist in the development of new products and or services
4. Add value to the company through active participation

Types of VC funds:
1. Private sector funds – Independent and captive (only financing within a specific group of companies)
2. Government funds

-------------------------------------------------------------------------------------------------------------------------------
Topic – Steps in funding – Financial stages

Source: Anita Shantaram material

Profile of the ideal Entrepreneur for VC funding

 From a venture capitalist’s perspective, the ideal entrepreneur:
 Is qualified in hot area of interest.
 Delivers sales or technical advances such as FDA approval with reasonable probability.
 Tells compelling story and is presentable to outside investor.
 Recognizes the need of an IPO for liquidity.
 Has a good reputation and can provide reference that shows competence and skill.
 Understand the need for team with variety of skill and therefore sees why equity has to be allocated
to other people.
 Works diligently towards the goal but maintains flexibility.
 Gets along with investor group.
 Understands the cost of capital and typical deal structures and is not offended by them.
 Is sort after by many VCs.
 Has realistic expectation about process and outcome.

Source: cleartax.in
VC Funding – What. When. How.
External investment is an inevitable part of a growing business. Working capital is different from profit.
Even if your business is generating profit, it may still need capital funding in order to realise its full
potential. There are various sources of funding out of which venture capital funding is one of the most
widely acclaimed. Here is all you need to know about VC funding.
How does VC funding Criteria work?
Mostly, investment capitalist firms are large entities such as the pension funds, insurance companies,
and financial firms. Together they put a small amount of their capital in a promising business. The
expected return in future is somewhere around 25-30% per year over the total lifetime of the
investment made.
The investment criteria of these VC entities with respect to the firm is largely based on the uniqueness
and feasibility of the business idea, the track record of the company, and their confidence in the
company leadership. But more than anything else, it depends on the industry.
VC funding depends a lot on the nature of the business and the industry trends. Usually, Venture
capitalists are more inclined towards funding businesses pertaining to growing industries as the overall
market condition also favors them. They focus on the middle part of the characteristic S-curve of the
industry. Avoiding both, the early and the later stages, they focus on the middle stage i.e. the growing
stage of the industry and if a promising business falls under this category, there are higher chances of
venture capitalists funding it.
When should you opt for a venture capital funding?

1. When it’s time to face the real competition

A start-up is usually on its own until it attracts investors. But once that phase is crossed, you’re most
likely to enter into the real market full of cut-throat competition. It is important to be able to survive,
match and eventually surpass the competition.

2. When expansion is the next step forward

Think about VC funding when you’re strategically and process-wise ready for expansion. Business
expansion does not happen overnight and more often than not, it goes over-budget. With VC funding,
not only will your business be able to expand smoothly but will also receive the benefit of legal,
financial, and business expertise of the investors.

3. When you need the perfect balance of finances, mentoring, and networking

Venture capital investments don’t just bring a good amount of capital with them but also the expertise
and knowledge of the investors. This guidance can be extremely beneficial in making further
advancements in business. Irrespective of the amount of financing, the biggest advantage of VC funding
is the crucial networking. With wealthy and influential investors believing in your business and
promoting it, your business in no time will become the next big thing in the business circuit.
METHODS OF VENTURE FINANCING
The financing pattern of the deal is the most
important element.
Following are the various methods of venture
financing:
• Equity (Present in almost all the deals)
• Conditional loan (Present in almost all the deals)
• Income note (Rare in India)
• Participating debentures (Rare in India)
• Quasi equity (Sometimes present in India)

Exit route
• Initial public offer(IPOs)
• Trade sale
• Promoter buy back
• Acquisition by another company

The Five Stages of VC Funding Explained

by Murray Goldstein
If you just glance at the home screen on your iPhone or Android device, chances are that you’ll see at
least one app that was built and marketed with venture capital. Free ones like Instagram, Snapchat and
Dropbox all raised multiple rounds of funding enroute to millions of downloads. Similarly, pay-per-use
services like Uber and Lyft have used VC funding to take on entrenched industries such as taxi and
limousine transportation.
The amount of money that goes into startups has been on the rise in the last few years. In 2013, VCs
invested nearly $11 billion in seed and early stage companies, up more than 17 percent from 2012.
While less than 1 percent of all startups formed each year strike a VC deal, funding is both a powerful
resource for the businesses that receive it and an indicator of important trends in technology. In 2014,
for example, there was much more VC attention on Bitcoin than ever before, highlighting how the
protocol was being supported by more merchants and apps.

You might have heard about a Bitcoin-focused startup or a new messaging service raising a “seed round”
– what does that mean? In this post we’ll roughly break down the stages of VC funding – there’s no
universal model, but a lot of firms follow a similar set of steps – so that you can get a glimpse at what
startups go through while raising enough money to deliver high-quality, scalable and frequently free
apps to users.

Stage 1: Seed capital

The descriptor “seed” is appropriate here, since it suggests money that will fuel a startup’s growth down
the road. At this point, the leaders of a startup may not have any commercially available product yet and
are instead most likely focused on convincing investors why their ideas are worthy of VC support.

Seed funding rounds are typically small and are channeled toward research and development of an
initial product. The money may also be used for conducting market research or expanding the team.
There are seed accelerators out there, like Y Combinator, that accept applicants, provide seed capital
and offer an opportunity to demo a solution to major investors.

Stage 2: Startup capital

This stage is similar to the seed stage. With initial market analysis conducted and business plans in place,
companies look to begin marketing and advertising the product and acquiring customers.
Organizations at this stage likely have at least a sample product available. VC funding may be diverted to
acquiring more management personnel, fine-tuning the product/service or conducting additional
research.

Stage 3: Early stage/first stage/second stage capital

Though sometimes called “first stage,” this stage only comes after the seed and startup ones in most
cases. Funding received at this stage will often go toward manufacturing and production facilities, sales
and more marketing.
The amount invested here may be significantly higher than during prior stages. At this point, the
company may also be moving toward profitability as it pushes its products and advertisements to a
wider audience.

Stage 4: Expansion stage/second stage/third stage capital

Growth is often exponential by this stage. Accordingly, VC funding serves as more fuel for the fire,
enabling expansion to additional markets (e.g., other cities or countries) and diversification and
differentiation of product lines.
With a commercially available product, a startup at this stage should be taking in ample revenue, if not
profit. Many companies that get expansion funding have been in business for two to three years.
“VC funding serves as more fuel for the fire, enabling expansion to additional markets and diversification
and differentiation of product lines.”

Stage 5: Mezzanine/bridge/pre-public stage

After reaching this juncture, the company may be looking to go public, given that its products and
services have found suitable traction. Funds received here can be used for activities such as:
 Mergers and acquisitions
 Price reductions/other measures to drive out competitors
 Financing the steps toward an initial public offering
If all goes well, investors may sell their shares and end their engagement with the company, having
made a healthy return. Many tech IPOs – think Facebook, Twitter and Yelp – were only possible after
years of VC funding that fueled user and revenue growth. There’s a saying that there’s no such thing as a
free lunch, and VC funding of free apps and services is a good case in point.

Topic – Concepts of VC – Structure and funds

Venture capital funds in India

VCFs in India can be categorized into following five groups:

1) Those promoted by the Central Government controlled development finance institutions.
For example:
- ICICI Venture Funds Ltd.
- IFCI Venture Capital Funds Ltd (IVCF)
- SIDBI Venture Capital Ltd (SVCL)

2) Those promoted by State Government controlled development finance institutions.

For example:
- Punjab Infotech Venture Fund
- Gujarat Venture Finance Ltd (GVFL)
- Kerala Venture Capital Fund Pvt Ltd.

3) Those promoted by public sector banks.

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

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 capital fund. (A separate list of foreign venture
capital funds operating in India has been provided)

For example:
- Walden International Investment Group
- HSBC Private Equity management Mauritius Ltd

How does the Venture Capital work?

 Venture capital firms typically source the majority of their funding from large investment
institutions.
 Investment institutions expect very high ROI
 VC’s invest in companies with high potential where they are able to exit through either an IPO or a
merger/acquisition.
 Their primary ROI comes from capital gains although they also receive some return through
dividend.
------------------------

The three most important aspects of a venture capital deal, known as a term sheet are: (a) liquidation
rights, (b) management participation and control, and (c) exit rights.

Liquidation Rights

Most venture capital investments are structured as convertible preferred stock with dividend and
liquidation preferences. The preferred stock often will bear a fixed-rate dividend that, due to the cash
constraints of early-stage companies, is not payable currently but is cumulative and becomes part of the
liquidation preference upon a sale or liquidation of the company. The payment of dividends on the
preferred stock will have priority over common stock dividends. These cumulative dividend rights
provide a priority minimum rate of return to the VCs.

The preferred stock will have a liquidation preference that generally is equal to the purchase price (or a
multiple thereof), plus accrued and unpaid dividends, to ensure that the VCs get their money back
before the holders of the common stock (e.g., founders, management, and employees) if the company is
sold or liquidated. Most VCs also insist on participation rights so that they share on an equal basis with
the holders of the common stock in any proceeds that remain after the payment of their liquidation
preference. These liquidation rights and the right to convert the preferred stock into common stock
allow the VCs to share in the upside if the company is successfully sold.

An important consideration to VCs is the percentage of the company that they own on a fully diluted
basis. “Fully diluted” means the total number of issued shares of common stock, plus all shares of
common stock that would be issued if all outstanding options, warrants, convertible preferred stock,
and convertible debt were exercised or converted. This percentage is a function of the pre-money
valuation of the company on which the VCs and the company agree.
 To determine the pre-money valuation, VCs analyze the projected value of the company and the
percentage of this value that will provide them with their required rate of return. This analysis takes into
account the risks to the company and the future dilution to the initial investors from anticipated follow-
on investments.

VCs protect their ownership percentages in three ways: preemptive rights, anti-dilution protection, and
price protection.

 Preemptive rights enable the investors to maintain their percentage ownership in the company
by purchasing a pro rata share of stock sold in future financing rounds, like ‘Rights issue’ etc.

 Anti-dilution protection adjusts the investors’ ownership percentages if the company effects a

stock split, stock dividend, or recapitalization, so that the percentage holding of the VC funder is
maintained.

 Price protection adjusts the conversion price at which the preferred stock can be converted into
common stock if the company issues common stock or stock convertible into common stock at a price
below the current conversion price of the preferred stock (that is, the VCs will be issued more shares of
common stock upon the conversion of the preferred stock). This protects the VCs from the risk that they
overpaid for their stock if the pre-money valuation turns out to be too high.

There are two common types of price protection: full ratchet and weighted average ratchet. A full
ratchet adjusts the conversion price to the lowest price at which the company subsequently sells its
stock, regardless of the number of shares of stock the company issues at that price. A weighted average
ratchet adjusts the conversion price according to a formula that takes into account the lower issue price
and the number of shares that the company issues at that price.

Management Participation and Control

Many VCs state that they invest in management, not technology, and VCs expect the management team
to operate the business without undue interference. Most investment structures provide, however, that
the VCs participate in management through representation on the board of directors, affirmative and
negative covenants or protective provisions, and stock transfer restrictions. Typical protective provisions
give the VCs the right to approve amendments to the company’s certificate of incorporation and bylaws,
future issuances of stock, the declaration and payment of dividends, increases in the company’s stock
option pool, expenditures in excess of approved budgets, the incurrence of debt, and the sale of the
company. In addition, VCs generally require that management’s stock be subject to vesting and buy-back
rights.

As long as the company is achieving its business goals and not violating any of the protective provisions,
most VCs permit management to operate the business without substantial investor participation except
at the board level. However, VCs may negotiate the right to take control of the board of directors if the
company materially fails to achieve its business plan or to meet certain milestones, or if the company
violates any of the protective provisions.

Exit Rights
VCs must achieve liquidity in order to provide the requisite rate of return to their investors. Most VC
funds have a limited life of 10 years, and most investments from a fund are made in the first four years.
Therefore, investments are structured to provide liquidity within five to seven years so that investments
that are made in a fund’s third and fourth years are liquidated as the fund winds up and its assets are
distributed to the fund’s investors. The primary liquidity events for VCs are the sale of the company, the
initial public offering of the company’s stock, or the redemption or repurchase of their stock by the
company. Generally, VCs do not have a contractual right to force the company to be sold. However, the
sale of the company will be subject to the approval of the VCs and depending upon the composition of
the board of directors, the VCs may be in a position to direct the sale efforts. VCs typically also have
demand registration rights that theoretically give them the right to force the company to go public and
register their shares. Also, VCs generally will have piggyback registration rights that give them the right
to include their stock in future company registrations.

VCs also insist on put or redemption rights to achieve liquidity if it is not available through a sale or
public offering. This gives the investors the right to require the company to repurchase their stock after
a period of generally four to seven years. The purchase price for the VCs’ stock may be based upon the
liquidation preference (i.e., the purchase price, plus accrued and unpaid dividends), the fair market
value of the stock as determined by an appraiser, or the value of the stock based on a multiple of the
company’s earnings. An early-stage company (particularly one that is struggling) may not be able to
finance the buyout of an investor, and the redemption right may not be a practical way to gain liquidity.
However, this right gives the VCs tremendous leverage to force management to deal with their need for
an exit and can result in a forced sale of the company. Also, if the VCs trigger their redemption right and
the company breaches its payment obligations, the VCs may be able to take over control of the board of
directors of the company.

Other exit rights that VCs typical require are tag-along and drag-along rights. Tag-along rights give the
investors the right to include their stock in any sale of stock by management. Drag-along rights give the
investors the right to force management to sell their stock in any sale of stock by the investors.

Conclusion

VC investment terms sometimes seem onerous and complex to entrepreneurs. Fund managers must
understand the terms and structure of the deal — and their many variations — intimately. As an
investor in a VC fund, you don’t need to be as conversant with the terms and structures as
entrepreneurs and fund managers, but it helps to know the general outline of a deal when evaluating
your fund manager’s performance.

The logic of the deal. (Anita Shantaram article)

 There are many variants of the basic deal structure, but whatever the specifics, the logic of the deal
is always the same: to give investors in the venture capital fund both ample downside protection
and a favorable position for additional investment of the company proves to be a winner.
 In a typically start-up deal, for example, the venture capital fund will invest $3 million in exchange
for a 40% preferred-equity ownership positing although recent valuations have been much higher.
The prefer-red provisions offer downside protection. For instance, the venture capitalists receive a
liquidation preference. A liquidation feature simulates debt by giving 100% preference over
 common shares held by management until the VCs $3 million is returned. In other words, should
the venture fail, they are given first claim to all the company's assets and technology. In addition,
the deal often includes blocking rights or disproportional voting rights over key decisions, including
the sale of the company or the timing of an IPO.
 The contract is also likely to contain downside protection in the form of anti-dilution clauses, or
ratchets. Such clauses protect against equity dilution if subsequent rounds of financing at lower
values take place. Should the company stumble and have to raise more money at a lower valuation
the venture firm will be given enough shares to maintain its original equity position - that is, the
total percentage of equity owned. That preferential treatment typically comes at the expense of the
common shareholders, or management as well as investors who are not affiliated with the VC firm
and who do not continue to invest on a pro rata basis.
 Alternatively, if a company is doing well, investors enjoy upside provisions, sometimes giving them
the right to put additional money into the venture at a predetermined price. That means venture
investors can increase their stakes in successful ventures at below market prices.
 VC firms also protect themselves from risk by co-investing with other firms. Typically, there will be a
“lead” investor and several "followers". It is the exception, not the rule, for one VC to finance an
individual company entirely. Rather, venture firms prefer to have two or three groups involved in
most stages of financing. Such relationships provide further portfolio diversification - that is, the
ability to invest in more deals per dollar of invested capital. They also decrease the workload of the
VC partners by getting others involved in assessing the risks during the due diligence period and in
managing the deal. And the presence of several. VC firms adds credibility. In fact, observes have
suggested that the truly smart fund will always be a follower of the top-tier firms.

Topic – VC – A comparison between India and other countries

How does India’s startup ecosystem compare with that of the US? – requires updating
by Bala

In 2006, the combined share of India and China in global deal value was only 2 percent. Today, India and
China account for close to one-fourth of global deal value. In barely a decade, India has become the
world’s third-largest startup ecosystem. 

But 2016 wasn’t a boom year for Indian startups. According to VCCEdge, the financial data and research
platform of News Corp VCCircle, private equity investments in India fell 25 per cent from its peak of
1,752 deals in 2015 to 1,309 deals in 2016. Merger & acquisition (M&A) deals remained robust, at 1,002
deals worth $61.4 billion as against 995 deals worth $23.7 billion in 2015, though primarily because of a
few large-value transactions.

India’s experience finds many parallels with the startup ecosystem in the United States, even as a few
key differences explain why startup growth in both the countries varies.

For both India and the US, 2015 was a boom year; 2016 was cautious
Investment activity and deal value declined in the US, from 2015 to 2016. Like India, 2015 was a
remarkable year for US investment ecosystem as well. In 2016, $69.1 billion was invested into the US
venture ecosystem, as against $79.3 billion in 2015. In 2016, startups in the US raised funds through
8,136 deals, as against 10,468 deals in 2015. The fall was, however, not as pronounced as it was in India.
International Journal of Latest Trends in Engineering and Technology Vol.
(9)Issue(1), pp.124-130
VENTURE CAPITAL: GLOBAL AND INDIAN PERSPECTIVE - Dr. Mamta Jain & Ms Purva
Ranu Jain

INDIAN VENTURE CAPITAL SCENARIO – (Not able to reproduce the graphs and hence please
refer to Annexure 7 for all figures wherever source of information has been mentioned)
The major highlights of venture capital industry in India which has shown the growth and development
since 2012-2016 in following heads are as:
1. Cumulative value of VC investment in 2016 was USD 15.0 billion in 620 deals.
(Source: Venture intelligence: India private equity trend report).
2. Information technology sector attracted maximum VC investments (22.3 per cent of the total deal
value and 56.6 per cent of the deal volume), followed by financial sector (30.8 per cent of the total deal
value and 8.7 per cent of the deal volume).
(Source: Venture intelligence: India private equity trend report)
3. India had emerged as one of the world’s largest recipient of FDI and FDI was running at an annual rate
of USD75 billion in 2016-17.
(Source: Fourth Wheel 2017)
4. Western India accounted for 46% of total investment in terms of value
(Source: Venture intelligence: India private equity trend report)
5. PE/VC exits in India declined by 18% to $7.86 Billion (across 215 deals) during the calendar year 2016.
(Source: Venture intelligence: India private equity trend report)
6. ROLE OF VENTURE CAPITAL IN THE WAKE OF UPCOMING KNOWLEDGE BASED INDUSTRIES IN INDIA
Scientific technology and knowledge-based ideas properly supported by venture capitalist can be a
powerful engine of economic growth and wealth creation in a sustainable manner.
Following are the roles which a venture capital can play in the wake of upcoming knowledge-based
industries in India:
1. Many people who approach venture capitalist have great innovative ideas but they lack necessary
skills to convert these ideas into viable business. Venture capitalist can mentor such people in scaling
up their business plan.
2. Venture capitalist can play a vital role by providing guidance to firms to develop and commercialize
new ideas by lowering the costs of failure and encouraging firms to take risks and experiment with
potential growth opportunities
3. They can give valuable advice and help in formulating marketing strategy, growth strategy, financing
strategy etc.
4. Venture capitalists introduce entrepreneurs to the networks of customers, financial institutions,
consultants, policy makers etc.
5. Venture capitalist helps portfolio firms in raising additional finance as and when needed.
7. VENTURE CAPITAL FINANCING: GLOBAL SCENARIO The concept of venture capital originated in USA in
1950s when the capital magnets like Rockfeller Group financed the new technology companies. The
concept became popular during 1960‟s and 1970‟s when several private enterprises started financing
highly risky and highly rewarding projects. The American Research and Development was formed as the
first venture organization which financed over 100 companies and made profit over 35 times its
investment. Since then venture capital has grown‟ vastly in USA, UK, Europe and Japan and has an
important contribution in the economic development of these countries. The growth and development
of venture capital in various countries is highlighted below:
7.1 USA: Venture capital has been primarily an American phenomenon, which has played a constructive
role in the industrial development of USA. American Research and development corporation, founded by
Gen. Doriot soon after the second world war is believed to have heralded the institutionalization of
venture capital in the USA. The real development of VC took place in 1958 when the business
administration Act was passed by the US congress. US occupied about 54% of the total global VC
investments in 2016. The more mature VC markets of the US favor earlier–stage investments and the
main exit route for VC-backed companies is acquisitions (M&A), representing more than 90% of all exits.
(Source: 2017 NVCA Yearbook Highlights)
7.2 UNITED KINGDOM: The early stirrings of the UK Venture capital industry began in 1930s, but it was
only in the early 1980s that it really began to develop and expand when the British government made
provisions for tax rebate to people for making investment in unlisted companies in the stock exchange,
under business expansion scheme. Venture capital is playing phenomenally important role by helping
Early-stage fast growth companies to deliver the innovation which is helping UK economy to improve and
grow. The UK‟s strong venture-capital scene has created a fertile environment for disruptive tech
companies. Today, it is a world leader in the financial technology (fintech), enterprise technology, e-
commerce, property, and travel sectors. In 2016, 936 deals were completed, delivering €4bn in
investments representing 34% of all deals completed in Europe. The UK has the highest concentration of
capital in Europe and a significant source of funds for rest of the continent.
(Source: 2016 European venture capital report)
7.3 CANADA: The Canadian venture capital (VC) market is well established and has been growing both in
terms of the number of deals and the amount of money invested; however, the average deal size is small
compared to that in the United States. In 2015, a total of CAD 2.7 bn in venture capital was invested in
Canadian companies. The volume of Canada’s VC investment as a percentage of GDP ranked third
amongst other developed nations – at 0.08% of GDP. By sector, firms in information and communication
technologies (ICT) have captured the largest share of VC investment in Canada (63%).
7.4 EUROPE: Since 1995, Europe has seen a dramatic increase in venture capital investment in
companies that are in their seed, start-up or expansion stages but still when compared with leading
global economies like US the European venture capital market lag behind both in terms of size and stage
of development. The amount of venture capital provided by US investors to start-ups amounts to 0.211%
of GDP per annum on average – more than seven times the EU average (as shown in figure). VC firms
located in the EU financed more than 28,000 young companies providing a total of EUR 35 bn in venture
capital from 2007 to 2015. On average, VC firms invest EUR 1.3 m in companies located in the EU in each
funding round. € 16.2B venture capital is raised by European companies in 2016.
(Source: 2016 European Venture capital report)
7.5 FRANCE: The venture capital activity in France came into picture in 1971 with the creation of the
Societies Financiers Innovation. Although the French VC market suffered during the economic crisis of
2008–2009, fundraising has significantly risen since and investments are expected to increase in the
coming years. In order to create a private VC industry in the seed segment, the French state decided to
create a EUR 600 m “fund of fund” program, dedicated to financing seed VC funds, in 2011.
(Source: 2016 European venture capital report)
7.6 GERMANY: Like France, Germany has a strong tradition of government support for the business
sector that dates back to the post world war II programs dedicated to rebuilding the German industry.
Today, Germany is Europe’s second largest venture capital market after the UK.
(Source: 2016 European venture capital report)
7.7 JAPAN: By taking inspire from American venture companies, several venture capital institutions were
established in Japan after Second World War by well-known financial institutions for financing of high
technology industries, in which the names of DIAWA Securities, SANYO Securities and Yamiechi Securities
group and International bank of Japan desire mention. Venture capital financing in Japan was mainly
started in 1970‟s when the listing norms were relaxed along with registration requirement of the stock
exchange. The formation of OTC in 1982further added momentum to the growth of venture capital in
Japan. In Japan the venture investments are primarily equity made in more mature private companies.
Normally the venture capital firms in Japan do not invest in startups.
7.8 SINGAPORE: The first venture capital fund set up in Singapore was South East Asia Venture
Investment (“SEAVI”) in 1983, with participation from the U.S venture capital firm Advent International.
The first public investment in venture capital fund was in 1986 by the Economic Development Board of
Singapore (EDB). In 1993, the Singapore Venture Capital Association (SVCA) was established. The World
Bank has named Singapore as the world’s easiest place to do business. Singapore’s stable legal systems,
pro-business tax regime and government incentives for technology start-ups have been very attractive
pull factors for the setup of early stage enterprises and venture capital funds. Through the years,
Singapore continued to be a major investment hub with Singapore-based fund managers accounting for
more than 55% of total private equity and venture capital investments into Southeast Asia. There are
around 153 venture capital firms. VC investments in Singapore achieved historic figures with 100 deals
with an aggregate value of $3.5b recorded in 2016. According to a report by global valuation firm Duff
and Phelps, the technology sector accounted for the majority of deal volume at 53% and deal value at
34%.
7.9 ISRAEL: Another country in which Venture capital originated relatively early is Israel. The evolutionary
process of the industry in Israel is quite similar to that of the US. There was a high technology sector in
Israel requiring funds for commercialization. The formation of Athena in 1985, the first formal venture
capital firm, marked the origin of the industry in Israel.
(Source: 2016 European venture capital report)
7.10 INDIA: Venture capital originated too late in India in 1973 on the recommendation of Bhatt
Committee. The first Venture capital fund in India was established in 1975 by Industrial Finance
Corporation (IFCI) of India. The Indian venture capital industry is dominated by public sector financial
institutions. In India venture capital funds are regulated by SEBI. Cumulative value of VC investments in
2016 was USD 15.0 billion in 971 deals in 2016. Information technology companies and tech – oriented
startups dominated, accounting for 56.6 percent of deal volumes and 22.3 per cent of deal values.
7.11 CHINA: In China the venture capital industry started in the mid-1980s when the government felt
the need for developing high technology industries. The initial efforts were not successful because of the
unfavorable regulatory environment in China. In early 1990s, majority of the venture capital backed firms
were State Owned Enterprises (SOEs). Most of the venture capital funds were organized as joint venture
funds with SOEs initially. In China, the industry grew in 1999-2000 in tandem with the growth in the IT
sector. Venture capital markets of China generally prefer less risky later-stage companies. In China IPOs
represent the vast majority of exits for VC-backed companies .VC funding has grown seven-fold in the
last five years in China. In 2015 total funding of US$49b through 1,635 deals is there as compared to
US$7b in 2010. At the same time, deal size has doubled from US$15m in 2010 to US$30m in 2015.
(Source: Preqin Private Equity Online)

8. REASONS AND SHORTCOMINGS FOR POOR GROWTH OF VENTURE CAPITAL INDUSTRY IN INDIA

1. The venture capital ecosystem is relatively weak in India. The industry is fragmented. Angel investing is
still at a nascent stage. Entrepreneurs are finding it difficult to get seed stage funding.
2. Presently high net worth individuals and corporate are not provided with any incentives for
investment in VCFs. In absence of any incentive, it is extremely difficult for domestic VCFs to raise money
from this investor group that has a good potential.
3. As the venture capital scheme emphasizes on new innovations and technologies development. This
requires regular interaction between industry and research institutes and laboratories. However, there is
little interaction between research institutes and industry in India.
4. So far VCFs are concentrated in few big cities and are mainly benefitting entrepreneurs located in
these big cities. Venture Capital Fund should be established in semi-urban and rural areas also to use the
potential of budding new entrepreneurs.
5. Long gestation period and high risk associated with investments made in the form of shares or debt in
startup companies is a quite challenging task for VCs.
6. Compliance of local SEBI regulations, FDI rules, FEMA and adherence to CBDT rules for claiming tax
exemptions by VCs are great hurdles in growth of venture capital industry.

A comparison of definitions and regulations in some countries with India

India:

Venture capital fund is a fund formed as a trust or a company under the regulations which

- Has dedicated pool of capital

- raised in the specified manner and
- invested in venture capital undertaking
Venture Capital undertaking is domestic company,

- whose shares are not listed

- which is in the business for providing services, production or manufacturing of articles which are
not in the negative list.
- Each scheme launched or fund set up by a venture capital fund shall have firm commitment from
the investors for contribution or an amount or at least Rupees five crores before the start of
operations by the venture capital fund
Negative list covers following activities:

- Non-banking financial services [excluding those Non – Banking Financial companies which are
registered with Reserve Bank of India and have been categorized as Equipment Leasing or Hire
Purchase companies.
- Gold financing [excluding those companies, which are engaged in gold financing for jewellery.
- Activities not permitted under the Industrial Policy of Government of India
- Any other activity which may be specified by the SEBI.
UK

Venture capital includes the business of carrying

- Investing in, advising on investments which are, venture capital investment

- managing investments which are, arranging transaction in, venture capital investments.
- Advising on investments or managing investments in relation to portfolios or establishing,
operating or winding up collective investment schemes invests only in venture capital investments
- Any custody activities as related to above.
Venture Capital Investment is investment which at the time of investment is made, is,

- in a new and developing company

- in a management buyout or buy-in or
- Made as means of financing the invitee Company or venture and accompanied by a right of
consultation.
Malaysia:

Venture capital company (VCC) and Venture Capital Management Company (VCMC) means a
corporation that deals in investments of securities of venture companies and are registered as VCC or
VCMC under the guidelines:

Venture company means a company which utilizes seed-capital, start-up and early stage financing and,

- in relation to VCC is not listed and

- in relation to VCMC is not listed at the point of first investment by such VCMC.

Taiwan
Venture capital investment enterprise is a Company limited by shares, which,

- engages in venture capital investment business under the approval of Ministry of Finance,
- specializes in the investments either in foreign or domestic technological enterprises assist the
management and supervision of such enterprise
China

Foreign invested venture capital investment (FIVCEI) means foreign invested enterprise established
within the territory of China by foreign investors or foreign investors with Companies and established
under Chinese Law.

Venture capital investment means a type of investment activity pursuant to which equity investment are
injected mainly into high and new-tech enterprises that have not been publicly listed.

In India earlier, the venture capital funding was not allowed in the Real Estate and the Gold Financing.
 Topic – Inherent risks in VC funding

The 11 Risks VCs Evaluate

Though the industry is called venture capital, the goal of a VC isn’t to maximize every risk. Instead, we
try to understand all the risks a business might face and weigh those risks with the reward - the exit.
Here are the major risks that I typically review when a startup pitches.

Market timing risk - Is now the right time for the business? It’s often hard to evaluate this risk, but
nevertheless, it’s an important consideration. There are many stories of people saying I invented
Facebook before Facebook, which may very well be true. But the market just wasn’t yet ready for it.

Business model risk - Is there a clear business model? Do the unit economics seem to work? If not, what
are the assumptions required to achieve profitability?

Market adoption risk - Are there strong competitive players in the market? What are the major barriers
to entry?

Market size risk - If the company is successful, is the exit scenario large enough to provide the types of
returns our fund needs?

Execution risk - Does the team have the right skills and passion to reach their goals? If not, are they
amenable to finding others to complement their skills?

Technology risk - Does the company have to develop a new technology that may not reach fruition, or
may take much longer than expected? This is typically more prevalent in cleantech and hardware
companies.

Capitalization structure risk - does the company have enough room in the cap table to take more
investment necessary to grow while still ensuring employees and executives are well compensated?

Platform risk - Is the startup building atop YouTube, Twitter or Facebook? How strong is their
relationship? Are their product plans in the direct path of the platform or complementary?

Venture management risk - Is the company receptive to feedback? Is the team candid about the state of
the business?

Financial risk - How much money does the company require to achieve its goals? Is the financing risk
manageable given the current environment and company trajectory?

Legal risk - Does the company have a high likelihood of lawsuit for patent or copyright infringement?
Does the company have any outstanding complaints with early employees or founders? Are there
regulatory challenges involved in this sector?

The list of these risks applies differently to each startup, but it’s a good general outline for
entrepreneurs to think through when they pitch their companies to VCs.
VCF - What are the risks?
Investing in startups involves considerable risk, including the possible loss of all or a significant portion
of your investment. You should review all disclosed risk factors before making an investment decision.
The following are some of the primary risks associated with investing in a startup under Title III:

 The company may be unable to complete an initial public offering of its securities, a merger, a
buyout, or other liquidity event

 The company may be unable to expand and maintain market acceptance for its services or
products

 The company may be unable to adapt to rapidly changing consumer preferences, technological
advances, or market trends

 The company may be unable to achieve management’s projections for growth, to maintain or
increase historical rates of growth, or to achieve growth based on past or current trends

 The company may be unable to develop, maintain, and expand successful marketing
relationships, affiliations, joint ventures, and partnerships that may be needed to continue and
accelerate growth and market penetration

 The company may be unable to manage rapid growth effectively

 The company’s business operations may be disrupted or costs increased as a result of the
company’s customers complaining or making assertions about its services or products

 The company may experience technological problems, including potentially widespread outages
and disruptions in Internet and mobile commerce

 The company may experience performance issues arising from infrastructure changes, human or
software errors, website or third-party hosting disruptions, network disruptions, or capacity
constraints due to a number of potential causes including technical failures, cyber-attacks,
security vulnerabilities, natural disasters, or fraud

 The company may be unable to adequately secure and protect intellectual property rights

 The company may be the subject of claims or litigation for infringement of intellectual property
rights and other alleged violations of law

 Changes in laws and regulations may materially affect the company’s business

 The company may be unable to comply with all applicable local, U.S., and international laws and
regulations, including rules regarding data security and privacy, resulting in increased costs
and/or business disruption if the company becomes subject to claims and litigation for legal
 non-compliance

 Liability risks and labor costs and requirements may jeopardize the company’s business

 The company may be unable to secure additional capital necessary to support operations, to
finance expansion, and/or to maintain competitive position

 The company may issue additional company equity securities that dilute the value of existing
equity securities, and that dilute the voting power of existing investors

 The company may be unable to hire or retain key members of management and a qualified
workforce

 The company may be unable to compete effectively against other businesses in its industry,
some of which have longer operating histories, greater name recognition, and significantly
greater financial, technical, marketing, distribution and other resources

 Competing companies may develop new services, products, and marketing and distribution
channels or may establish business models or technologies that are disruptive to the company’s
business

 Current and future competitors of the company may make strategic acquisitions or establish
cooperative relationships among themselves or with others that may significantly increase their
ability to meet the needs of existing and potential customers, putting the company at a
disadvantage

 The business of the company may be jeopardized by stagnant economic conditions and by
political, geopolitical, regulatory, financial, or other developments in the U.S. and globally,
including incidents of war and terrorism, outbreaks and pandemics of serious communicable
diseases, and natural and man-made disasters that are beyond the company’s control

 Because the valuation of a startup is subjective compared to the market-driven stock prices of
public companies, you may overpay for the equity securities you purchase

 The class of equity securities you purchase may have fewer rights than other equity classes
issued by the company

 The company may be able to provide only limited information on its operations and business
plan due to the early stage of its development

 You may be restricted from selling or transferring your securities for 12 months following your
purchase, and beyond that 12-month period, there may be no market for your securities should
you wish to sell them at that time

 The company may not have relationships with established, professional early-stage investors
such as angel investors, startup accelerators, and venture capital firms, or may not have these
experienced individuals on their board of directors, leaving them without significant business
 mentorship, valuable resources and contacts, or general guidance

 The value of the company’s equity securities may experience significant and unexpected decline,
including prior to, during, or after an initial public offering

There may be other risks that are specific to the company, its industry, or its business model, and there
may be other risks not generally disclosed or known, in part because the company is privately held and
does not provide risk disclosure in publicly available reports. Investors must understand that they are
voluntarily assuming all of the risks of the investment, including any and all risks relating to the
company.
It is impossible for anyone to know with any certainty which companies will be more successful than
others, and an investment is subject to all of the risks inherent in any investment in a nascent business
or industry with a number of different competitors.
--------------------------

Advantages of Venture Capital

Expansion of Company: Venture capital provides large funding that a company needs to expand its
business. It has the ability for company expansion that would not be possible through bank loans or
other methods.
Expertise joining the company: Venture capitalists provide valuable expertise, advice and industry
connections. These experts have deep knowledge of specific market standards and they can help you
avoid your business from many downsides that are usually associated with startups.
Better Management: It’s not always that being an entrepreneur one is also a good business manager.
However, since Venture Capitalists hold a percentage of equity in the business. They will have the power
to say in the management of the business. So, if one is not good at managing the business, this is a
significant benefit.
No Obligation to repay: In addition, there is an obligation to repay to investors as it would be in case of
banks loans. Rather, investors take the investment risk on their own shoulders because they believe in
the company’s future success.
Value Added Services: Venture Capitalists provide HR Consultants, who are specialist in hiring the best
staff for your business. This helps in avoiding to hire the wrong person. It also offers a number of other
such services such as mentoring, alliances and also facilitates the exit.

Disadvantages of Venture Capital

Complex Process: It is a lengthy and complex process which needs a detailed business plan and financial
projections. Until and unless the Venture Capitalists are properly satisfied with the business plan,
whether or not it will succeed in the future, they won’t invest. So, securing a deal with a Venture
Capitalist can be a long and complex process.
Loss of control: Venture Capital firms add one of their team members to your management team, while
this is usually done for ensuring the success of the business, it can also create internal problems.
Loss over decisions: Another big problem faced in Venture Capital funding is that you will have to give
up many key decisions on how the company will process or operate. This is because Venture Capitalist
are required to be informed about all the key decision relating to business plans, and they usually can
override such decision if they are unsatisfied with the decision.
No Confidentiality: Generally, Venture Capitalists treat information confidentially. But they refuse to
sign non- disclosure agreement due to the legal ramification of doing so. This puts the ideas at risk,
especially when they are new. Further, your investor will expect regular information and consultation to
check how things are progressing. For example, accounts and minutes of board meetings.
Quick Liquidity: Most Venture Capitalists seek to realize their investment in the company in three to five
years. If your business plan expects a longer timetable before providing liquidity, then Venture Capital
funding may not be a suitable option for you.

Some of the benefits of private debt vis-à-vis private equity through PE in the Indian context are set out
in the table below:
Serial no. Particulars
1 Assured returns
2 Capital repatriation
3 Tax benefits
Private debt Private equity
Investors are eligible for Returns on PE investments cannot
assured returns on their be assured. Put Options are not
investment through interest looked at favorably and will be
and redemption premium, subject to the conditionalities as
both of which can be legally per Indian laws as existing as on
assured. date
Capital can be fully Repatriation of capital limited to
repatriated buy-back or reduction of capital
and subject to the conditionalities
as per Indian laws as existing as on
date
Interest payments are a Dividend payment and buyback
deductible expense of the are taxed at the hands of the
borrower. investee company at 15% or 20%
respectively in addition to
corporate tax of 30%. Hence,
foreign tax credit against such tax

4 Sources of payment
5 Security
6 Equity upside
paid in India may not be available.
Interest may be paid out of Dividends can be paid out of
any source of the borrower. profits only. Reduction of capital
may be done without profits, but
is a court driven process and
subject to lender approvals
Debt may be secured by No security creation is possible to
creation of security over the secure the investment amount or
assets of the borrower. returns thereon
Returns may be structured as Returns may be structured by way
interest or redemption of dividends or capital reduction,
premium and linked to cash both of which may be tax
flow, share price etc. hence inefficient structures – means not
achieving equity like escaping tax applicability
structure with tax
optimization.

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Venture capital, private equity and M&A

glossary
PitchBook  July 10, 2017

From angels to zombie funds—we explained some of the most common terms used in the private markets to help you
learn more about the industry. Take a look at the definitions—then see what you can do with data on the entire venture
capital, private equity and M&A landscape. Ready to test your knowledge? Take our interactive quiz.
 

A
Accelerator: 
A program startups can apply to that provides funds and mentorship to help companies grow, usually in exchange for
equity. Most accelerators focus on helping early-stage companies.
 
Add-on/Bolt-on: 
When a private equity firm acquires a company to add onto an existing portfolio company. In add-on deals, the existing
portfolio company is called the platform and the private equity firm is called the sponsor. Bolt-on is used more often in
Europe.
 
Alternative investment: 
An asset that is not a conventional investment type (stocks, bonds, cash). Alternative investments include venture capital,
private equity, hedge funds and real estate.
 
Angel: 
A high-net-worth individual who makes direct investments into early-stage companies.

Anti-trust filing: 
A formal notification of an acquisition to competition regulators. In the US, these regulators include, but are not limited to,
the Federal Trade Commission and Department of Justice.
 
Asset allocation: 
The mix of investments in a portfolio. To balance risk and reward, asset allocation is determined by investment goals, risk
tolerance and time.
 
Asset-based lending:
Any form of lending to a business that is collateralized or secured by a balance sheet asset. Pledged assets may include
inventory, equipment or accounts receivable that will be redeemed in the event of default by the debtor.

Asset deal: 
When the assets of a company are acquired instead of shares.
 

  B
Benchmark: 
When a fund compares its returns to the performance of similar funds.

Board of directors: 
A group of individuals selected to represent stockholders with regard to company policies or significant company
decisions. VC and PE investors will often place executives on the boards of their portfolio companies.

Book runner: 
The main entity responsible for the issuance of new equity, debt and other securities.  

Break-up fee: 
A fee paid by the seller if it breaches or decides to terminate a definitive acquisition agreement.

Bridge loan: 
A temporary, limited amount of financing that serves as a 'bridge' until a long-term debt or equity investment can be
secured.

Brownfield: 
An investment in an existing asset, land or structure that typically requires repairs, upgrades and expansion.
 
Burn rate: 
How long it takes a company to spend the capital it received from investors.

Business development company: 

A company created to invest in both the debt and equity of small and medium-sized businesses. Investments can be made
in both public and private entities. While similar to VC funds, many BDCs are publicly traded, which allows smaller, non-
accredited investors to back startups.  
 
Buyout/Leveraged buyout: 
A private equity transaction in which a firm acquires all—or a significant amount of—equity in a company. A leveraged
buyout is when firms use a mix of cash and debt to acquire equity, which is very common.
 

C
Capital call: 
When a general partner is ready to make an investment, it will ask its limited partners for the capital they’ve already
committed to the fund.
 
Capital overhang/Dry powder: 
The amount of capital available in a fund for investors to invest.
 
Carried interest: 
A general partner’s share of the capital gains from a fund, usually 20%.
 
Carveout: 
When a company sells all or part of its business.

Change of control clauses: 

Clauses that can invalidate or dissolve a contract in the event that a change in control of the company takes place.
 
Chapter 11: 
The section of the US Bankruptcy Code that outlines the process for asset reorganization.

Chapter 7: 
The section of the US Bankruptcy Code that outlines the process for asset liquidation.
 
Closed fund:
A fund that is finished taking commitments from limited partners and is ready to make investments.

Closing account: 
An account that helps determine the net debt and working capital that will be used to establish the final price of an M&A
deal according to the agreed price formula.

Closing agreement: 
A document that establishes the final settlement between all parties involved in an M&A deal and results in the transfer of
ownership from, and payment to, the target company.

Co-investment: 
When a limited partner invests directly in a company alongside a general partner, instead of through a general partner.

Condition precedent: 
A condition for closing a negotiated agreement such as securing approval from regulators.

Convertible debt: 
Debt that can be converted to equity when certain conditions are met, like a specific valuation or date.

Corporate acquisition:
When a corporation purchases another company for strategic purposes.

Corporate venture capital:

When a corporation has a venture capital team that invests in early-stage companies that align with the corporation’s goals.

Crowdfunding:
The process of raising small amounts of capital from many people to fund a venture.
 

  D
Data room: 
A secure, digital location where potential investors can review confidential information on a target company, including
financial statements, compensation agreements, intellectual property and client contracts.

Deal flow: 
The number of transactions that have closed during a given period.

Debt & cash-free pricing: 

The target company’s price without financial debts or cash.

Debt pushdown: 
When the acquisition debt is transferred to the operating company rather than the company that generates the operating
cash flow, if such a distinction exists.

Disbursement: 
The capital investors give to companies.

Distressed investment:
An investment made into a company experiencing liquidity, capitalization and/or underperformance issues.

Distributed to paid in (DPI): 

The value of all distributions divided by the amount limited partners have contributed to the fund.

Distribution: 
The capital limited partners receive from general partners after they exit an investment.

Drawdown rate:
The speed at which a general partner calls down the capital committed by its limited partners.

Due diligence: 
The vetting, analyzing and assessing of individuals, companies and investors before engaging in a transaction.
 

E
Early stage: 
The period of venture capital investment between seed and late stage deals, when companies have a proven concept and
little revenue.

Earnout provision: 
Part of a contract that details future compensation for the seller if the business attains certain performance goals.
 
EBITDA (earnings before interest, taxes, depreciation and amortization): 
A company’s net profit plus interest, taxes, depreciation and amortization.

Enterprise value (EV): 

A company’s value calculated as market capitalization, including all debt and equity interests, minus excess cash.
 
Evergreen fund: 
A fund that never closes and keeps fundraising to ensure consistent cash flows.
 
Exit: 
When an investor sells its equity in a portfolio company.
 

F
Family office: 
A firm that manages assets, investments and trusts for a wealthy family.
 
Final close: 
When a general partner stops fundraising.
 
Fund: 
An investment vehicle for limited partners, managed by general partners. Limited partners commit capital to funds, and
general partners invest the capital into assets.
 
Fund-of-funds: 
A fund that invests in other funds. A fund-of-funds devotes all its time to evaluating fund managers, which usually leads to
above-average returns. However, there are extra fees associated with investing in a fund-of-funds.
 
Fundraising: 
When general partners ask for capital commitments from limited partners.
 

G
General partner (GP): 
An entity that raises capital from limited partners for a fund and determines which assets the fund should invest in.

Greenfield: 
An investment that involves an asset or structure that does not yet exist. Investors fund all stages of development,
including design, construction, infrastructure and operations.    
 
Growth equity investment: 
When an investor gives a mature company capital it can use to expand or restructure in exchange for equity (usually a
minority stake).

H
Heads of agreement: 
The basic elements of a deal spelled out more specifically in a share purchase agreement.
 
Herfindahl-Hirschman index (HHI): 
A commonly accepted way to measure concentration within an industry, which the US Department of Justice uses to
review deals for anti-trust considerations. It is calculated by finding the square of the market share for each firm
competing in a market and adding up the results, which can range from near zero to 10,000.

I
Incubator: 
An organization that gives early-stage companies office space, resources, advice and networking opportunities (usually in
exchange for equity).
 
Initial public offering (IPO): 
The first time a private company’s stock is available to the public. All companies undergoing an IPO must register with
the SEC and take the necessary steps to comply with all applicable rules and regulations.
 
Institutional investor: 
An entity that invests capital on the behalf of organizations, companies or individuals. Examples include university
endowments, insurance companies and pension funds.
 
Internal rate of return (IRR): 
The rate at which the net present value of all cash flows from an investment will equal zero. IRR is commonly used to
gauge fund performance.
 
Investment bank: 
A financial institution that serves as an agent or underwriter for security issuances. Some investment banks also act as
brokers/dealers and provide advisory services for mergers, acquisitions, restructurings and other transactions.
 

J
J curve: 
When a fund’s performance over time looks like a ‘J’ on a chart. At the beginning of a fund’s lifecycle, performance and
cash flows are negative because the fund is investing and not yet yielding returns. As the fund starts exiting investments,
performance and cash flows increase.
 

K
Key performance indicators (KPIs): 
A set of metrics used to gauge the performance of a company. KPIs depend on a specific company’s strategic and
operational goals. Examples include revenue growth and monthly active users.  
 

L
Late stage: 
The final period of venture capital investment (usually after Series C), when companies have increased revenue and are
near exit.
 
Lead investor: 
The investor that makes the largest investment in a venture capital round. As the primary financier of the round, the lead
investor determines the valuation of the company.

Leakage: 
The distribution of profits or responsibilities for the repayment of loans to ensure a minimum amount of taxes are paid to
preserve deal value (prevent leakage) when structuring a deal that involves several companies.

Legal continuity: 
The question of whether the target company’s existing contracts should be retained after an acquisition. In asset deals,
prior agreements typically cease and must be entered into again. Legal continuity rarely impacts share deals.

Letter of intent (LOI): 

The initial document that outlines the goals of the parties involved in a deal and is drafted to open negotiations under
clauses dictating exclusivity and secrecy. A LOI is sometimes called a memorandum of understanding (MOU).

Leverage: 
The use of debt in an investment, including acquisitions and capital expenditures. With leverage, general partners can
expedite improvements to portfolio companies and amplify returns.

Limited partner (LP): 

An entity that commits capital to a general partner’s fund.   
 
Limited partnership: 
The relationship between a general partner and its limited partners.

Liquidation: 
The process of selling assets in order to pay creditors (and potentially shareholders).
 
Liquidity event: 
When a general partner sells equity in an asset and returns capital to its limited partners.
 

M
Management buyout (MBO): 
A buyout a company’s management team leads or participates in.
 
Management fee: 
The amount general partners charge limited partners to operate a fund. The fee is usually 0.5%–3% of the called capital
amount.

Material adverse change (MAC): 

In order for an LOI to become a share purchase agreement, usually the basic circumstances at the target company cannot
change. Examples of such circumstances include maintaining profitability, keeping important customers or maintaining
licenses.
 
Merger: 
When two or more companies combine.
 
Mezzanine investment: 
A financing round between senior and subordinated loans that typically includes equity-based options in the form of
warrants.
 
Middle-market company: 
A company with an enterprise value of $25M–$1B.

Multiple arbitrage: 
The investment gains achieved by increasing the sales multiple relative to the original investment multiple. For example,
buying a company at 4x EBITDA and selling it at 7x EBITDA. 
 

N
Net debt: 
There is no universal definition of net debt, which makes its definition in a LOI and SPA paramount. Typically, net debt
includes cash less financial liabilities (loans, bills of exchange, repayable subsidies, pensions and other  long-
term commitments to staff, commissions giving rise to cash outflows within the foreseeable future, off-balance sheet
commitments that can be considered equivalent to debt and certain leasing debts).

Non-disclosure agreement (NDA): 

A pact between the parties involved in a deal that confirms they will not misuse the information exchanged during
negotiations.

Normalized working capital: 

An analysis of a target company that accounts for all one-off or non-recurring items to determine how working capital
normally operates.

O
Offer letter: 
A non-binding indication of one party’s intention to purchase a target company.

Operating partner: 
An executive dedicated to working with portfolio companies to increase their value. They often have an expertise in a
certain area (like a specific industry). 
 

P
Paid-in capital: 
The amount of committed capital that has been transferred from the limited partner to the general partner.
 
Placement agent: 
A third-party firm that helps general partners fundraise.
 
Platform company: 
A private equity-backed company that completes an add-on transaction.
 
Portfolio company: 
A company that has received an investment from a venture capital or private equity firm.

Post-money valuation: 
The value of a company after an infusion of capital.  
 
Pre-money valuation: 
The value of a company investors determine before they invest capital.

Pre-seed: 
The stage before the seed stage. As seed-stage investing has become more popular, investors have started to invest in
companies at this stage in the hopes of finding them early on. A pre-seed company is often just the founder(s) and an idea.

Private equity:
Capital that is not noted on the public stock exchange. Private equity involves investors giving private companies capital
in exchange for equity.

Private investment in public equity (PIPE): 

When a private investor purchases stock in a public company (usually for less than the current market price).

Public market equivalent: 

An analysis that compares a private fund’s performance to a public benchmark or index.
 
Public-to-private transaction: 
When a private equity firm acquires all the shares of a public company, changing the company’s status from public to
private.
 

R
Recapitalization: 
An investment strategy that involves restructuring a company’s debt and equity mixture.
 
Residual value to paid in (RVPI): 
The value of all remaining investments in a fund relative to the amount limited partners have contributed the fund.
 
Return on investment (ROI): 
The percentage of profit or loss that resulted from an investment.
 
Reverse merger/Reverse takeover: 
When a private company acquires a public company.

Reverse termination fee: 

A fee paid by the buyer if it breaches or decides to terminate a definitive acquisition agreement.
 

S
Secondary market: 
When one limited partner sells its alternative investments to another limited partner. Limited partners do this for a variety
of reasons, including to adjust their asset allocation.
 
Seed: 
The first stage of venture capital investment, before early stage.
 
Senior debt: 
The debt that takes priority over other securities in the event of liquidation.
 
Series A–D+: 
The identification of venture rounds after seed.

Share deal: 
When the shares of a target company are acquired.
Share purchase agreement: 
The final contract between parties involved in a deal that is subject to a number of condition precedents determined during
negotiations.

Sovereign wealth fund: 

A state-owned investment fund designed to protect and/or grow a range of financial assets, including stocks, bonds and
natural resources.

Spin-off: 
A type of divestiture that creates an independent company through the sale or distribution of new shares of an existing
business or division of a company.

Staple financing: 
A pre-arranged financing package offered to potential acquirers that includes all the details of a lending package.
The name comes from the fact that the financing details are stapled to the back of the acquisition term sheet. 

Step-up multiple: 
The difference between the post-valuation of a company's previous VC round and the pre-money valuation of its new
round. 

Strategic acquisition:
When a corporation acquires a company for its technology, products or services.

Subordinated debt: 
Loans that have a lower priority than senior debt in the event of liquidation.
 

T
Target company: 
The entity purchased by an acquirer.

Target working capital: 

An amount recorded during negotiations to reflect a historical analysis of the working capital requirements of a target
company. It reflects closing accounts as well as an increased or decreased price if a target company has more or less
working capital than the target capital on the date of the closing accounts.

Total value to paid in (TVPI):

The value of all remaining investments in a fund plus the value of all distributions relative to the amount limited partners
have contributed to the fund.

Tranche:  
A portion of an investment dependent on a company hitting certain milestones. Every  tranche of a round is part of the
same round.

Transaction fees: 
The amount private equity firms charge the companies they acquire (typically between 1% and 2%).
 

U
Underwriting: 
When investment banks issue debt and equity securities on behalf of corporations and governments to generate investment
capital.
 
Unicorn: 
A venture capital-backed company with a valuation of $1B or more.
 
V
Venture capital: 
A type of private equity investing that focuses on startups and early-stage companies with long-term, high-growth
potential.
 
Vintage year: 
When a fund closes and starts investing

W
Warrant: 
A security that gives the holder the option to purchase a company’s stock at a predetermined price for a specified period.

Working capital: 
The customers, suppliers, inventories and other assets and liabilities required for day-to-day operations of a target
company.

Z
Zombie fund: 
A fund that invests all its committed capital but holds onto investments longer than normal to continue collecting
management fees. 

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All about ‘Due diligence’ – VC

Every investor approaches due diligence differently. Some angel investors may request information in a
detailed manner all at once, while others may simply request information at different times or stages.
Regardless of an investor’s method to obtain information on a potential company, it is a proven fact that
exercising thorough due diligence is indicative of more profitable returns. The following documents may
be requested in due diligence.

General Corporate Materials

These documents include:

  The company’s
o articles of Incorporation (and all amendments)
o bylaws (and all amendments), minute book (including all minutes and resolutions of
shareholders and directors, executive committees, and other governing groups)
o organizational chart
o list of shareholders (and number of shares held by each)
 Copies of
o agreements (relating to options, voting trusts, warrants, puts, calls, subscriptions, and
convertible securities)
o active status reports (in the state of incorporation for the last three years)
 A list of
o all states where the company is authorized to do business (and annual reports for the
last three years)
 o all states, provinces, or countries where the company owns or leases property,
maintains employees, or conducts business
o all of the company's assumed names and copies of registrations
 A Certificate of Good Standing from the Secretary of State of the state where the company is
incorporated

Financial Information

The most recent financial statements

o that have been audited for three years (including the auditor's reports)
o that have not been audited (including comparable statements of the previous year)
 The auditor's letters and replies for the past five years
 A schedule of
o all indebtedness and contingent liabilities
o inventory
o accounts receivable
o accounts payable
 A description of depreciation and amortization methods and changes in accounting methods
over the past five years
 Any analysis of
o projections, capital budgets, and strategic plans
o fixed and variable expenses
o gross margins
 If available
o the company's credit report
o analyst reports
 The company's general ledger
 A description of the company's internal control procedures

Physical Assets

 A schedule of
o fixed assets and their locations
o sales and purchases of major capital equipment during the last three years
 All U.C.C. (Uniform Commercial Code) filings
 All leases of equipment

Real Estate

 A schedule of the company's business locations

 Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals,
variances, or use permits

Intellectual Property

 A schedule of
 o domestic and foreign patents and patent applications
o trademark and trade names
o copyrights
o (copies of) and copies of all consulting agreements, agreements regarding inventions,
licenses, or assignments of intellectual property to or from the company
o (summary of) any claims or threatened claims by or against the company regarding
intellectual property
o
 A description of
o important technical know-how
o methods used to protect trade secrets and know-how
 Any
o "work for hire" agreements
o patent clearance documents

Employees and Employee Benefits

 A list of
o employees, including positions, current salaries, salaries, and bonuses paid during last
three years, and years of service
o (and description of) benefits of all employee health and welfare insurance policies or
self-funded arrangements
 A description of
o all employee problems within the last three years, including alleged wrongful
termination, harassment, and discrimination
o any labor disputes, requests for arbitration, or grievance procedures currently pending
or settled within the last three years
o worker's compensation claim history
o unemployment insurance claims history
 Copies of
o collective bargaining agreements, if any
o all stock option and stock purchase plans and a schedule of grants
o
 All employment, consulting, non-disclosure, non-solicitation, or non-competition agreements
between the company and any of its employees
 Resumes of key employees
 The company's personnel handbook and a schedule of all employee benefits including holiday,
vacation, and sick leave policies
 Summary plan descriptions of qualified and nonqualified retirement plans

Licenses and Permits

 Copies of any governmental licenses, permits, or consents

 Any correspondence or documents relating to any proceedings of any regulatory agency

Environmental Issues
  Environmental audits, if any, for each property leased by the company
 A list
o of hazardous substances used in the company's operations
o of environmental permits and licenses
o identifying and describing any environmental litigation or investigations
o identifying and describing any known superfund exposure
o identifying and describing any contingent environmental liabilities or continuing
indemnification obligations
o
 A description of the company's disposal methods
 Copies of all correspondence, notices, and files related to EPA, state, or local regulatory agencies

Tax matters

 Federal, state, local, and foreign income tax returns for the last three years
 States sales tax returns for the last three years
 Employment tax filings for three years
 Excise tax filings for three years
 Any
o audit and revenue agency reports
o tax settlement documents for the last three years
o tax liens

Material Contracts

 A schedule of all subsidiary, partnership, or joint venture relationships and obligations, with
copies of all related agreements
 Agreements
o loan and bank financing contracts, line of credit, or promissory notes to which the
company is a party
o security, mortgages, indentures, collateral pledges, and similar contracts (including
guaranties to which the company is a party) and any installment sale contracts
o distribution, sales representative, marketing, and supply contracts
o any options and stock purchase contracts involving interests in other companies
o nondisclosure or noncompetition agreements to which the company is a party
o
 Copies of all contracts between the company and any officers, directors, five-percent
shareholders, or affiliates
 Any letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or
divestitures within the last five years
 The company's standard quote, purchase order, invoice, and warranty forms
 All other material contracts

Product or Service Lines

  A list of all existing products or services and products or services that are under development
 Copies of all correspondence and reports related to any regulatory approvals or      disapprovals
of any of the company's products or services  
 A summary of
o all complaints or warranty claims
o results of all tests, evaluations, studies, surveys, and other data regarding existing
products or services and products or services under development

Customer Information

 A schedule of
o the company's twelve largest customers in terms of sales thereto and a description of
sales thereto over a period of two years
o unfilled orders
 Any supply or service agreements
 A description or copy of
o the company's purchasing policies
o the company's credit policy
o the company's major competitors
 A list and explanation for any major customers lost over the last two years
 All surveys and market research reports relevant to the company or its products or services
 The company's current advertising programs, marketing plans, budgets, and printed marketing
materials

Litigation Issues

 A schedule of all pending litigation

 A description of any threatened litigation
 Copies of insurance policies possibly providing coverage as to pending or threatened litigation
 Documents relating to any injunctions, consent decrees, or settlements to which the company is
a party
 A list of unsatisfied judgments

Insurance Coverage

 A schedule of
o (and copies of) the company's general liability, personal and real property, product
liability, errors and omissions, key-man, directors and officers, worker's compensation,
and other insurance
o the company's insurance claims history for past three years

Professionals

 A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged
by the company in the past five years

Articles and Public Relations

  Copies of all advertising and marketing articles relating to the company within the past three
years
 Press releases and clippings
 Analysis reports

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*** End of document ***