Review of

Venture Financing in India by A. Sahay

Submitted by: Neha Sikarwar Roll no. 12 Section B

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About the paper:

The paper starts with Research and Development Cess Act, 1986 and covers the development in the field till 2003 and presents an analysis of venture investments as well as future prospects. The history of Venture capital (VC), its advent in India, Characteristics of V C , Government guidelines on V C, Classification of VC in India, Types of V C and their analysis has been dealt in the paper. The paper explains that when venture capitalists invest in a business they become partowners and typically require a seat on the company's board of directors. They tend to take a minority share in the company and usually do not take day- to -day control. Rather, professional venture capitalists act as mentors and aim to provide support and advice on a range of management and technical issues to assist the company to develop its full potential. Surveys, worldwide, consistently rate the management support as the most important contribution of a venture capital firm. There are many sources of capital, but only a venture capitalist can provide experienced management input gained by helping many other companies successfully conquer the inevitable problems and growing pains. Some of the advantages of VC mentioned in the paper are: Finance -The venture capitalist injects long-term equity finance, which provides a solid capital base for future growth. The venture capitalist may also be capable of providing additional rounds of funding should it be required to finance growth. Business Partner -The venture capitalist is a business partner, sharing the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. Mentoring -The venture capitalist is able to provide strategic, operational and financial advice to the company based on past experience with other companies in similar situations. Alliances -The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners and, if needed, co-investments with other venture capital fi rms when additional rounds of financing are required. Facilitation of Exit -The venture capitalist is experienced in the process of preparing a company for an initial public offering (IPO) and facilitating in trade sales.

The paper also explains the historical context of VC in India. He says that the government of India, relying on the World Banks study of the inspection of the potential of development of Venture Capital in the private sector took a policy initiative and communicated guidelines for Venture Capital Funds in 1988 but these were restrictive; allowing the setting up of Venture Capital Funds by banks or financial institutions only. He also says that Research and Development Cess Act, 1986 introduced in the fiscal budget for the year 1986 -87, is

the precursor of the concept of venture capital as a new financial service in India. This Act imposed 5 per cent cess on all know- how import payments to create a pool of funds for, inter alia, venture capital activities. Technology Development Fund (TDF) was set up in the year 1987 - 88, through the levy of this cess on all technology import payments. Year 1988 marked the establishment of the Technology Development and Information Company of India Ltd. (TDICI) promoted by the ICICI and UTI (Unit Trust of India) and was immediately followed by the Gujurat Venture Finance Ltd. However, there was no significant Venture Capital activity till the mid-1990s; unfriendly policy and regulatory framework being the major reasons. In the year 1996, Security Exchange Board of India introduced the SEBI (Foreign Venture Capital and Private Equity Funds investing in India) Regulations in order to regulate as well as facilitate Foreign Venture Capital and Private Equity Funds investing in India. These guidelines were further amended in April 2000 with the objective of fuelling the growth of venture capital activities in India. According to Sahay, The Venture funds in India can be classified on the basis of: a) b) c) d) e) f) Genesis Investment Philosophy Size of Investment Value Addition domestic & offshore and Private & public funds.

He says that the venture capitalist may investment in an enterprise through equity, quasi equity, conditional loans, and income notes. Investment in the form of equity is the most desirable form of venture financing, as it reflects an approach of sharing risks and rewards and does not put any pressure on the cash flow of the company in the initial teething period. He then goes on to discuss the guidelines issued by the Government of India for Venture Capital. He has also discussed the exit options that are exercised by VC a) b) c) d) e) Initial Public Offer (IPO) Trade Sale Promoter Buy Back Company Buy Back Management Buy Out

In the end he has analyzed the VC investment data for the years 2002-04.

Critic
In the conclusion, the author has mentioned that VCs in India invest in profitable companies rather than start-ups. This might have been the trend in the early 2000s but not now. Now a big portion of the VC funding is going to startups especially e-commerce as seen from the following figure

There has been an exponential growth in this sector as seen from the following figure

The author has not discussed the financial stages and type of assistance provided by VC at each stage. The stages are - Seed funding, Start-up, Growth, Second-Round, Expansion, Exit of venture capitalist Moreover, he has not discussed various issues faced by VC in India like Venture Capital Market in India Getting Overheated - The Venture Capital market in India seems to be getting as hot as the countrys famous summers. However, this potential over-exuberance may lead to some stormy days ahead, based on sobering research compiled by global research and analytics services firm, Evalueserve. Exit route barriers - Due to crash down of market by 51% from January to November 2008. It creates a problem for venture capital firms. Because nobody is trying to come up with IPO and IPO is the exit route door Venture Capital. Taxes on emerging sector - As per new guidelines, Government proposed to limit pass-through status to venture capital funds (VCFs) making investment in nine areas. These nine areas are biotechnology, information technology, nanotechnology, seed research and development, R&D for pharmaceutical sectors, dairy industry, poultry industry and production of bio-fuels. Pass-through status means that the incomes earned by funds are taxable now.

The author says that Venture fund, generally, flows to the entrepreneur when the investor is personally familiar with him. This has seen a downfall in recent times and professionalization of VC funding has taken place. The author has not made any comparison of VC fund put in different sectors till the year 2003 though massive data is available.

Conclusion:
The author has made a decent attempt to understand the Venture Capital, its growth in India and different types of VC in Indian context. He has explained how VC evolved in India and various factors that were responsible for this growth. However, he has taken a bird eye view of the scenario and not presented in-depth detail regarding the same. Future growth prospects have also not been discussed.