By G.

Veeraswamy 2011201068

Recognizing the importance of venture capital, the government introduced major liberalisation of tax treatment for venture capital funds and simplification of procedures. These included the following: SEBI was recognized as the single nodal agency. A new clause (23FB) in Section 10 of Income Tax Act was introduced with effect from 1st March 2000. This clause stated that any income, of a venture capital company or a venture capital fund, from any investments made in venture capital undertaking, would not be included in computing the total income.

Section 115U was also introduced in the Income Tax Act with effect from the assessment year 2001-02 to establish a VC pass through. This means that the VC profits will not be taxed twice. The regulated VC Fund (with SEBI) would be exempted from tax (subject to certain conditions) but the VC investor will have to pay tax. Earlier on, if a VCF wished to avail certain tax benefits, the VCF had to exit from investments made in a venture capital undertaking (VCU) within twelve months of the VCU obtaining a listing. However, this requirement was done away around November 2000. The Finance Bill 2001, proposes to amend section 10 (23 FB) so as to provide that a VCC / VCF will continue to be eligible for exemption under section 10 (23 FB), even if the shares of the VCU, in which the VCC / VCF has made the initial investment, are subsequently listed in a recognised stock exchange in India.

Indian officials are seriously considering whether or not to put incentives in place in the venture capital arena domestically due to an imbalanced trend toward later stage investments. The official Indian governments Department of Industrial Policy and Promotion [DIPP] is concerned that the majority of private capital is flowing to well established companies while true start-ups are languishing.

The DIPPs Secretary R.P. Singh said this recently about small and medium sized enterprises, or SMEs We are trying to incentivise the SMEs, see what benefits can be given to the [foreign] venture capitalists with a focus on SMEs in the manufacturing sector. An official project run by Mr. Singh and the DIPP is the Delhi-Mumbai Industrial Corridor [DMIC], which aims to put focus on start-up investments in the region between the two cities. Worldwide sources are sought, but most of the simmering interest is coming from Singapore and Japan. Both nations have a long history of investing inside India.

Singapore is especially valued for its extensive experience with business dealings inside India, while Japan is similarly valued but with a bit of an eye toward long-term debt commitments and technical know-how which can benefit start-ups. No incentives are in place yet, but the issue was covered at a recent round-table held to discuss the DMIC. As expected, the meeting was mainly organized and attended by investors form Japan and Singapore.

Share option plans. These are given to the directors, officers or employees of a company allowing them, at a future date, to receive or to purchase or subscribe to the securities of the investee company at a predetermined price. Share options in the case of listed companies are governed by specific regulations issued by SEBI Performance bonuses. These are variable salary components which are linked to the fulfilment of certain key performance targets by the investee company.

Supporting Entrepreneurial Talent: Venture Capitalist stepping, encourage and nurture entrepreneurs where the letter has limited resources or in situations where entrepreneur is not than the entrepreneur himself.

Economic Opportunity Credit: Available to qualified businesses that make a qualified investment in a new or expanded business. The credit is also available for qualified small businesses and headquarters relocation. Manufacturing Investment Credit: For manufacturers that make qualified capital investments in an industrial facility. Tax Increment Financing: Allows increases in property tax associated with qualified economic development and public improvement projects to assist with their long-term financing.

If you are unfamiliar with venture capital, it is money that is invested in companies that are just starting up and are in their early stages of development. Because they do not yet have a proven track record of success, they are considered high risk, but also high-potential earners.

The venture capital fund owns equity in the co mpany for which it provides the investment. T he interesting part about it is that the venture c apital fund is usually invested only in compani es that are involved in cutting edge technology like software, information technology or biotec hnology. When initial public offerings or trade sales can bring a bit of a return, venture capital becomes a part of private equity. But not all private equi ty is considered a venture capital.

In return for the investment venture capitalists make in a company, they get substantial control when it comes to making decisions for the company, plus they own a large portion of the company itself.

When companies are just starting to get off the ground, venture capital allows them the funding they need to grow their business. At this point, bank loans or completing a debt offering are not realistic options for a company that has no history in terms of producing income.

Another reason why venture capital is popular with companies is because it creates job growth. Each year, approximately two million businesses are created just in the United States alone, but only a very small percentage (600800 companies) receives venture capital funding. The National Venture Capital Association reports that eleven percent of jobs in the private sector come from companies who get venture capital funding.

Unlike regular lenders where a loan is made an d then paid back, venture capital is made with an understanding that the venture capitalist wil l own stake in the company. Of course, the venture capitalist will only make money if the company proves to be profitable. I f it does succeed, venture capitalists usually en d their relationship with the company when th ey sell their shares to another owner (usually in a three to seven-year period).

Venture capitalists do not just invest in any star t-up company. More often than not, they are lo oking for businesses that are unique and are off ering something new, innovative and in high d emand. They also want to invest in a company that has a good business model and an effective team of managers. As long as there is the potential for h igh growth, the venture capitalist will make the investment.

A real passion for the business from the compa nys founders. A real possibility to get out of the investment b efore the funding cycle ends. A return of no less than forty percent a year.

SEBI (Venture capital funds) Regulations 1996. The venture capital fund regulations by the Securities and Exchange Board of India are a comprehensive set of laws to be followed by the venture capital funds in India. From the registration of venture capital funds to the action to be taken in case of default, the regulation has been divided in VI chapters.

Registration Of Venture Capital Funds A Venture capital fund can either be a fund established as a trust under the Indian trust act or a company as defined under companies act 1956. The regulations provided for the registration of a company or a trust which either was functioning as a venture capital fund before the commencement of this act or proposed to do so after the commencement of this act.

A company or trust (which functioned as a venture capital fund before the commencement of these regulations) shall cease to function as a venture capital fund if it does not apply to SEBI for registration within 3 months from the commencement of the regulations.

Once your company has decided to explore the venture capital funding route, it is very important for your company to follow the appropriate process to raise funds. In India, the typical venture capital fund raising process involve the following steps: 1. Identifying the right investment banker The company should decide to work with an Investment Banking firm(IB) who offers the following skill set:

a. Very good understanding of venture capital business b. Good understanding of companys industry and business c. Ability to tell a good and true story about the company d. Experience of dealing with the VCs e. Good network in the VC community

2. Preparation of Investment Memorandum and Financial Model: Once the company has finalized the investment banking firm, then the company and the investment bank work together to prepare the Investment Memorandum (IM) and a Financial Model (FM). A good IM captures the companys business in such a manner that it addresses most of the investors key questions and helps the investor make his mind about the company. A Financial Model captures various business variables like revenue drivers, cost drivers, capital expenditure etc. in a Microsoft Excel file and projects the company revenues, profitability, cash flows and fund requirements for next 5 to 7 years.

3. Short listing and approaching the venture capital funds: The next step is to short list the investors whom the investment banker will approach on companys behalf. While shortlisting the investors, it should be kept in mind that the short listed investors should be comfortable with the companys industry, stage of business (seed stage, early stage, growth stage, pre-IPO etc.) and the companys fund requirements.

4. Meeting the Venture Capital Funds: The investment banker approaches the venture capital funds and starts making presentation to them. The purpose of these presentations to get the first meeting between the promoters of the company and the investors. In the follow-up meetings, the company tries to convince the investors about the investment. Once the investors are convinced then they issue a Term Sheet.

5. Signing the Term Sheet: A Term Sheet (TS), as the name implies, covers the key terms of the investment. Two of the most important terms in the TS are the valuation of the company (price) and the transaction structure. There are a number of other important terms related to investors exit, board memberships etc, which are also covered in the Term Sheet. Once there is an agreement on all the terms, a non-binding Term Sheet is signed between the company and the investors.

6. Due Diligence by the Investors: After the Term Sheet, investors conduct a due diligence process on the company. Generally investors due diligence process focuses on the following aspects of the company and its expansion plans: a. Financial b. Business c. Technological

7. Signing the shareholders agreements and funds transfer Once the investors are satisfied with the outcome of the due diligence process, they issue a Shareholders Agreement (SHA). SHA covers all the terms of the Term Sheet and, in addition, it has a number of other important terms and conditions regarding dispute resolution, non-compete, lockin, share transfer process etc. Generally lawyers from the companys side and the investors side also get involved in this process. Once there is an agreement, all the shareholders of the company and the investors sign the SHA and investor transfers funds to the company.

Venture Capital Financing in India provides a balanced, two-part presentation of the practice of venture capital financing in India in the light of global experience. The first part provides detailed coverage of the practices and procedures adopted by the venture capital industry in India as well as its operational performance. Among the aspects discussed are negotiation and deal-structuring techniques, regulatory and legal framework, methods of investment monitoring, portfolio evaluation, exit strategies, and opportunities for overseas investors.

PITCHINDIA was founded in January 2007 when it was realised that there was a critical gap in the marketplace for entrepreneurs in India. India has talent and potential which has been restrained due to scarce access to capital. When it was understood that hundreds of small companies failed to flourish due to lack of funding at the start-up stage, it was necessary to find a solution and this is how PITCHINDIA was created.

PITCHINDIA is an online portal connecting entrepreneurs in India to global investors. It acts as a platform for budding entrepreneurs and start-up businesses to pitch their business ideas to successful business people (most of whom are millionaires and experts in their field) in the hope of gaining financial investment and invaluable mentoring to transform their ideas into reality.

It has been a well known fact that India's economy is booming with thousands of graduates being exploited by businesses overseas. By encouraging entrepreneurship, India's economy will grow faster and pioneer some of the most advanced technology. It can only be a win-win situation for both Investors and Entrepreneurs.

A Venture capital is another method of financing in the form of equity participation. A venture capitalist finances a project based on the potentialities of a new innovative project. It is a contrast based on conventional security based financing. Much thrust is given to new ideas or technological innovations. Finance is being provided not only for start up but also for development capital by the financial intermediary.

Venture capital (VC) is funding invested, or available for investment, in an enterprise that offers the probability of profit along with the possibility of loss. Indeed, venture capital was once also known as risk capital, but that term has fallen out of usage, probably because investors don't like to see the words "risk" and "capital" in close conjunction.

In other Words Venture Capital is Financing for new businesses, or money provided by investors to start up firms and small businesses with perceived, long-term growth potential. This is a very important source of funding for start ups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.