HC 4.

3: FINANCIAL
SERVICES
M.Com Fourth Semester

MODULE – 3
VENTURE CAPITAL
 INTRODUCTION
• Origin:
• Venture capital as new phenomenon originated in the US and developed across the
world since second half of the seventies.
• American Research and Development Corporation founded by Gen.Doriot after
second world war heralded the institutionalization of venture capital in the USA.
• Developed in many other countries in Europe, North America, and Asia.
• Business Administration Act passed in 1958 in US gave big boost Venture cpital.
• UK stands in the second place after US in terms of investment and support to
entrepreneurial activities.
• The success in these countries prompted other countries to design and implement
venture capital to new ventures.
 MEANING AND DEFINITION
• Venture capital refers to commitment of capital as shareholding , for
the formulation and setting up of small firms specializing in new ideas
or new technologies.
• It is not merely an injection of funds into a new firm. It is a
simultaneous input of skill needed to set up the firm,design the
marketing strategy and organize and manage it.
• It is an association with successive stages of firm’s development with
distinctive types of financing appropriate to each stage of
developmet.
• Venture capital is long term risk capital to finance high technology
projects which involves risk but has strong potential for growth.
• Venture capitalists pool their resources including managerial abilities
to assist new entrepreneurs in the early stage of the project.
• Once the projects reaches the stage of profitability, they sell their
equity holding at high premium and exit from the project.
• Definition: A financing institution which joins an entrepreneur as a
co-promoter in a project and shares the risks and rewards of the
enterprise.
 FEATURES OF VENTURE CAPITAL
• Venture capital is usually in the form of equity participation. It may also invest through debt.
• Investment is made only in high risk but high growth potential projects.
• Venture capital is available only for commercialization of new ideas or new technologies.
• Venture capitalist joins the entrepreneur as a co-promoter in projects and share risk and
rewards.
• There is continuous involvement in business after making investment.
• Once the venture reaches the full potential, the venture capitalist disinvests holdings either to
the promoter or in the market.
• The objective of venture capitalist is not profit but capital appreciation.
• Venture capital is not just injection of funds but also an input needed to set up the firm ,
marketing strategy , and organize and manage it.
• Investment is usually made in small and medium scale enterprises.
 SCOPE OF VENTURE CAPITAL
• Venture capital may take various forms of initiatives at different stages of the project, viz.
• Development of an idea stage: In the initial stage VCC(venture capital company) provide seed
capital for translating an idea into business proposition.
• Implementation stage: When the firm set to start the production of the product or offer service
, start up finance is provided by the VCC.
• First and second stage funding is used to boost the activity and the growth.
• Fledging stage : When the project made headway in its activity but facing some teething
problems in such stage the VCC provides additional finance to support marketing and
stabalising in the market.
• Establishment stage: When the firm establishes in the market and expected to expand and
faces fund paucity the VCC provides the fund at this to enable the firm to attain stability.
• At the end of the establishment stage and listed on stock exchange the VCC divest its holding
through routes.
 THE ACTIVITIES OF THE VENTURE
CAPITAL FUNDS
• Provide seed capital for industries and support a concept or Idea.
• Provide additional capital to new ventures at various stages of growth.
• Bridge finance/project finance.
• Equity finance to take over other companies.
• Capital to new entrepreneurs in foreign operations.
• Capital to mature firms for expansion, diversification and restructuring.
• Research and development financing for product development.
• Start up capital for initial production and marketing.
• Development financing for facilitating public issues.
• Acquisition or buyout financing for acquiring other companies.
• Turnaround financing for turning around a sick unit.
 ADVANTAGES OF VENTURE CAPITAL FUNDS
• Advantages to the investing public:
• With the projects being supported by the VCC with relative expertise and the
experience the other investors interest is also insulated.
• Investors have no means to vouch for the reasonableness of the claims
made by the promoters about the profitability of the business. The presence
of the VCC with necessary skills will take care about the claims.
• The VCC in the management of the firm will ensure that the affairs the
company prudently managed
• Advantages to Promoters:
• The entrepreneur face difficulty to convince the underwriters, brokers, intermediaries and
investors for the other source finance to fund the project but with convincing of VCC can
ensure the success of the project.
• Venture Capital assistance would eliminate the difficulties associated with public issues and
enabling the entrepreneur to concentrate on the primary activities of the enterprise.
• The venture capital assistance will enable the firm to save the expenditure like cost of public
issues which is normally in the range of 10 to 15 percent of the issue value.
• Save the other expenditure like, cost of share maintenance registry, listing fee, cost of printing
and posting of annual reports etc.
• Venture capitalists act as business partners.
• Venture capitalists provide strategic, operational, tactical, financial advise based on their past
experience.
• General:
• A developed venture capital institutional setup reduces the time lag between a technological
innovation and its commercial exploitation.
• It helps in developing new processes and products in conducive atmosphere free from
complacency and uses full potential of new ideas.
• Venture Capitalists acts as cushion to support business borrowings.
• The business supported by VCC once take-off well, will instill confidence in other investors
leading to increased productivity and profitability.
• Well developed VCC network induces the entry of large number of new technocrats.
• Helps in stabilizing industries and creating trained technocrats capable of building and
managing industries.
• Stimulates faster and healthy industrial development.
• Act as an intermediary between investors looking for high returns and ventures in need of
capital for their startups.
• It paves the way for private sector to share responsibility with public sector.
 GUIDELINES GOVERNING VENTURE
CAPITAL COMPANIES
• Following are the guidelines issued by the Government of India
governing venture capital companies.
• The public sector financial institutions, State Bank of India, scheduled
banks, foreign banks and their subsidiaries are eligible for setting up of
Venture Capital Funds with a minimum capital of Rs 10 crore and a debt
equity ratio of 1:1.5.
• Raising of funds from the Public with 40% contribution from promoters.
• Foreign equity upto 25% subject to certain conditions.
• NRI can invest upto 74% on repatriable basis and 25-40%on non
repatriable basis.
• The venture capital funds can setup joint ventures with stipulated agencies and
non institutional promoters with equity shareholding not more than 20% and
should not be single largest holder.
• The assistance to enterprises with a total investment of not more than Rs 10
crore.
• The VCC/VCF should be managed by professionals independent of parent
organisations.
• The VCC/VCF will not allowed to operate in activities like trading, broking,
money market operations, bills discounting, intercorporate lending.
• Allowed to invest in leasing to the extent of 15% of the total funds developed.
• Listing can be according to the prescribed norms and underwriting of issues at
the promoters discretion .
• A person holding a position or full time chairperson/president, chief executive,
managing director or executive director/whole time director in a company will
not be allowed to hold the same position simultaneously in the VCC/VCF
• The venture capital assistance should be extended to:
• The enterprise having investment up to Rs 10 crore.
• The technology involved should be new and untried or incorporate significant improvement
over the existing technologies in India.
• The promoters should be new, professionally or technically qualified, with inadequate
resources.
• Established in the company Form by employing professionally qualified person for
maintenance of accounts.

• The share pricing at the time disinvestment by public issue or general sale offer may be done
subject to being calculated objectively and the basis be disclosed adequately to the public.
Venture Capital Initiatives in India
• Indian tradition of venture capital history goes back more than 150 years, wherein managing agency houses
acted as venture capitalists.
• Tata Iron and Steels and Empress mills were to raise the capital from the investing public for supporting
ventures.
• In 1937, Tatas initiated establishment of “ Investment Corporation of India” as managing agency house to
act as a venture capitalists.
• Successfully promoted enterprises such as CEAT tyres, Associated Bearings, National Rayons.
• 1973 R S Bhat Committee recommended the formation of venture capital fund with a corpus of Rs 100 crore.
• The seventh five year plan emphasized the need for developing a system of venture capital funding.
• Research and Development Cess Act enacted in 1986 levying a 5% cess on payments made for purchasing of
technology from abroad and same has used for creating venture capital fund.
• United Nations Development Programme in 1987 examined the possibility of developing venture capital in
private sector.
• Comptroller of Capital Issues issued venture capital guidelines in 1988.
Methods of Venture Capital Financing in
India
• Equity Participation: VCC participate in equity through direct purchase of shares
restricting the limit to 49% and retain the holding till the firms make profit.
• Conventional Loan: Financial assistance provided with lower fixed rate of interest
until the firms makes profit after that the rate of interest will be normal or higher.
• Conditional Loan: Under this interest free loan is provided during the implementation
period of the project but royalty is charged on sales, loan is redeemed as per the
predetermined schedule.
• Income Notes: It is a combination of conventional and conditional loans. Both interest
and royalty are payable at much lower rate than in case of conditional loans.
• Venture Capital firms were incorporated in India by all India Financial Institutions like
IDBI, ICICI, IFCI, State level financial institutions, public sector banks or promoted by
foreign banks/ private financial institutions.