sonali project
DESCRIPTION
slonTRANSCRIPT
APROJECT REPORT
ON
“VENTURE CAPITAL IN INDIA”
A detailed study done in
Finance
“Submitted in partial fulfillment of the requirement for the award of degree
of Bachelor of Business Administration (BBA)
under Bharati Vidyapeeth Deemed University, Pune.”
Submitted by
Miss. SONALI SANJAY MOHITE.
BBA 3rd YEAR (SEM-V)
ROLL NO-34
BATCH: 2012-2015
Under the guidance of
PROF. DR.SHARUKH TARA
Bharati Vidyapeeth’s
Institute of Management & Entrepreneurship Development
Navi Mumbai
(i)
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ACKNOWLEDGEMENT
It is indeed a great pleasure and proud to present this report. It was learning and enriching
experience in doing this project in venture capital in India.
The completion of this project has been possible due to help and guidance received at
various stages of the project. I am grateful to all the people involved and truly appreciate
their untiring efforts.
I would also like to thank Prof. Dr. Mr. Sharukh Tara for his kind patience and
willingness to guide me at every stage of this project, without his help the project would
not have been possible.
His guidance had helped me a lot in gaining confidence required for successful
completion of this project.
I would like to thank my institute “Bharati Vidyapeeth’s Institute of Management and
Entrepreneurship Development” which has groomed me in all possible ways for
making this project worth studying.
Last but not the least; I extend my gratitude to my family members for their most
precious blessing and encouragement which has always been my strength and confidence
in completing this project.
Signature of the student
(Sonali Sanjay Mohite.)
(ii)
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PLEASE PASTE HERE THE CERTIFICATE FROM THE COMPANY
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(iii)
PLEASE PASTE HERE THE CERTIFICATE FROM THE INSTITUTE
(iv)
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EXECUTIVE SUMMARY
This report, which contains in depth study of Venture capital Industry in India, is made
with an intension to get through all the aspects relate to the topic and to become able to
make some suggestion at the industry.
Future of any economy depends on the success of the new technologies and industries
and services supporting these technologies. In India, where human, particularly technical
and entrepreneurial are abundant and there is shortfall of capital, venture capital has a
greater significance. It is observed the new companies, particularly the smaller ones,
create more jobs. Venture capital helps employment generation particularly for educated
and skilled workers.
The financing of domestically developed technologies in general and those developed by
the new generation of entrepreneur has always been a problem in both developed and
developing countries. In India, risk finance has always been in short supply.
India is on the threshold of a high technology revolution and new entrepreneurial growth.
Slow growth of significant institutional set up to provide much needed venture capital has
hampered the growth of the economy. A radial change in the existing framework of
venture capital financing in India is a must to achieve high economic growth.
Venture Capital is the capital which funds the early seed or initial stages of potentially
high risk business ideas. The investment is usually in the form of shares (stock) or an
instrument, which can be converted into shares at a future date. Venture capitalists
(VC’s) expect high annual returns (generally varying between 25% and 75%) on their
investment.
(v)
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TABLE OF CONTENTS<font size 14, underline, center alignment>
PARTICULARS <Times New Roman,14,> PAGE NO: Acknowledgement (i)
Certificates (ii)
Executive Summary (iv)
Table of Contents (v)
Chapter 1: Introduction of the Project 8
1.1: Concept & Significance of the Study 9
1.2: Objective of the Study 9
1.3: Scope and Limitations 10
1.4: Literature Review 10
Chapter 2: Introduction to Venture Capital with reference to India 11
2.1: Venture Capital – An Overview 12
2.2: Evolution of Venture Capital in India 14
2.3: Venture Capital Operation in India 15
2.4: Current Trends in India 16
2.5: Issue and Challenges 17
Chapter 3: Research Methodology 18
3.1: Meaning of Research 19
3.2: Research Design 19
3.3: Data Collection 19
3.4: Research Findings 20
3.5: Current Analysis & Investigations 22
Chapter 4: Methods of Financing 23
4.1: Forms of Financing 24
4.2: Stages in Venture Capital Financing 26
Chapter 5: Venture Capital Investment Process 28
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5.1:Deal Organization 29
5.2: Preliminary Screening 30
5.3: Evaluation or Due Diligence 30
5.4: Deal Structuring 31
5.5: Post investment activity & exist 31
5.6: factors influencing venture capitalists choice of investment 32
Chapter 6: Legal Framework 33
6.1: SEBI Regulations 34
6.2: Eligibility Criteria 36
6.3: Other Regulations 37
Chapter 7: Profile of the Company 48
Chapter 8: Conclusion 56
Bibliography vi
ssss
Chapter1
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Introduction of the Subject
1.1:- Introduction to the project
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This project has been a great learning experience for researcher; at the time it gave
enough scope to implement analytical ability. The theme of the project is to know about
venture capital in India. The study include evolution of entire process over the years. It
throws light on the operations in India. It speaks about various funding process and has
made comparisons with conventional method of financing. It goes on to explain in detail
the process of venture capital investment in particular venture.
The concept of venture capital is not new. In the modern time Angel investors, public venture capital, and other funding sources have had a significant impact on the U.S. economy during the1890s.
1.2:- Objective of the study
The main objective of the study, undertaken by the researcher for this project report can
be explained as under:
To understand the mechanism of Venture Capital industry.
To study the various stages of Venture Capital investment process.
To study the procedure for accessing Venture Capital and regulatory system in
India.
To analyze the future of Venture Capital industry in India.
1.3:- Scope of the study
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By its very nature the scope of the project was very large. The project report will mainly
be helpful for the following:
Student who have no knowledge of the Venture Capital Industry.
People who want to make careers in Venture Capital Industry.
Individuals who wants to enter into business of Venture capital.
1.4 :- Research Methodology
The data collected for this project has been entirely secondary data. The data has been
collected through:
Books
Press Releases of RBI, SEBI
Websites
1.5:- Limitations of the study
The various limitations encountered while doing the study of the project are listed below :
The scope of the topic is very large so it was not possible to make an in-depth
study.
The collected is entirely secondary in nature.
The limited practical exposure of the researcher and limited time span of four to
six weeks for vary vast matter of this nature.
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Chapter2
Introduction to Venture Capital
With Reference to India
2.1:- VENTURE CAPITAL -AN OVERVIEW
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A form of equity financing designed specially for funding high risk and high reward
projects is known as ‘Venture Capital’.
Venture Capital derives its value from brand equity, professional image, constructive
criticism, domain knowledge, industry contacts, etc as they bring to table the benefits at a
significantly lower management agency cost.
Long – term investment, generally in high – risk industrial projects with high reward
possibilities, is called ‘venture capital’. The investment may take place at any stage of
implementation of the project, between start-up and commencement of commercial
production. Venture Capital is also invested in financing the new business and
professional activities that carry a higher degree of success and failure as well. Venture
Capital implies a high level of risk implicit in the investment of funds.
DEFINITION:-
1. According to Dr. Neil Cross, a senior Executive with 3i, one of the world’s
largest and oldest venture capital companies, and a former Chairman of the
European Venture Capital Association, “Venture Capital Investment is defined as
the provision of risk bearing capital, usually in the form of a participation in
equity, to companies with high growth potential. In addition, the venture
company provides some value added in the form of management advice and
contribution to overall strategy. The relatively high risks for the venture capitalist
are compensated by the possibility of high return, usually through substantial
capital gains in the medium-term.’’
2. According to the Bank of England Quarterly Bulletin of 1984 “Venture capital
investment is defined as an activity by which investors support entrepreneurial
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talent with finance and business skills to exploit market opportunities and thus
obtain long-term capital gains.”
Origin :-
The concept of venture capital originated in USA during 19th. And early 20th. Century.
European investors along with American natives were involved in backing construction
and other new industries viz. Rail, Road, Steel, Oil, Gas and Glass.
VC Specialization:-
1. The state of development of Investee Company decided the financing stage as
perceived by the venture capitalist.
2. The funds investments size range i.e. minimum/maximum equity percentages also
vary from fund to fund.
3. VC funds includes many financing instruments i.e. Shares, Preferred Shares,
deferred shares, convertible loan stock.
4. Venture capitalist specializes in specific technology and their portfolio includes a
significant proportion of business in the areas of advanced technology.
5. Time scale to realization i.e. early stage financing are inevitably taking a medium
to Long-term (5-7 years) and later stage financing will have a 3-5 years time
scale. Geographical Limitations i.e. funds say also specialize regionally.
2.2:- Evolution of Venture Capital in India:
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Traditionally, the role of venture capital was an extension of the developmental financial
institutions like IDBI, ICICI, SIDBI and State Finance Corporations (SFCs). The first
origins of modern Venture Capital in India can be traced to the setting up of a
Technology Development Fund (TDF) in the year 1987-88. TDF was meant to provide
financial assistance – to innovative and high-risk technological programs through the
Industrial Development Bank of India. This measure was followed up in November 1988,
by the issue of guidelines by the (then) Controller of Capital Issues (CCI). These
stipulated the framework for the establishment and operation of funds/companies that
could avail of the fiscal benefits extended to them.
However, it was realized that the concept of venture capital funding needed to be
institutionalized and regulated. This funding requires different skills in assessing the
proposal and monitoring the progress of the fledging enterprise. In 1996, the Securities
and Exchange Board of India (SEBI) came out with guidelines for venture capital funds
has to adhere to, in order to carry out activities in India. There are a number of funds,
which are currently operational in India and involved in funding start-up ventures.
The Indian Venture Capital Association (IVCA) is the nodal center for all venture
activity in the country. The association was set up in 1992 and over the last few years,
has built up an impressive database. According to the IVCA, the pool of funds available
for investment to its 20 members in 1997 was Rs 25.6 bn. Out of this, Rs10 bn. had been
invested in 691 projects.
2.3:- Venture Capital Operations in India :-
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The venture capital industry has grown in a narrow and restricted environment where the
growth and development has been limited due to the conservative government policy.
Although its presence on the platform of industrial finance has created new hopes for
industrial development and growth.
Also why the venture capital industry has not grown can be argued with reference to the
following reasons:
Most of the venture capitalist funds are managed by the financial institutions and
banks where the venture capital fund is distinct from the management company. It is
the latter that screens, makes and manages individual investments. Except for IDBI
and SIDBI who have their own equity funds earmarked for venture capital financing
and as such are an exception.
Venture capital financing is only on the strengths of the business plan of the venture
and the chances of the success depends on various qualified considerations like the
fund managers skill and experience in understanding the business plan, the skills of
the entrepreneurs promoting the venture etc. Thus unlike a traditional pattern of
lending followed by banks and financial institutions where the stress for financing is
on the cash flows or collaterals, the venture capitalists don’t have any collateral or
existing assets.
The long term nature of venture capital investments carries a high and differentiated
risk in each stage of enterprise. Investments focus on high returns in the forms of long
term capital gains, therefore only serious business proposals with fair amount of
probability of success are selected by fund managers, also the procedures for making
an investment decisions followed by the fund managers are still a guarded secret, but
generally private placements are made on high growth and high return basis.
2.4:- Current Trends in India:-
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Growth of VC in India:-
Venture capitals in India invest in the companies that fit into their criteria of investment stage,
potential yield and exit period. The actual choice varied with the venture capitalists depending
upon their investment strategies. The numbers of venture capital funds which are active in India
are growing at a rapid rate. Also the average investments which are made by capitalists are
growing.
VC investment in India jumped 120% to $238 million in 2nd Quarter 08, driven by various deals
Bangalore, Mumbai and New Delhi (21 August 2008) — Venture capitalists invested some
$928 million in 80 deals for entrepreneurial companies in India during 2007, according to the
Quarterly India Venture Capital Report. This was a whopping 166% increase over the $349
million invested in 36 deals in 2006 and easily the highest total on record for the region.
The report found nearly 48% of all venture financing deals in India were for Information
Technology (IT) companies. The most popular recipients of venture capital in the IT industry
were companies in the Web-heavy ―information services‖ sector, which accounted for 22 deals
and nearly $141 million in investment. Among the deals in this area was the $10 million second
round for Bangalore-based Four Interactive, an online provider of local information on food,
events, lifestyle, shopping and more.
According to the data, the overall business/consumer/retail industry saw 30 deals completed in
2007 and more than $346 million invested, a 92% jump over the $180 million invested in 16
deals in the industry in 2006. As said, the business/consumer service area accounted for the bulk
of the interest in this industry, with 22 deals and $254 million invested.
India's health care industry, while still in its infancy, also saw increased investor interest in 2007
with seven completed deals and nearly $100 million invested, more than double the $41 million
invested in the prior year. 79% of all deals in India were for seed and first rounds and a lot of
these companies will continue raising venture capital as they progress toward profitability and
liquidity. And because the majority of investment is going to early-stage companies, we aren't
seeing ballooning deal sizes like those in the U.S and Europe where investors are focused more
on later-stage companies.‖
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In fact, the median size of a venture capital round for companies India was $9 million in 2007,
up slightly from $8.7 million in 2006 but well below the $18.8 million median seen in 2005. Of
all the companies in India that received venture funding in 2007, nearly 73% were already
generating revenues or profitable.
2.5:-Issues and Challenges :-
Indian VC yet to be established as a sustainable asset class among institutional
investors. Moreover a limited amount of true ―risk-capital‖ impacts
entrepreneurial activity. Exit challenges exist mainly due to shallow capital
markets and dull M&A environment for small companies. Most importantly,
India is yet to create a brand-name for IP-led companies, like Israel has
successfully done.
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Chapter 3:-
Research Methodology
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3.1:-MEANING OF RESEARCH:
Research in common parlance refers to a search for knowledge. One can also
define research as a scientific and systematic search for pertinent information on a
specific topic. In fact, research is an art of scientific investigation. The Advanced
Learner’s Dictionary of Current English lays down the meaning of research as “a
careful investigation or inquiry especially through search new facts in any branch
of knowledge.”
3.2:- Research Design: “Research design is the plan structure & strategy of investigation so as to obtain answer to research question and to control variance”.It’s found that research design is purely and simply the framework for a study that Research design is broadly classified into
Exploratory research design Descriptive research design Casual research design
This research is exploratory research. The major purpose of this research is description of state of affair as it exists at present.
3.3:-Data Collection:
This is secondary data which has been collected. Secondary data is the data collected by some other person and complied for different purpose which are used in research for this study. It includes
Internet Magazine Newspaper etc.
3.4:- Research Findings:-
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1:-No. of venture Firms in India
Here the venture capital industry is highly fragmented no one is market leader. The industry is young and crowded with aspiring contenders. As in the year 2006 and 2007 the stock market of India was booming like anything thus more venture capital investors and players were attracted towards industry, which can be seen from the chart given below. But in the year 2008 because of sub-prime crisis the stock market has crashed and it affect adversely the venture capital industry because the IPO is the main exit route for the venture capital industry and because of current crash no one is coming with IPO. As there was high growth of stock market in the year 2006 and 2007 most of the VCs have entered in the market so now in crashed market every one is eager to sell their services in small market of buyers. So the competition is very high at current stage.
www.nasscom.org, strategic review 2008 published by (National Association of Software and Service Companies) Strategic review 2008
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Findings from the above graph :Ratio of existing venture capital fund has reduced .No. of active funds increades in the year 2012 .The graph went tremendously down in the year 2009 due to inflation.And by every year no. of new venture capital have been emerging.
3.5:- current Analysis & Investigations:-
Analysis Growth of Venture Capital finance in India and forecasting Venture Capital Investments in near future:-
To understand the scenario of Venture Capital Investment in India, firstly, we looked at the Total Investment details of SEBI Registered Venture Capital Funds (VCF) & Foreign Venture Capital Investors (FVCI) as of DEC. 31 of each year starting 2007:-
Year Total VC Investment
(in Rs. Crores)
2007 28,280
2008 33,939
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2009 42,059
2010 47,859
2011 56,868
2012 55,542
2013 69,520
Chapter 4:
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METHODS OF FINANCING
4.1:- The following forms of financing are used by venture capitalists in
India:
1. EQUITY:
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The venture capitalist provides capital in the form of equity for the project and acts as co-
owner with the promoter, sharing profits and losses in the venture. The equity
contribution is less than the promoter’s contribution (generally not exceeding 49% of the
total capital) so that the promoter can retain effective control and majority ownership of
the enterprise.
2.CONVENTIONAL LOANS:
Some venture capitalists provide conventional loans to promoters for a longer period of
10-12 years. The loans are offered at concessional rates of 6% per annum during the
initial development period, and then raised to as much as 14% once the project is
demonstrated to be commercially viable and successful. In some cases the venture fund
may decide to charge a royalty after the project is commercialized.
3.CONDITIONAL LOANS:
A conditional loan is not repayable like a conventional loan and does not carry interest.
The repayment of a conditional loan is linked to the sales or turnover of the company in
the form of royalty. The rate of royalty and the schedule payments are decided keeping in
view the gestation period and the repayment capacity of the project. In cases of projects
which the promoter anticipates a high turnover, he readily opts to pay a high rate of
interest (as high as 20% per annum) once the project becomes viable, instead of paying
royalty on sales.
4.INCOME NOTES:It is a hybrid security combining the features of both conventional loans and conditional
loans. The promoter has to pay both interest and royalty on sales, but at substantially low
rates. IDBI VC fund provides funding equal to 80 – 87.5% of a project’s cost for
commercial application of indigenous technology or adapting imported technology to
wider domestic application. Funds are made available in the form of unsecured loans at a
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lower rate of interest during development phase and at a higher rate after development
stage. In addition to interest charges, royalty on sales could also be charge.
5.OTHER INSTRUMENTS:A few venture capitalists, particularly in the private sector, have started introducing
innovative financial securities. The ‘Participating debenture’ introduced by Twentieth
Century Finance Corporation is an example. Such securities carries charges spread over
three phases. In the start-up phase, before the venture attains operations on a minimum
level, no interest is charged. After this, a low rate of interest is charged up to a
particular level of operation. Once the venture starts operating on full commercial basis,
a high rate of interest is required to be paid. A variation could be in terms of paying a
certain share of the post-tax profits instead of royalty.
4.2:-STAGES IN VENTURE CAPITAL FIANACING:
Historically VC evolved as a method of early-stage financing, but the notion of VC
recognizes different stages of financing. It also includes development, expansion ad
buyouts financing for those enterprises that are unable to raise funds from the normal
financing channels. VC financing also provides turnaround finances to revitalize and
revive sick enterprises
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The different stages of venture financing is as shown below:-
Sr.
No.
Stage Description
1. Early Financing
Stage
Seed financing for supporting a concept or idea
R&D financing for product development
Start-up capital for initial production and marketing
First stage financing for full-scale production and
marketing
2. Expansion
Financing
Second stage financing for working capital and initial
expansion
Development financing for facilitation public issues
Bridge financing for facilitating public issues
3. Acquisition/Buyout
Financing
Acquisition financing for acquiring another firm for further
growth
Management buyout financing for enabling operating group
to acquire or part of its business
Turnaround financing for turning around a sick unit
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Chapter 5:-
Venture Capital Investment Process
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5.VC Investment Process:- Venture Capital Investment Process is different from normal project financing. In
order to understand the investment process a review of the available literature
on venture capital financing is carried out. Tyebjee and Bruno in 1984 gave a
model of venture capital investment activity which with some variations is
commonly used presently. As per Tyebjee and Bruno venture capital activity is a
five step Process as follows:
1. Deal Organization
2. Screening
3. Evaluation or Due Diligence
4. Deal Structuring
5. Post Investment Activity and Exit
5.1:-Deal Organization
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It means sourcing or locating venture capital proposals. Deals can originate from
different sources. Most common is their being referred to venture capital funds
by their parent or sister organizations, industry associations, consultants and
past clients.
5.2.:-Preliminary Screening
Instead of evaluating all the proposals received by the venture capitalist, which is
a time consuming and costly preposition, the deals are first put through a
screening process. Only the proposals passing the screening test are considered
for evaluation. This saves the time and cost of the venture capitalist. Each
venture capitalist has its own broad criteria for such screening that limit the
projects to selected areas in terms of industry sector, technology, product, stage
of financing, size of venture / investment, regional preferences etc.
5.3. :-Evaluation or due Diligence
The proposals that have successfully passed through screening process are subjected
to detailed evaluation. This process is called Due Diligence. Most of the ventures
coming to venture capitalist are new ventures being setup by first time promoters,
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neither the ventures have any track record nor the entrepreneurs any operating
experience. Hence the normal evaluation criteria used for project financing by
financial institutions are not of much use. The venture capitalist, to a large extent
depends upon his subjective judgment. The exact nature of evaluation differs with the
stage of financing. Most of the times venture capitalists evaluate the promoters for his
managerial abilities and entrepreneurial qualities. Where possible, the product
characteristics and market potential are also evaluated. Evaluation is based upon the
business plan provided by the entrepreneurs.
5.4:-.Deal structuring
When the proposal passes through due diligence and is accepted by the venture
capitalist. The exact terms of the investment are negotiated between the venture
capitalist and investee company. The process is called Deal Structuring. The term
includes the amount, form and price of the investment.
5.5.:-Post investment activity and exit
After the terms of assistance are finalized, venture capitalist becomes the partner and
collaborator and is involved in development and growth of the investee company.
Different venture capitalists have different ways of monitoring the progress of the
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investee company. The venture capitalists, as and when required, give directives for
proper financial and marketing management and in case of managerial crises, venture
capitalists go to the extent of changing the management team. Venture capitalists aim at
long term capital gain. They plan to en-cash their investments within 5 to 8 years
depending upon their policy, the state of economy and stage of financing.
5.6:- Factors influencing Venture Capitalists choice of investment
Track record of promoters and the management team
Nature of the business and the promoters experience in the proposed or related
business
Business should meet the investment objectives in terms of risk and return
Marketing strategy
Technology and technology collaboration
A detailed and well organized business plan is the only way to gain a venture
capitalist attention and obtain funding. The detailed proposal must cover the
following issues:-
Business and its future
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Management
Financing
Risk factors
Analysis of operations and projections
Product specifications
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Chapter 6:-
Legal Framework
LEGAL FRAMEWORK
The Legal Framework within which venture capital companies operate comprises the
erstwhile government guidelines 1988, repealed in 1995 to give way to SEBI regulations
which have since been enforced.
At present the regulatory framework comprises the following: Central government
guidelines (revoked since 1995), SEBI regulations, Self-regulatory body of venture
capital companies and funds better known as Indian Venture Capital Association (IVCA).
However to regulate business transactions of VCs the provisions of Indian Contract Act
1872, Companies Act 1956, SEBI Act 1992, Securities Contract Act 1956 etc. are
applicable just like any other Investment company.
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6.1:SEBI REGULATIONS:
The SEBI is empowered to register and regulate the working of venture capital funds.
This powers where given very recently in 1995 under the Securities Law Amendment
Act. Since then SEBI has formulated regulations known as Securities and Exchange
Board of India (VENTURE CAPITAL FUNDS) (SECOND AMENDMENT)
REGULATIONS, 2006
A venture capital fund means a fund established in the form of a trust or a company
including a body corporate and registered under these regulations which-
i. has a dedicated pool of capital,
ii. raised in a manner specified in the regulations, and
iii. Invests in venture capital undertaking in accordance with the regulations.
iv.
Venture Capital Undertaking Means a Domestic Company:i. Whose shares are not listed on a recognized stock exchange in India;
ii. Which is engaged in the business for providing services, production or
manufacture of article or things or does not include such activities or sectors
which are specified in the negative list by the Board with the approval of the
central Government by notification in the Official Gazette in this behalf.
Negative List1. Real Estate
2. Non-banking financial services
3. Gold Financing
4. Activities not permitted under industrial policy of Government of
India.
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5. Any other activity which may be specified by the Board in
consultation with Government of India from time to time.
Application for Grant of Certificate:Any company or trust or body corporate proposing to carry on any activity as a venture
capital fund must apply to SEBI for grant of a certificate of carrying out venture capital
activity in India. An application for grant of certificate must be made in Form A and must
be accompanied by a non-refundable application fee of Rs 25,000/- payable by bank draft
in favor of the Securities and Exchange Board of India at Mumbai. Registration fee for
grant of certificate is Rs 5,00,000.
6.2:Eligibility Criteria:-
For the purpose of grant of certificate by SEBI, the following conditions must be
satisfied:-
A. If the application is made by a company
1. The main object of the company as per its Memorandum of Association must be the
carrying on of the activity of venture capital fund.
2. It is prohibited by its Memorandum and Articles of Association from making an
invitation to the public subscribe to its securities.
3. None of its directors or its principal officer or employee is involved in any litigation
concerned with the securities market which may have an adverse bearing on the
business of the applicant. The directors or the principal officer or employee must not
have been at any time convicted for an offense involving moral turpitude or any
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economic offense and is a fit and proper person to act as director or principal officer
or employee of the company.
B. If the application is made by a trust:
1. The instrument of trust (Trust Deed) is in the form of a deed and has been
duly registered under the provisions of the Indian Registration Act, 1908.
2. The main object of the trust is to carry on the activity of a venture capital
fund
3. None of its trustees or directors of the trustee company, if any, is involved
in any litigation connected with the securities market which may have an
adverse bearing in the business of the venture capital fund.
4. The directors of its trustee company or the trustees have not at any time
being convicted of an offense involving moral turpitude or any economic
offense
In both cases, the applicant must not have already applied for certificate from SEBI or its
certificate must not have been suspended by SEBI or cancelled by SEBI and the applicant
must be a fit and proper person.
6.3:-OTHER REGULATIONS:
6.3.1:-Furnishing of Information and clarification at the Time of
Application:
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SEBI may require the applicant to furnish such further information as it considers
necessary for processing the application. An application, which is not complete in all
respects, shall be rejected by SEBI. However, before rejecting any application, the
applicant will be given an opportunity to make representation before SEBI and to remove
any defect in the application within 30 days of the date of receipt of communication from
SEBI regarding the defect. SEBI may extend the period of 30 days for up to another 90
days on being satisfied that it is necessary and is equitable to do so.
6.3.1:-Procedure for Grant of Certificate:If SEBI is satisfied that the applicant is eligible for grant of certificate, it shall send
intimation to the applicant of its eligibility. On receipt of intimation, the applicant must
pay to SEBI, registration fee of Rs 5, 00,000 and on the receipt of such fees; SEBI shall
grant a certificate of registration in Form B.
6.3.2:-Conditions of Certificate:
The certificate granted shall be subject to the following conditions
1. The venture capital fund shall abide by the provisions of the SEBI Act and
these regulations.
2. The venture capital fund shall not carry on any other activity other than that
of a venture capital fund.
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3. The venture capital fund shall inform SEBI in writing of any information or
details previously submitted to SEBI which have changed after grant of the
certificate.
If the information or details submitted are found to be false or are misleading in any
particular manner, suitable penal action can be taken.
6.3.3:-Procedure Where Certificate Is Not Granted:
After considering any application, if SEBI is of the opinion that the certificate cannot be
granted under law, it may reject the application after giving the applicant a reasonable
opportunity of making its representation. The decision of SEBI to reject the application
shall be communicated to the applicant within 30 days.
6.3.4:-Investment Conditions and Restrictions:
A venture capital fund may raise money from any source, whether Indian, foreign or
nonresident Indian by way of issue of units. No venture capital fund shall accept any
investment from any investor less than Rs5, 00, 000. However this condition is not
applicable to:-
a. Employees or the principal officer or directors of the venture capital fund,
or directors of the trustee company or trustees where the venture capital
fund has been established as a trust
b. the employees of the fund manager or asset management company
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For the purpose of these regulations, fund raised means actual money raised from
investors for subscribing to the securities of the venture capital fund and includes money
that is raised from the author of the trust (in case the venture capital fund has been
established as a trust) but does not include the paid up capital of the trustee company, if
any.
Each scheme launched or fund set up by a venture capital fund shall have firm
commitment from the investors for contribution of an amount of at least Rupees five
crores before the start of operations by the venture capital fund.
6.3.5:- All Investment Made or To Be Made By a Venture Capital Fund
Shall Be Subject To the Following Conditions, Namely:
A. venture capital fund shall disclose the investment strategy at the time of
application for registration;
B. venture capital fund shall not invest more than 25% corpus of the fund in one
venture capital undertaking;
C. shall not invest in the associated companies; and
D. venture capital fund shall make investment in the venture capital undertaking as
enumerated below:
i. At least 75% of the investible funds shall be invested in unlisted equity shares
or equity linked instruments. However, if the venture capital fund seeks to
avail of benefits under the relevant provisions of the Income Tax Act
applicable to a venture capital fund, it shall be required to disinvest from such
investments within a period of one year from the date on which the shares of
the venture capital undertaking are listed in a recognized Stock Exchange.
ii. Not more than 25% of the investible funds may be invested by way of:
a) Subscription to initial public offer of a venture capital undertaking whose shares
are proposed to be listed subject to lock-in period of one year;
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b) Debt or debt instrument of a venture capital undertaking in which the venture
capital fund has already made an investment by way of equity.
6.3.6:- General Obligations and Responsibilities:
No venture capital fund shall issue any documents or advertisement inviting offers from
the public for the subscription of the purchase of any of its securities or units.
6.3.7:- Private placement:
A venture capital fund may raise money only through private placement of its securities
or units. The venture capital fund before issuing any securities or units must file with
SEBI a placement memorandum.
6.3.8:- Placement Memorandum or Subscription Agreement:
The venture capital fund must:–
a) issue a placement memorandum which shall contain details of the terms and
conditions subject to which monies are proposed to be raised from investors; or
b) Enter into contribution or subscription agreement with the investors which shall
specify the terms and conditions subject to which monies are proposed to be
raised.
The Venture Capital Fund must file with the Board for information, the copy of the
placement memorandum or the copy of the contribution or subscription agreement
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entered with the investors along with a report of money actually collected from the
investor.
6.3.9:- Maintenance of Books and Records:
Every venture capital fund must maintain for a period of 8 years books of accounts,
records and documents which must give a true and fair picture of state of affairs of the
venture capital fund.
6.3.10:- Power to Call for Information:
SEBI may at any time call for any information from the venture capital fund in respect to
any matter relating to its activity as a venture capital fund. Such information must be
submitted within the time specified by days to SEBI.
6.3.11:- Submission of Reports to SEBI:
SEBI may at any time call upon the venture capital fund to file such report as it deems fit
with regards to the activity carried out by venture capital fund.
6.3.12:- Winding –Up:
A scheme of venture capital fund setup as a trust shall be wound up:-
1. When the period of the scheme as mentioned in the placement memorandum is
over ; or
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2. If, in the opinion of the trustees or the trustee company, it is in the interest of the
investors that be wound-up ; or
3. If 75 % of the investors in the scheme pass a resolution at a meeting of unit
holders of the scheme that the scheme be wound up ; or
4. If SEBI so directs, in the interest of investors.
The venture capital fund setup as a company shall be wound up according to provision of
the Companies Act, 1956.
A venture capital fund set up as a body corporate shall be wound up in accordance with
the provisions of the statute under which it is constituted.
The trustees or trustee company of the venture capital fund set up as a trust or the Board
of Directors in the case of the venture capital fund is set up as a company (including body
corporate) shall intimate the Board and investors of the circumstances leading to the
winding up of the Fund or Scheme.
6.3.13:- Inspection and Investigation:
SEBI may appoint one or more person, suo-moto or upon receipt of information or
complaint, as inspecting or investigating officer for inspection or investigation of the
books of accounts, records and documents relating to the venture capital fund for any of
the following reason :-
1. To ensure that the books of accounts records and documents are being maintained
by the venture capital fund in the manner specified in these regulations.
2. To inspect or investigate into complaints received from investors, clients or any
other person on any matter having a bearing on the activity of the venture capital
fund.
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3. To ascertain that the provision of the SEBI Act and these regulations are being
complied with by the venture capital fund.
4. To inspect or investigate suo moto into the affairs of the venture capital fund in
the interest of the securities market and the interest of investors.
6.3.14:- Notice before Inspection or Investigation:Before ordering an inspection or investigation, SEBI shall give not less than 10 days’
notice to the venture capital fund. However, where SEBI is satisfied that in the interest of
the investors, no such notice need be given, it may by order in writing not give such
notice.
6.3.15:- Obligation of Venture Capital Fund on Inspection or
Investigation:
It shall be the duty of every officer of the Venture Capital Fund in respect of whom an
inspection or investigation has been ordered and any other associate person who is in
possession of relevant information pertaining to conduct and affairs of such Venture
Capital Fund including fund manager or asset management company, if any, to produce
to the Investigating or Inspecting Officer such books, accounts and other documents in
his custody or control and furnish him with such statements and information as the said
Officer may require for the purposes of the investigation or inspection.
It shall be the duty of every officer of the Venture Capital Fund and any other associate
person who is in possession of relevant information pertaining to conduct and affairs of
the Venture Capital Fund to give to the Inspecting or Investigating Officer all such
assistance and shall extend all such co-operation as may be required in connection with
the inspection or investigations and shall furnish such information sought by the
inspecting or investigating officer in connection with the inspection or investigation.
The Investigating or Inspecting Officer shall, for the purposes of inspection or
investigation, have power to examine on oath and record the statement of any employees,
directors or person responsible for or connected with the activities of venture capital fund
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or any other associate person having relevant information pertaining to such Venture
Capital Fund.
The Inspecting or Investigating Officer shall, for the purposes of inspection or
investigation, have power to obtain authenticated copies of documents, books, accounts
of Venture Capital Fund, from any person having control or custody of such documents,
books or accounts.
The inspecting or investigating officer in the course of inspection or investigation shall be
entitled to examine or record the statement of any director, trustee, officer or employee of
the venture capital fund.
It shall be the duty of the director, trustee, officer or employee to reasonably assist the
inspecting or investigating officer in connection with the inspection or investigation.
6.3.16:- Submission of the Report to SEBI:
The inspecting or investigating officer shall as soon as possible on completion of the
inspection submit his inspection or investigation report to SEBI. He may also submit an
interim report if so required.
SEBI shall after consideration of inspection or investigation report or the interim report
communicate the finding of the inspecting officer to the venture capital fund and give it
an opportunity to make a representation. On receipt of the reply, if any, from the venture
capital fund, SEBI may call upon the venture capital fund to take such measures as the
board may be fit in the interest of the securities market or for due compliance with the
provisions of the SEBI Act.
The Board may after consideration of the investigation or inspection report and after
giving reasonable opportunity of hearing to the venture capital fund or its trustees,
directors issue such direction as it deems fit in the interest of securities market or the
investors including directors in the nature of:-
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a) requiring a venture capital fund not to launch new schemes or raise money from
investors for a particular period;
b) prohibiting the person concerned from disposing of any of the properties of the
fund or scheme acquired in violation of these regulations;
c) requiring the person connected to dispose of the assets of the fund or scheme in a
manner as may be specified in the directions;
d) requiring the person concerned to refund any money or the assets to the concerned
investors along with the requisite interest or otherwise, collected under the
scheme;
e) Prohibiting the person concerned from operating in the capital market or from
accessing the capital market for a specified period.
6.3.17:-Procedure for Action In Case Of Default:
Suspension of Certificate:SEBI may suspend, without prejudice to issue of directions or measure as above, the
certificate granted to a venture capital fund if the venture capital fund contravenes any of
the provisions of the SEBI Act or of the regulations made there under or fails to furnish
any information relating to its activity as a venture capital fund as required by SEBI or
furnishes to SEBI false or misleading information or does not submit periodical returns or
reports as required by SEBI or does not co-operate with any enquiry inspection or
investigation conducted by SEBI or fails to redress the complaints of investors or fails to
give a satisfactory reply to SEBI in this behalf.
Cancellation of Certificate:
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SEBI may cancel the certificate granted to a venture capital fund where the venture
capital fund is guilty of fraud or as been convicted of an offence involving moral
turpitude or where the venture capital fund has been guilty of repeated default under these
regulations.
No order of suspension or cancellation shall be made by except after holding an enquiry
in accordance with the following procedure:-
For the purpose of holding an enquiry, SEBI may appoint one or more enquiry officers.
The enquiry officer shall issue to venture capital fund at its registered office or principal
place of business a notice stating the grounds on which the action is proposed to be taken
and show cause why such action need not be taken within a period of 14 days from the
date of receipt of notice.
The venture capital fund may within 14 days from the date of receipt of such notice,
furnish to the enquiry officer its reply and make its representation before him. A venture
capital fund may appear through any person duly authorized by it. The enquiry officer
shall after taking into account all relevant facts and circumstances, submit a report to
SEBI and recommend penal action, if any, to be taken against the venture capital fund as
also the grounds on which such action is justified.
On receipt of the report from the enquiry officer, SEBI shall consider the same and may
issue to the venture capital fund a show cause notice as to why such penal action as
proposed by the enquiry officer or such appropriate action should not be taken against it.
The venture capital fund, within 14 days from the date of receipt of such show cause
notice, sends a reply to SEBI.
After considering the reply, if any, of the venture capital fund, SEBI shall pass such an
order as it deems fit.
On and from the date of suspension of certificate, the venture capital fund shall cease to
carryon any activity as a venture capital fund during the period of suspension and shall be
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subject to such directions of SEBI with regards to any records, documents, securities as
may be in its custody or control relating into its activity as a venture capital fund as SEBI
specifies. On and from the date of cancellation of a certificate, the venture capital fund,
with immediate effect, shall cease to carry on any activity of the venture capital fund and
shall be subject to such direction of SEBI with regard to transfer of records, documents
and securities that may be in its custody or control relating to the activities of the venture
capital fund as SEBI may specify. The order of suspension or cancellation of certificate
may be published by SEBI in at least two newspapers.
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Chapter 7
Profile of the company
IFCI Venture Capital Funds Ltd was set up by IFCI Ltd in 1975 as Risk Capital Foundation with a view to widen the entrepreneurial base by providing start up capital for setting up Green Field projects. Since its inception IFCI Venture has provided the start-up capital and venture funding to over 400 entrepreneurs.
Background:-IFCI Venture Capital Funds Ltd. (IFCI Venture) was promoted as a Risk Capital
Foundation (RCF) in 1975 by the IFCI Ltd., a society to provide financial assistance to
first generation professionals and technocrat entrepreneurs for setting up own ventures
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through soft loans, under the Risk Capital Scheme.
In 1988, RCF was converted into a company, Risk Capital and Technology Finance
Corporation Ltd. (RCTC), when it also introduced the Technology Finance and
Development Scheme for financing development and commercialization of indigenous
technology. Besides, under Risk Capital Scheme, RCTC started providing financial
assistance to entrepreneurs by way of direct equity participation. Based on IFCI Venture's
credentials and strengths, Unit Trust of India (UTI), entrusted RCTC with the
management of a new venture capital fund named Venture Capital Unit Scheme
(VECAUS-III) in 1991. The size of VECAUS-III was Rs.80 Crores, contributed by UTI
and IFCI. To reflect the shift in the company's activities, the name of RCTC was changed
to IFCI Venture Capital Funds Ltd. (IFCI Venture) in February 2000.
In order to focus on Asset Management Activities, IFCI Venture discontinued Risk
Capital and Technology Finance Scheme(s) in 2000-01 and continued managing
VECAUS-III. In 2007, as UTI had ceased to carry out its activities and its assets vested
with Specified Undertaking of the Unit Trust of India (SUUTI), the portfolio of
VECAUS-III under management of IFCI Venture was transferred to SUUTI.
Mission:- Mission
"To become the leading institutional player in VC industry of the country."
Vision:-
"To emerge as the most trusted partner for upcoming enterprises in the country, thereby
contributing to the growth of the economy and in the process, optimizing returns on
investment."
M MD Speak:-
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With a 61 year old parentage and 34 year old history, IFCI Venture is a pioneer of
the Indian Venture Capital Industry. We follow a strong corporate governance
model and recognise integrity, sincerity, innovation as key values, in line with our
vision of being the most trusted partner for upcoming enterprises in the country.
We bring a full set of strategic and financial resources to the entrepreneurs who
are fully committed to "Walk the Talk".
India is the growth story of the world, and we are constantly on the lookout for
"The Better Mousetrap" that could revolutionise the way an industry operates.
Our focus for evaluating potential portfolio companies is based on their
competitive position, track records, management teams and ability to execute a
business plan and growth strategy.
Our differentiated partnership approach helps nurture and build entrepreneurial
talent in the country, which translates into consistent superior returns for our
investors.
Present Business Activities:-
The years, IFCI Venture acquired expertise and experience of investing in technology-
oriented & innovative projects. Since its inception, it has provided finance to over 400
ventures and supported commercialization of over 50 new technologies. It has pioneered
efforts for widening entrepreneurial base in the country and catalyzed the introduction of
Venture Capital activity in India.
Management of PE/VC Funds
Advisory Services
Short term lending’s
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IFCI Venture Capital Funds Ltd. people are a true reflection of what the company is
today-- the competitive advantage it enjoys in industry. Most of the original core team
members are still with the company, they are from a wide range of educational and
sgeographic backgrounds. The different points of view they bring lead to superior
business solutions for our clients and us. Their individual experiences promote creativity
and innovation and contribute to our success. We offer an open and fair work culture that
enables people from diverse cultural, educational and professional backgrounds to work
together. IFCI Venture Capital's people are some of the most creative, forward-thinking
people in the business world.
Knowing that every step we take to make our people better pays off millions of times a
day, we've built a company based on growing the value of our people. Every employee of
IFCI Venture Capital understands the importance of delivering quality service and
possesses IFCI Venture Capital Funds Ltd. people are a true reflection of what the
company is today-- the competitive advantage it enjoys in industry. Most of the original
core team members are still with the company, they are from a wide range of educational
and geographic backgrounds. The different points of view they bring lead to superior
business solutions for our clients and us. Their individual experiences promote creativity
and innovation and contribute to our success. We offer an open and fair work culture that
enables people from diverse cultural, educational and professional backgrounds to work
together. IFCI Venture Capital's people are some of the most creative, forward-thinking
people in the business world.
Knowing that every step we take to make our people better pays off millions of times a
day, we've built a company based on growing the value of our people. Every employee of
IFCI Venture Capital understands the importance of delivering quality service and
possesses the ingenuity and drive that are vital to the success of our clients' business.
IFCI Venture Capital hires and develops the most professional, experienced people in our
industry. To better serve our clients, we provide our team member with technical training
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relevant for the key industries we serve.
Our people have the capability to quickly and professionally solve the challenges faced
by our clients. Every member of the IFCI Venture Capital's team, is committed to
delivering the highest quality service using the latest market information, technological
advancements and a level of personal attention that each and every client expects and
deserves.
Shareholders Pattern:-
SHAREHOLDER PRESENT EQUITY-
HOLDING
Rs. Lakh (%)IFCI LTD 5952.10 98.59
TATA TEA LTD. 25.oo 0.41
TATA CHEMICALS LTD. 25.00 0.41
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IL&FS FINANCIAL SERVICES
LTD.
25.00 0.41
TATA STEELS LTD. 10.00 0.17
TOTAL 6037.10 100.00
Our Strengths:-
We have expertise in providing corporate advisory services, leveraging three decades of
experience in undertaking investment. The focus of these advisory services is to provide
independent, fair and informed assessment for undertaking decisions through the
Investment cycle from deal identification to exit planning.
Our team members with their background, experience and understanding of critical
aspects related to equity investment is an apt partner to carry out in-depth due diligence
and appraisal of business plans.
The legal divisions and the accounts division of ours have 16+ years of industry
experience.
Investment Approach:-
IFCI Venture, based on it's wide-ranging experience, has formulated certain parameters for taking investment decisions. These parameters serve basis to effectively evaluate the sustainability and profitability of a project, crucial for timely returns. These parameters would be different for the three funds/ short term loans
Investment Process:-At IFCI Venture, the process of taking an investment decision broadly included the following steps :
Initial/ Preliminary discussions with promoters Submission of business plan by the promoters Due-diligence/ Investment appraisal
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Investment decision/ Further direction
Post Investment Role:-
At IFCI Venture, the objective is to create value by evolving a long term relationship with the entrepreneur. Besides, IFCI Venture's proactive and responsive approach ensures congruence of interests. The presence of IFCI Venture, not only lends credibility to the project but also raises the confidence level of promoters to deal with situations of strategic importance.
Besides financing, IFCI Venture believes in playing an active role through:
Value Addition: IFCI Venture adds value to its investee companies by closely associating with entrepreneurs in upgrading management systems, formulating and implementing growth strategies, marketing tie-ups, facilitating technological up gradations, etc., without interfering in day to day affairs.
Domain Knowledge : IFCI Venture, since its inception in 1975, has a track record of investments in over 400 ventures spread all over India in diversified industrial sectors. The insight gained by IFCI Venture enables it to help investee companies in crisis resolution as well as growth orientation.
Advisory Services: IFCI Venture also offers Advisory Services to Companies providing strategic inputs for realizing growth plan and optimizing returns on investment.
Syndication of Investment: IFCI Venture after assessing requirement of funds of investee Companies helps them Syndicate investment from their investors.
E-mail Addresses:-
Managing Director: Shivendra [email protected]; [email protected]
Deals: [email protected]
IFCI Venture, with its three decades of experience of Investing in more than 400 companies in various sectors has gained proficiency in all phases of Investment cycle from Deal Sourcing to Exit from Investment. The Team with its rich experience in undertaking Due-diligence and Valuation provides a platform for strengthening the
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Investment structure. IFCI Venture acts as partner through its continuous support to grow to Global Levels, thereby, enhancing the enterprise value.
Short term lending: [email protected]
IFCI Venture, with a view to broadbase its own portfolio, initiated an effort to provide Short Term Loans to promising growth oriented companies. The aim is to provide immediate assistance for meeting the specific requirement arising due to general business operation, procurement of balancing equipments/plant and machinery, financing of a specific project being undertaken by the company, etc.
Advisory: [email protected]
IFCI Venture offers comprehensive services to its clients, leveraging three decades of equity investment experience to provide independent, fair and informed assessments for investment decisions.
Resources: [email protected]
The division deals with all the activities under the purview of Resources managed by IFCI Venture, including raising of funds for India Automotive Component Manufacturer Private Equity Fund (IACM-1-D), Green India Venture Fund (GIVF), India Enterprise Development Fund (IEDF) both from domestic and overseas investors.
Chapter 8:- CONCLUSION
The venture capital industry is now in its infancy stage and it still requires developments in its rules and regulations, SEBI’s regulations do not offer a level playing field for VCs. Also what is very important is that more and more encouragement should be given to the established businesses and financial firms to establish venture capital companies this will in turn boost the promotion of small and medium industry in the country.
Earlier it was only public and joint sectors which established venture capital companies at the initiative of the government, but the new economic policy has allowed the private sector also to establish venture capital companies.
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SEBI has suggested the induction of professional management in VCs to help the operational efficiency of these firms. The VCs are also expected to provide maximum information about their Investments Portfolios, divestment plans, exit routes, successful ventures and failures etc.
There are also changes which are required in the laws that bind the transactions of these VCs, like the Companies Act 1956, like to allow the investee company to buy-back their own shares from the VCs.
Bibliography:-
Books:-
Dr. S Guruswamy, Indian Financial System, 2nd edition
Websites:-Indian Venture Capital Association
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www.sebi.gov.in
www.google.com
www.nasscom.org
www.ifciventure.com/
Report:-
Trends of Venture Capital in India, survey report by Delloitte,2007.
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