Early BeginningsIn the absence
of an organised Venture Capital industry till almost 1998, individual investors and development financial institutions played the role of venture capitalists in India. Entrepreneurs have largely depended upon private
placements, public offerings and lending by the financial institutions. In 1973 a committee on Development of Small and Medium Enterprises highlighted the need to foster venture capital as a source of
funding new entrepreneurs and technology. Thereafter some public sector funds were set up but the activity of venture capital did not gather momentum as the thrust was on high-technology projects funded on a purely
financial rather than a holistic basis. Regulatory Guidelines & Framework Later, a study was undertaken by the World Bank to examine the possibility of developing Venture Capital in the private sector,
based on which the Government of India took a policy initiative and announced guidelines for Venture Capital Funds (VCFs) in India in 1988. However, these guidelines restricted setting up of VCFs by the
banks or the financial institutions only. Internationally, the trend favoured Venture Capital being supplied by smaller-scale, entrepreneurial venture financiers willing to take high risk in the expectation of high
returns, a trend that has continued in this decade. Thereafter, the Government of India issued guidelines in September 1995 for overseas investment in Venture Capital in India. For tax-exemption purposes,
guidelines were also issued by the Central Board of Direct Taxes (CBDT) and the investments and flow of foreign currency into and out of India have been governed by the Reserve Bank of India's (RBI) requirements.
Further, as a part of its mandate to regulate and to develop the Indian capital markets, the Securities and Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations, 1996. These guidelines were further amended in Apr 2000
with the objective of fuelling the growth of Venture Capital activities in India.Industry Size, Activity and Participants Pursuant to the regulatory framework mentioned above, some
domestic VCFs were registered with SEBI. Some overseas investment has also come through the Mauritius route. However, the venture capital industry, understood globally as "independently managed, dedicated pools of
capital that focus on equity or equity-linked investments in privately held, high-growth companies", is relatively in a nascent stage in India. Figures from the Indian Venture Capital Association (IVCA) show that,
till 1998, around Rs. 30 billion had been committed by domestic VCFs and offshore funds which are members of IVCA [Not all overseas venture investors and domestic funds are members of the IVCA]. Figures
available from private sources indicate that overall funds committed are around US$ 1.3 billion. Investible funds are less than 50% of the committed funds and actual investments are lower still
.
Full Report of IVCA on the Venture Capital Activity in India is available here Results of the Survey of the Indian VC INDUSTRY PRACTICES conducted by
Ventureahead.com are available here (to be linked to the relevant page) Funds Registered With SEBIAt the same time, due to economic liberalization and increasing global outlook in India, there is increased awareness and interest of domestic as well as
foreign investors in venture capital. While only 8 domestic VCFs were registered with SEBI during 1996-1998, an additional 11 funds have already been registered in 1999. Institutional interest is growing
and foreign venture investments are also on the increase.
Full list of Venture Capital Funds registered with SEBI is available here Check out our Indian Venture Capital Directory to access the websites of all the VCs, whether registered with SEBI or not,
investing in India Policy SupportGiven the proper environment and policy support, there is undoubtedly tremendous potential for venture capital activity in India.
The Finance Minister of India, in his 1999 budget speech, announced that "for boosting high-tech sectors and supporting first generation entrepreneurs, there is an acute need for higher investment in venture capital activities." He also announced that the guidelines for registration of venture capital activity with the Central Board of Direct Taxes would be harmonized with those for registration with the Securities and Exchange Board of India.
The SEBI committee on Venture Capital was set up in July, 1999
to identify the impediments and suggest suitable measures to facilitate the growth of venture capital activity in India. Also keeping in view the need for a global perspective it was decided to associate Indian entrepreneurs from Silicon Valley in the committee. The committee is
headed by Mr. K.B. Chandrasekhar, Chairman, Exodus Communications Inc. The setting up of this committee by SEBI, consisting of industry participants and professionals, was motivated primarily by the need
for SEBI to play a facilitating role in tune with the mandate of SEBI to regulate as well as develop the market. The full text of the K.B. Chandrasekhar SEBI Committee Report is available here
Objectives and Vision for Venture Capital in IndiaVenture Capital is very different from traditional sources of financing. Venture capitalists finance innovation and ideas which have potential for high growth but with
inherent uncertainties. This makes it a high-risk, high return investment. Apart from finance, venture capitalists provide networking, management and marketing support as well. In the broadest sense, therefore, venture
capital connotes financial as well as human capital. In the global venture capital industry, investors and investee firms work together closely in an enabling environment that allows entrepreneurs to focus on value
creating ideas and allows venture capitalists to drive the industry through ownership of the levers of control, in return for the provision of capital, skills, information and complementary resources. This very blend of
risk financing and hand holding of entrepreneurs by venture capitalists creates an environment particularly suitable for knowledge and technology based enterprises. Scientific, technology and knowledge
based ideas properly supported by venture capital can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner. In various developed and developing economies venture capital has
played a significant developmental role. India, along with Israel, Taiwan and the United States, is recognized for its globally competitive high technology and human capital. India's recent
success story in software and information technology is almost a fairy tale of success against several odds such as inadequate infrastructure, expensive hardware, restricted access to foreign skills & capital and
limited domestic demand. It is also a very good pointer to the potential India has in the field of knowledge and technology based industry. India has the second largest English speaking scientific and technical manpower
in the world. Some of the management (IIMs) and technology institutes (IITs) are globally known as centres of excellence. Every year over 200,000 engineers graduate from Government and private-run
engineering colleges. Many also specialise through diploma courses in computers and other technical areas. Management institutes produce 40000 management graduates annually. All these are potential entrepreneurs. In Silicon Valley, these very Indians have proved their potential and have carved out a prominent place in terms of wealth creation as well as credibility. There are success stories that are well known.
They were backed by a venture capital environment in Silicon Valley and elsewhere in US which supports innovation and invention. This also has a powerful grip over the nation's collective imagination. Reportedly, at
least 30% of the start-up enterprises in Silicon Valley are currently being started by Indians. Back home also, as per NASSCOM data, the Indian software sector crossed the Rs 100 billion mark turnover
during 1998. The sector grew 58%
on a year to year basis and exports accounted for Rs 65.3 billion while the domestic market accounted for Rs 35.1 billion. Exports grew by 67% in rupee terms and 55% in US dollar terms. The strength of software professionals grew by 14% in 1997 and has crossed 1,60000.
The global software sector is expected to grow at 12% to 15% per annum for the next 5 to 7 years. Such information technology services are fuelled by technological advances and also by the
need for efficiency and cost saving in all business and industries. With the inherent skills and manpower that India has, software exports will thrive with an estimated 50% growth per annum. The total market
capitalisation of the listed software companies is approximately 16% of the total market capitalisation of Rs. 750 billion as on October 1999.
Recently, there has also been greater visibility of Indian companies in the US. Given such vast potential not only in IT and software but also in the field of service industries, biotechnology, telecommunications,
media and entertainment, medical and health services and other technology based manufacturing and product development, venture capital industry can play a catalytic role to put India on the world map as a
success story. It is also important to recognise that while India is doing very well in IT and software, it is still a low cost developer and service provider. Though it has the advantage of
English-speaking, skilled manpower and cheap labour, its leadership is on a slipping edge as other countries such as Philippines, China and Vietnam are moving to occupy India's position as the premier supplier of low
end software and support services. Many such countries have superior supplies of power, telecom and internet connections compared to India. So just as the US did in the semiconductor industry in the eighties,
it is time for India to move to a higher level in the value chain. This will not happen automatically. The sequence of steps in the high technology value chain is information, knowledge, ideas,
innovation, product development and marketing. Basically, India is still at the level of 'knowledge'. Given the limited infrastructure, low foreign investment and other transitional problems, it certainly
needs policy support
to move to the third stage, i.e. ideas and beyond, towards innovation and product development. This is very crucial for sustainable growth and for maintaining India's competitive edge. This will need capital and other support which can be provided by venture capitalists.
India also has a vast pool of existing and ongoing scientific and technical research carried out by a large number of research laboratories including defense laboratories as well as Universities and
technical institutes. A conducive venture capital environment, including incubation facilities, can help a great deal in identifying and actualizing some of this research into commercial production. Development of a proper venture capital industry particularly in the Indian context is important for bringing to market high quality public offerings (IPOs). In the present situation, an
individual investor becomes a venture capitalist of a sort by financing new enterprises and undertaking unknown risk. Investors also get enticed into public offerings of unproven and at times dubious quality. This
situation can be corrected by venture capital backed successful enterprises accessing the capital market. This will also protect smaller investors. That the potential of venture capital is tremendous
becomes obvious from the experience of other countries. A study of US markets
during the period 1972 through 1992 showed that venture-backed IP's earned 44.6% over a typical five year holding period after listing compared with 22.5% for non-venture backed IPOs. The success of venture capital is only partly reflected by these numbers since 80% of firms that receive venture capital are sold to acquiring companies rather than coming out with IPOs, in which the return multiple vis-à-vis non-venture funded companies is much higher. This potential can also be seen in sales growth figures for the U.S. where, from 1992 to 1998, venture capital funded companies sales have grown by 66.5% per annum on an average versus 5% for Fortune 500 firms. The export growth by venture funded companies was 165%. All the top 10 sectors, measured by asset and sales growth in USA, were technology related.
Thus, venture capital is valuable not just because it makes risk capital available at the early stages of a project but also because of the expertise of venture capitalist that leads to superior product
development. The big focus of venture capital worldwide is, of course, technology. Thus, in 1999, $30 bn of venture capital is expected to be invested in the U.S. of which technology firms will get
80%.
Behind this huge supply of venture funds from formally organized venture capital firms is an even larger pool of "angel" or seed/start-up funds provided by private investors. In 1999, it is expected that angel investment will be of the order of $90 bn, thus taking the total "at-risk" investment in high technology ventures in a single year to $120 bn.
By contrast, in India, cumulative disbursements to date are less than $500m, of which technology firms have received only 36%. 18 new Venture Capital funds have registered with the SEBI, taking the total number
to 28. In f act, VC or Angel Investments in high-tech firms in India have grown by over 5000 percent, from Rs. 70 crore to 3,200 crore between 1996 and 2000. NASSCOM expects this to grow further and touch Rs.
50,000 crores by 2008, as indicated in the table below.
| |
Rs. Crore |
US$ million |
1996-97 |
70 |
20 |
1997-98 |
320 |
80 |
1998-99 |
610 |
150 |
1999-2000 |
1,600 |
370 |
2000-01 (proj,) |
3,200 |
700 |
2001-02 (proj.) |
6,500 |
1400 |
2007-08 (proj.) |
50,000 |
10,000 |
India certainly needs a large pool of risk capital both from home and abroad. Examples of
US, Taiwan and Israel clearly show that this can happen provided there is right regulatory, legal, tax and institutional environment, there are risk taking capacities
among the budding entrepreneurs, start-ups have access to R&D flowing out of national and state level laboratories and universities, and infrastructure support such as telecom, technology parks etc. keeps pace.
Taiwan has benefited from close ties with Silicon Valley. A transnational community of Taiwanese venture capitalists has fostered
a two-way flow of capital, skills and information between Silicon Valley and Taiwan. Several of Israel's experiences have relevance for India. Government policy on
incubators, the funding of R&D projects, and the BIRD project provide useful object lessons for the Indian government and business alike. Venture capital has similarly
played a very important role in U.K., Australia and Hong Kong also in development of technology growth of exports and employment. Steps are being taken at the level of
Government, Ministry of Information and Technology, CSIR for improvement in infrastructure and R&D.
This section has largely been excerpted from the K.B.Chandrasekhar SEBI Committee Report .You can down load the full report from here |
