Venture capital has suddenly become a buzzword. And rightly so. The venture capital funds injected Rs.1,400 crore in 1999 in our economy. This year - fiscal 2000-01, the venture capital is expected to more than double to Rs.3,200 crore, an increase by 120 per cent. Again, in 1999, as many as 11 new venture capital funds (VCFs) were registered with the regulatory authority - the Securities and Exchange Board of India (SEBI). Many more are being registered. A heartening feature of this development is that many VCFs have been set up in the states where grass-root entrepreneurial development takes place.
In a way, venture capital financing is not new to India. The need for venture capital financing was first felt in 1972 by the Committee on Development of Small and Medium Entrepreneurs under the chairmanship of Shri R.S. Bhatt (popularly known as the Bhatt Committee). It was introduced in 1975 by all-India financial institutions when Risk Capital Foundation (RCF) was set up, sponsored by the Industrial Finance Corporation of India (IFCI). The Technology Policy statement, 1983 envisaged a positive role for the venture capital.
It was, however, only in 1988 that the Government announced guidelines for the establishment and functioning of venture capital activities. During this year, the RCF was also converted into the Risk Capital and Technology Finance Corporation of India Ltd. (RCTC). The guidelines vested the requisite powers in the Controller of Capital Issues (CCI). With the abolition of office of CCI in 1992, its powers were vested in Securities and Exchange Board of India (SEBI). The SEBI Act was amended in 1995 empowering SEBI to register and regulate the working of venture capital funds.
The Securities and Exchange Board of India (SEBI) has since then formulated the regulations for regulating venture capital funds - The Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996, known in brief as SEBI (VCF) Regulations, 1996. The SEBI set up a Committee on Venture Capital in July 1999 under the chairmanship of Shri K.B. Chandrasekhar, Chairman, Exodus Communications, Inc. The draft proposals, discussed on December 08, 1999 in the meeting of the SEBI committee, may be surfed at the URL : http://www.sebi.com/report/venture capital - dr.html.
The venture capital, as growth-driven technology-based means of financing is well established in the developed countries like the U.S.A., and Japan. It is also well established in the Asian countries, particularly South Korea, Singapore, Hong Kong, Thailand and Malaysia. Chandrasekhar proposals, cited above, have noted that a study of U.S. markets during the period 1972 through 1992 showed that venture - backed IPOs earned 44.6 percent over a typical five year holding period after listing compared with 22.5 percent for non-venture backed IPOs. Again, from 1992 to 1998, venture capital funded companies sales have grown by 66.5 percent per annum on average versus 5 percent for Fortune 500 firms. The export growth by venture funded companies was 165 percent.
The proposals have noted that in 1999, 30 billion dollar of venture capital is expected to be invested in the U.S. Again, in 1999, it is expected that angel investment will be of the order of 90 billion dollar, thus making the total "at-risk" investment in a single year of 120 billion dollars. By contrast, in India, the proposals, note, cumulative disbursements to date are less than half a billion dollars. But things are changing in our country. And, it may also be noted, that companies such as Apple, America Online, Intel, and Sun were financed by the U.S. government agency, Small Business Administration (SBA).
What then is so special about the venture capital ? The answer lies in the basics of economic growth and development which are spurred primarily by the entrepreneurs and their entrepreneurial spirit. When these entrepreneurs wish to translate their dreams into reality, they face the most important problem of affordable investment capital. Traditional modes of financing do not meet their requirement as the proposed ventures have high risk. Moreover, an entrepreneur may have only an idea which requires to be nurtured into a busines plan. How to finance such a project ? The answer is venture capital.
A venture capitalist, by definition, is a risk - taker. By constrast, the traditional financier eschews risk, protection of capital being his first priority. A venture capitalist shares the risk alongwith the entrepreneur. Indeed, he becomes an active partner in the enterprise. No such role is played by the traditional financier. Also a venture capitalist will invest in the project before its listing. A traditional financier will usually invest only in listed companies with a sound track record, assured return of his capital being his first priority. We thus see that a venture capitalist and a traditional financier operate in two different worlds.
Within the lower boundary of an idea and the upper boundary of the initial public offering (IPO), a venture capitalist has a broad spectrum of various financing stages - the seed stage (conceptualisation), the start - up state (operation), the expansion stage, and the mezzanine stage (just before the IPO). Incubation and angel investing (investing in an idea) should form a significant part of a venture fund. Typically, the venture fund will exit the project at the IPO stage.
We in the Delhi
Financial Corporation (DFC) are shortly going to launch a venture fund
- the first venture fund by any State Financial Corporation. Realsing the
importance of the Information Technology (IT) and absence of any scope
for further industrialisation of Delhi, we are focusing investment only
in IT sector. Formally designated as Delhi IT Venture Fund (DITVF), it
will have a corpus of Rs.20 crore with contribution from SIDBI, IDBI, DFC
and Government of NCT of Delhi. Let us see how it shapes and to what extent
it helps our entrepreneurs in enabling them to realise their dreams.