Financial Services

Individual Assignment

Submitted By
Vaibhav Gupta
2014313
Section - E

Q1 What are the different ways to increase the flow of equity capital?
As the article discusses there are basically two way how equity capital is raised in India.
Foreign portfolio flows: This comes through the capital supply by the foreign investors into a
country in form of deposit money in a country's bank or make purchases in the countrys stock and
bond markets. This type of investment involve transactions in securities that are relatively liquid i.e.
they can be bought and sold very quickly, depending on the volatility of the market invested in i.e.
any time they can take back the money depend upon how the market is performing. Foreign

portfolio investment typically involves short-term positions i.e. taking part in the profitability of
firms operating abroad without having to directly manage their operations.
Initial Public Offerings: Another way to raise the capital is by IPO. IPOs are often issued by
smaller for expanding the operation and by the large privately owned companies looking to
become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm
generally investment banking firms, which helps them to determine what type of security to issue
(common or preferred), the best offering price. You may also have to share stock with the other
company, with the company having the power to interfere in your business management. Generally
companies prefer to raise capital via equity through private equity to avoid the stress involved in
dealing a public holding company.
Another way to raise the capital which is not much prevailing in INDIA is investment by HNI
(High Net worth Individual) and domestic institutions. These can invest in venture capital (capital
provided to early-stage, high-potential, and growth startup companies) and private equity industry
as these people as enough of cash and a hands on experience in a particular sector which can help
a company in its growth phase and can take it to maturity stage.

2. Why has venture capital funding proved to be far more reliable source of
capital than IPOs or foreign portfolio money?
Venture capital funding has emerged to be a reliable source of capital for small businesses than
either IPOs or foreign portfolio money. Venture Capital Funding is generally done done for the
small- and medium-size enterprises with strong growth potential. These investments are generally
characterized as high-risk/high-return opportunities.
In addition to financial capital, venture capitalists provide valuable expertise, advice, managerial
inputs and industry connections. These experts can help your business avoid many of the pitfalls
that are usually associated with the growing companies. This is done by appointing a venture
capitalist as a member of the company's board. This way, the VC firm has intimate involvement
in the direction of the company. Hence this can improve the profit and growth of the company and
take it another level by helping to compete in global marketplace.
Where as in case of FPI this doesnt give the investor the much control over the company to
manage their operations or to take a stand on the managerial decisions.

Q3 What tangible and intangible benefits do PE and venture funds provide to

investee companies?
Private Equity and venture capital not just provide the capital and resources they also provide
some tangible and intangible benefits.
Tangible Benefits

1.
2.
3.
4.
5.
6.
7.

Increased Exports income

Mergers and Acquisitions of other companies
More Industry connections
Employment generation
Increase in Revenue and Profit
Greater Credit discipline(Fewer Loan defaults)
Better reporting standards

Intangible Benefits
1.
2.
3.
4.
5.

Expertise & Experience

Strategic and managerial inputs
Better Goodwill
Governance standards of family-owned businesses
Encouragement(to other business who does not have enough funds)

4. What critical issues in the PE Industry need to be addressed in order to

support the 'Make in India' initiative?
Broadly as defined in the article there are two issues that needs to be addressed
Taxing issues
This can be addressed by three issues that are being highlighted in the article
a) Reducing complexity in taxation by restoring the tax pass-through for all PE/VC funds;
b) Allowing and facilitating domestic capital pools to invest in PE/VC
c) Making it simpler for fund managers of India-focused foreign investors to operate from India
by clarifying non-applicability of permanent establishment
There is lack of clarity on taxation and this holds back many players from investing. Previously
under the Venture Capital Funds Regulations 1996 tax pass through was available for all venture
capital firms but according to the new regulations tax pass through is given only to the Category I
AIFs while not to rest of the category.
Category I - Category I includes AIFs which invest in start-up or early stage ventures or social
ventures or SMEs or infrastructure or other sectors or areas which the Government or regulators
consider as socially or economically desirable.
Category II - Category II AIFs are funds including private equity funds or debt funds which do
not fall in Category I and III and which do not undertake leverage or borrowing other than to meet
day-to-day operational requirements.
Category III - Category III AIFs are funds which employ diverse or complex trading strategies
and may employ leverage including through investment in listed or unlisted derivatives.

Hence the tax pass through is available for only the startups or an early stage venture. Due to
absence of this venture capital firms are paying tax at maximum marginal rate that is higher than
that applicable to these investors. Hence tax pass through should be considered for each category
of AIFs.
Apart from this there is a non-clarity of tax issues regarding creation of a business connection or
permanent establishment in India to the fund manager of India-focused foreign investors. Hence
they out of India and operate from the tax heaven countries like Singapore or any other location.
So, regulator should make sure that there should be clarity over such issues so that they can operate
from India and this would not only help the Indian industry but it would be simpler for fund
manager to invest in India.
Blocked channels
Another issue faced by Indian PE Industry that compared globally that a very less chunk of fund
comes from different investors such as insurance companies and pension funds. The reason for
this is the various restriction imposed by the regulator. If allowed to flow money from these
institutions such as insurance companies, pension funds and charitable trusts would generate
enough funds that can be invested for the startup companies. Hence the regulator should come out
of this conservative approach and help generate funds for the startups without depending on the
reliance on foreign funds.
Solving these issues will help PE and VC companies by making simpler and easier to invest in
India.