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The concept of venture capital is new. Venture capitalists often relate the concept to the story of
Christopher Columbus. In the fifteenth century, Christopher Columbus sought to travel westwards
instead of eastwards from Europe and so planned to reach India. His far-fetched idea did not find
favor with the king of Portugal, who refused to finance him. Finally, Queen Isabella of Spain
decided to fund him and the voyages of Christopher Columbus are not empanelled in history. And
thus evolved the concept of venture capital. The modern venture capital industry began taking
shape, however, in the post-world war II years.

Venture capital is an equity investment in a high-risk project related to some innovations or new
technological developments contemplated by a company. Venture capital also means a combination
of capital and management expertise provided for the initial risks of a new and emerging company,
which has a good growth prospect in terms of products, technologies, business concepts or services
with the objective of retrieving the investment with a handsome reward at a future date In the
classical sense, venture capital financing or venturing simply means investing in privately-owned
technology based companies with a view to securing the highest possible returns in the shortest
possible time, notwithstanding the high risk element involved.

The concept of venture capital fund was born with the fundamental objective to provide initial
capital and support in building capital base to the entrepreneurs having a sound background of
professional education and expertise,who take initiatives to launch the business, based on fast
changing technology.Financial institutions and bankers primarily cater to projects with minimum
investment risk, maximum security of lending and uniform return from an early stage investment.
Conventional financing schemes are basically security-oriented and are meant for projects based on
proven technology.

Venture capital broadly implies an investment made in a business or industrial enterprise which
carries elements of risk and insecurity and the probability of business hazards. To connote the risk
and adventure the generic name of “Venture Capital” was coined.Venture capital is a high risk –
high return business. The high risk is due to the facts that projects are untested and are undertaken
by the novices. The targeted long-term returns from venture capital investment are naturally high.
The seeking of such potentially high returns had some analysts to term venture capital as “Vulture


The history private equity and venture capital and the development of these asse classes has
occurred through a series of boom and bust cycles since the middle of the 20th century. Within the

broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital
experienced growth along parallel, although interrelated tracks.

Since the origins of the modern private equity industry in 1946, there have been four major epochs
marked by three boom and bust cycles. The early history private equity —from 1946 through
1981—was characterized by relatively small volumes of private equity investment, rudimentary
firm organizations and limited awareness of and familiarity with the private equity industry. The
first boom and bust cycle, from 1982 through 1993, was characterized by the dramatic surge in
leveraged buyouts activity financed by junk bonds and culminating in the massive buyout of RJR
Nabisco before the near collapse of the leveraged buyout industry in the late 1980s and early 1990s.
The second boom of bust cycle, (from 1992 through 2002) emerged from the ashes of the savings
and loan crisis, the insider trading scandals, the real estate market collapse and the recession of the
early 1990s. This period saw the emergence of more institutionalized private equity firms,
ultimately culminating in the massive Dot-com bubble in 1999 and 2000. The third boom and bust
cycle (from 2003 through 2007) came in the wake of the collapse of the Dot-com
bubble—leveraged buyouts reach unparalleled size and the institutionalization of private equity
firms is exemplified by the Blackstone Group's 2007 initial public offering.

In its early years through to roughly the year 2000, the private equity and venture capital asset
classes were primarily active in the United States. With the second private equity boom in the mid-
1990s and liberalization of regulation for institutional investors in Europe, a mature European
private equity market emerged


According to Dominguez, “Venture Capital Financing is generally the first capital invested by
sources outside the firm, and the last to exit. In the parlance of the market, it is the ‘front money’ or
funds that are normally subordinated to all other financial commitments of the enterprise. Aside
from common stock financing, the most common forms of alternative equity instruments issued in
venture capital investments are convertible debentures, warrants and letter stock options”.

“Venture capital can be defined as equity or equity-linked investments in young, privately held
companies, where the investor is a financial intermediary who is typically active as a director, an
advisor, or even a manager of the firm”.
“Venture capital financing, generally implying long-term investment in
high risk industrial projects with high reward possibilities, may be at any stage of implementation of
the project or its production cycle, viz. to start up an economic activity or an industrial or
commercial project or to improve a process or a
product in an enterprise associated with both risk and reward”.

“Venture capital is the organized financing of relatively new enterprises to achieve substantial
capital gains. Such young companies are chosen because of their potential for considerable growth
due to advanced technology, new products or services, or other valued innovations. A high level of
risk is implied by the term “Venture Capital’ and is implicit in this type of investment, since
certainingredients necessary for success are missing and must be added later”.

“Venture capital is 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 capital company provides
some value-added in the form of management advice and contribution to overall strategy. The
relatively high risks for the venture capitalists are compensated by the possibility of high return,
usually through substantial capital gains in the medium term”.



Every business and every product was funded by someone who stepped up to the plate and invested,
for better or for worse. The term venture capitalists denotes institutional investors that provide
equity financing to new projects and play an active role in advising the management.

Venture capitalists are part riverboat gambler, part security analyst, and part entrepreneurial voyeur.
They are skeptics and business romantics; skeptics in that their realism must often temper the
optimistic fervor of the entrepreneur and romantics, in that often they have little real control over
operations, so must suspend disbelief. This is a business of ambiguity and adversity- ambiguity in
that often the venture capitalist must read between the lines, based on his general knowledge and
experience, to derive the real state of affairs for an investment, ambiguity in that the investments are
often highly illiquid and must be held through good times and bad-ambiguity in that most
entrepreneurs have a love/hate relationship with the venture capitalists. They want the money of
venture capitalists, and at times, their counsel, but want to be free of limitations and controls. They,
in most investments in this risky business go through the valley of death at least once. Prior to
becoming successful, venture capital investments go many places most reasonable men would rather
not. Creative business
development often depends on unreasonable men. For entrepreneurs the attractions of venture
capital inevitably go beyond the money. More than finance, the venture capitalist gives his
marketing and management skills for the development of the new firm. But the venture capitalist
takes a big risk. If a new venture fails, all the money poured into the enterprise is lost. There are
rarely any assets of inventory to be sold off. A venture capitalist is not a lender, but an equity
partner. He cannot survive on minimalism but he is driven by wealth maximization.

2.2 The Venture Capital Funds

A venture capital company and its venture funds are generally different entities. The company
usually floats a number of venture funds, normally time-bound (close-ended), partly from its
resources and partly with major contributions from large corporations, pension funds, etc. The
money is then invested in a judicious mix of select high as well as low risk projects.

Venture capital companies do not invest in the firms where the credential of the management
appears to be doubtful. The most important investment determinant of a venture capital fund is the
quality of the management. George Doriot, the most successful venture capital funds expert in the
USA says, “we can back a first rate management team with a second rate product and have success,
but if we back a first rate product with a second rate management team, we can seldom achieve our

In the developed countries, fund is mainly provided by private sector, pension funds, insurance
companies and banks, along with subscriptions from private individuals and some industrial
companies. The availability of large pools of private capital is fundamental to the development of
venture capital industry. The following figure depicts the source of venture capital funds in the
developed countries.

Several distinct stages of a company’s (project) development are recognized by the venture capital
industry for investment purposes. Venture capital firms all over the world follow more or less
similar practices of financing. The venture capital financing covers a wide range of investment
opportunities. An entrepreneur needs venture capital at different stages of his company’s growth.
Conceptually, there are three different stages at which a venture capital firm can make investments.

3.1. Early Stage Financing

Ventures that seek finance for developing a new concept or exploiting a new technology fall under
this category. The management team is often incomplete and does not have any proven track record.
Finance may be provided at seed stage, start-up stage or at the first stage.

3.2. Seed Finance

In the initial stage there is only an idea. The venture capitalist provides the finance to the
entrepreneurs to prove the concept. Seed capital is required to meet the primary expenditures in
respect of rent of the space, service charges of the professionals and installation of requisite
productive facilities. The seed capital stage is essentially an ‘applied research’ phase associated with
research and development. Financing in this stage involves serious risk as the technology or
innovation being attempted may succeed or fail, after repeated investment. Chances of success in
high technology projects are meager. Seed capital finance is warranted when there is enough
evidence to show that the entrepreneur has used up his own resources in carrying his idea to the
point of acceptance and initiating research.

At this stage, the venture capital firm has to see that the technology skill of the entrepreneur is
matched with market opportunities. The key risk at this stage is marketing-related. The venture
capital firm has to evaluate the commercial acumen of the entrepreneur to take advantage of the
market opportunity, awareness of competition, the correct timing of launching the product and the
ability to motivate the staff to stay with the project rather than defect to rival companies. The risk
perception of investment at this stage is extremely high and the investment may be realized in about
7 to 10 years.

3.3. Start-up Capital

Start-up capital is provided for financing product development and initial marketing activities to
launch a business. The companies may be in their initial stages of development and finance may be
extended for creation of new infrastructure and meeting the working capital margin. In fact in the
public eye, the term ‘start-up’ appears t be synonymous with venture capital in that the
product/service is being commercialized for the first time in association with venture capital firm.

At this stage some indication of the potential market for the new product/service is available. There
are certain inherent problems in start-up investments, especially related to the structuring of the
deal. The natural desire of the entrepreneur is to exercise control over the business he is starting
with inadequate resources of his own.

Although the start-up stage is exposed to high risk, and the investment may take 5 to 10 years to
realize, venture capital firms, however, assess the managerial ability and capacity of the
entrepreneur before making any financial commitment at this stage and if needed, supply
managerial skills and supervise the implementation.

3.4 First Stage Financing

In this stage the firm starts producing the product, but the prospects are still uncertain as to whether
the market will accept the product or reject it outright. The venture capitalist who finances a firm at
this stage has a very high risk and may take 5 to 7 years to realize the investment.

3.5. Expansion Financing

An enterprise established in a given market increases its profits exponentially by achieving the
economies of scale. This expansion can be achieved either through an organic growth, that is by
expanding production capacity and setting up proper distribution system or by way of acquisitions.
Anyhow, expansion needs finance and venture capitalists support both organic growth as well as
acquisitions for expansion.

3.6. Second Stage Financing

Financing is done when the firm has the product or the service but it has yet to develop the
marketing infrastructure to reach the consumer. During this period, additional finance is required
because the project faces competition and the firms own profits are normally meager to help it to
penetrate the market.

The entrepreneur has invested his own funds but further infusion of funds by the venture capital
firm is necessary. The venture capital firms provide larger funds at this stage than at other early
stage financing, because the time scale for the investment is obviously shorter than in the start-up
case and the second round financing is partly in the form of debt instrument which will provide
some income to the venture capital firm.

3.7. Third Stage Financing/Mezzanine Financing/ Development Capital

Finance may be required by established and profitable companies for development or expansion of
plant/equipment, expanding marketing and distribution capabilities, refinancing existing debt,
penetrating new geographic regions, induction of new management, and so on. Venture finance
provided at this stage has medium risk and can be realized in one to three years. It constitutes a
significant part of the activities of many venture capital firms.


4.1. Bridge Finance

Bridge finance may be provided when a company is expecting to go to the public shortly or any
other sanctioned financial assistance from the commercial banks, financial institutions and the like.
When the finance remains undisbursed due to some bureaucratic reasons, venture capital firms come
forward to finance the projects of the ventures under such critical juncture. This is the last round of
financing before going public, hence it involves low risk and the investment may be realized in one
to three years. Often bridge financing is structured so that it can be repaid from the proceeds of an
initial public offering.

4.2. Turnaround Finance

Finance may be given to a specialized group to bring about a turnaround of an ailing (sick)
company. Two kinds of inputs are required in turn-around, namely money and management. The
company may face mounting debt burden and slowing down of cash inflows and may need more
funds from all sources. The enterprise may seek a moratorium from creditors for unpaid liabilities.
The original entrepreneur may be compelled to relinquish the enterprise to a new management.

4.3. Acquisition Finance

Funds may be given to one company to finance its acquisition of another company. Risk is medium
to high and the investment may be realized in three to five years in this case.

4.4. Management / Leveraged Buy-out Financing

The funds provided to the current operating management to acquire or purchase a significant share
holding in the business they manage are called management buy-out. Management buy-in refers to
the funds provided to enable a manager or a group of managers from outside the company to buy
into it. Buy-out financed by other venture capitalists is known as leveraged buy-out.


5.1. Investment Procedure

In generating a deal flow, the venture capital investor creates a pipeline of ‘deals’ or investment
opportunities that he would consider investing in. This is achieved primarily through plugging into
an appropriate network. The most popular network obviously is the network of venture capital
funds/investors. It is also common for venture capitals to develop working relationships with R&D
institutions, academia, etc, which could potentially lead to business opportunities. Understandably
the composition of the network would depend on the investment focus of the venture capital
funds/company. Thus venture capital funds focusing on early stage technology based deals would
develop a network of R&D centers working in those areas.

The network is crucial to the success of the venture capital investor. It is almost imperative for the
venture capital investor to receive a large number of investment proposals from which he can select
a few good investment candidates finally. Before making any investment, the goal as venture
capitalists is to understand virtually every aspect of the target company: the experience and
capabilities of the management team, the business plan, the nature of its operations, its products
and/or services, the methods by which sales are made, the market for the products and/or services,
the competitive landscape, and other factors that may affect the outcome of the investment. While
due diligence investigations are viewed by many as mundane and irritating tasks, the process
enables venture capitalists to address areas of concern, is an important tool in determining a fair pre-
investment valuation, and may help to avoid significant and otherwise unexpected liability
following the investment. The venture capitalists view the due diligence process as a means of
identifying and becoming comfortable with the risks to which their capital will be exposed.

The due diligence process involves an assessment of both the microeconomic and macroeconomic
factors that can affect the earnings growth of the target company. The due diligence process also
includes a review of the corporate and legal records, including the documentation supporting any
previous issuances of the company's securities. Only one or two business plans in 100 result in
successful financing. And of every 10 investments made, only one or two are successful. But this is
enough to recover investments made by the venture capital (VC) in all 10 start-ups in addition to an
average 40-50% return! Securing an investment from an institutional venture capital fund is
extremely difficult. It is estimated that only five business plans in 100 are viable investment
opportunities and only three in 100 results in successful financing.

In fact, the odds could be as low as one in 100. More than half of the proposals to venture capitalists
are usually rejected after a 20-30 minute scanning, and 25 per cent are discarded after a lengthier
review. The remaining 15 per cent are looked at in more detail, but at least 10 per cent of these are
dismissed due to irreconcilable flaws in the management team or the business plan. A Venture
Capitalist looks at various aspects before investing in any venture. First, you need to work out a
business plan. The business plan is a document that outlines the management team, product,
marketing plan, capital costs and means of financing and profitability statements.

 Initial Evaluation: This involves the initial process of assessing the feasibility of the project.

 Due diligence: In this stage an in-depth study is conducted to analyze the feasibility of the

 Deal structuring and negotiation: Having established the feasibility, the instruments that give
the required return are structured.

 Investment valuation: In this stage, final amount for deal is decided.

 Documentation: This is the process of creating and executing legal documents to protect the
interest of the venture.

 Monitoring and Value addition: In this stage, the project is monitored by executives from the
venture fund and undesirable variations from the business plan are dealt with.

 Exit Policies: There are mainly 3 exit policies followed by VCF’s in general.

5.1.1.Initial Evaluation:

Before any in depth analysis is done on a project, an initial screening is carried out to satisfy the
venture capitalist of certain aspects of the project. These include

 Competitive aspects of the product or service

 Outlook of the target market and their perception of the new product

 Abilities of the management team

 Availability of other sources of funding

 Expected returns

 Time and resources required from the venture capital firm .Through this screening the
venture firm builds an initial overview about the
 Technical skills, experience, business sense, temperament and ethics of the promoters

 The stage of the technology being used, the drivers of the technology and the direction in
which it is moving Location and size of market and market development costs, driving
forces of the market, competitors and share, distribution channels and other market related

 Financial facts of the deal

 Competitive edge available to the company and factors affecting it significantly

 Advantages from the deal for the venture capitalist

 Exit options available

5.1.2.Due diligence

Due diligence is term used that includes all the activities that are associated with investigating an
investment proposal to assess feasibility. It includes carrying out in depth reference checks on the
proposal related aspects such as management team, products, technology and market. Additional
studies and collection of project-based data are done during this stage. The important feature to note
is that venture capital due diligence focuses on the qualitative aspects of an investment opportunity.

 Areas of due diligence would include

 General assessment

 business plan analysis

 contract details

 collaborators

 corporate objectives

 SWOT analysis

 Time scale of implementation

 People

 Managerial abilities, past performance and credibility of promoters

 Financial background and feedback about promoters from bankers and previous lenders

 Details of Board of Directors and their role in the activities

 Availability of skilled labour

 In this category the type of questions asked will depend on the nature of the industry
into which the company is planning to enter. Some of the areas generally considered are

 Technical details, manufacturing process and patent rights

 Competing technologies and comparisons

 Raw materials to be used, their availability and major suppliers, reliability of these suppliers

 Machinery to be used and its availability

 Details of various tests conducted regarding the new product

 Product life-cycle

 Environment and pollution related issues

 The questions asked under this head also vary depending on the type of product. Some
of the main questions asked are

 main customers

 future demand for the product

 competitors in the market for the same product category and their strategy

 pricing strategy

 supplier and buyer bargaining power

 channels of distribution
 marketing plan to be followed

 future sales forecast.

 Market survey could be conducted to gather further more accurate and relevant data.

 Finance

 Financial forecasts for the next 3-5 years

 Analysis of financial reports and balance sheets of firms already promoted or run by the
promoters of the new venture

 Cost of production

 Wage structure details

 Accounting process to be used

 Financial report of critical suppliers

 Returns for the next 3-5 years and thereby the returns to the venture fund

 Budgeting methods to be adopted and budgetary control systems

 External financial audit if required

Sometimes, companies may have experienced operational problems during their early stages of
growth or due to bad management. These could result in losses or cash flow drains on the company.
Sometimes financing from venture capital may end up being used to finance these losses. They
avoid this through due diligence and scrutiny of the business plan.

5.1.3. Structuring a deal

Structuring refers to putting together the financial aspects of the deal and negotiating with the
entrepreneurs to accept a venture capital’s proposal and finally closing the deal. Also the structure
should take into consideration the various commercial issues (i.e. what the entrepreneur wants and
what the venture capital would require to protect the investment). The instruments to be used in
structuring deals are many and varied. The objective in selecting the instrument would be to
maximize (or optimize) venture capital’s returns/protection and yet satisfy the entrepreneur’s
requirements. The instruments could be as follows:


Equity shares new or vendor shares par value partially-paid shares

Preference shares redeemable (conditions under Company Act)

participating par value

nominal shares

Loan clean Vs secured

Interest bearing Vs noninterest bearing

convertible Vs one with features (warrants)

1st Charge, 2nd Charge,

loan Vs loan stock maturity

Warrants exercise price, expiry period

In India, straight equity and convertibles are popular and commonly used. Nowadays, warrants are
issued as a tool to bring down pricing. A variation that was first used by PACT and TDICI was
"royalty on sales". Under this, the company was given a conditional loan. If the project was
successful, the company had to pay a percentage of sales as royalty and if it failed then the amount
was written off. In structuring a deal, it is important to listen to what the entrepreneur wants, but the
venture capital comes up with his own solution. Even for the proposed investment amount, the
venture capital decides whether or not the amount requested, is appropriate and consistent with the
risk level of the investment. The risks which the company problems, etc).

factors influencing choice of inatrument

Categories Factors influencing the choice of Instrument

Company specific Risk, current stage of operation, , expected profitability, future

cash flows, investment liquidity options

Promoter specific Current financial position of promoters, performance track-record,

willingness of promoters to dilute stake

Product/Project Future market potential, product life-cycle, gestation period


Macro environment Tax options on different instruments, legal framework, policies

adopted by competition

5.1.4. Investment valuation

The investment valuation process is an exercise aimed at arriving at ‘an acceptable price’ for the
deal. Typically in countries where free pricing regimes exist, the valuation process goes through the
following steps:

Evaluate future revenue and profitability

Forecast likely future value of the firm based on experienced market capitalization or expected
acquisition proceeds depending upon the anticipated exit from the investment.

Target ownership positions in the investee firm so as to achieve desired appreciation on the
proposed investment. The appreciation desired should yield a hurdle rate of return on a Discounted
Cash Flow basis.

In certainty the valuation of the firm is driven by a number of factors. The more significant among
these are:

Overall economic conditions: A buoyant economy produces an optimistic long- term outlook for
new products/services and therefore results in more liberal pre-money valuations.

Demand and supply of capital: when there is a surplus of venture capital of venture capital chasing a
relatively limited number of venture capital deals,

valuations go up.

This can result in unhealthy levels of low returns for venture capital investors. Specific rates of
deals: such as the founder’s/management team’s track record, innovation/ unique selling propositions
(USPs), the product/service size of the potential market, etc affects valuations in an obvious manner.

The degree of popularity of the industry/technology in question also influences the pre-money.
Computer Aided Skills Software Engineering (CASE) tools and Artificial Intelligence were one time
darlings of the venture capital community that have now given place to biotech and retailing.

5.1.5. Documentation
It is the process of creating and executing legal agreements that are needed by the venture fund for
guarding of investment.

 Based on the type of instrument used the different types of agreements are

 Equity Agreement

 Income Note Agreement

 Conditional Loan Agreement

 Optionally Convertible Debenture Agreement etc.

There are also different agreements based on whether the agreement is with the promoters or the
company. The different legal documents that are to be created and executed by the venture firm are
Shareholders agreement - This agreement is made between the venture capitalist, the company and
the promoters. The agreement takes into account Capital structure.

Transfer of shares: This lays the condition for transfer of equity between the equity holders. The
promoters cannot sell their shares without the prior permission of the venture capitalist.

Appointment of Board of Directors Provisions regarding suspension/cancellation of the investment.

The issues under which such cancellation or suspension takes place are default of covenants
and conditions, supply of misleading information, inability to pay debts, disposal and removal of
assets, refusal of disbursal by other financial institutions, proceedings against the company, and
liquidation or dissolution of the company.

Equity subscription agreement - This is the agreement between the venture capitalist and the
company onNumber of shares to be subscribed by the venture capitalist Purpose of the subscription
Pre-disbursement conditions that need to be met
Submission of reports to the venture capitalist Currency of the agreement Deed of Undertaking -
The agreement is signed between the promoters and the venture capitalist wherein the promoter
agrees not to withdraw, transfer, assign, pledge, hypothecate etc their investment without prior
permission of the venture capitalist. The promoters shall not diversify, expand or change product
mix without permission.

Income Note Agreement - It contains details of repayment, interest, royalty, conversion, dividend

Conditional Loan Agreement - It contains details on the terms and conditions of the loan, security of
loan, appointment of nominee directors etc.
Deed of Hypothecation, Shortfall Undertaking, Joint and Several Personal Guarantee Power of
Attorney etc.

Whenever there is a modification in any of the agreements, then a Supplementary Agreement is

created for the same.

5.1.6. Monitoring and follow up

The role of the venture capitalist does not stop after the investment is made in the project. The skills
of the venture capitalist are most required once the investment is made. The venture capitalist gives
ongoing advice to the promoters and monitors the project continuously. It is to be understood that
the providers of venture capital are not just financiers or subscribers to the equity of the project they
fund. They function as a dual capacity, as a financial partner and strategic advisor. Venture
capitalists monitor and evaluate projects regularly.

They are actively involved in the management of the of the investor unit and provide expert
business counsel, to ensure its survival and growth. Deviations or causes of worry may alert them to
potential problems and they can suggest remedial actions or measures to avoid these problems. As
professional in this unique method of financing, they may have innovative solutions to maximize
the chances of success of the project. After all, the ultimate aim of the venture capitalist is the same
as that of the promoters – the long term profitability and viability of the investor company.

Various styles
 Hands-on Style suggests supportive and direct involvement of the venture capitalist in the
assisted firm through Board representation and regularly advising the entrepreneur on
matters of technology, marketing and general management. Indian venture capitalists do not
generally involve themselves on a hands-on basis bit they do have board representations.

 Hands-off Style involves occasional assessment of the assisted firms management and its
performance with no direct management assistance being provided. Indian venture funds
generally follow this approach.

 Intermediate Style venture capital funds are entitled to obtain on a regular basis information
about the assisted projects. Venture capital target companies with superior products or
services focused at fast-growing or untapped markets. Venture capitalists must be confident
that the firm has the quality and depth in the management team to achieve its aspirations.
They will want to ensure that the investee company has the willingness to adopt modern
corporate governance standards. Firms strong in factors relating to patents, management,
idea, and potential are more likely to obtain VC financing and willing partners to support
commercialization activities.

5.1.7. EXIT strategies adopted by VCF’ s:

A venture capital firm enters a relationship with a company with the expectation that a significant
return of investment will result when the firm exits the investment. The firm plans for that exit to
take place within a certain amount of time, usually from three to six years, depending on the
development stage of the company in which it is investing. Depending on the investment focus and
strategy of the venture firm, it will seek to exit the investment in the portfolio company. While the
initial public offering may be the most glamorous and heralded type of exit for the venture capitalist
and owners of the company, most successful exits of venture investments occur through a merger or
acquisition of the company by either the original founders or another company. Again, the expertise
of the venture firm in successfully exiting its investment will dictate the success of the exit for
themselves and the owner of the company. There are several common exit strategies:


 Mergers and Acquisitions

 Redemption


The initial public offering is the most glamorous and visible type of exit for a venture investment. In
recent years technology IPOs have been in the limelight during the IPO boom of the last six years.
At public offering, the venture firm is considered an insider and will receive stock in the company,
but the firm is regulated and restricted in how that stock can be sold or liquidated for several years.
Once this stock is freely tradable, usually after about two years, the venture fund will distribute this
stock or cash to its limited partner investor who may then manage the public stock as a regular stock
holding or may liquidate it upon receipt. Over the last twenty-five years, almost 3000 companies
financed by venture funds have gone public.

 Mergers and Acquisitions

Mergers and acquisitions represent the most common type of successful exit for venture
investments. In an era of large companies dominating industry landscapes, acquisition is often the
targeted and most common exit strategy. Smaller companies have, in essence, become the research
and development arm of larger companies who often look to buy them once their innovations can
contribute to their own profitability. In the case of a merger or acquisition, the venture firm will
receive stock or cash from the acquiring company and the venture investor will distribute the
proceeds from the sale to its limited partners.

 Redemption

Another alternative is that the company may be required to buy back a venture capital firm's stock at
cost plus a certain premium. Often a venture capital firm will put a redemption clause (sometimes
referred to as a "buy-back clause") in the investment terms which allows them to exit their
investment in your company in the event that an IPO or acquisition does not happen within a
designated time period.



Recognizing the importance of venture capital, the government introduced major liberilisation of tax
treatment for venture capital funds and simplification of procedures. These included the following:

 SEBI was recognized as the single nodal agency.

 A new clause (23FB) in Section 10 of Income Tax Act was introduced with effect from 1st
March 2000. This clause stated that any income, of a venture capital company or a venture
capital fund, from any investments made in venture capital undertaking, would not be
included in computing the total income.

 Section 115U was also introduced in the Income Tax Act with effect from the assessment
year 2001-02 to establish a VC pass through. This means that the VC profits will not be
taxed twice. The regulated VC Fund (with SEBI) would be exempted from tax (subject to
certain conditions) but the VC investor will have to pay tax.

 Earlier on, if a VCF wished to avail certain tax benefits, the VCF had to exit from
investments made in a venture capital undertaking (VCU) within twelve months of the VCU
obtaining a listing. However, this requirement was done away around November 2000. The
Finance Bill 2001, proposes to amend section 10 (23 FB) so as to provide that a VCC / VCF
will continue to be eligible for exemption under section 10 (23 FB), even if the shares of the
VCU, in which the VCC / VCF has made the initial investment, are subsequently listed in a
recognized stock exchange in India.


There have been a number of initiatives by the Government as well as the industry to pave way for a
business and regulatory environment that is conducive to new venture development and to
innovation at the user end. Some of the initiatives in the past have included those by the Ministry of
Finance, the Securities, Exchange Board of India (SEBI), Ministry of Information Technology
(formerly Department of Electronics), State Governments, Financial Institutions, the Indian Venture
Capital Association. These initiatives resulted in the availability of more than US$ 500 million of
venture funds for Indian ventures during 1999-2000. With the growing realization of the immense
potential offered by Indian technology companies, funding opportunities are rapidly increasing. The
Government of India has already taken laudable steps to facilitate the creation of an environment
that is conducive for venture capital funds and start-ups in India.

These include:

 introduction of sweat equity,

 allowing venture capital funds to offset losses incurred in one companyagainst profits from
another and establishment of government facilitated venture capital funds.

However, the present regulatory framework is still not enough to provide for an

 environment that lays stress on

 encouraging the flow of venture funds,

 easy exit options (for either party),

 mentoring,

 non-qualified availability of funds,

 and flow of public funds for enterprise building in India.

India needs to encourage the growth of risk capital by acting on three fronts:

 The Government of India and Indian financial institutions should catalyze the process by
creating Israel's Yozma-like funds. This will stimulate competition but also protect
entrepreneurs from inevitable risks.

 India should amend its regulatory framework so that the VC funds can earn a reasonable
return on their risk capital.

 India should actively promote the infusion of VC skills and capabilities, either by attracting
global VC funds or attracting managers from these funds.

However, the above moves need to be substantiated with the earliest implementation of the
recommendations of the SEBI Committee on Venture Capital.


According to this regulations, a VCF means a fund established in the form of a trust/company;
including a body corporate, and registered with SEBI which

has a dedicated pool of capital raised in a manner specified in the regulations and (ii) invests in
venture capital undertakings(VCUs) in accordance with these regulations a VCU means a domestic
company (i) whose shares are not listed on a recognized stock exchange in India and (ii) which is
engaged in the business of providing services/production/manufacture of articles/things but doesn’t
include such activities/sectors as are specified in the negative list by SEBI with

governmental approval-namely, real estate, non-banking financial companies(NBFCs),gold

financing, activities not permitted under the industrial policy of the Government and any other
activity which may be specified by SEBI in consultation with the Government from time to time.
The main elements of the SEBI regulation are briefly outlined:


All VCFs must be registered with SEBI and pay Rs 25,000 as application fee and Rs 5,00,000 as
registration fee for grant of certificate. The eligibility criteria for registration is:
 Any company or trust[or a body corporate] proposing to carry on any activity as a
venture capital fund on or after the commencement of these regulations shall make an
application to the Board for grant of a certificate.

 Any company or a body corporate], who on the date of commencement of these regulations
is carrying any activity as a venture capital fund without a certificate shall make an
application to the Board for grant of a certificate within a period of three months from the
date of such commencement: Provided that the Board, in special cases, may extend the staid
period up to a maximum of six months from the date of such commencement.

 An application for grant of certificate under sub-regulation or sub-regulation shall be made

to the Board in Form A and shall be accompanied by a nonrefundable application fee as
specified in Part A of the Second Schedule to be paid in the manner specified in Part B

 Any company or trust 3[or a body corporate] referred to in sub-regulation who fails to make
an application for grant of a certificate within the period specified therein shall cease to carry
on any activity as a venture capital fund.

 The Board may in the interest of the investors issue directions with regard to the transfer of
records, documents or securities or disposal of investments relating to its activities as a
venture capital fund.

 The Board may in order to protect the interests of investors appoint any person to take
charge of records, documents, securities and for this purpose also determine the terms and
conditions of such an appointment.

 Eligibility Criteria.

 For the purpose of the grant of a certificate by the Board the applicant shall have to fulfill in
particular the following conditions, namely:—

 if the application is made by a company memorandum of association as has its main

objective, the carrying on of the activity of a venture capital fund;

 it is prohibited by its memorandum and articles of association from making an invitation to

the public to subscribe to its securities;
 its director or principal officer or employee is not involved in any litigation connected with
the securities market which may have an adverse bearing on the business of the applicant;

 its director, principal officer or employee has not at any time been convicted of any offence
involving moral turpitude or any economic offence;

 it is a fit and proper person

 if the application is made by a trust—

 the instrument of trust is in the form of a deed and has been duly registered under the
provisions of the Indian Registration Act, 1908 (16 of 1908);

 the main object of the trust is to carry on the activity of a venture capital fund;

 the directors of its trustee company, if any or any trustee is not involved in any litigation
connected with the securities market which may have an adverse bearing on the business of
the applicant inserted by the SEBI (Venture Capital Funds) Amendment Regulations, 1998

 the directors of its trustee company, if any, or a trustee has not at any time, been convicted of
any offence involving moral turpitude or of any economic offence if the application is made
by a body corporate

i. it is set up or established under the laws of the Central or State Legislature,

ii. the applicant is permitted to carry on the activities of a venture capital fund,

iii. the applicant is a fit and proper person,

iv. the directors or the trustees, as the case may be, of such body corporate have not been
convicted of any offence involving moral turpitude or of any economic offence,

v. the directors or the trustees, as the case may be, of such body corporate, if any, are not
involved in any litigation connected with the securities market which may have an adverse
bearing on the business of the applicant


Minimum investment in a Venture Capital Fund.

A venture capital fund may raise monies from any investor whether Indian, Foreign or non-
resident Indian. No venture capital fund set up as a company or any scheme of a venture capital
fund set up as a trust shall accept any investment from any investor which is less than five lakhs
rupees provided that nothing contained in sub-regulation shall apply to investors who are,

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;

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.

 Restrictions on investment by VCF .

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

b) venture capital fund shall not invest more than 25% corpus for the purpose, one venture
capital undertaking venture capital fund may invest in securities of foreign companies
subject to such conditions or guidelines that may be stipulated or issued by the Reserve Bank
of India and the Board from time to time.

Restrictions on investment by a venture capital fund-All investments made or to be made

by a venture capital fund shall be subject to the following restrictions:

a) the venture capital fund shall not invest in the equity shares of any company or institution
providing financial services;

b) at least 80 percent of funds raised by a venture capital fund shall be invested in the equity
shares or equity related securities issued by a company whose securities are not listed on any
recognized stock exchange: Provided that a venture capital fund may invest in equity shares
or equity related securities of a company whose securities are to be listed or are listed where
the venture capital fund has made these investments through private placements prior to the
listing of the securities.

The equity shares or equity related securities of a financially weak company or a sick industrial
company, whose securities may or may not be listed

on any recognized stock-exchange.

Explanation: For the purposes of this regulation, a "financially weak company" means a company,
which has at the end of the previous financial year accumulated losses, which has resulted in erosion
of more than 50% but less than 100% of its network as at the beginning of the previous financial

Providing financial assistance in any other manner to companies in whose equity shares the venture
capital fund has invested under sub-clause.

As For the purposes of this regulation, "funds raised" means the actual monies raised from investors
for subscribing to the securities of the venture capital fund and includes monies raised from the
author of the trust in case the venture capital fund has been established as a trust but shall not
include the paid up capital of the trustee company.

i. at least [66.67%] of the investible funds shall be invested in unlisted equity shares or equity
linked instruments of venture capital undertaking.

ii. Not more than 4[33.33%] of the investible funds may be invested.

 Prohibition on listing

No VCF would be entitled to get its units listed on any recognized stock exchange till the expiry of
three years from the date of issuance of units by it.


A VCF is not permitted to issue any document /advertisement inviting offers from public for
subscription/purchase of any of its units. It may receive money from investment in the VCF through
only private placement of its units.

 Placement memorandum/subscription agreement.

The venture capital fund should

a) issue a placement memorandum which shall contain details of the terms and conditions
subject to which monies are proposed to be raised from investor 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.

c) The Venture Capital Fund shall file with the Board for information, the copy of the
placement memorandum or the copy of the contribution or subscription agreement entered
with the investors along with a report of money actually collected from the investor.

d) the minimum amount to be raised for each scheme and the provision for refund of monies to
investor in the event of non-receipt of minimum amount.

 Winding-up.

A scheme of a venture capital fund set up as a trust shall be wound up,

a) when the period of the scheme, if any, mentioned in the placement memorandum is over;

b) if it is the opinion of the trustees or the trustee company, as the case may be, that the scheme
shall be wound up in the interests of investors in the units;

c) if seventy-five per cent of the investors in the scheme pass a resolution at a meeting of unit
holders that the scheme be wound up; or (d) if the Board so directs in the interests of

 A venture capital fund set up as a company shall be wound up in accordance with

the provisions of the Companies Act, 1956 (1 of 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.

As per the preference of investors, after obtaining approval of at least 75% of the investors of the


SEBI may, suomoto, or upon receipt of information/complaint appoint one/more person(s) as

inspecting /investigating officer(s) to undertake inspection/investigation of the books of
accounts/records/documents relating to a VCF for any of the following reasons:

 To ensure that the book of accounts, records and documents were being maintained by it in
the specified manner.

 To inspect or investigate into complaints received from investors, clients or any other person,
on any matter having a bearing on its activities.

 To ascertain whether it is complying with the provisions of the SEBI acts and its regulations.

 To inspect or investigate suomoto, into the affairs of the venture capital fund, in the interest
of the securities market/investors.

 Obligations of VCFs

Obligations of venture capital fund on inspection or investigation by the Board.-(1) It shall be the
duty of the venture capital fund whose affairs are being inspected or investigated, and of every
director, officer and employee thereof, of
its asset management company, if any, and of its trustees or directors or the directors of the trustee
company, if any, to produce before the inspecting or investigating officer such books, securities,
accounts, records and other documents in its custody or control and furnish him with such
statements and information relating to the venture capital fund, as the inspecting or investigating
officer may require, within such reasonable period as the inspecting officer may specify.

It shall be the duty of every officer of the Venture Capital Fund in respect of whom an inspection or
investigation has been ordered under regulation 25 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 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 or any other associate person
having relevant information pertaining to such Venture Capital Fund.

 Action in case of default

SEBI can suspend/cancel the registration of a VCF on the basis of the due procedure.

 Suspension of registration

The certificate of registration granted to a VCF can be suspended by SEBI, in addition to issuing of
direction/measures specified above in the following circumstances:

 Contravention of any of the provisions of the SEBI Act or these regulations.

 Failure to furnish any information relating to its activity as a VCF as required by SEBI.

 Furnishing to SEBI information which is false/misleading in any material particular.

 Non-submission of periodic returns/reports as required by SEBI

 Non-cooperation in any enquiry, inspection/investigation conducted by SEBI

 Failure to resolve the complaints of investors/to give a satisfactory reply to SEBI in this

 Cancellation of registration

The registration of a VCF can be cancelled by SEBI when it:

 Is guilty of fraud or is convicted of an offence involving moral turpitude;

 Has been guilty of repeated defaults which may result in suspension of the registration;

 Contravenes any of the provisions of the SEBI Act or these regulations.

The order of suspension/cancellation of certificate of registration would be published by

SEBI in two newspapers. On and from the date of suspension/cancellation, the VCF would cease to

carry on any activity as a VCF and would be subject to directions from concerning SEBI the transfer

of records, documents/securities that may be in its custody/control as it may specify.

 Action Against Intermediaries

SEBI may initiate action for suspension/cancellation of registration of an intermediary

(registered with it) who fails to exercise due diligence in the performance of its functions or fails to
comply with its obligations under these regulations.

Any person aggrieved by an order of SEBI under these regulations may prefer an appeal to
the securities appellate Tribunal (SAT).

 Regulatory Reforms and Framework

SEBI (Venture Capital Funds) (Amendment) Regulations, 2000 and the SEBI (Foreign Venture
Capital Investors) Regulations, 2000.

1. Following are the salient features of SEBI (Venture Capital Funds) (Amendment)
Regulations, 2000:

 Definition of venture capital fund:

The venture capital fund is now defined as a fund established in the form of a Trust, a company
including a body corporate and registered with SEBI which:

 has a dedicated pool of capital;

 raised in the manner specified under the Regulations; and

 to invest in venture capital undertakings in accordance with the Regulations.

 Definition of venture capital undertaking:

Venture capital undertaking means a domestic company:

 Whose shares are not listed on a recognized stock exchange in India.

 Which is engaged in business including providing services, production or manufacture of

articles 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. The negative list includes real estate, non-banking financial
services, gold financing, activities not permitted under the Industrial Policy of the
Government of India.

 Minimum contribution and fund size:

The minimum investment in a Venture Capital Fund from any investor will not be less than Rs.5
lacks and the minimum corpus of the fund before the fund can start activities shall be at least Rs.5

 Investment criteria:

The earlier investment criteria has been substituted by a new investment criteria which has the
following requirements:

 Disclosure of investment strategy;

 Maximum investment in single venture capital undertaking not to exceed 25% of the corpus
of the fund;

 Investment in the associated companies not permitted;

 At least 75% of the investible funds to be invested equity shares or equity linked

 Not more than25% 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;

b) Debt or debt instrument of a venture capital fund has already made an investment by way of

It has also been provided that venture capital fund seeking to avail
benefit under the relevant provisions of the Income Tax Act will be required to divest from the
investment within a period of one year from the listing of the venture capital undertaking.

1. Disclosure and information to investors:

In order to simplify and expedite the process of fund raising, the requirement of filing the Placement
memorandum with SEBI is dispensed with and instead the fund will be required to submit a copy of
Placement Memorandum/copy of contribution agreement entered with the investors along with the
details of the fund raiser for information to SEBI. Further, the contents of the Placement
Memorandum are strengthened to provide adequate disclosure and information to investors. SEBI
will also prescribe suitable reporting requirement from the fund on their investment activity.

2. QIB status for venture capital funds:

The venture capital funds will be eligible to participate in the IPO through book building route as
Qualified Institutional Buyer subject to compliance with the SEBI (Venture Capital Fund)

3. Relaxation in takeover code:

The acquisition of shares by the company or any of the promoters from the Venture Capital Fund
under the terms of agreement shall be treated on the same footing as that of acquisition of shares by
promoters/companies from the state level financial institutions and shall be exempt from making an
open offer to other shareholders.

4. Investments by mutual funds in venture capital funds:

In order to increase the resources for domestic venture capital funds, mutual funds are permitted to
invest up to 5% of its corpus in the case of open-ended schemes and up to 10% of its corpus in the
case of close-ended schemes. Apart from raising the resources for venture capital funds this would
provide an opportunity to small investors to participate in venture capital activities through mutual

5. Government of India guidelines:

The government of India (MOF) guidelines for overseas venture capital investment in India dated
September 20, 1995 will be repealed by the MOF on notification of SEBI Venture Capital Fund

The following will be the salient features of SEBI (Foreign Venture Capital investors) Regulations,

Definition of foreign venture capital investor:

Any entity incorporated and established outside India and proposes to make investment in venture
capital fund or venture capital undertaking and registered with SEBI.

 Eligibility criteria:

Entity incorporated and established outside India in the form of investment company, trust,
partnership, pension fund, mutual fund, university fund, endowment fund, asset management
company, investment manager, investment management company or other investment vehicle
incorporated outside India would be eligible for seeking registration from SEBI. SEBI for the
purpose of registration shall consider whether the applicant is regulated by an appropriate foreign
regulatory authority; or is an income tax payer; or submits a certificate from its banker of its or its
promoters’ track record where the applicant is neither a regulated entity nor an income tax payer.

 Investment criteria:

 Disclosure of investment strategy;

 Maximum investment in single venture capital undertaking not to exceed 25% of the funds
committed for investment of India. However it can invest its total fund committed in one
venture capital fund;

 At least 75% of the investible funds to be invested in unlisted equity shares or equity linked

 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;

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.

The foreign venture capital investors proposing to make venture capital investment under the
Regulations would be granted registration by SEBI. SEBI
registered foreign venture capital investors shall be permitted to make investment on an automatic
route within the overall sect oral ceiling of foreign investment under Annexure III of statement of
Industrial Policy without any approval from FIPB.

Further, SEBI registered FVCIs shall be granted a general permission from the exchange control
angle for inflow and outflow of funds and no prior approval of RBI would be required foe pricing,
however, there would be ex-post reporting requirement for the amount transacted.

7. Trading in unlisted equity:

The board also approved the proposal to permit OTCEI to develop a trading window for unlisted
securities where Qualified Institutional Buyers (QIB) would be permitted to participate.

Some of the members of the Board felt that the mandated post listing exit time frame of one year for
availing tax pass through by a domestic venture capital fund could be reconsidered by the
Government in the light of international experience and the need to avoid operational restrictions
and optimize inflow of venture capital in the country. The Board also desired that a small Group
within SEBI could be set up to codify the experience of the existing players, international
experience including tax treatment and potential areas for venture capital funding.

There have been tremendous legal and regulatory reforms in the Venture Capital and Private Equity
sectors, which have led to the present state of boom in the Private Equity scenario in India. Some of
the major reforms impacting this industry can be summarized as under:

 Government if India issued guidelines in September 1995 for overseas Venture Capital
investment in India.

 SEBI framed SEBI (Venture Capital Funds) Regulations, 1996.

 In 1999-the companies (Amendment) Act, 1999, dispensed with prior approval of Central
Government for investment by a company exceeding 60 percent (paid-up share capital +free
reserves) or 100 percent free reserve, whichever is more, and enabled the company to make
investment by way of special resolution at general meeting.

 In 2000-SEBI introduced an-other regulation for SEBI (Foreign Venture Capital Investors)
Regulations, 2000, enabling foreign Venture Capital and Private Equity investors to register
with SEBI and avail certain benefits provided there under.

 In 2000-amendments were made in SEBI (Substantial Acquisition of Shares and Takeovers)

Regulation, 1997; as a result, these regulations were not to apply to the shares transferred
from VCF or FVCI to the promoters or to the company itself, if effected as per pre-existing
agreement between VCF or FVCI and the promoters of the company . If promoters buy back
the shares from FVCI, then there is no requirement of public offering.

 In 2000-as per FEMA, FVCI can acquire or sell any investment held by it at a mutually
acceptable price.

 In 2001-The companies (Amendment) Act, 2001, reduced the period of issue of fresh shares
from 24 months to 6 months, from when the company completes the buyback of its shares.

India’s Security markets regulator SEBI (Securities Exchange Board of India) has approved the
SEBI (Alternative Investment Funds) Regulations, 2012 to bring unregulated funds under its
purview, ensure systemic stability, increase market efficiency and enable the formation of new
capital. These regulations will be applicable to all pooled investment vehicles apart from Mutual
Funds, CIS Schemes, Family Trusts, ESOP Trusts, Employee Welfare Trusts, holding companies,
funds managed by Asset Reconstruction Companies, Securitization Trust or funds directly regulated
by any other regulator in India. Some of the regulations approved by the board include:

 Registration:

All Alternative Investment Funds (AIFs), whether operating as Private Equity Funds, Real Estate
Funds or Hedge Funds should be registered with SEBI.

Withdrawal of old VC Fund Regulations:

The SEBI (Venture Capital Funds) Regulations of 1996 will be officially withdrawn, however
existing venture capital funds will continue to be regulated by the regulations until the fund winds
down its operations and they will not be allowed to raise any fresh funds, except for the previous
investor commitments. That being said, Venture Capital funds can also opt to re-register themselves
under the new AIF regulations, provided they receive the approval to do so from 66.67% of their
investors and can seek exemption from the board from strictly adhering to these regulations, in case
they are not able to comply with all the new regulations.

 Corpus:

AIFs should have a minimum corpus of Rs 20 crores and they shall not accept any investment less
than Rs 1 crores from an investor. The fund should not have more than 1000 investors and the fund
manager should have continuing interest of minimum 2.5% of the initial corpus or Rs 5 crores,
whichever is lower. The fund manager is not allowed to continue the interest through the waiver of
management fees.

 Filings:

Funds can launch schemes, following the filing of information

memorandum with the Board along with applicable fees, and fund units can be listed on the stock
exchange subject to a minimum tradable lot of Rs one crores, however they are forbidden to raise
funds through the exchange.

 Limits To Investment:

AIFs are not allowed to invest more than 25% of the funds in one Company and are forbidden to
invest in associate companies. They should also provide investors with financial information of
portfolio companies as also material risks and how these are managed on an annual basis.

 What Funds Are Under This New Regulation?

SEBI stated that the new regulations will broadly cover all types of funds under three categories. All
AIFs can apply for registration under one of the categories below:

 Category I AIFs:

These funds will be close ended, adhere to the investment restrictions as instructed for each category
and shall not engage in leverage i.e. any activity to multiply gains and losses like borrowing money,
buying fixed assets and using derivatives. SEBI stated that they or Government of India or other
Indian regulators may consider certain incentives or concessions for these funds, depending upon
the specific need of each type of funds. Among the funds included in this category are Venture
Capital Funds, SME Funds, Social Venture Funds and Infrastructure Funds and the minimum tenure
of these funds should be 3 years.

 Category II AIFs:

These funds shall be close ended with no investment restrictions. However these funds are not
allowed to engage in leverage other than meeting day-to-day operational requirements, as per the
regulations and they will not attract any specific incentives or concessions from SEBI, Government
of India or any other regulator. Among the funds included in this category include Private Equity
Funds, Debt Funds, Fund of Funds and unclassified funds that don’t fall under either category I or
category III and have a minimum tenure of 3 years.

 Category III AIFs:

These funds can be open ended or closed ended and are allowed to engage in leverage within the
prescribed board limits. Among the funds included are Hedge Funds which, according to SEBI,
have negative externalities i.e. these funds make decisions which may impose a negative effect on
other funds, thereby leading to inefficiencies in the market. These funds will be regulated through
Board’s directions in areas such as operational standards, conduct of business rules, prudential
requirements, restrictions on redemption, and conflict of interest.


In India, the Venture Capital plays a vital role in the development and growth of innovative
entrepreneurships. Venture Capital activity in the past was possibly done by the developmental
financial institutions like IDBI, ICICI and State Financial Corporations. These institutions promoted
entities in the private sector with debt as an instrument of funding. For a long time, funds raised
from public were used as a source of Venture Capital. This source however depended a lot on the
market vagaries. And with the minimum paid up capital requirements being raised for listing at the
stock exchanges, it became difficult for smaller firms with viable projects to raise funds from public.

In India, the need for Venture Capital was recognised in the 7th five year plan and long term fiscal
policy of GOI. In 1973 a committee on Development of small and medium enterprises highlighted
the need to faster VC as a source of funding new entrepreneurs and technology. VC financing really
started in India in 1988 with the formation of Technology Development and Information Company
of India Ltd. (TDICI) – promoted by ICICI and UTI.

The first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and
promoted by Bank of India, Asian Development Bank and the Commonwealth Development
Corporation viz. Credit Capital Venture Fund. At the same time Gujarat Venture Finance Ltd. and
APIDC Venture Capital Ltd. were started by state level financial institutions.



For a very long time, Silicon Valley venture

capitalists only invested locally. However,
throughout the years, they expanded their
investments worldwide. Most recently, Matrix
Partners, a leading American venture capitalist
firm, had announced a $150 million India fund,
where they will provide internet, mobile, media,
entertainment, leisure, and travel
services to customers in Mumbai. Sequoia
Capital, a Silicon Valley-based VC firm, wanted to take advantage of investing in start-up companies and had acquired
West bridge Capital, an Indian firm, for $350 million. It is no wonder that venture capitalist investments in India have
risen dramatically within the past few years. From 2005 to 2007, VC investments in India grew from $320 million to
about $777 million, respectively.

 Some important Venture Capital Funds in India:-

1. APIDC Venture Capital Limited , 1102, Babukhan Estate, Hyderabad 500 001
2. Canbank Venture Capital Fund Limited, IInd Floor, Kareem Towers, Bangalore
3. Gujarat Venture Capital Fund 1997, Ashram Road, Ahmedabad 380 009
4. Industrial Venture Capital Limited, Thyagaraya Road, Chennai 600 017
5. Auto Ancillary Fund Opp. Signals Enclave, New Delhi 110 010
6. Gujarat Venture Capital Fund 1995 Ashram Road Ahmedabad 380 009
7. Karnataka Information Technology Venture Capital Fund Cunningham Rd Bangalore
8. India Auto Ancillary Fund Nariman Point, Mumbai 400 021
9. Information Technology Fund, Nariman Point, Mumbai 400 021
10. Tamilnadu Infotech Fund Nariman Point, Mumbai 400 021
11. Orissa Venture Capital Fund Nariman Point Mumbai 400 021
12. Uttar Pradesh Venture Capital Fund Nariman Point, Mumbai 400 021
13. SICOM Venture Capital Fund Nariman Point Mumbai 400 021
14. Punjab Infotech Venture Fund 18 Himalaya Marg, Chandigarh 160 017
15. National venture fund for software and information technology industry Nariman.



DHFL Venture Capital India Pvt. Ltd. (DVCI) provides advisory, managerial and consultancy
services to Venture Capital Funds, Venture Capital Managements and Venture Capital
Undertakings, related to Indian Real Estate.

DVCI is promoted by Dewan Housing Finance Corporation Limited (DHFL), India’s premier
second largest housing finance company in the private sector.

The Company is presently providing investment management services to DHFL Venture

Capital Fund. DHFL Venture Capital Fund was launched in Feb 2006, one of the first private
equity Real estate funds in India. The fund is registered with Securities and Exchange Board
of India.


Canaan Partners (Canaan) is a global venture capital firm focusing on investments in early
stage companies in the technology and healthcare sectors.

The firm’s technology group focuses on digital media, communications, enterprise sofware,
semiconductors, and cleantech. The healthcare group focuses on biopharmaceuticals,
devices, and diagnostics.

Founded in 1987, the firm has offices in Menlo Park, California; Westport, Connecticut;
Gurgaon, India; and Herzliya, Israel. Since inception, Canaan has raised eight funds to date
and as of 2009 manages $3 billion in capital.
Canbank Venture Capital Fund Ltd (CVCFL) is a wholly owned Subsidiary of Canara Bank.
Canbank Venture Capital Fund is India’s First and Only Public Sector Bank sponsored
Venture Capital Fund, set up in 1989. The Fund is registered with SEBI.

Four Venture Capital Funds with an aggregate corpus of around INR 1200 Million launched
till date. The portfolio investments are spread across diverse industrial segments.

 A Case on Technology Development & Information Company Of India Ltd.

TDICI was incorporated in January 1988 with the support of the ICICI and the UTI. The
country’s first venture fund managed by the TDICI called VECAUS ( Venture Capital Units
Scheme) was started with an initial corpus of Rs.20 crore and was completely committed to
37 small and medium enterprises.

The first project of the TDICI was loan and equity to a computer sofware company called
Kale Consultants.

Present Status: At present the TDICI is administering two UTI -mobilised funds under
VECAUS-I and II, totaling Rs.120 crore. the Rs.20 crore invested under the first fund,
VECAUS-I, has already yielded returns totaling Rs. 16 crore to its investors.