Venture Capital in India

Venture Capital in India

Venture capital was originated in India very late. Bhatt Committee (Committee on Development of Small and Medium Entrepreneurs) in the year 1972 recommended the creation of venture capital. The committee urged the need for providing such capital to help new entrepreneurs and technologists in setting up industries.

Brief description of some of the venture capital funds of India is as follows:

Risk capital foundation: The Industrial Finance Corporation of India (IFCI) launched the first venture capital fund in the year 1975. The fund, ‘Risk Capital Foundation’ (RCF) aimed at supplementing promoters’ equity with a view to encourage technologies and professionals to promote new industries.

Seed capital scheme: This venture capital fund was launched by IDBI in 1976, with the same objective in mind.

Venture capital schemes: Venture capital funding obtained official sponsorship with the announcement by the Central Government of the “Technology Policy Statement” in 1983. It prescribed guidelines for achieving technological self reliance through commercialization and exploitation of technologies. The ICICI, an all-India financial institution in the private sector set up a Venture Capital Scheme in 1986, to encourage new technocrats in the private sector to enter new fields of high technology with inherent high risk. The scheme aimed at allocating funds for providing assistance in the form of venture capital to economic activities having risk, but also high profit potential.

PACT: The ICICI undertook the administration of Program for Application of Commercial Technology (PACT) aided by USAID with an initial grant of US$ 10 million. The program aims at financing specific needs of the corporate sector industrial units along the lines of venture capital funding.

Government fund: IDBI, as nodal agency, administers the venture capital fund created on April1, 1986, by the Central Government. The government started imposing a Research and Development (R & D) under the R & D Cess Act, 1986, levy on all payments made for the purchase of technology from abroad, including royalty payments, lump sum payments for foreign collaboration and payment for designs and drawings.

TDICI: In 1988, an ICICI sponsored company, viz, Technology Development and Information Company of India Ltd. (TDICI) was founded, and venture capital operations of ICICI were taken over by it with effect from July 1, 1988.

RCTFC: The Risk Capital Foundation (RCF) sponsored by IFCI was converted into Risk Capital and Technology Finance Corporation Ltd. (RCTFC) in the year 1988. It took over the activities of RCF in addition to the management of other financing technology development schemes and venture capital fund.

VECAUS: VECAUS–I, the UTI sponsored “Venture Capital Unit Scheme” was launched in the year 1989. Technology Development and Information Company of India Ltd. (TDICI) was appointed as its manager. In the year 1990, the corporation was also entrusted with the responsibility of managing another UTI sponsored venture fund named “VECAUS-II”. In 1991, UTI launched VECAUS –III and RCTC was appointed as fund manager.

Other  funds:  The  liberalized  guidelines  introduced  by  the government, in 1988 gave rise to the setting up of a number of venture capital funds, especially in the private sector.

Venture Leasing

A leasing arrangement in which the ‘lessor’ provides both the assets and the equity capital to the lessee is called venture leasing

Advantages

Minimizes initial investments by startups

Rentals can be tailored to the cash flow profile

Equity participation can lower lease rentals

Asset risk transferred to lessor

Disadvantages

May be difficult to offload equity stake

Depreciation tax shield transferred to the lessor

High agency costs to prevent misuse of asset

Lower debt capacity for lessee.

Conclusion

In the US and UK, the venture capitalists are playing a strategic role in the promotion and development of industries in partnership with the entrepreneurs. It’s phenomenal contribution to the harnessing of technical innovation to successful commercial exploitation is there as standing testimony. In the radically changing economic environment, now further accelerated by the high technology explosion both the entrepreneurs and the venture capitalists are equally important to the well being of any country. Venture capital promotes entrepreneurship, accelerates the process of industrialization, promotes new products and services and generates employment opportunities and brings a new boost to the economy.