CHAPTER I11

GROWTH AND DEVELOPMENT OF VENTURE

CAPITAL COMPANIES/FUNDS IN INDIA

VENTURE CAPITAL IN INDIA - THE BEGINNING

Venture capital in lndia is of fairly recent origin and can be stated to

have commenced in the late 1980s. 'Thc initial stcps for the institutionalisation

of venture capital were taken by the govcrnmcnt. This was in November 1988

when the Ciovernment of India announced the venturc capital guidelines.

Institutions conforming to the guidelines (Venture capital companies or Venture

capital hnds ) were entitled to tax relief' on capital gains under the Indian

Income Tax Act.

The emergence of venture capital in lndia was cssentially influenced by

developments in western countrics. 'l'hough India has a fairly well developed

network of specialized financial institution:; which provide long term finance to

new industrial projects, a gap was felt in the area of equity finance to new

projects, especially those involving a higher degree of risk due to new untried

technology. The venturc capital guidelines (1988) focussed on a relatively

narrow area of venture capital activity. nan~ely, equity oricntcd finance for the

commercialization of relativcly new technologies prornotcd by relatively new

entrepreneurs. The enlphasis on technology in the venture capital guidelines

was influenced by the early US experience and the availability of World Bank

assistance and support for new venture capital companies and funds operating in

this area.

Indian venture capital firms are allowed to make investments only in

India. So far 61 per cent of investments have been in start-ups, with seed

investment(9 per cent), development ( 1 3 per cent), and mezzanine ( I 5 per cent)

contributing the balance amount. Both equity and debt instruments have been

used in the Indian venture capital industry, including conventional loans and

conditional loans, as well as various quasi-equity instruments, although policies

regarding the instrument-mix can still be said to be in an evolutionary stage.

Though the Venture Capital industry in India is still relatively young to

make an assessment of its performance, certain points can be made regarding thc

direction in which the industry is moving. Firstly, there are very few players

currently in the field and even the few venture capital colnpanics promoted by

private companies have been supported to a significant cxtent by banks and other

financial institutions. Secondly. the industry has a relatively narrow f'ocus as

compared to many of its counterparts in developed countries. So far, financing

arrangements, such as management buy-outs, etc, have not even been considered

by the Indian in dust^ as appropriate venture investments. However as the

industry is still in the evolutionary stage, it is possible that it may broaden its area

of activities in the future. 'l'hirdly, thc financing structures in India have initially

included a strong component of loan finance, which is more similar to the

Japanese and Korean, than the U.S.A and U.K., models.

GROWTH OF VENTURE CAPITAL IN INDIA

The growth of venture capital in India has followed a gradual sequence

of events. The idea of venture capital tinaniing was adopted at thc instance of

the central government and government sponsored institutions. The need for

venture capital financing was first highlighted in 1972 by the Committee on

Development of Small and Medium Entrepreneurs under the chairmanship of

R.S.Bhatt (popularly Known as the Bhatt Committee) which drew attention to

the problems of new entrepreneurs and technologists in setting up industries. In

1975 venture capital financing was introduced in India by the All-lndia

Financial Institutions with the inauguration of Risk Capital Foundation (KCF)

sponsored by IFCI to supplement "promoters" equity with a view to

encouraging technologists and professionals to promote new industries, ln 1976

the seed capital schcmc was introduced by 1t)Bl. Till I984 Venture Capital

took the form of risk capital and seed capital. In retrospect, though, it may be

difficult to establish that the spate of sickness in industrial units in the decades

prior to 1980, could possibly have been avoided. had venture capital been readily

available.

A positive role for venture capital was envisaged in the national

Technological Policy statement in1983. which set guidelines for technological

self -reliance in order to encourage the commercialisation and exploitation of'

technologies developed in the country. 'l'he Policy statement stressed the

development of indigenous technology and the efficient absorption and

adaptation of imported technology appropriate to national priorities and

resources. Given these objectives Venture Capital became a necessary method

of financing for enterprises using such technology.

FACTORS RESPONSIBLE FOR GROWTH OF VENTURE CAPITAL IN INDIA

As we have secn, the 'l'echnology f'olicy statement (1983) of the

government set the guidelines for technological self-reliance. The policy

statement stressed the following objectives:

To attain technological competence and self-reliance, particularly in

strategic and critical areas, making the maximum use of indigenous

resources :

to use traditional skills and capabilities, making them commercially

competitive:

to provide the maximum gainful and satisfying employment

to ensure maximum development with minimum capital outlay

to identify obsolescence of technology in use and arrange for modernisation

of both equipment and technology

to develop technologies which arc internationally competitive, particularly

those with export potential

to reduce demands on energy, particularly energy from non-renewable

sources

to ensure harmony with the environment, prcscrvc the ecological balance

and improve the quality of the habitat and

to recycle waste material and make full utilisation of by-products.

While, medium and large-scale industries were able to follow the

government policy framework with thc help of development finance from the

All -India financial institutions, small and medium- scale industries lacked the

finance to do so. Despite the creation, as noted, of venture financing

institutions by1988 finance for tcchnological ventures on a small or tnedium-

scale was not freely available.

In January 1989 the Working Group on the Development of Capital

Market set up by the Planning Commission under the chairmanship of Abid

Hussain highlighted the lack of financial support for small and medium scale

industries adopting indigenous technology. While making observations on the

organisation and financing of venture capital industry in India, the working

Group noted the absence of a proper system of financing companies with a

capital base of less than Rs.50 million also, in particular the difficulty faced by

new companies venturing to undertake activities like development and

commercialisation of improved technology for application in new arcas or End-

uses and specialised consultancy services in software and equipmcnt

maintenances.

For the development of indigenous technology, R&D is required to be

adopted on a larger scale. 'I'here is no dearth in India for skilled and trained

manpower. What is required is venture finance on tlexible tenns both for

laboratory testing, processing, and commercialisation of the developed

technology. R&D activity has been confined to institutions like Council of

Scientific and lndustrial Research(C'S1K). Indian Council of Agricultural

Research (ICAR), R&D centres are attached to various government ministries

such as industries, commerce. steel mines, chemicals and fertilisers, power,

coal, energy, communications, transport, rural development and education and

health, or engaged in basic industry like steel, engineering goods, machine tools,

electronic equipment, fertilisers and chemicals. drug and pharmaceuticals. In

the private sector there is not much incentive for R&D, baring a few top

industries in R&D where the industrial sector is roughly 23 percent which

comes to only 0.2 per cent of GNP. Hence. thc need exists for making R&Il a

necessary activity in the industrial sector. For motivating individual attempts

in the development of new technology in the corporate or cooperative sectors

venture capital is still required for a higher order.

An industry expert who is optimistic about the future of venture

capitalism in India, believes that a shift from stress on technology is required for

the survival and growth of venture capital industry,

AN OVERVIEW

Venture capital institutions are a reccnt addition to this reasonabl\

developed network of institutional finance and are meant 10 fill the gap in thc

conventional financial mechanism. ith special emphasis on new entrepreneurs.

commercialization of tcchnologics and support to smaller and medium-

sized companies in the industrial and scrvicc$ scctors. Most of' thc Indian

Venture capital institutions are les5 than five !ears old and perhaps it is too

early to make an evaluation of their contribution to thc Indian cconomq

The devcloplncnt of the venture cnpit;~l industry startcd in thc IJ.S.A.

about four decades ago, but it has groiln mliinly since the curly ninctccn

eighties. The concept later travcrscd to the I1.K.. where i t has not established

itself as a fairly i~llportant cotnponent ot'thc tinancia1 sector. I n the countries of'

Continental Europe, .lapan and some other Asiall countries, venture capital

institutions are a reccnt development. I lo\vevcr. the Indian Vcnturc Capital

industry has the most to learn Iron thc espcricnccs ot'the 1J.S.A. and thc 1I .K.

in this field. The concept of'venturc capital has undergone a significant change

in developed countries, going well beyond the inltial emphasis on technology-

oriented industrial enterprises. and corning closer to a 'private equity class'

concentrating on unlisted new colnpanies in the industrial and services scctors

irrespective of the nature of their projects. 'l'he initial emphasis in the venture

capital guidelines of the Ciovernmcnt 01' 1nd:;l (1988) has been exclusively on

new entrepreneurs and new technologies.

The venture capital industry differs from conventional financial

institutions in that it promotes mainly unlisted and new companies with which it

is basically involved in equity-oriented investment. Venture capital institutions

maintain a close rapport and a 'hands-on' approach in nurturing investments

during their association with investec companies. as active partners rather that1

as passive investors.

A major distinguishing feature of' venture capital is the importance of'

exiting fiom thc investment at an appropriate future date. by divesting its equity

stake after achieving significant capital gains. In a very real sense, the exit

from the investment is of equal, if not greater. importance than the initial

decision to invest in the company. It has oticn been pointed out by vcnture

capital analysts that a venture capital firm has to consciously think of' thc

possible exit, cvcn at the time of initial invustmcnt. This is thc reason why

venture capital investnients are made mainl! in companies \!pith a considcrablc

growth potential so that there is an opportunity fi)r a public listing at an earl),

future date, at which point tllc cxit cart be pi:unned.

For a venture capital firm, structural and lcgal aspects are of' great

importance. With the evolution of thc vcnture capital indus1t-y in thc 1J.S.A..

U.K and other developed countries, sc\,eral changes have occurred in the

structuring of venture capital iinns. Various kinds 01' structures have been

tried, including public companies, unit trusts, lilnitcd partnership, off-shore

companies, off shore trusts, ctc. The ob,jectivc of structuring in a venture capital

firm has been the achieveinent of tax transparency in its operations. i.e. while

the income accruing to the investors in the vcnture capital firm would be taxed

at their (investors) end, there would be no taxation at the lcvcl of the venture

capital firm itself. This doublc taxation is a scrious problem currently being

faced by some of the players in the Indian vcnture capital industry.

Venture capital institutions in developed countries have considerable

flexibility in structuring their deals with investce companies; this is due to thc

availability of a large number of financial instruments, some of which are yet to

be added t o the armory of the Indian institutions.

It has alreadj been mentioned that the exit route is o f ma.jor importance

in the venture capital industry. One of the major exit routes is ob~iousl!

through the stock markets, especialll, \\,here cquitjr investments are concerned.

The flexibility of the stock ~narkct system is of' special significance to venture

capital firms, as 11iost of their investments arc in small and medium lirnis.

The recent introduction of Over-the- Counter-market (0I'C)in India holds grcat

promise for Venture capital institutions. as i t is ~neant to catcr specitically to

the requirements of smallcr companics.

BRIEF INTRODUCTION TO INDIAN VENTURE CAPITAL COM PANIESIFUNDS

Out of the 22 Indian Vcnturc ('apital companics listed belocc onc

member has not continued as nicmber in IVCA after the year 1995. (AN%

Grindlays 3i Investment Scrviccs 1,imitcd). 'l'hc 21 companics are briefly

explained as follows.

Venture capital funds are b~ and large crcatcd as 'trust funds' under the

Indian Trust Act, 1882 and arc managed independently by institutions or

public limited companies responsible fbr the creation of funds. Vcnturc funds

known as Vecaus-I, 11 and I11 were cstahlishcd by Ilnit Trust of India and

managed by IClCI and IFCI respectively. Except fix IDBI which has set apart

a predetermined sum out of its own cquity capital, Venturc Capital companics

have played a leading role as sponsors ol'funds.

TABLE 3.1

LIST OF VENTURE CAPITAL COMPANlESlFllNDS IN I N Y A - 1

Name of the Companies

ANZ Grindlays 3i Investment Servtces Ltd, 1987 I

- I IDBI Venture Capital Fund Scheme - - ? T I IFCI Venture Capital Fund I,td.

i ----I 1088 1 -- -- - - . -.

ICICI Venture Fund ~ a n a ~ e r n e n t ( ' o ~ ~ ~ ~ i i ~ ~ ) Ltd. 1 9 @)--I - -- - - -

Canbank Venture Capital Fund Ltd. 1989 - -- - -- -

IL&FS Venture Corporation ~ t d : - 1989 - --- -- - . - -

APIDC Venture Capital Ltd. 1990 -

Gujarat Venture 1:inancc Ltd. 1990 1 INDUS Venture Management Ltd.

---

.- -

1991---/

IFB Venture Capital Financc 1 2. -

- - -- - - - -- -.

SIDBI Venture Capital I)i\jision -- - - -

Pathfinder lnvestlnent ~ o r n p a n ~ Private I rrl. - - -- - --

Industrial Venture Capital !,td.

I 1992

.- - - 1 1992

I 1993 ---___ I

1 094 *

JF Electra Advisors lidia Ltd 1 - 1995 / . .

Baring Private Equity Partners ( I ) I td. 1996 'I

- - - -- - i ---

Draper International 1996 - - --

HSBC Private Equity Managelnent Maur~tius L,td I---- 1996 -. -- - - -

International Venture Capital Management 1,td. 1- 1996 - 1

Walden Nikko - -- - - - - - - - . - --

Alliance Venture Capital Advisors Ltd. : -nVh-

1997 -

ICF Advisors Private Ltd. - I---i497 --

Marigold Capital Service Ltd. I 1 I T -- 1

source. IV('A, A c t ~ j 11) Reports

.AGE WISE CLASSIFICATION

The IVCA members were classified into two categories bascd on their

age that is year of establishment . At the end of 1998. a total of 22 VCCsIVCFs

were registered as members under the Indian venture capital association but one

member has not continued. Out of the 2 1 conipanies, 10 were established prior

to 1992 and the balance I 1 VCCsIVCFs were established after 1992. About

50% of the total companies were established upto 1992. Out of' 10 companies

(established upto 1992) 7 were fro111 public sector VCCs/VCl:s which comes to

about 75% and the balance 3 were from private sector VCCsiVC'1:s. '['he idea ol'

venture capital financing was first adapted by the ccntral government and

government sponsored institution, apart from the government sponsored

institutions operating in the field of \.cnture capital financing, a foreign hank

ANZ Grindlays Rank set up in 1987 thc first private venture capital fund but

after 1995 it has not continued as member in the IVCA and it was fbllowcd by

IL& FS venturc corporation (fbrnially known as credit capital venture fi~nd ( I )

I,td.,) was established in 1989. I t was the tirst venture capital (.'orlipany in India

set up in private sector. I t is to be noted that only one venture capital company

was established from overseas. Hut alier 1092 most of' the companies werc

established from outside India and the>, all f'nll under private sector. In India, the

initial stage of the venture cnpital originated with the government and

government sponsored institutions establishing more VCCs1VC'I;s but in later

stage of the venture capital growth the private sector participation was morc than

the public sector.

Fig.3.1 NO.OF VCCsNCFs AND ITS ASSISTED UNITS

Years

[ O No of VCCNCF --t 'Jo of ass~sted un~ts

PERFORMANCE OF VCCsIVCFs COMING UNDER INDIAN VENTURE CAPITAL ASSOCIATlON

Major ienture capital organisations in the count9 are ~nernber of I he

Indian Venture Capital Association (IVC'A). In 1993 IVCA had only 10

members which was folloiied b! a 1 0 " o increase, in 1994 and 1995 no further

increase in the IVCA membership in 1995. But in 1996. 70% of the membership

increased based on the base ycar 1993 and tlien in 1997 this trend had increased

by 100%. In 1998, it was Sollo\+ed b) further increased trend I hus the IVC'A

has maintained its total number of' tncliihcrs in tlic increasing trend over the

period of six pears i.c.. fkom 1993 to 109P.

In 1993 I V C members invested u total amount of' Rs. 3 17.38 crorcs in

428 units/pro.jects, Rs. 3 1.38 crores \vas tlic avc'ragc contribution made by the

members and the average invest~iicnt pcr unit \vas Ils. 0.74 crorc. In 1994, their

total investment was Ks. 425.80 crorcs which \+,as ovcr 3490 increase as

compared to 1993 it was invested in 488 project. 'l'hc numbcr of' assisted

projects had also increased over by 14'!,b as compared to the base ycar I993 as

well as the average contribution per member also had increased to over 2 !'%I

and the average investment per unit ]lad also incrensctl to o\,cr 17Y/ ((Ks. 0.74

crore in 1993).

In 1995, the total amount of invcstmcnt was o+ er lis. 146.6 crores Inore

than the previous year 1994 (XO0/o more than the base ?car) the niuuber of'units

assisted had also incrcased Srorn 4x8 to 602 projects (ovcr 40'K, more than the

base year).

They assisted to the extent of' Us. 672.85 crores. They assisted to 622

projects (45% Inore than the base !;ear 1993) and the average invcst~llcnt pcr

project was Rs.1.08 crores (Rs.0.74 crorc in 1993) It was over 45?4 more than

1993.

In 1997 their total investment \\as Its. 1000.46 crores. It was over 2 15'/b

more than the base year 1993. 'l'lic mcmber's nvcragc investment isas Ks.50.00

crores. They assisted 691 pro.jects. I t laas over h l ' ! lo more than the base year

and per project investment with Rs 1.45 crores in the year. It was an increasc

of over 95% than in 1 993.

In 1998, the total assistance \+>as Rs. 1255.9') crores(over 293% Inorc than

the year 1993) to the 728 prolects. per projcct in1 cstmcnt \Inas Rs. 1.73 crores

but in 1993 it was Rs. 0.74 crorc on11 (132 " O morc than 1993).

In India, venture capital liad bccn increasing ovcr thc pcriod from 1903

to 1998 in terms of total number 01' unlts ass~sted as well as total amount of

assistance.

'TAB1.E 3.3 CHARACTERISTICS OF VCC'sNCFts IN INIIIA

7- 1 size of - I Name of the Companies / funds No. of Nature of 1

(Rs. in 1 funds 1 funds ! - - --

Industrial Venture -- - C y t a l Ltd --

ICF Advisors Private I IFB Venture Capital Finance 1,td - I APIDC Venture Capital I,td - --

HSBC Private Equity Management

SIDBI Venture Capital L)i\ ision - - -

Marigold Capital Service Ltd. -- - . . . - Pathfinder Investment -- Cornpan! ( I 3 ) 1,td. Walden Nikko - -- - -

- -- ----

canbank Venture Cwtal l*und l.td, - - -- . - 1 - 1

INDUS Venture Mangcmcnt - --- I td - 1 I rlr\t fund IL&FS Venture Corporation - -- Lttl ruct fund JF Electra Advisors India I td . IDBI Venture Capital ~ u n d .. Schelnr - . ICICI Venture Fund Managcmcnt Company I td. TOTAL - --

Source: IV('A. Actn ~ t > Reports.

Draper International 1 43.60

FUND SIZE WISE CLASSIFICATION

The 21 venture capital companies/funds were classified into three

Alliance Venture Capilal ~ d v l , o r s i i d - -. -

Baring Private Equitl Partners (1) I I'D IFCI Venture Capital - Fund Ltd.

q -- -

International Venture Capital I( )llbliorc - f i ~ n d Gujarat Venture Finance Ltd. +-

1

categories based on their size of Silnds (\olume). 'l'he first category had

companies with fund s i ~ e less than Rs.50 crores, the second catcgory had

Ol?;;horc - fund 1

companies with a fund size ranging from Rs.50 crores to Rs. 100 crores and the

third category of companies ~ i t h fund size above Rs.100 crorcs. 'I'lie first

category, had a total hnds of Rs. 220.17 crores which is almost 1 1 % of the

total finds. In this category most of the VC'C'sNCFs were from privatc sector

i.e, 7 companies out of 10 companies. All the 10 members wcrc established

after the year 1990 except one i.e.. Canbank Venture Capital Fund I,td., In this

category three companies arc from oFterseas anti others arc don~estic funds.

4 VCCsNCFs of the total 2 1 members tall under the second category. In

this category all the funds were offkhore except the IFC'I Venture tiund. In this

category the total funds of' companies tjcre to Rs. 375.33 crorcs jsliich was

about 16% of the total fund size.

The third category consist5 7 conipanics' with a total fund of

Rs.1470.55 crores, which almost 75'Y0 01' thc total Sund s i x . O ~ i t of' the 7

companies, 5 arc don~estic funds and thc othcr 2 companies arc tiotn outside

India. 3 venture capital fund/companics belonging to public sector and othcr 4

companies are from private sector.

CLASSIFICATlON ON THE BASIS OF FUND TYPE

The 21 companies wcrc classified into two categories namely I>omcstic

funds and offshore funds. Out of the 31 vcnturc capital companiesifunds, 13

companies were identified to be of' the domestic type and Lhe balance of' 8

companies were from offshore. 'I'he total resources of dornestic funds

amounted to Rs. 1395.95 crores which is almost 71 % of the total funds and the

resources of offshore fund amounted to lis. 570.00 crores which is 29% of the

total funds. All the offshore funds were establishcd after the year 1995. The

domestic funds were established in 1987 onwards but after 1995 only a very few

domestic funds were established.

TABLE 3.4 LOCATION WISE VENTURE CAPITAL COMPANIES/FUNDS

Size of funds Name of the Companies Year of I No. of (Rs. In

~stablishrnent / -- -- 2- -

Domestic 1 -- - + - -- - -

IFCI Venture Cqital Fund L,td. - -- - - .-- - - - - - - 80.00 - -

ICICI Venture Fund Management Company Ltd. - - 1989 5

-1 532.00

Canbank Venture Capital ---- Fund - I ,td - - I989 - - - 7 I 33.98 I -

APIDC Venture Capital Ltd. -- -- - - -- - - , 1990 Gujarat Venture Finance - 1 td. - --

INDUS Venture Management I td. 148 76 IFB Venture Capital ~ i n a n c c t t d -- 1092 - 10.00 .-

SIDBI Venture Capital Division 1992 - 1 - 1 17 73 , IL&FS ven tu rdorpra t ion lid 1993 Pathfinder Investment -- - -- Cornpan\ - (~)zd -. -

Industrial Venture Capital I,td *---- 1994 - - - 7 -- 00

Marigold Capital Serv~ce I td. - - I 1097 - - -- 20 00

IDBI Venture Capital Fund Scheme - -- ' 1987 I -- 2 1 7.007

Sub Total (A) - I

- - 1395.95 --

Offshore ICF Advisors Private I td. Walden Nikko - - -- 3375 Draper International -- 1996 - - 43 - 00 - AVC Advisors Ltd. - 1997 5 0 00 Baring Private Equity I'artners ( I ) I td International Venture Capital Management 85.23 Ltd. -- I- - . - --

IISBC Private Equity Management I I996 1 I lO9.02 , Mauritius Ltd. .- ---

Source: IVCA Activity Reports

I Fig.3.2 I STAGE WISE FINANCING BY VCCSNCFS

1993 1994 1995 1996 1997 1998

Years

I 1 0 Seed stage Start up stage q Later stage OTurnaround

STAGE WISE FINANCING

In 1993, Rs.82.25 crores. which is almost 36% of thc total investment of

Rs. 317.38 crores. had been invested in seed stage projects. follo\ved b!, Rs.

124.82 crores in start up stage. which is nearl!. 40%) of the total investment, Rs.

107.46 crores in later stage projects (it is almost 33%) and only Rs. 2.85

crores in the turnaround stage. which is less than 1?/0 of the total investment.

While maximum investment was in thc start-up projects least investments was

made in the turnaround project.

In 1994, 17% of the total in\:cstmcnt \vas invested in seed stage prc!jccts,

nearly 42% of the total in\lestmcnt in start up slagc. About 4O'',i1 of' thc total

investment in later stage prqiccts. In the turnaround stage less than I"." 01'thc

total investment was invested. 'The maximum invcstmcnts were made in ~ h c

start up stage and the least investment \vcrc in the turnaround stage as in the

previous year 1993

In 1995 maximuni investments were in pro.jects in the startup stage ( over

44%) about around 15% in tlic seed s l a y investment. About 40% in the latcr

state projects. 'Turnaround financing attracted the least amount of' invcst~nent of'

around 1%.

In 1996, the ma,jorit), o f the investment Isere in prc!iccts in thc start-up

stage with over 42") of the total investment. 'l'his was fi)llowed by invcstmcnt

of nearly 42% in prolects in later stages ovcr 14'Yo in seed siagc pro,jects and

nearly 2% in turnaround stages projects.

In 1997 about 10% of the total in~restrnent had been in\festcd in seed

stage projects, followed b j 38% of the total investment in start up stage. about

51% in later stage projects and only around 1 % in turnaround stagc. I'he

maximum investment were madc in projects in the latcr stage and the least

investments wcrc in the turnaround stagc.

In 1998, lnasi~nurn inkcstrncnt5 \\ere i l l projxts in the later stage about

53% of the total investment. It is over 5 times more than that 01' IC)03

investments, followed by 41'Ml in start up projects, and around 5% in the sccd

stage projects investment which about 33°/n lesser than thc investment in 1993,

and about 1% was invested in the turnaround stagc.

The average investment per project tnake an interesting study. 11 is Ks

0.80 crores (Rs.0.73 crore in 1993) pcr pro,ject in the seed stage, Ks. 1.45 crorc

( Rs. 0.74 crore in 1993) per pro.jcct in start up stagc ( i t is almost 100'!/0

increase over the year 1993). Its. 3.35 crores ( Ks. 0.77 crorc in 1993) per

project in later stagc (it is almost 10Oil4, increase ovcr the ycar 1903). Ks 0.92

crore ( Rs. 0.41 crore in 1993) per pro,jcct in turnaround stagc, (it is also ovcr

100% increase compared lo the >,car 1003). This shows that thc average

investment per pro-ject is the maximum in the latcr stage. 'l'tiis is as cxpcclcd.

since the later stage projects generally rccli~irc larger amounts of' finance. I'hc

following table reveals that not only is tile nultiber ol'invcsttnents in turnaround

projects less but the amount of investlilcnt in such projects also is very little.

TABLE 3.6

CLASSIFICATION OF PROJECTS ASSISTED STAGE WISE

By the end of 1993, all VC'C'siVC'Iss invested in 428 projects out of '

which 168 projects (39% ) bcre in start-up pro~ccts, 140 projects ( about 33%))

in later stage, 113 projects ( oicr 9h0/l,) in seed stage and 7 prcjcctc (around

2%) in turnaround projects.

In 1994, about 3h00 of'thc total c~f 388 prolcct linanced mcrc in start up

stage about 36% in the later s t a g . ah0111 17'>0 111 the seed stage and over I'X, 111

turnaround projects.

In 1995, about 4590 projects ncrc In start up stage out o f the total 602

projects, around 37Y0 in the latcr stage prolecls and about 16% in seed stage

projects and around 2%) ill turnaround stage.

In 1996, the start up stage projccts accounted for 44%. This was

followed by 37% in later stage projects. 17?/0 in seed stagc projects and about

2% in turnaround stage projects. I t clearly indicates that the start up and latcr

stage is preferred for financing.

In 1997, VCC's VCFs had inltested in 297 start up stagc projects (around

43%) out of the 691 projccts, 978 projects \$ere choscn for investment in later

state (it is over 40% of'the total projccts) follo\ved by 107 projects in the seed

stage and 9 projects in turnaround stage. ( I t is ovcr I ( % oi' the total project

assisted.

In 1998, 16 VCCsNCFs had invested in start up stage projects which is

over 48% of the total projects linanccd followed by in later stagc projects about

11% , 39% in seed stage and less than 2% invested in turnaround stagc

projects. The maxirnum investments were made in prcjccts in the start up

stage and the least investment were in thc turnaround stage.

Fig.3.3 SOURCES OF CAPITAL TO VCCsNCFs IN INDIA

Years CIFore~gn ~nd~v~dua l /Inst Investors OAll India financial lnst~tut~ons OState Flnanciai lnst~tu~t~ons OMult~lateral Devt.Agenc~es UNat~onalised Banks OOther Banks

Prlvate Sector OPublic Sector W Insurance Compan~es CIMutual fund ONon-Res~dent lnd~ans OPubl~c

SOURCES OF CAPITAL

Contributors to the venturc capital funds have been classified into

various categories. In 1093. the ~na.jor contributors to the vcnturc capital

industry were the all lndia financial institutions. Out of' the total funds of

Rs.491.89 crores ovcr 47% ( Ks. 230.00 crores) was from these All lndia

Institutions. Othcr contributors to the funds included the ~nultilatcral

development agencies such as the world bank. who contributed ovcr 14%. non-

resident Indians contributed around 1 3%. lorcign institutional/indi~~idual

investors contributed almost 8"to and the others the balance.

In 1994 also thc ma.ior contributions to the I2enturc capital industr!

came from the all lndia financial institutions which is about 63% 01' the total

funds of Rs. 61 1.93 crorcs . 'I'his is a stccp increase in thc contributions tiom

this segment compared to the previous year 1993, during the year 1994. 'l'hc

multilateral developnlent agcncics. such as the world bank contributed over

1 I%, and the non-resident lndians contributed OoA. and the balance was t'ro~n

private sector nationalised banks Foreign institutionaliindi\~id11;il investors. Stntc

Financial Institutions, Clthcr hanks. lnsuriuncc colnpanics etc.

This year 1995 also, the mqor contr~but~ons arc the all India financial

institutions (60%). I'llc rnultilatetdl dcvclopment agencies ( 17%)). thc prl\ ate

sector (6%) non-resident over 4'hr and the nat~onallscd banks about 400.

In 1996, the All lndia financial institutions contributed ovcr 39'l/;, and

37% was contributed by foreign indi\,idual 1 institutional investors. 'I'his is a

steep increase over thcir contributions i ~ : the previous year 1995. Other

contributors made smaller contribution to the venture capital funds.

In 1997, there was a no st significant change in the contributions to thc

venture capital funds. The contributions from the foreign individual j

institutional investors exccedcd contributions frorn the all India linancial

institutions. This year the investment from the Fllls \vas more than twice that

of the AIFIs. the FIlls contributed over 549.0 of thc total funds of Rs. 3 5 5 9 . 5 3

crores while the AIFIs contributed n\ r r 3 4 " 0 of the total funds. While in

absolute terms, the contributions from the AII:Is has increased in 1997

compared to 1996. Rut in tcrlns of percentage of their contribution to the total

funds however, there was a dccrcase. Other significant contributors in 1997

were the multilateral development agencies (X1!/o) and other batiks ( o w r 6"4) .

The trend seen in ttic ycar 1997 has coritinucd in 1998. with fi~rcign

institutional /individual investors inwsting almost twice the amount invested

by AIFIs in venture capital l'unds. FIIIs contrihutcd Its 15 17.8 1 crorcs oilt of '

the total Rs. 2988.40 crorcs ( i t is owr 500,b) tllc halaricc 50'5i1 is contributed b!

other 11 contributors.

Fig.3.4 CLASSIFICATION OF INVESTMENTS BY

INSTRUMENTS

1993 1994 1995 1996 1997 1998 Years

Equity shares Convert~ble Debt Preference shares Non-convertible debt Other instruments

INVESTMENT BY METHODS O F FINANCING

The most coinmon mode of' financing appears to be through equity

shares. It is above 60% in all the ycars. Convcrtihle debt assumed significance

in the years 1994, 1995. 1996 and 1998. 1'rcli.rcncc share gained prominence

in 1997. Non convertible debt in 1993.

It reflects the o\ierall trcnd in the Indian vcnture capital industry which

subscribed mostly to the equity share capital of thc investec units.

Fig.3.5 INVESTMENT BY INDUSTRY

1993 1994 1995 1996 1997 1998

Years

Biotechnology Computer software Computer Hardware

Telecommunication UOther electrontcs Energy related

t¶ Medical lndst. Prod & Mach Food & Food Processing

Consumer related Other lndustr~es

INVESTMENT BY INDUSTRY

An analysis of investments niadc by VC'CsNCFs during 1993- 1998

reveals that, a higher proportion of' in\.cstmcnt has gone to industrial products

and machinery. Thc pcrccntagc of' in\ cstmcnt in this industn rangcs fiom

23.5% to 33.7%. The nest industrial scgment that attracted significant

investment ranging fro111 39'0 t o 20°h is computcr soft\varc. Consumer products.

Food & Food processing and Medical equiplncnts rcccivcd around 604, 1 0 7"A

and all other industries recei\,ed less than 5% investment. 'l'hc rniscellancous

category attracted between 13% 10 2096 during thc period.

An analysis of trend in the average in\,estment per project sho\vs that

there is four fold increase in the pcr project in\.estment in case of computer

software and hardware industr?. It is more than double increase of all other

category of industries. As lbr as nulnber oi'projects assisted, the trend is similar

to the trend seen in the value nf'in\~estmcnt industr!. n.ise (\.ide 'l'ablc 3.0).

FINANCING BY REGION

' fABLk 3.1 1 FINANCING BY RkGION

- (Atnoun1 R \ III_('I(JC\)

- 1--

An analysis of'trcnd In the Rcgron \+ 1st. linancing b} VCC'\'VC'I 4 \ h o w \

that there is a decline in the pcrcentagc 01' financial asststance in Southcrn

Region. Its share has comc down fiom 37'1.1, In 1093 to 38.7'50 in I908 I hcrc

is an increase of 5% in the casc of' Wcstcrn Kegion. Northern and Llastcrn

Regions maintained more or less a stable sharc in the assistance, financing

projects outside India has gained pro~ninencc in 1997 and 1998 and about 4% to

5% of total assistance has gabc tonards these projects. In absolutc term5

however the value of assistance had increased in all regions.

Fig.3.6 FINANCING BY REGION

Years

South West North East 618l Outside India

TABLE 3.12

PER UNIT lNVESTMENT BY REGION --

Years 1993 1994 No No

won ,,,,& Avenge qO?U - - Average - -. -- . .

South 225 0 67 241 0 79

North 58 0 85 63 ' Outside 00 lnd~a

-, --,

I I . Source: IVCA. Acti\ilty Reports.

Table 3.12 shows the avcragc ln\estment per proiect in each of the liwr

regions. The average assistance per unit Inore than doublcd in South West and

North. Howevcr t.,astern Kcglon registcrcd only 60% increase in the average

per unit assistance. Assislancc to prc!jccts out side India has shown significant

increase during thc perlod .l he l able al\o relcals that the percentage of'

increase in the nurnber 01'uriits a\sistcd 15 niorc In caw of' Wcstcrn and Isa\tcrn

Region, North Registercd Ioivcst gronth in terms of'number ot' units assisted.

CONCLUSION

In short the growth analysis of Vcnturc Capital Industrq, shows that there

is appreciable increase in nunibsr oS units. thc iraluc of ' assistance and number

of projects assisted during thc period. 'l'his is positiise sign of growth.

Prior to '90s VCFs are mostl!. o\\.ned b!, public scctor units. Atier

1990's most of the VCI-:s arc set up b!' Forcign cornpanics in priwtc sector.

Public sector units havc set up largc sizc VC'1;s ~vhcrc as privatc scctor and

offshore funds are srnall and medium. Most ol'thc sa~nplc VCl's arc domcstic

funds. Analysis of assistance shows that thc percentage of' assistance at seed

stage has declined during 1993 to 1998 \vlierc as assistancc during start up and

later stages has increased. I:inancing of' V('1:s also has undergone signilicant

change. Prior to 1997, much of the li~nding has come from public financial

institutions . In 1997 and 1008 fbrcign institutional in\rcstors and individual

investors have made nia.jor contribution. I.quity tinancing is the most fiequcnt

method of assistance units. A Iiighcr proportion of assistancc has gone l o

industrial products and machinerq.. Assistancc to Southcr~i Rcgion units has

declined but there is tnarginal increasc ol'5'%, in Wcstcrn region.