Venture Capital in India

GENESIS

The venture capital industry in India is still in as embryonic stage. With a view to promote
innovation, enterprise and conversion of scientific technology, and knowledge-based into
commercial production, it is very important to promote venture capital activity in India. Going by the
recent success story in the area of information technology, India has a tremendous potential for
growth of knowledge-based industries. This potential is not confined only to information technology,
but is equally relevant in several other areas such as bio-technology, pharmaceuticals and drugs,
agriculture, food processing, telecommunication, services, etc.

Given the inherent strength of its skilled and cost competitive manpower, technology,
research and entrepreneurship, and with the proper environment and policy support, India can
achieve repaid and sustainable economic growth and competitive global strength.A flourishing
venture capital industry in India will fill the gap between the capital requirements of technology
knowledge-based startup enterprises and the funding available from traditional institutional lenders
such as banks, etc. The gap exists because such startups are necessarily based on intangible assets
such as human capital and technology-enabled mission.

Very often, they use technology developed in university and government research
laboratories that would otherwise not be converted to commercial use. However, from the viewpoint
of a traditional banker, they have neither physical assets nor a low-risk business plan. Not
surprisingly, companies such as Apple, Exodus, Hotmail and Yahoo, to mention a few of the many
successful multinational venture capital funded companies, initially failed to get startup capital when
they approached traditional lenders. However, they were able to obtain finance from independently
managed venture capital funds that focus on equity or equity-linked investments in privately held,
high-growth companies. In addition to finance, other services such as smart advice, hands-on
management support and other skills that help the entrepreneurial vision to be converted to
marketable products are also offered.

CRITICAL FACTORS

Following are the critical factors required for the success of the VC industry in India:

1. Framework: - The regulatory, tax and legal environment should play an enabling role in the
success of VCFs. Internationally, venture funds have evolved in an atmosphere of structural
flexibility, fiscal neutrality and operational adaptability.
2. Flexibility: - Resource rising, investment, management and exit should be as simple and flexible
as needed and driven by global trends.
3. Institutional: - Venture capital should become an institutionalized industry that protects investors
and investee firms, operating in an environment suitable for raising the large amounts of risk
capital needed and for spurring innovation through startups of a wide range of high growth areas.
4. Global exposure :- In view of increasing global integration and mobility of capital, it is important
that Indian venture capital funds as well as venture finance enterprises are able to have global
exposure and investment opportunities.
5. Infrastructure: - Infrastructure in the form of incubators and R&D, need to be promoted using
Government support and private management, as has successfully been done by countries such as
the U.S. Israel and Taiwan. This is necessary for faster conversion of R&D and technological
innovation into commercial products. .

VENTURE CAPITAL FUNDS IN INDIA-A PROFILE

The Industrial Development Bank of India (IDBI), an apex public special and development
financial institution provides venture-financing facility to new entrepreneurs. This is done through:

 Direct venture capital assistance

 Indirect venture capital assistance formulated for providing equity type assistance to new
small and medium-scale units, the assistance being extended by the ‘seed capital scheme
through State Industrial Development / Investment Corporation (SIDCs/SIICs), and the
special capital scheme through State Financial Corporation’s (SFSs)

Features

The special features of IDBI’s venture capital fund are detailed below:

1. Objectives :- The venture capital scheme that was commenced in 1986 aimed at the following
objectives :
 Encouraging commercial application of indigenously developed technology
 Adaption imported technology to wider domestic applications
2. Activities :-
 Setting up pilot plant/demonstration plant/prototype/software development based on laboratory
process/detailed designs developed in-house or in any of the national/other laboratories
 Assisting in technological innovations leading to substantial quality up gradation, reduced
material consumption, reduced energy consumption, cost reduction and improved
competitiveness
 Assisting in the adaptations/modifications to process or product which has been imparted in order
to make it suitable for Indian operating conditions. The modifications may also include
substitution of imported raw materials/components with indigenous materials
 Undertaking studies, surveys, seed marketing, market promotion programmes and training
programmes incidental to above
3. Entrepreneurs :- The venture capital scheme targets all industrial entrepreneurs, existing as
well as new units In the case of existing units, a good record of performance and sound financial
position are the prerequisites for assistance. Units in default of institutional/bank loans are not
normally encouraged. In the case of new units, the nature of innovation and its profit potential are
considered.
4. Nature of financing :- Venture capital funds assistance is provided to projects in diverse fields
like chemicals, software, electronics, biotechnology, food products and medical equipment.
5. Stage of financing :- Assistance under the scheme is available for setting up new facilities,
carrying out trial runs and obtaining market acceptance for the process/product during the
 development period. In addition facility is also available for financing the cost of fixed assets
(Land, building, plant and machinery) as well as operating expenditure (including cost of raw
materials, salaries and wages, utilities and market development expenses).
6. Method of financing :- Venture capital assistance is provided mainly in the form of unsecured
loans at concessional terms during the initial development period. Assistance is provided after
taking into consideration the resource capability of the promoters for new projects and the
availability of cash surplus in the case of an existing company. The minimum promoters’
contribution is 10 percent of the total capital for ventures costing Rs. 50 lakhs and less, and 15
percent for ventures costing more than Rs. 50 lakhs.
Royalty collections are made by IDBI at a mutally agreed rate on the sates of the product
arising from the venture, the royalty being payable during the currency of the loan. The period of
repayment of the loan is fixed depending on the cash generation of the venture. In the case of a
new company setting up the operations venture capital assistance is provided for the setting up of
a commercial size plant, following successful completion of trials at the pilot plant stage. The
assistance is also available in the form of equity shares in the assisted company depending on the
growth potential as assessed by IDBI.
7. Project appraisal :- IDBI carries out appraisal of the proposed project before extending
assistance under the Fund. For this purpose, the Fund required fulfillment of certain conditions
such as the composition of the Board of Directors, R&D team, Government approvals and
sanctions, payment of dividends, sale and purchase of assets, sale of technology, sharing with
IDBI, lump payments/royalties arising from the sale of technology, preparation of a techno-
economic feasibility report before the end of trail runs, monitoring of the venture by the
Evaluation Committee of IDBI, etc.

It is incumbent of the part of the entrepreneur to submit to the IDBI a preliminary profile
of the proposal giving the following details:

 Brief details of the performance of the existing industrial concern

 Nature and the advantages of the proposed process/product
 Development content in the process
 Proposal for the scheme including nature of upscaling (e.g., lab to pilot plant scale, etc)
 Approximate cost of the venture

A detailed application form is then filled in and submitted to the Technology

Department for appraisal after examining the prima facie eligibility of the proposal. The project
is then submitted to a Screening Committee for its recommendations. The IDBI may also refer
the proposal to a group of experts. The new project is finally accepted by IDBI for assistance. A
complete application normally takes 2 to 3 months for processing.

8. Managerial support and monitoring :- IDBI, for the purpose of ensuring the end use of
the credit sanctioned to the ventures, employs appropriate management support and monitoring
mechanisms. They include a monthly progress report, periodic visit to the unit, and discussions
with the promoters. The degree of progress in the implementation of the projects is assessed by
scrutinizing the periodic reports submitted by the venture company.
 Similarly, the physical progress achieved is evaluated by undertaking visit to and holding
discussions with the units financed. Based on the assessment, requisite guidance is provided to
the entrepreneur, besides fixing the cut-off date for enhancing the interest payable by the venture.
Time and cost overruns are besides monitored. With and idea of promoting closer interaction
with the promoters of the venture at the local level, the task of follow-up of the venture is
entrusted to a few Technical Consultancy Organizations (TCOs).
9. Marketing :- For promoting its scheme, IDBI is in constant touch with about 500 industrial
undertakings having R&D set-ups. Besides, it also conducts seminars and industrial meets to
educate entrepreneurs about its schemes, etc. Providing consultancy services through TCOs also
encourages entrepreneurial activities.
10. Exit mechanism The usual exit route adopted by IDBI for its venture capital assistance is
through promoter’s buy-back and selling in the market.

Seed Capital Scheme of IDBI

Under this scheme, IDBI provides indirect assistance to small-scale units by way of equity.
The scheme is operated through SIDC’s and SFC’s, as agents of of IDBI. The scheme envisages
meeting the risk capital requirements of the entrepreneurs. The scheme caters to technically o
professionally qualified, experienced or skilled new entrepreneurs. The main features of the scheme
are as under:

1. Maximum quantum of assistance shall be 10 percent of the project cost, subject to a

ceiling of Rs. 15 lakhs.
2. Minimum required Debt-Equity Ratio (DER) is 2:1 for medium sector project and 3:1 for
SSI units.
3. Joint sector project with over 50 percent contribution to equity from the public sector
partner is not eligible for seed capital.
4. Seed capital assistance is not to exceed the promoter’s own contribution to the project
cost.
5. In the case of SSI units, seed capital requirement up to Rs. 4 lakhs is to be financed by
SFCs from special capital and anything in excess shall be met under this scheme.
6. SIDCs shall meet a part of the gap in equity where project cost exceeds Rs.15 crores and
where the gap in equity and requirement of seed capital assistance exceeds Rs. 7.5 lakhs.
The remaining equity may be met by way of seed capital under the scheme.

Special Capital Scheme of IDBI

The scheme is operated through SFCs for small-scale industries. Assistance under the
scheme is provided from the special class of share capital contributed by the State Government and
IDBI. Under the guidelines framed by IDBI for the use of the special capital, the SFCs provide
equity assistance to eligible small scale units covered under the Credit Guarantee Scheme for small-
scale industries.
 Some of the features of the scheme are as follows:

Sectors Assistance from this fund is available for projects being set up in the priority sectors, with
preference being given to industrial units promoted by new entrepreneurs who may not have
academic qualifications but possess some practical experience in the line of manufacture they intend
to start. Assistance is also available for projects proposed to be located in backward areas.

Eligibility Assistance is made available only for such projects where the promoters do not have
sufficient resources to meet the normal level of contribution expected of them by the SFCs.

Terms Special Capital Assistance is provided on soft terms to proprietary and partnership concerns at
a nominal interest rate of 1 percent p.a. For private limited companies, there are subscriptions to
cumulative redeemable preference shares. A moratorium upto 5 and 3 years for principal and interest
payments respectively is allowed to help the entrepreneurs in the initial years. The normal debt-
equity ratio of 3:1 is expected by the SFCs in the case of small-scale units. The maximum assistance
that can be sanctioned, out of Special Capital to meet the gap in the equity contribution is 20 percent
of the project cost or Rs.2 lakhs, whichever is lower.

VCF of ICICI

Venture Capital Fund assistance was launched by ICICI in 1986. It aimed at encouraging new
technocrats in the private sector in new fields of high technology with high inherent risk.

The salient features of the venture capital scheme operated by ICICI are discussed below.

Projects assisted In order to provide assistance, an essential requirement is that the new technology
or product holds the promise of significant tangible benefits over the existing options, and the
expected financial returns are commensurate with the risks. Projects, where the initial investment
may not exceed Rs.2 crores in the form of equity or conditional loan, the flexible charges and
repayment period are appraised.

The scheme provides assistance to:

 Projects with commercial Research and Development, involving development of a new

technology
 Projects involving product implementation of an indigenously developed technology on a
commercial scale
 Projects involving implementation of an innovative technology imported/transferred from
abroad

Appraisal Financing decisions are based on factors such as new or existing company, promoters’
contribution, desirable debt equity ratio, nature of project and assessment of business and profit
potential. The investment period ranges from five to eight years after the successful establishment of
the venture, or a reasonable period after the original investment.

Exit ICICI exits itself through the sale of the equity holding either to the promoter or through a
stock exchange ( the first option to buy equity at a mutually negotiated price would be that of the
project promoter).
Operation ICICI operates the venture capital fund through two of its subsidiary companies such as
the Technology Development and Information Company of India Ltd. (TDICI), and the Program for
Application of Commercial Technology (PACT).

a. TDICI The Technology Development and Information Company of India Ltd (TDICI) was set
up in 1988, with a view to render the required assistance for technical advancement to the
industry. The company was established by ICICI in collaboration with UTI with a capital of
Rs.20 crores consisting of 20 lakh units of Rs. 100 each, subscribed by ICICI and UTI in equal
proportions. Assistance is provided from this Fund mainly in the form of equity, conditional
loans, and convertible debentures, to set up technological ventures with a potential for fast
growth.
b. PACT The Program for Application of Commercial Technology (PACT) is a U.S. aided scheme.
The Fund gas been administered by the ICICI since August 1986. The programme commenced
with a grant of US$ 10 million from USAID.

VCF of IFCI

The venture capital fund was started by IFCI with the name ‘Risk Capital Foundation’. This
was later converted into ‘Risk Capital and Technology Finance Corporation Ltd’.

The Risk Capital and Technology Finance Corporation Ltd’, as an arm of IFCI, began to
enlarge its activities and to take up financing of technology development and its commercialization
in January, 1988. RCTC operates schemes such as the Risk Capital Scheme, which provides
assistance to the promoter and/or to the promoted company for meeting a part of the promoters’
contribution. The Technology Finance and Development Scheme provides assistance for technology
development by way of different financial instruments i.e., conventional loans, conditional loans and
equity, and venture capital scheme.

The corporation was set up as a wholly owned subsidiary of IFCI in January,1988. This was
constituted by converting the erstwhile Risk Capital Foundations (a registered society) into a
corporate body. Its equity capital is jointly held by IFCI, UTI, Infrastructure Leasing and Financial
Services Ltd. And a few companies in the Tata group. Following are the features of the venture
capital financing operated by the corporation:

 Providing finance in the form of equity to ventures financed by conventional financial

institutions to fill the gap in the promoters’ contribution stipulated by such institutions
 Encouraging the development of technology, the scheme having been specially designed to
extend support to technological innovations. Finance is provided under the scheme for
commercializing innovative technologies, supporting the infrastructure for advanced or
complex technologies and setting up pilot plants and prototype manufacture

The RCTC, in addition to managing its own scheme, also manages a Venture Capital Unit Scheme-
VECAUS-III, 1991 which was started with a resource base of Rs.30 crore with participation
from UTI, IFCI and the World Bank in equal proportions. The RCTC’s support to the venture
is in the form of substantial equity, though loans are also given wherever necessary. This fund
 has been fully committed to various ventures and RCTC is planning to set up another fund
structured on lines similar to VECAUS-III, out with a bigger corpus and wider participation.

Other Venture Funds

In addition to the above, venture capital funds were also started by a number of commercial
banks, both Indian and foreign, and also by many private entrepreneurs. A brief description of some
of these venture funds is presented below:

1. SBI capital venture capital fund It was set up by SBI Capital Markets Ltd with a corpus of
Rs.10 crores. New ventures were financed through its “Bought out deals”. The objective of the fund
is to adopt an innovative approach to promote new capital issues, particularly in sluggish capital
markets. It purchases new issues with the objective of unloading them at a later stage when the
market picks up.
2. CanBank financial services ltd It is a subsidiary of Canara Bank, and set up the CanBank
Venture Capital Fund in 1989 with a corpus of Rs. 10 crores. The Fund was established to provide
early stage finance to first generation entrepreneurs and technocrats with concrete ideas and projects.
3. 20th century venture capital fund This Fund was established with a corpus of Rs. 20 crores
by the 20th Century Finance Co. Ltd. As its main promoter. The fund envisages to focus on sick
industries and first generation entrepreneurs.
4. SICOM venture capital fund The Fund was set up by the State Industrial and Investment
Corporation of Maharashtra Ltd. (SICOM).
5. APIDC-VCL This fund was set up by the Andhra Pradesh Industrial Development
Corporation through its subsidiary ‘Venture Capital Ltd’ in June, 1990. APIDC subscribes Rs.9
crores to the fund of Rs. 13.5 crores, of which the remaining Rs. 4.5 crores is subscribed by the
World Bank. IDBI and Andhra Bank have committed Rs.3 and Rs.1.5 crores respectively to the fund,
which started operations in April, 1990.
The thrust areas identified for investment include biotechnology, chemicals including drugs
and pharmaceuticals and electronics. Assistance is provided to projects in other sectors too.
Similarly, assistance is available in the form of equity as well as loan. Attention is paid to the
innovativeness of a project relating to the product and processes, and its growth potential. The
assistance from the fund will normally be in the form of equity, but in cases where loan facilities are
not available on conventional terms from other financial institutions, loan assistance is also
considered. Promoters’ contribution will be in the range of 10 to 15 percent. Based on the financial
position of the entrepreneur, a higher contribution could also be insisted.
6. India investment fund This Fund was set up by the ANZ Grindlays Bank. This was the first
Indian private venture capital fund set up with an initial capital of Rs.10 crores. The fund finances
the start-up cost of entrepreneurs. The main objective of the fund is to achieve capital growth for its
investors through participating in fast growing companies or high technology firms with a potential
for fast growth. The India Investment Fund has been subscribed mainly by Non-resident Indians to
create the first private venture capital fund for India.

This fund-raising initiative was sponsored by ANZ Grindlays, who are advisors to the fund,
and keep to meet the need for new sources of finance to assist in the nation’s economic expansion.
The fund helps the promoters of new or existing businesses in sharing the risks and rewards of equity
investment, to invest in a broad range of activities, with particular emphasis on developments which
exploit new technology, as also other sectors eligible to receive Non-resident Indian investment
which can demonstrate considerable potential for capital growth.

7. National equity fund This Fund was set up by the Central Government for small
entrepreneurs in August 1988 with a corpus of Rs. 10 crores. The Union Government makes a
provision of Rs.5 crores and IDBI provides a matching contribution. The Fund is aimed at providing
seed capital assistance to small entrepreneurs in the rurul areas of the country, as well as in urban
areas with a population below 5 Lakhs. IDBI administers the scheme. The assistance under the
scheme would be available not only for establishing new projects but also for the purpose of
rehabilitation of small viable sick units.
New entrepreneurs establishing industrial projects in the tiny or small-scale sector, including
groups of such entrepreneurs who organize themselves as an industrial cooperative or in any other
legal form are eligible for assistance, subject to banks being satisfied about the viability of the
rehabilitation proposals. Those seeking assistance under the scheme will be evaluated by the primary
lending banks. IDBI provides guidelines to banks for evaluation of entrepreneurs.
The terms of assistance of the Fund are:
 Debt-equity ratio of 3:1
 Minimum promoters’ contribution at 10 percent of project cost
 Nominal interest is 1 percent per annum which may be retained by the primary lending
bank
 Loan repayable over a maximum period of 7 years including an initial moratorium of up to
3 years

No security (including collateral) need be provided by borrowers for the soft loan.

8. Gujarat venture finance ltd. (GVFL) The GVFL is a fund management company. It acts as
a trustee manager of a venture fund called ‘Gujarat Venture Capital Fund’, started in 1990. The
GVFL was promoted by Gujarat Industries Investment Corporation Ltd., (GIIC) in association with
Gujarat Lease Finance Corporation Ltd., the Gujarat Alkalies and Chemicals Ltd. and Gujarat State
Fertilizer Corporation Ltd. While GIIC holds 40 percent of the equity capital of GVFL, the rest of its
capital has been contributed by the other three organizations. The fund has a resource base of Rs.24
crores contributed by GIIC (with support from the World Bank), IDBI and some private companies.
The GVFL’s investment philosophy aims at providing finance for innovations in technology leading
to an improvement in product quality and energy conservation, launching a new product/process
based on imported/indigenous know-how/technology and the commercialization of technology from
the pilot plant stage.
9. Grindlays bank venture capital The Grinklays bank has promoted two funds, namely, India
Investment Fund Ltd. floated in 1987, and India Investment Fund, floated in 1990. Both these funds
are close-ended and have been set up as offshore funds for US$7.5 millions and $15 million,
respectively. Non-resident Indians hold over 60 percent of both the funds, the balance being held by
international institutions. These funds provide finance mainly by way of equity or convertible
debentures. The maximum assistance made available to one venture is limited to Rs.1 crore. The
fund’s investment focus is on financing of young and mature ventures, both at the initial stage and
for expansion. The funds follow a hands-off approach in nurturing the investment.
10. Lazard credit capital venture fund (VCCVF) It was originally established in 1986 as Credit
Capital Venture Fund Ltd. (CCVF). Its present capital base is Rs.10.8 crores contributed by Credit
Capital Group (18.50%), Bank of India (19.08%), Asian Development Bank (11.56%),
Commonwealth Development Corporation (11.56%) and the public (39.30%). It provides finance to
ventures with a high growth potential in the early, first and second stages. The Fund aims at being a
value-adding partner of the entrepreneur to help realize the full potential of the ventures. The
maximum assistance to a venture is restricted to Rs. 50 lakh.
The Fund follows a hands-on approach Recently, two separate funds for Rs. 10 crores each
have been floated by the same group for financing information technology projects and auto-
ancilliary projects. It has also recently launched ten state funds of Rs.10 crore each. Ever since
Infrastructure Leasing and Financial Services Ltd. (ILFS) acquired it in 1996, it has been known as
ILFS Venture Fund Corporation.
11. Indus venture management limited (IVML) Shri. T. Thomas, the former Director of
Unilever, promoted this Fund. The IVML has been entrusted with the management of the Indus
Venture Capital Fund-I (IVCF). Thomas & Associates, IDBI, IFCI, Deutsche Bank, International
Finance Corporation (Washington) and a few other national/international organizations.

ORGANIZATIONS STRUCTURE

Venture capital companies are structured on the lines of an investment company, a Unit
Trust, as a scheme of the Unit Trust of India (UTI) or as a division of a financial institution/bank.
Unlike in the USA, a limited partnership type of organization is not allowed in India. A brief
description of the kind of structure adopted by the venture capital companies in India is presented
below:

Investment Company

The Lazard Credit Capital Venture Finance Corporation Ltd (formerly Credit Capital Venture
Finance Corporation Ltd.) and ILFS Venture Capital Company Ltd are examples of venture capital
companies organized as investment companies. Such companies are extended tax concessions under
the CBDT guidelines (1995).

Unit Trust

The Indus Venture Fund is an example of a unit trust form of structure, formed under the
Indian Trust Act. Individual/corporate bodies have made the capital contribution. An asset
management company manages the trust. It is entitled to a management fee and carries interest.

Scheme of UTI

Under this structure, venture capital companies are floated as schemes of UTI. The Trust
subscribes to their corpus in collaboration with other institutions/organizations. Examples include the
Venture Capital Unit Schemes (VECAUSs) of the companies sponsored by UTI. Accordingly, the
UTI-sponsored institution, TDICI Ltd. has floated VECAUS-I and II, and another sponsored
institution RCTC Ltd., has floated the VECAUS-III. Tax exemptions are available to such schemes.
Division of a financial institution/bank :- Venture capital companies can also be set up as a
division of a financial institution or a bank. Examples in this category include venture capital scheme
floated by institutions such as IDBI, ICICI, IFCI and banks such as Canara Bank, Grindlays bank, etc

According to SEBI venture capital regulations, 1996, venture capital funds can be structure
either as a company under the Companies Act, 1956 or as a trust under the provisions of the Indian
Trust Act, 1882.

REGISTRATION OF VNETURE CAPITAL RUND (VCF)

Main requirements under SEBI (Venture Capital Funds) Regulations. 1996

The following are the eligibility criteria for grant of a certificate of registration as per
regulation 4 of SEBI (Venture Capital Funds) Regulations 1996.

A. Where the application is made by a company

a. Prohibition It is prohibited by its memorandum and articles of association from making an

invitation to the public to subscribe to its securities.

h. Litigation It is necessary that its director or principal officer of employee is not involved in
any litigation connected with the securities market which may have an adverse bearing on the
business of the applicant.

c. Conviction It is necessary that its director, principal officer or employee has not at any time
been convicted of any offence involving moral turpitude or any economic offence.

d. Objective The main objective of the Memorandum of association is to carry on of the activity
of a venture capital fund.

B. Where the application is made by a trust

a. Registered deed 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).
b. Objective The main object of the trust is to carry on the activity of a venture capital fund.
c. Litigation The directors of its trustee company, if any, of any trustee should not be involved
in any litigation connected with the securities market which may have as adverse bearing on
the business of the applicant.
d. Conviction 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.
C. Where the application is made by a body corporate
a. Set up It is set up or established under the laws of the Central or State Legislature.
b. Permission The applicant is permitted to carry on the activities of a venture capital fund
c. Conviction 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. The
directors or the trustees, as the case may be, of such body corporate, if any, is not involved in
any litigation connected with the securities ma4rket which may have an adverse bearing on
 the business of the applicant. Suspended under Regulation 30 or cancelled under Regulation
31 and the applicant is a fit and proper person.

APPLICATION FOR REGISTRATION

An applicant should apply for registration in Form A prescribed under First Schedule of
SEBI (Venture Capital Funds) Regulation 1996 along with the requisite fees. All documents should
be enclosed as specified in the form. While applying, it shall be ensured that the main object clause
of the memorandum of the applicant company/trust deed, etc as the case may be, permits the
applicant to carry on venture capital fund activities.

Additional Information

The following additional information shall also be furnished :

1. A complete list of the group/associate companies registered with SEBI, indicating the
capacity in which they are Registered along with the SEBI Registration number
2. Whether the applicant or its group/associate companies are listed on any of the recognized
stock exchange (s) in India.
3. Whether there have been any instances of violation of or non-adherence to any securities
related regulations and whether any action has been taken against the applicant or any
associate/group companies in this regard, by a regulatory agency in India or abroad
4. Whether the applicant or any of its directors have been found guilty of fraud, have been
convicted of an offence involving moral turpitude or have been found guilty of any
economic offence
5. Details of registration of the company/associate/group companies, which are
registered/required to be registered with reserve Bank of India (RBI) as a Banking
company, or Non Banking Finance Company or in any other capacity and address (es) of
concerned branch office (s) of RBI
6. Details of disciplinary action taken By RBI against any o0f the group/associate companies
7. Applicant can submit ‘no objection certificate’ from RBI to get registered with SEBI, to
expedite the registration process
8. Whether any of the directors or employees of the company or group/associate companies
were ever associated with any organization as a director or an employee against whom SEBI
had initiated action of suspension or cancellation of certificate of registration, or initiated any
other action under the provisions of SEBI Act or lunched any prosecution for acts committed
during their association

Other Documents to be Submitted to SEBI

1. Memorandum and Articles of Associatio9n of applicant company, executed copy of trust

deed if the fund is being set up as a trust, and the main objective of constitution in case of
body corporate
2. Executed copy of Investment Management Agreement, if applicable
3. Disclosure of the investment strategy as required under Regulation 11 (a) of the SEBI
(Venture Capital Funds ) Regulations, 1996
 4. Copies of letters of commitment from investors in suppo9rty of the target amount proposed to
be raised by the fund
5. Undertaking that the venture capital fund will not make an investment in any area listed
under Third Schedule to SEBI (Venture Capital Funds) Regulations, 1996

GRANT OF CERTIFICATE OF REGISTRATION

Once all the above requirements have been complied with and requisite the fees as per
Second Schedule Regulations has been paid, SEBI grants certification of registration to the applicant
as a venture capital funds

Registration of Foreign Venture Capital Investor (VCI)

Main requirements under SEBI (Foreign Venture Capital Investors) Regulation, 2000

The following are the eligibility criteria for grant of a certificate of registration in
accordance with Regulation 4 of SEBI (Foreign Venture Capital Investors) Regulation, 2000

a. Track record The applicant’s track record, professional competence, financial soundness,
experience, general reputation of fairness and integrity.
b. Approval Whether the applicant has been granted the necessary approval by RBI for
making investments in India.
c. Nature of business Whether the applicant is an investment company, in investment trust,
investment partnership, pension fund, mutual fund, endowment fund, university fund,
charitable institution or any other entity incorporated outside India, or whether the applicant
is an asset management company, investment manager, investment management company or
any other investment vehicle incorporated outside India.
d. Authorization Whether the applicant is authorized to invest in venture capital fund or carry
on activity as a foreign venture capital investor.
e. Regulation Whether the applicant is regulated by an appropriate foreign regulatory
authority, is an income tax payer, submits a certificate from its banker a document of its
promoter’s track record where the applicant is neither a regulated entity nor an income tax
payer.
f. Refusal and fitness The applicant has not been refused a certificate by the Board and the
applicant is a fit and proper person.

Application for Registration

The applicant must submit the application in Form A as specified in the First Schedule to
SEBI (Foreign Venture Capital Investors) Regulation, 2000 along with requisite fees as prescribed
under Second Schedule of the Regulation. The application and other documents as specified in Form
A should be submitted in duplicated on set of documents is forwarded by SEBI to RBI for the
purpose of approval for making an investment in India. While applying, it must be ensured that the
objective of the memorandum of association/constitution document of the applicant company
permits it to carry on venture capital fund activities.
Additional Information

While applying, the following additional information shall be furnished: A complete list of your
group/associate companies registered with SEBI, and also and the capacity in which they are
registered and the SEBI Registration number.

a. Whether the promoter or its group/associate companies are listed on any or the recognized
stock exchange (s) in India.
b. Whether there have been any instances of violation of or non-adherence to any securities
related regulations and whether any action has been taken against any of the associate/group
companies in this regard, by a regulatory agency in India or abroad.
c. Whether the applicant or any of its directors have been found guilty of fraud or have been
convicted of an offence involving moral turpitude or have been found guilty of any economic
offence.
d. Details of registration of the company/associated/group companies, which are
registered/required to be registered with RBI as a Banking company or Non Banking Finance
Company, in any other capacity and address (es) of concerned branch office (s) of RBI.
e. Details of disciplinary action taken by RBI against any of the group/associate companies.
f. Whether any of the directors or employees of the company or the group/associate companies
were ever associated with any organization as a director or an employee against whom SEBI
had initiated action of suspension or cancellation of certificate of registration, or initiated any
other action under the provisions of SEBI Act, of launched any prosecution for acts
committed during their association.

Other Documents to be submitted to SEBI

a. Copy of latest financial statements of the applicant or the promoters.

b. Copy of Memorandum and Articles of Association/Constitution Document and Certified
copy of Certificate or Incorporation.
c. Disclose the investment strategy as required under Regulation 11 (a) of the SEBI (Foreign
Venture Capital Investors) Regulation 2000. Also, disclose the amount proposed to be
invested in India.
d. Copy of custodian agreement, entered into with a domestic custodian under Regulation 8 (b).
e. Certified copy of business license (if any), issued by the regulatory agency abroad, with
which the applicant is registered.
f. A brief write up on activities of the applicant and its group.
g. Profile of the Directors/Key personnel of the FVCI.
h. Confirmation that a designated bank in India has been appointed.
i. Declaration that the foreign venture capital investor will not make investment in any area
listed under Third Schedule to SEBI (Foreign Venture Capital Investors) Regulation 2000.
 Conclusion

Adequate and timely capital is sine quo-non for the effective development and growth of an
economy. Venture capital, which is essentially a capital fund for financing high risk, high return
and high technology new ventures, is beginning to have an impact on Indian’s economic
development. This had happened due to hands-on and hands-off venture capital funds
encouraging ventures of technocrats and professionals. Venture capitalists play a significant role
in the Indian financial market. They play a critical role as catalysts by providing capital and other
support for new ventures. They contribute to the growth of the vast technical manpower in the
country, thus generating employment.

IDBI was the pioneer in the realm of venture capital business. It launched its first VCF in the
year 1986. The fund aimed at encouraging the commercial application of indigenously developed
technology and adapting imported technology. IDBI also operates a seed capital scheme for
providing indirect assistance to SSI. The ICICI also has made a constituted by IFCI called ‘Risk
Capital Foundation’. A noteworthy role has been played by commercial banks in the venture
capital industry. Equally important is the role played by the private sector venture capital firms
like Gujarat Venture Finance Limited, etc.

Bibliography

 Financial Services & System by [Link]

 Management Financial Services by [Link] Babu

 [Link]