Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies.

The venture capital fund makes money by owningequity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. It is important to note that venture capital is a subset of private equity. Therefore all venture capital is private equity, but not all private equity is venture capital.
[1]

In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value). Venture capital is also associated with job creation (accounting for 21% of US GDP),
[2]

the knowledge

economy, and used as a proxy measure of innovation within an economic sector or geography. Every year there are nearly 2 million businesses created in the USA, and only 600-800 get venture capital funding. According to the National Venture Capital Association 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP.

Features Venture Capital

New Ventures: Venture capital investment is generally made in new enterprises that use new technology to produce new products, in expectation of high gains or sometimes, spectacular returns. Continuous involvement: Venture capitalists continuously involve themselves with the clients investments, either by providing loans or managerial skills or any other support. Mode of Investments:

Venture capital is basically an equity financing method, the investment being made in relatively new companies when it is too early to go to the capital market to raise funds. In addition, financing also takes the form of loan finance/convertible debt to ensure a running yield on the portfolio of the venture capitalists. Objective: The basic objective of a venture capitalist is to make a capital gain on equity investment at the time of exit, and regular return on debt financing. It is long term investment in growth-oriented small/medium firm. It is a long term capital that is injected to enable the business to grow at a rapid pace, mostly from the start up stage. Hands on Approach: Venture capital institutions take active part in providing value added services such as providing business skills, etc to investee firms. They do not interfere in the management of the firms nor do they acquire a majority/controlling interest in the investee firms. The rationale for the extension of hands-on management is that venture capital investments tend to be highly non-liquid. High Risk return Ventures: Venture capitalists finance high risk return ventures. Some of the ventures yield very high return in order to compensate for the heavy risks related to the ventures. Venture capitalists usually make huge capital gains at the time of exit. Nature of Firms: Venture capitalists usually finance small and medium sized firms during the early stages of their development, until they are established and are able to raise finance from the conventional industrial finance market. Many of these firms are new, high technology oriented companies. Liquidity:

Liquidity of venture capital investment depends on the success pr otherwise of the new venture or product. Accordingly, there will be higher liquidity where the new ventures are highly successful. Methods of Evaluation: The evaluation of venture capital investments are generally idea based and growth based, in contrast with the conventional investments, which are asset based. Venture capitalists employ the following methods in order to evaluate their investments: 1) Conventional Method 2) First Chicago Method 3) Revenue Multiplier Method Conventional Method: Under this method of valuation, venture capitalists take into account the time at which the investee companies start the venture and the time at which such companies exit their investments. The exit takes place in the form of sale to public/ third party and so on. The value of the venture for the purpose of investment involves the following computations: 1) Annual revenue: The annual revenue at the time of liquidation of the investments is calculated as follows: Present annual revenue in the beginning, compounded at an expected annual growth rate for a certain holding period. 2) Expected earnings level: The expected level is computed as follows: Future earning level x After tax margin percentage at the time of liquidation. 3) Future market valuation: The future market valuation of the venture capitalists is ascertained as follows: Earnings levels x Expected P/E ratio on the date of liquidation 4) Present value of VC: The present value of the venture capital using a suitable discount factor is determined. 5) Minimum percentage of ownership: The minimum percentage of ownership required is calculated as follows: = Finance sought x 100 / Calculated present value of the venture capitalists

If you are a Early Stage Startup, your chances are of getting VC or Private Equity funding is very slim and numbers prove it Only 9% of all the VC / PE deals have been for early stage companies between 2004 to 2008. This is especially true during the times of recession. Venture Capitalists play it safe and hardly venture in funding a early stage startups.

These are the findings of India Venture Capital & Private Equity Report 2009, created by Thillai Rajan & Ashish Deshmukh of IIT, Madras. The report analysis in detail the venture capital and Private Equity funding in India between 2004 to 2008. India had seen tremendous growth in overall Private Equity funding (2008 was exception due to downturn) In 2004, the total value of PE deals was $1.8 billion which grew tremendously to $22 billion in 2007 and then falling down to $8.1 billion in 2008.

Here are some of the highlights of the report:

Stage wise Private Equity Investment between 2004 to 2008

Out of the total PE VC Investments, around 50% went to Growth and Late stage companies.

Industry-wise Private Equity Investment breakup by amount

India is one of the largest economies in the World.[1] The world is looking at India as an ideal investment destination with strategic advantages and lucrative commercial incentives. A Foreign retailer looking for investment in India has several operations. If a foreign company does not want to incorporate an entity in India it may set up laison or branch office or may enter into franchise agreements with India partners. If a foreign company instead decides to incorporate an entity under Indian law, the company may form a Joint Venture (hereunafter JV).[2]

Joint Ventures by Foreign Companies A foreign company can invest in an Indian company through a joint venture agreement (or as a wholly owned subsidiary) in the areas which are otherwise not reserved exclusively for the public sector or which are not under the prohibited categories such as real estate, insurance, agriculture and plantation. Foreign investment into India is governed by the Foreign Direct Investment (FDI) policy and the Foreign Exchange Management Act, 1999 (FEMA). The Government has set up a Indian Investment Centre in the Ministry of Finance as a single window agency for authentic information or any assistance that may be required for investments, technical collaborations and joint ventures and advises foreign investors on setting up industrial projects in India by providing information regarding investment environment and opportunities, Governments industrial and foreign investment policies, taxation laws and facilities and incentives and also assists them in identifying collaborators in India.[7] For such foreign investments into India, a two tier approval mechanism has been provided: Automatic Approval Route- FDI in sectors or activities to the extent permitted under automatic route does not require any prior approval either by Government of India or Reserve Bank of India (RBI). The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors. Foreign Investment Promotion Board (FIPB) Approval Route:- FDI in activities not covered under the automatic approval route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB).It also provides appropriate institutional arrangements, transparent procedures and guidelines for investment promotion and to consider and approve/recommend proposals for foreign investment.

FORMS OF JVs

Se

Rec

JVs may be either contractual or structural, or both. The main classification of JVs is as Equity / Corporate JV and Contractual JV. An Equity JV is an arrangement whereby a separate legal entity is created in accordance with the agreement of two or more parties. The parties undertake to provide money or other resources as their contribution to the assets or other capital of that legal entity. This structure is best suited to long-term, broad based JVs. TheContractual JV might be used where the establishment of a separate legal entity is not needed or if such is not feasible. This agreement can be entered into in situations where the project involves a temporary task or a limited activity or is for a limited term. Below are the most common structures employed to constitute a JV.

Pop

Com

Qu

Sub Rec

[I] Equity/ Corporate JV

[A company incorporated under the relevant laws (a separate juristic entity)]

Br

Here the parties to the JV would hold shares in a company (JV Co), freshly incorporated or in existence under theCompanies Act, 1956 and would subscribe to the shares of such company in an agreed proportion. The documents of incorporation, i.e. the Memorandum of Association (MoA) and Articles of Association (AoA) of the JV Co. would be suitably drafted so as to reflect the rights, intentions and obligations of the parties. This route is preferred since it allows structural flexibility in terms of creating an entity, which is tailor made to suit the specifications of both the parties. Further, the new investor can collaborate with the promoters of an existing company and convert the same to a JV Co. The MoA and the AoA of the company would be amended accordingly to incorporate the JV Agreement into it.

Bus Civ Con Crim Fam Lab Leg Inte Pro Tax Stu Oth

The advantages of using a corporate vehicle are:

E It Gives an independent legal identity to the JV It puts in place a better management and employee structure The participants have the benefit of limited liability and the flexibility to raise finance The company will survive as the same entity despite a change in its ownership

[II] Partnership

[A partnership or any other unincorporated vehicle]

A partnership JV or hybrid models are unincorporated forms of JV which represent the business relationship between the parties with a profit motive. This is reflected in the tax regime, whereby partners are separately assessed even though the profits are computed as if the partnership were a separate entity. A partnership represents a relationship between persons who have agreed to share the profits of business carried on by all or any of them acting for all.[8]

The partners are separately assessed for tax, though the profits are computed as if the partnership were a separate entity. This JV has inherent disadvantages including unlimited liability, limited capital, no separate identity etc. Consequently, partnerships are not normally used for major businesses except by professionals such as solicitors and accountants or where there are specific tax advantages.

The Limited Liability Partnership Act, 2008 introduced limited liability partnerships (LLPs) in India, which is a beneficial business vehicle as it provides the benefits of limited liability to its partners and allows its members the flexibility of organizing their internal structure as a partnership based on an agreement. At the same time a LLP has the basic features of a corporation including separate legal identity.[9]

A non-resident person who wishes to participate in a partnership firm registered in India or a sole proprietorship will be subject to the Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulations, 2000. Any contribution to the capital of a firm or a proprietary concern or any association of persons in India by a person resident outside India is subject to the approval of the Foreign Investment Promotion Board(FIPB) and RBI[10], granted on a case-by case basis. This acts as another impediment to such structures, which is why a corporate entity is generally preferred from a structuring perspective.

[III] Co-operation Agreements/ Strategic Alliances

[A cooperation agreement or a strategic alliance]

In a cooperation agreement or a strategic alliance, the parties agree to collaborate as independent contractors rather than shareholders in a company or partners in a partnership. This type of agreement is ideal where the parties intend not to be bound by the formality and permanence of a corporate vehicle.

Such alliances are highly functional constructs that allow companies to acquire products, technology & working capital to increase production capacity and improve productivity. Strategic alliances provide companies an opportunity to establish a de facto geographical presence and aid in accessing new markets, increase market penetration, sales & market share. Co-operation agreements / strategic alliances can be employed for business activities such as Purchasing/ Distribution agreements, Technology transfer agreements, marketing and promotional collaboration, intellectual advice.

The rights, duties and obligations of the parties as between themselves and third parties and the duration of their legal relationship is mutually agreed by the parties under the contract, which will be binding on the parties and breach of it will entitle the other party to seek legal recourse against the defaulter.

Another useful way of understanding different types of JVs is by the Anti-trust Route. Five common types of JVs have emerged during anti-trust analysis:

Fully Integrated Joint Ventures It deals with all aspects of a line of business, which include manufacturing, distribution, marketing and sales. It is viewed as a partial merger of the parent companies and the standards applicable to mergers and acquisitions under Section 7 of the Clayton Act are applicable in these cases. The analysis requires evaluation of the position of the parties as competitors, the relevant markets and competitive effects among others. A case which illustrates this type of JV isUnited States v Ivaco[11], United States v PennOlin Chemical Co.[12] Research and Development Joint Ventures R&D JVs can provide pro-competitive benefits while maintaining competition among the parent companies, which includes sharing of the economic risks, increasing economies of scale and pooling important research and development information among others. Also, they provide lesser anticompetitive risks due to which they are looked upon favorably. A case which illustrates this point is Addamox Corporation v. Open Software Foundation, Inc.[13] Production Joint Ventures Production JVs involve the integration or creation of production facilities. They may or may not be for the purposes of manufacturing a new product altogether. Production JVs increase productive capacities while retaining the same level of competition in the market. One of the most common example is that of New United Motor Manufacturing, Inc. a production JV between Toyota and GM.[14]

 Joint Selling & Buying Agreements A JV may be focused only on selling or marketing activities of the parent companies. As the CC Guidelines suggest, these arrangements may be pro-competitive if they allow the goods or services to reach the marketplace quickly and efficiently. A case which illustrates this point is United States v Columbia Pictures[15], Northwest wholesale stationers v Pacific Stationery and Printing Co.[16] Network Joint Ventures They are those in which consumers attach themselves to a physical network. Prime examples of such industries are the power, telecommunications and even the electronic finance and banking industries. The nature of network industries results in cooperation and coordination among the firms that participate in the network, which is essential for the smooth functioning of the network and while it can enhance the efficiencies, it can also lead to acquisition of market power. Usually the courts use the Rule of Reason to analyze these JVs. A case which illustrates this point is United States v Electronic Payment Service[17]

DOCUMENTATION IN A JV

Establishing a JV involves a series of steps and selection of the best partner after proper due diligence is the most significant of all. Once a partner is identified, a memorandum of understanding (MoU) or a letter of intent (LoI) is signed by the parties expressing the intention to enter into a definitive Joint Venture agreement (JVA) in the future and make the relationship formal. JV transactions demand efficient, clear and foolproof documentation. Basic legal documents for establishing a joint venture are:

JVA / shareholders agreement (SHA); and Memorandum and Articles of Association of the JV Co. Miscellaneous agreements such as trade mark licenses and technology transfers.

The most important document is the JVA or SHA. Essentially this provides for the method of formation of the JV company and sets out the mutual rights and obligations of parties for the purposes of conducting the JV and the manner in which the parties will conduct themselves in operating and managing the JV. The JV agreement is between partners and does not bind the JV company unless its terms are included in the AoA of the JV company.[18] Therefore it is necessary to specifically incorporate the JVA or the SHA into the AoA of the JV company.

 BOARD AND MANAGEMENT OF THE JV

There are no specific rules relating to board or management structure of joint venture and also no requirement for a two tier board. Under Companies Act, a private company must have 2 directors and public company should have three. The Act also provides that at least two-thirds of the directors of a public company must be appointed by the shareholders in general meeting and their office must be liable to retirement by rotation. One-third of the retiring directors must retire at every AGM.[19] Where the JV is listed, the Board must comprise an optimum combination of executive and non executive directors. If the chairman is non executive, at least one- third of the board should be independent; if the JV has an executive chairman, a majority of the board should comprise independent directors.

TRANSFER OF SHARES

The enforceability of restrictions on transfer is a complex area under Indian law. The Supreme Court, in the case of VB Rangaraj v. Gopalakrishnan[20], casts doubts over enforceability of agreements between shareholders in an Indian company unless the provisions (especially in relation to transfer of shares) are incorporated into the articles. Even if provisions are incorporated in the articles, there is risk that some of the provisions maybe construed as an unlawful fetter on the statutory provisions of the Company and held unenforceable.

Sec 111A of the Act provides that shares of a public company must be freely transferable. This requirement has cast further doubt on the validity of restrictions on transfer of shares of a public company (even if restrictions are included in the articles). However, not withstanding the above, parties often use contractual restrictions on transfer.[21]

TAX BENEFITS

There are no tax laws or incentive which affect JV specifically, the following maybe relevant to foreign investors:

India has double tax treaties with a number of countries. The treaty with Mauritius is particularly favorable especially as it eases nthe obligation to pay Indian Capital gains tax at the time of exit from Indian JV.

 To promote exports from India, the government has introduced some tax incentives under Software Technology Parks (STP) Scheme and the Export Oriented Units (EOU) Scheme. Subject to satisfaction of certain conditions, companies engaged in the export of certain services/goods and are registered under these schemes are entitled to certain tax exemptions. India has introduced transfer pricing rules which require transactions between a multinational and its Indian subsidiary to be on arms length terms. If not, the tax authorities are entitled to impute a price that represents the arms length price and tax the transactions accordingly.

CONCLUSION

All joint ventures do not always yield the desired results contemplated by the joint venture parties at the time of starting the joint venture. Despite the various advantages associated with the formation and even after carrying out the compatibility and feasibility studies and taking adequate steps towards the realization of the goals of the joint venture, a considerable number of joint ventures do not succeed, and eventually break-up. While good joint ventures may be highly profitable and hold promise for the future, bad joint ventures can at times get worse than no deal at all. Joint ventures involve dynamic relationships and circumstances, and it may not always be feasible to factor in the underlying conditions that may change with efflux of time, at the time of entering into the joint venture agreement.

The main reasons for failure are human factors like lack of trust, lack of synchronization of objectives, goals of partners, several joint venture partners leading to clash of ideals, cultural differences, family run business vis--vis professionally managed company; economic and policy restricting factors like taxation, lack of financial compatibility, physical infrastructure deficiencies, non-feasibility of proposed JV business.

Thus few basic elements may be kept in mind for a successful JV:

Each JV partner should be clear of his organizational goals and the objectives. Each side should try to recognize and bridge the cultural gaps JV partners should have a clear idea about the attributes sought in the other partner JV partners should be committed and focused to the JV goals No action should seem unilateral and should always have reciprocal agreements The JV agreement should be as exhaustive as possible and should contain a robust and amicable arbitration or other dispute resolution model.

There should be adequate research and due diligence Exist options must be such that it does not create burden or huge loss on the remaining JV partners.

Thus JV is one of the most rewarding forms of entering in a new market which welcomes foreign exchange and wants the domestic sector to prosper. However the JV partners should always understand that without mutual trust a JV cannot be successful in long term.

BIBLIOGRAPHY

PRIMARY SOURCES Acts Companies Act 1956 Foreign Exchange Management (Investment in Firm or Proprietary Concern in India) Regulation, 2000 Foreign Exchange Management Act, 1999 Indian Partnership Act, 1932 Limited Liability Partnership Act, 2008

SECONDARY SOURCES Books

A.K. Majumdar and Dr.G.K. Kapoor, Taxmans Company Law and Practice, 11th Edition, Taxmann Publications (P) Ltd. Agarwal Raj; Joint Ventures- Law and Management; Bharat Publishing House; India; 2002 Caves, R. E.; Multinational Enterprise and Economic Analysis, 2nd Edition, Cambridge University Press(1996) Charlesworth and Morse, Company Law, 16th Edn., Sweet and Maxwell, (1999) Hewitt Ian; Joint Ventures; 4th Ed; Sweet & Maxwell; London; 2008

K. Sekhar, Guide To SEBI Capital Issues, Debentures & Listing, 1996 Seth Dua and Associates, Joint Ventures & M&A (Lexis Nexis, New Delhi, 2005)

Articles

Edmund W. Kitch, The Antitrust Economics of Joint Ventures, 54 ANTITRUST L.J. 957 Ethier, W. J. (1986) The Multinational Firm, Quarterly Journal of Economics, 101(4), Journal of International Business Studies, 22: 479-501. Frank Partnoy, Shifting Contours of Global Derivatives Contracts 22 U. Pa. J. Int'l Econ. L. 421 (2001). Gatignon, H. and E. Anderson (1988) The Multinational Corporations Degree of Control Joseph F. Brodley, Antitrust and Joint Ventures, 95 HARv. L. REV. 1521. K. Sekhar, Guide To SEBI Capital Issues, Debentures & Listing, 1996 L.A. Stout, Betting the Bank: How Derivatives Trading Under Conditions of Uncertainty Can Increase Risks and Erode Returns In Financial Markets 21 Iowa J. Corp. L. 53 (2001). Mark B. Baker; Awakening the Sleeping Giant: India and Foreign Direct Investment in 21st Century; 15 Industrial International & Competition Law Review Modified Transactions-Cost Analysis Approach, Journal of Marketing, 57(July): 19-38. Nabhi, Manual for Foreign Collaboration and Investment in India, 1997 Over Foreign Subsidiaries: An Empirical Test of Transactions Cost Explanation, Journal of Ownership, Location, and Internalization Factors, Journal of International Business Studies, Richard J. Hoskins, Antitrust Analysis of Joint Ventures and Competitor Collaborations: A Primer for the Corporate Lawyer, 10 U. MIAMI Bus. L. REV. 119 Ritter, J. R., 1987, The costs of going public, Journal of Financial Economics, 269-281 Robert Pitofsky, Joint Ventures under the Antitrust Laws: Some Reflections on the Significance of PennOlin, 82 HARV. L. REV. 1007 Zahra, S., R. D. Ireland, I. Gutierrez and M. Hitt (2000) Privatization and Entrepreneurial Transformation, Academy of Management Review, 525-550

URLs

Joint Ventures, at [Link] Majmudar & Co., Joint Ventures at [Link]/pdf/Joint%20ventures%20in%[Link] in India,

Organisation of Economic Co-operation and Development, Competition Issues in Joint Ventures, available at [Link]/dotooecd/0/33/[Link] Robert Pitofsky, Joint Venture Guidelines: View from One of the Drafters, available at [Link]

[1] See, Mark B. Baker; Awakening the Sleeping Giant: India and Foreign Direct Investment in 21 Century; 15 Industrial International & Competition Law Review; 389, at 390; 2005 (stating India as the Fourt largest economy in the World in terms of purchasing power parity) [2] Opening for Business in India- Retailers Option; Suffolk Transnational Law Review; Vol 31; 2007; pg 165-189, at p 170 [3] New Horizons Limitedv. Union of India (UOI) and Ors (1995) 1 SCC 478 [4] Fuji Xerox Co., Ltd. is a joint venture partnership between the Japanese photographic firm Fuji Photo Film Co. (75%) and the American document management company Xerox (25%) to develop, produce and sell xerographic and document-related products and services in the Asia-Pacific region. [Link] [5] Majmudar & Co., Joint Ventures in India, at [Link]/pdf/Joint%20ventures%20in%[Link] [6] K. Sekhar, Guide To SEBI Capital Issues, Debentures & Listing, 1996, p. 3 [7] Joint Ventures, at [Link] [8] Sec 4 of the Indian Partnership Act, 1932 [9] The LLP Act permits the conversion of a partnership firm, a private company and an unlisted public company into an LLP, in accordance with specified rules. As a consequence of the conversion, all assets, interests, rights, privileges, liabilities and obligations of the firm or the company may be transferred to the resulting LLP and would continue to vest in such LLP. An LLP is a body corporate formed and incorporated under the LLP Act, 2008. [10] Reserve Bank of India [11] 704 F. Supp. 1409 (1989) [12] 378 US 158 (1964) [13] 152 F. 3d 48 (1 Circuit, 1998) [14] New United Motor Manufacturing, Inc. is an automobile manufacturing plant in Fremont, California. The factory
st

st

was originally a General Motors plant opened in 1962 and shut down in 1982. GM and Toyota reopened the factory as a joint venture in 1984 to manufacture vehicles to be sold under both brands. GM pulled out of the venture in June 2009. Toyota indicated it plans to pull out by March 2010. When it reopened for production in 1984, it was the first automotive joint venture plant in the United States. GM saw this joint venture as an opportunity to learn about the ideas of lean manufacturing from the Japanese company, while Toyota gained its first manufacturing base in North America and a chance to implement its production system in an American labor environment. Many business textbooks mention NUMMI when they discuss joint ventures. Available at [Link] [15] 507 F Supp 412 (SDNY 1980) [16] M. 2763, 6.12.2002 [17] 1994 2 Trade Case (CCH) 796 (D. Del. 1994) [18] VB Rangaraj v. VB Gopalkrishnan and Ors 73 Comp Cas 201 (SC) (1992) [19] Annual General Meeting [20] AIR 1992 SC 453 [21] Hewitt Ian; Joint Ventures; 4 Ed; Sweet & Maxwell; London; 2008
th

Share

Share

Source : ,

You need to be logged in to post comment 2 Comments for this Article

Divya Vikram
Wrote on 23 December 2010

thank you so much:)

[Link]
Wrote on 20 December 2010

Now a days in the developing business scenerio JV arrangements hold a unenviable position on it's own to facilitate timebound and specialised projects. The present analysis is an good effort to create an awareness .

More Newer Articles

Stages & Growth Of Administration of Justice Contempt of Courts License and claim case How a judge should be ? Let Us See Tibet As it is Behind Bamboo Curtain "Phishing" in the Sea of Internet Combating Corruption: The intent and the course Police Must Serve People; Not Punish People

SECTION 1 - INDUSTRIAL SCENERIO AT THE NATIONAL LEVEL Livestock base The leather industry in India owes its origin and growth to the strong and wide spread livestock base in the country. According to an assessment made in 1996, the world livestock population was 3194 million heads and India with 479 million heads accounted for 15% of world population. India ranked number one in cattle, buffaloes and goat population and four in sheep population. Almost 60% of the buffaloes in the world are in India. With an annual average rate of growth around 1.5% India is

maintaining the lead position. 1 Availability of hides and skins

Hides (from cattle and buffaloes) and skins (from goats and sheep) the basic raw materials for leather industry are obtained from slaughtered and dead ovine and bovine animals. The quality of hides and skins depends upon the area from which they originate. India is known to produce some superior qualities of hides and skins. The goat skins of North Bihar and Bengal (The Ganges valley) possess very fine grain and are prized all over the world as the finest raw material for superior glazed kid leather. 2 The current annual availability of hides and skins is placed around 160 million pieces. It is estimated that 40 to 50 percent of cattle hides and 30 to 40 percent of buffalo hides are obtained from fallen stock. In case of cattle hides, only 79 percent of the fallen stock are recovered. In buffaloes hides and sheep skins the recovery is around 90 percent. 3 If the rate of recovery is improved there will be substantial increase in the overall availability of hides and skins

High level of deterioration in quality necessitates imports Due to ages old flaying, curing, storing and handling practices, a significant portion of the hides and skins become low grade by the time they reach the tanneries. Since high quality of leather is required for manufacture of products for export the Government have allowed import of all types of leather without any restrictions. In 1997-98, the leather industry has imported raw hides and skins worth Rs.167.84

crores, semi processed leather for Rs.18.95 crores and finished leathers to the tune of Rs.348.70 crores, totaling Rs.535.49 crores. Socio - economic importance The leather industry, by virtue of its strong linkage to rural agro-based families tending livestock, its role as a major employment provider to the masses- 15 million direct and 5 million indirect employment and fourth largest foreign exchange earner Rs.6955.78 crores through export of leather and leather products in 1998 99 occupies a place of pride and prominence in the socio-economic firmament of the nation

Shrinkage of leather industry in developed countries another factor Due to substantial increase in labor costs, tough pollution control regulations and shift towards hi-tech, less labor intensive industries, the developed countries started shrinking leather-based activities in seventies and eighties. These countries preferred to source their supplies from developing countries, extending the technology and know how. There were added advantages in price and choice of sources. 4 Transformation from exporter of raw material to value added products The period 1970 to 1990 witnessed the transformation of Indian leather industry from an exporter of hides and skins to that of finished products exporter. During this period (1972-73 to 1990 91) export of semi-finished leather declined from Rs.152.60 to Rs. 3.80 crores and export of finished leather and products increased from Rs. 31.40 to Rs. 2550.00 crores. This trend continued in the nineties also. Predominance of SSI units policy induced SSI Units dominate the tanning sector as well as products sectors. This is due to the conscious policy of the government to protect the millions of artisans dependent on

leather industry for their livelihood. 5 Hence almost all items of leather industry were reserved for small scale sector. The products reserved for small-scale sectors are: Vegetable tanned hides and skins: semi finished Chrome tanned hides and skins : semi finished Sole leather, picking band leather, leather pickers and other accessories for textile industry, harness leather, leather shoes, shoe uppers, leather sandals and chappals, leather garments, suit cases and travel goods, purses, handbags, fancy leather goods, watch straps, cases and covers of all types, industrial gloves and washers and laces. 6 For finished leather no reservation No industrial license is required for processing of hides and skins from wet blue stage to finished leather. However, the location of industrial projects will be subject to Central or State Environmental laws or regulation, zoning and land use regulation. An industrial Entrepreneur Memorandum needs to be filed with the Central Government. 7