The domestic venture fund industry feels it has been delivered a severe blow by the Reserve Bank of India's (RBI) guidelines on treatment of banks' investments in venture capital funds (VCFs). Over 80 per cent of funding for local venture funds has come from banks. | |
| The classification of investments in VCFs by banks as exposure to capital market, a higher risk weight of 150 resulting in higher capital allocation and capping of banks' investments at 10 per cent of net worth appear as a dead-end for non-bank Indian venture funds. |
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| "The guidelines will restrict banks', including SBI's, exposure to venture funds," an official at State Bank of India (SBI), the country's largest bank, said. |
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| The RBI has been discouraging commercial banks from getting into high-risk areas such as capital market and real estate for nearly two years now. |
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| To check the flow of bank funds to these sensitive sectors, the banking regulator has raised the risk weights and increased provisioning requirements for certain class of assets. It has now brought venture fund investments under capital market classification and made stringent norms applicable to them. |
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| Hemant Kanoria, vice-chairman and managing director of Kolkata-based Srei Infrastructure Finance Ltd (SIFL), said "The RBI should encourage the banks to invest in VC funds rather than discouraging it by tightening guidelines. Earlier DFI's (development finance institutions) used to give the seed capital but now DFI's like IFCI are in a bad shape. IDBI has converted itself into a bank as did ICICI. So who is going to finance the risk capital is a big question." |
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| Most of the fresh investments by foreign venture funds in India are as private equity and into real estate. "The RBI guidelines have created an artificial increase in the return on equity prices (because of the high returns in other investments like real estate. This will eventually harm the economy," said Vishnu Varshney, CEO of Ahmedabad-based GVFL, the country's oldest venture capital firm. |
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| The RBI guidelines have already affected GVFL's fund raising for its new venture funds, one being a fund for start-up SMEs. The Indian Venture Capital Association has written to the RBI airing its views against the new guidelines. |
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| GVFL's Varshney wants the RBI to make a differentiation between classical venture funds, which support start-up activities, and private equity in real estate, as the Securities and Exchange Board of India (Sebi) does and expects the RBI to modify its guidelines. |
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| Kanoria said venture funding should enjoy the status of priority sector lending for at least the next 2-3 years. "Till last year, venture funding was considered as priority sector. I think it should continue for some time," he added. |
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| Kanoria also feels that the VC funds as well as the industries would suffer badly due to the new guidelines. Incidentally, Srei Venture is now planning to reopen the IGCF for new subscription. The new guideline could be a major blow for SVCL. |
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