The Roadblocks To Venture Capital

Apple, Hotmail, Yahoo!. They are some of the success stories of the wired world. Yet, as start-ups, all of them failed to get capital from traditional lenders. And they only took off because they could source finance from independently-managed venture capital funds, that focused on equity or equity-linked investments in privately-held, high-growth companies.

With the Internet revolution spreading across India, more and more knowledge-based businesses are seeking venture capital. Yet, as the Securities and Exchange Board of India (Sebi) promoted committee on venture capital funding, headed by Silicon Valley-based K B Chandrashekhar of Exodus, points out, the venture capital industry in India is still at a nascent stage. And there are some critical areas that need to be addressed if this industry has to succeed. The Chandrashekhar committee has identified these as:

 

* The regulatory, tax and legal environment should play an enabling role. Internationally, venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability.

* Raising resources, making investments, management and exit should be as simple and flexible as needed and driven by global trends.

* Venture capital should become an institutionalised 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 start-up firms in a wide range of high growth areas.

* In view of the 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 a global exposure and investment opportunities.

* Infrastructure in the form of incubators and research and development needs to be promoted. This can be done through both government support and with private management as has been successfully managed by countries like USA, Israel and Taiwan. This is necessary for faster conversion of R&D and technological innovation into commercial products.

At present, venture capital funds have to deal with multiple regulations. According to the report, three sets of regulations deal with venture capital activity in India. This includes Sebi (Venture Capital Regulations) 1996, Guidelines for Overseas Venture Capital Investments issued by the department of economic affairs in 1995 and the CBDT Guidelines for Venture Capital Companies issued in 1995 and modified in 1999. `The need is to consolidate and substitute all these with one single regulation of Sebi to provide for uniformity, hassle-free single-window clearance.' says the committee's report.

Or take the case of foreign venture capital funds. Currently, there is a disparity between foreign institutional investors (FII) and foreign venture capital investors (FVCI). FIIs registered with SEBI can freely invest and disinvest without taking approvals from the Reserve Bank or Foreign Investment Promotion Board (FIPB). This has brought positive investments of over $10 billion.

FVCIs, however, can make direct investments in venture capital undertakings or through a domestic venture capital fund only after obtaining approvals. Yet such long-term investment, which is in the nature of risk finance for start-up enterprises, needs to be encouraged. So FVCI's need to be brought on par with FIIs in that they should register with SEBI. Having done so, they should be able to make hassle-free investments and disinvestments.