Professional Documents
Culture Documents
SUBMITTED BY:-
HARSH VAIDWAN
ROLL NO. 34
PROGRAM: PGDM
SESSION : 2008-2010
AREA OF WINTER PROJECT: FINANCE
1
PREFACE
A cloud does not know why it moves in just such a direction and at
such a speed ……
These words enlighten the spirits to see beyond the horizons and look
clearly into the mind of new entrepreneur. It is aimed at providing a
comprehensive introduction to the area of venture capital and its major
strategic player.
2
Acknowledgement
This report has been prepared to give a brief description of the “EMPIRICAL
STUDY ON VENTURE CAPITAL IN INDIA & ITS MAJOR STRATEGIC
PLAYER” which was taken for the Financial Analysis for the fulfillment of our
professional course.
I would like to express my gratitude towards my project guide Prof. who not only
gave me directions on how to work on the project but also taught the valuable skills of
getting my work done with the help of others. He was a constant source of inspiration.
I would like to thanks my all faculty member who helped me with valuable data and
reports.
Being on the same line, I am thankful to all my friends and well wishers whose moral
support has helped me directly or indirectly in completing this project.
(HARSH VAIDWAN)
3
CONTENTS
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country attracts venture capital are IT and ITES, software products,
banking, PSU disinvestments, entertainment and media, biotechnology,
pharmaceuticals, contract manufacturing and retail. An offshore
venture capital company may contribute unto 100 percent of the capital
of a domestic venture capital fund and may also set up a domestic asset
management company to manage the fund. Venture capital funds
(VCFs) and venture capital companies (VCC) are permitted up to 40
percent of the paid up corpus of the domestic unlisted companies. This
ceiling would be subject to relevant equity investment limit in force in
relation to areas reserved for SSI. Investment in a single company by a
VCF/VCC shall not exceed 5 percent of the paid up corpus of a
domestic VCF/VCC. The automatic route is not available.
5
requirement of equity capital for the project, promoters turn to venture
capital financing. Venture capitalists not only provide funds but also
contribute to the project through proven expertise in the areas of
management, marketing, and technology which fill the gap by assuming
the role of partners in an enterprise. Venture capitalists take risks but
aspire for high return in the form of capital gain on investment.
In India the need for venture capital was first highlighted by the
Committee of Development of Small and Medium Enterprises under the
chairmanship of R.S. Bhatt in the year 1972. In 1975, the concept of
venture capital was introduced in India by Industrial Financial
Corporation of India (IFCI) with the inauguration of Risk Capital
Foundation (RCF) to supplement promoter’s equity with a view to
encouraging technologists and professionals to promote new industries.
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type, hidden information, occurs when one party to a transaction knows
relevant information that is not known to the other party for example,
an entrepreneur developing a new product may have much better idea
about whether the product will actually work than does the venture
capitalists that may finance the venture. The other type of
informational asymmetry is described as "hidden action." In this
situation one party to a transaction cannot observe relevant actions
taken by the other party (or at least can not legally verify these
actions). For example, an investor in an entrepreneurial firm might not
be able to observe whether the entrepreneur is working hard and
making sensible decisions or whether the entrepreneur is planning to
take the money run.
7
FEATURES OF VENTURE CAPITAL:
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the investors (suppliers of venture Capital). This phenomenon
also compels market. Therefore they try to avoid unethical take
over of the investor companies for personal purpose.
9
venture. Bankers, other creditors, suppliers, skilled managers,
and distributors come forward to join business once venture
capitalist
10
capitalist concentrate investment in early stage companies and high
technology industries where informational asymmetries are significant
and monitoring is valuable. Asymmetric information associated with
start-up companies make project governance extremely important
during the screen.
11
S. Stage Time Scale of Risk
No. Realization
(Years)
I Early Stage Investment
1 Seed Finance 7-10 Extreme
2 Start up Finance 5-10 Very High
3 First Stage 4-6 High
4 Second Stage / Follow on 3-6 High
Finance
II Later Stage Investment
5 Development/Expansion 1-3 Medium
Finance
6 Replacement/ Money out Deal 2-4 Medium
7 Turn around/ Recovery Finance 3-5 High/ Medium
8 Bridge Finance 1-3 Low
9 Mezzanine Finance 1-2 Low
10 Management/ Leverage Buy out 1-3 Low
11 Management Buy – in 1-3 High
It is clear that seed finance involved largest duration of time for
investment to fructify result. The risk is also maximum in this stage.
Seed financing Successive stage involves less risk in relation to
previous stage. Relatively, least risky stage is bridge finance and
mezzanine finance. The role of venture capital in this stage arises
because of the fact that merchant bankers may not be interested in
comparatively small business units. The venture capitalist, instead of
charging fee simply participates in business, signaling to outside
investors the future viability of the venture. In this way venture
capitalist share future wealth of the business unit at the time of actual
realization. Expansion finance is the best option to the venture
capitalist. In case of expansion finance risk is relatively more than it is
in mezzanine, but much less than in start-up or seed stage. At the same
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time, expansion finance offer sufficient profit potential to the venture
capitalist.
FORMS OF FINANCE
• Equity Participation
• Conventional Loan
• Conditional Loan
• Income Notes
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problems initially. But this kind of assistance is needed during the
second stage of financing as soon as the venture has taken off.
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2 Management Act as partner, active Passive
Approach participation (make efforts in participation
the direction of maximization (make efforts to
of shareholders wealth) keep its own
money safe and
secure)
4 Risk Taking Risk taker, but not risk lover Risk averser
Behaviour willing to accept high risk only
for potential high return
5 Time Frame Long-term consideration Short term to
repayment schedule undefined long term, but
time of
engagements is
predetermined
and certain.
6 Projects Preference for small start-ups, Preference for
innovative produces and successful
markets, new technology, high business,
growth sectors, generally generally
knowledge based and non- tangible asset
tangible assets base based.
7 Exit routes Buy back by promoters, IPO, Fixed repayment
sales to third party or any schedule
other possible way (term and (determined well
conditions of exit route are not in advance)
pre-determined)
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8 Financing Prefer stage-wise finance in One time
policy order to manage risk as well as financing
to monitor the performance
and opportunistic behaviour
(dishonesty of fraud) of the
promoters
9 Decision Multi stage, multi criteria, Fixed norms
Process multi purpose
10 Services It specializes in management It specializes in
services of which finance is a financial services
part. It participates in the and generally has
whole scope of business from nothing to do
team building through to with
operations and even during management.
exit.
.
16
Learner, J. (2004) “Venture Capital and the Decision to go
public” examines the timing of initial public offers and private
financing by venture capitalists. Using the sample of 350 privately held
venture capital backed biotechnology firms between 1978 and 1992, it
is established in the study that these companies go public when equity
valuations are high and employ private financing when values are
lower. Seasoned venture capitalist appears to be particularly proficient
at taking companies public near market peaks. The results are robust to
a variety of controls and alternative explanations. This establishes the
usefulness of venture capitalist as strategic adviser to the inverted
companies.
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of a industry’s life cycle. In this period of accelerated growth,
financials of both the eventual winners and losers look strikingly
similar. The Study also provides a new insight into deal structuring and
management of portfolio companies. The paper provides useful clues
for selecting sectors for investment to the venture capital industry in
India. In India, numbers of fast growing sectors are neglected by
venture capital fund’s which is not a good investment strategy.
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establishment of a separate National Venture Financing Institution
(NVFI), The study describes specific provisions pertaining to royalties
on sales, conditional loans and equity funding by venture capital. The
studies also stress the need of a dynamic unlisted Securities Market
(USM) for the success of venture capital in India. The suggestion to
have a NVFI is at variance with the international experience in India.
The study finds that the coverage of risk situations involving the
development of enterprises, expansion of established technology and
growth of new management are the areas neglected by the venture
capitalists in India.
The conclusion from the study emerge are that the guidelines
issued by the government related to venture capital in India,
specifically eligibility criteria with regard to the size of the
investment, technology and the background of the entrepreneurs are so
restrictive and indeed unrealistic in the sense that, they have come in
the way of growth of this business. The author seems to have confined
the role of venture capital in high-tech industries only that is certainly
unnecessary.
19
suggestions related to the fund management; conflict of interest
between different parties, appointment of custodian, investor
information and cancellation of registration etc.
20
different companies. The study has not tried to explain the reasons
behind the observed behaviour of venture capital funds in India.
21
RESEARCH METHODOLOGY
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investment by venture capital funds. And the condition of financing for
untried technology by venture capital funds has been done away with.
Still in mindset in concerned quarters remain bounded to the same old
concept.
23
SCOPE OF THE STUDY
Data Collection
Analysis of Data
Y = a + bx
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1. The date used in my research study is secondary data.
In this section I will discusses the various legal and regulatory issues
related to working of fund venture capital in India. Section 1 of this
research will explains recent S.E.B.I. regulations regarding venture
capital fund in India. Sections 2 will discuss relevant Income tax
provisions and section 3 explains measure recommendations of the
venture capital committees.
25
Recent S.E.B.T. Regulations, Income Tax Production, Venture Capital
Committee Recommendations.
Meaning:
Negative List:
1. Real Estate
3. Gold financing
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Associate in relation to venture capital fund means a person:
Ingestible funds:
Unit:
Eligibility criteria:
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1. The main object of the company as per its memorandum of
association must be carrying on of the activity of venture capital
fund.
5. In both cases, the applicant must not have already applied for
certificate from SEBI or its certificate must not have been
suspended by SEBI or cancelled by SEBI and the applicant must
be a fit and proper person.
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Maintenance of books and record:
SEBI may at anytime call for any information from the venture
capital fund in respect to any matter relating to its activity as a venture
capital fund. Such information must be submitted with in the time
specified by days to SEBI.
SEBI may at anytime call upon the venture capital fund to file
such report as it deems fit with regards to the activity carried out by
venture capital fund.
Winding up:
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2. To inspect or investigate into complaints received from
investors, clients or any other person on any matter having a
bearing on the activity of the venture capital fund.
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d. Requiring the person concerned to refund any money or the assets
to the concerned investors along with the requisite interest or
other wise, collected under the scheme.
The venture capital fund may with in 14 days from the date of
receipt of such notice furnish to the enquiry officer its reply and make
its representation before him. A venture capital fund may appear
through any person duly authorized by it. The enquiry officer shall
after taking into account all relevant facts and circumstances, submit a
report to SEBI and recommend penal action if any to be taken against
the venture capital fund and also the grounds on which such action is
justified.
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fails to exercise due diligence in the performance of its functions or
fails to comply with its abdications under these regulations. However
no such certificate of registration shall be suspended or cancelled
unless the procedure specified in the regulation applicable to such
intermediary is complied with.
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MAJOR RECOMMENDATIONS OF THE CHANDRASEKHAR
COMMITTEE
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C. Changes in Buy Back Requirements for Unlisted Securities: A
venture capital fund incorporated as a company/ venture capital
undertaking should be allowed to buyback upto 100% of its paid
up capital out of the sale proceeds of investments and assets and
not necessarily out of its free reserves and share premium
account or proceeds of fresh issue. Such purchases will be
exempt from the SEBI takeover code. A venture-financed
undertaking will be allowed to make an issue of capital within 6
months of buying back its own shares instead of 24 months as at
present. Further, negotiated deals may be permitted in unlisted
securities where one of the parties to the transaction is VCF.
D. Relaxation in IPO Norms: The IPO norms of 3 year track record
or the project being funded by the banks or financial institutions
should be relaxed to include the companies funded by the
registered VCFs also. The issuer company may float IPO without
having three years track record if the project cost to the extent of
10% is funded by the registered VCF. Venture capital holding
however shall be subject to lock in period of one year. Further,
when shares are acquired by VCF in a preferential allotment after
listing or as part of firm allotment in an IPO, the same shall be
subject to lock in for a period of one year. Those companies
which are funded by Venture capitalists and their securities are
listed on the stock exchanges outside the country; these
companies should be permitted to list their shares on the Indian
stock exchanges.
E. E. Relaxation in Takeover Code: The venture capital fund while
exercising its call or put option as per the terms of agreement
should be exempt from applicability of takeover code and 1969
circular under section 16 of SC(R) A issued by the Government
of India.
F. Issue of Shares with Differential Right with regard to voting and
dividend: In order to facilitate investment by VCF in new
enterprises, the Companies Act may be amended so as to permit
issue of shares by unlisted public companies with a differential
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right in regard to voting and dividend. Such flexibility already
exists under the Indian Companies Act in the case of private
companies which are not subsidiaries of public limited
companies.
G. QIB Market for Unlisted Securities: A market for trading in
unlisted securities by QIBs be developed.
H. NOC Requirement: In the case of transfer of securities by FVCI
to any other person, the RBI requirement of obtaining NOC from
joint venture partner or other shareholders should be dispensed
with.
I. RBI Pricing Norms: At present, investment/disinvestment by
FVCI is subject to approval of pricing by RBI which curtails
operational flexibility and needs to be dispensed with
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IPO. Such flexibility should be available for Indian startups as
well. Similarly, shareholders can take advantage of the higher
valuations in overseas markets while divesting their holdings.
C. Global Investment Opportunity for Domestic Venture Capital
Funds (DVCF): DVCFs should be permitted to invest higher of
25% of the fund's corpus or US $10 million or to the extent of
foreign contribution in the fund's corpus in unlisted equity or
equity-linked investments of a foreign company. Such
investments will fall within the overall ceiling of 70% of the
fund's corpus. This will allow DVCFs to invest in synergistic
startups offshore and also provide them with global management
exposure.
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are expected to be brought in by offshore investors over 3/5 years on
conservative estimates. This would in turn lead to increase in the value
of products and services adding up to US$100 billion to GDP by 2005.
Venture supported enterprises would convert into quality IPO’s
providing over all benefit and protection to the investors.
Additionally, judging from the global experience, this will result into
substantial and sustainable employment generation of around 3 million
jobs in skilled sector alone over next five years. Spin off effect of such
activity would create other support services and further employment.
This can put India on a path of rapid economic growth and a position of
strength in global economy.
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suitable of risk capital needed and for spurring innovation through start
up firms in a wide range of high growth areas.
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which or a dedicated pool of capital raised in the manner specified
under the regulations to invest in venture capital undertakings in
accordance with the regulations. The minimum size of the fund from
any investor will not be less then INR 500,000 and the minimum corpus
of the fund at the start has to be at least INR 50 million. The new
regulations stipulated that the maximum investment in single venture
capital undertaking is to exceed 25% of the corpus of the fund. The
new regulations allowed venture capital fund to participate in a
company's initial public offering through the book building route as a
qualified institutional buyer.
39
has been that in that case of India there was no relationship between
entrepreneurship financing and venture capital financing.
A B C
Undertaking (VCU)
40
From the point of view of fund raising, funds are of the
following three types:
• Commercial Banks
• Insurance Companies
• Corporate Sector
• Mutual Funds
• Non-Resident Indians
41
2 Andhra Pradesh Venture Capital Limited Promoted
by PSFC.
The bottom line is that if the deal succeeds a venture capital fund
gets a very high return on its investments. But if the financed venture
fails, the investment has to be written off. Some instances of such
doomed investment are:
INCUBATION
(NURTURING)
DISINVESTMENT
MECHANISM
(EXIT STRATEGIES)
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The venture capitalists do not finance all the ventures for which
proposals are received. They invest only in a small percentage of
business proposals, which they review. It is said that it is hard to
convince a venture capitalist that a business is sound as to get a first
novel published. Proposals are subjected to due diligence process. The
venture capitalist assesses whether the applicant has the passion,
commitment and ethical values to turn his idea in to a business.
Following point should be considered while selecting venture
capitalists.
• Match the stage of your project with the funding pattern of the
venture capitalist.
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In this method only two points of time in the life of the venture
capital investment namely the starting time of investment and the exit
time when the investment would be liquidated through sale to public
third party and so on. The sequences of steps are:
45
E.g. Daksh – c- services, taken over by IBM, was estimated to
have revenue of about USD 50 million and net profit of USD 10
Million for financial year 2004. The value of the deal estimated to be
between USD 130 to 170 million works out to 9 sales multiple of 3 and
earnings multiple of 15.
V (1+r) n x a x P
M = ----- = ------------------
n
R (1 + d)
Where:
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design and testing of the product. The balance sheet at this stage would
be as follows:
Balance Sheet
This cash is again fully utilized and the company asks for more
money from the venture capitalist for pilot Production and test
marketing of the product. After investment the Balance Sheet would
now look like this:
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Second Stage Balance Sheet
V) Exit Strategies
Exit is one of the most important issues from both the sides (Venture
capitalists and entrepreneur). The actual returns for the venture
capitalists come at the time of exit. Depending on the investment focus
and strategy of the venture firm, it will seek to exit the investment in
the portfolio company within three to five years of the initial
investment. While the initial public offering may be the most
glamorous and heralded type of exit for the venture capitalist and
owners of the company, most successful exits of venture investments
occur through a merger or acquisition of the company by either the
original founders or another company. Again, the expertise of the
venture firm in successfully exiting its investment will dictate the
success of the exit for themselves and the owner of the company .
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1. IPO
The initial public offering is the most glamorous and visible type of
exit for a venture investment. In recent years technology IPO’s have
been in the limelight during the IPO boom of the last six years. At
public offering, the venture firm is considered an insider and will
receive stock in the company, but the firm is regulated and restricted in
how that stock can be sold or liquidated for several years. Once this
stock is freely tradable, usually after about two years, the venture fund
will distribute this stock or cash to its limited partner investor who
may then manage the public stock as a regular stock holding or may
liquidate it upon receipt. Over the last twenty-five years, almost 3000
companies financed by venture funds have gone public.
3. Sales to other
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Each company is valued at an agreed-upon value between the venture
firms when invested in by the venture fund or funds. In subsequent
quarters, the venture investor will usually keep this valuation intact
until a material event occurs to change the value. Venture investors try
to conservatively value their investments using guidelines or standard
industry practices and by terms outlined in the prospectus of the fund.
The venture investor is usually conservative in the valuation of
companies, but it is common to find that early stage funds may have an
even more conservative valuation of their companies due to the long
lives of their investments when compared to other funds with shorter
investment cycles.
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venture capital funds. In the meantime, number of experts suggested
development of a commercially viable venture capital industry in the
country.
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2009, the BSE Bensex had a 47% increase, outperforming stock
markets in other emerging markets.
According to Reserve Bank of India indicators in 2009, Indian
companies have issued $42.6 billion in debt and equity worldwide up
from $32 billion in 2008. In 2003, the amount was $5.8 billion.
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investment activity. The healthcare & Life science industry was the
only sector to show a decline in activity in 2009.
Some of the highlights of 2009 include:
1. 31% of all investments fell into the US$10-25 million category
2. Venture capital investments accounted for 25% of the private
Equity deals (in volume terms). Late stage deals accounted for
35% of all deals
3. PE firms obtained exit routes in 65 companies, including 16 via
Initial public offering (IPO)
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ICICI VENTURE FUND
ICICI Venture is a subsidiary of ICICI Bank, the largest private sector financial
services group in India. ICICI Venture is one of the largest and most successful
private equity firms in India with funds under management in excess of USD 2
billion.
ICICI Venture, over the years has built an enviable portfolio of companies across
sectors including pharmaceuticals, Information Technology, media, manufacturing,
logistics, textiles, real estate etc thereby building sustainable value.
It has several “firsts” to its credit in the Indian Private Equity industry. Amongst them
are India’s first leveraged buyout (Infomedia), the first real estate investment (Cyber
Gateway), the first mezzanine financing for a acquisition (Arch Pharmalabs) and the
first ‘royalty-based’ structured deal in Pharma Research & Development (Dr
Reddy’s).
INVESTMENT STRATEGY
Private Equity Practice: - The USD 810 million India Advantage Fund Series 2 from
which ICICI Venture is currently investing is a broad based Fund and intends to tap
the India growth story across various sectors.
Stage of Investments
The investments are primarily structured as growth capital or buyouts, though the
Fund may invest through the PIPE route and secondary transactions as well.
Buyouts
ICICI Venture has been a pioneer in buyout investing in India. Buyouts continue to
form a key focus area for the firm and its funds. ICICI Venture has developed the
requisite capability to manage these buyouts and has developed a rich storehouse of
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knowledge and experience through its earlier buyout transactions.
While managing these buyouts, there is a strong involvement of the investment teams
in reorganizing, restructuring and re-strategizing the bought out companies, so that, by
the time of exit, these companies reach newer heights and generate handsome returns
for our investors as well as for themselves.
Growth Capital
The Funds managed by ICICI Venture endeavor to provide financial assistance to
well established/existing enterprises with robust business models and healthy balance
sheets through a variety of investment instruments.
Investment Theme
ICICI Venture, through its earlier Funds has invested in private equity across retail,
media, IT/ITES, consumer services, consumer goods, textiles, pharmaceuticals,
biotech, oil, non-consumer goods etc. The intention is to broad-base the investments
across certain focus sectors and pro actively create deals in these sectors.
For the current Fund (IAF Series 2), the investment themes are driven by four broad
macro drivers:
Mezzanine Practice
The ICICI Venture Mezzanine practice provides mezzanine finance for buyout
opportunities by financial sponsors as well as leveraged acquisition by companies and
towards mid-market growth capital. It also looks at suitable turnaround opportunities,
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real estate, recapitalization and ownership consolidations etc.
Credited with being the first institutional equity investor in the property space, ICICI
Venture Real Estate has built an enviable portfolio comprising premium housing,
integrated townships, commercial, retail hospitality and IT real estate, spread across
country.
ICICI Venture has a strategic long term joint venture with Tishman Speyer Properties,
one of the finest owners, developers, and operators of first class real estate in the
world, for investments and development of property in India. The JV Company, TSI
Ventures Limited, pursues ground-up development of commercial, office, residential
and retail properties throughout India.
ICICI Venture Real Estate also actively seeks to invest in and partner with leading
entrepreneurs and developers, for funding their growth aspirations in this space. The
focus of the Fund is to develop, acquire, lease, and sell quality real estate that is
attractive to quality consumers, tenants / users. The Fund is strongly diversified and
invests in projects in all growing Indian cities.
INVESTMENT APPROACH
Deal Sourcing
ICICI Venture's investment process starts with the sourcing of deals. Being the
premier private equity player in India, ICICI Venture's reputation and brand equity
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has been attracting investment proposals and deals from entrepreneurs, management
teams, promoters and intermediaries. Deals are also directly sourced from industry
contacts of the management team. Besides, ICICI Venture also leverages its network
with investment banks, fund investors, and also draws upon its access to the ICICI
Bank Limited network with its large corporate clientele.
Deal Evaluation
The investment proposal would move through various stages of preliminary analysis,
initial meeting, internal valuation discussion, valuation negotiation, term sheet
negotiation, management committee meeting, & due diligence appraisal meeting
before it is proposed in the Investor Committee meeting.
Investment Decision
The Investment Committee reviews a deal recommended for investment and either
approves or rejects the investment proposal. The Investment Committee may, if
considered necessary, ask for further analysis, additional due diligence or any other
clarifications. The final decision is based on a majority vote in the Investment
Committee.
Post-Investment Process
ICICI Venture endeavors to ensure that the Portfolio Companies are governed
effectively and that there is active involvement and timely intervention by the team
once the investment is made. The team creates value in the Portfolio Companies by
57
taking strategic, operational and financial initiatives aimed at strengthening their
competitive position vis-à-vis competitors and industry benchmarks.
The Investment team works with management teams to identify opportunities for
enhancing value through cost reduction and internal rationalization. They also work
together to implement growth strategies based on market definitions, customer
segmentation, price management, focused marketing and sales plans, strategic capital
investments and /or the introduction of proven technologies. The Investment teams
also help in further strengthening the management teams. ICICI Venture works
actively with management teams to identify and execute acquisitions.
Exit Strategy
ICICI Venture seeks to achieve a timely and appropriate exit to return cash and
profits for its Investors. Such exit strategies may include:
1. Selling off the stake to strategic investors
2. Initial Public Offering in India or overseas
3. Sale to any other private equity fund or venture capital fund
4. Secondary sale on stock markets
5. Merger with an existing listed company
6. Management / Company buy-backs.
PORTFOLIO
BY FUND
58
Geometric Software ,Arch Pharmalabs Perlecan
IAF Series 2 Kalpataru Power, Home Solutions ,Centurion Bank
of Punjab, Sainik Mining and Allied Services Limited
, Rubamin Limited , Tops Securities, Karvy Stock
Broking Ltd
BY SECTOR
Banking & Financial Services Centurion Bank of Punjab , Karvy
Stock Broking Ltd
Energy Reliance Petroleum , Kalpataru Power
59
Manufacturing Samtel Color , Tebma Shipyards Ltd. ,
ACE Refractories , Electrotherm (India)
Limited
SIDBI
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• SIDBI’s Assistance to the small scale sector is channelised
basically through 3 routes viz. :-
1. Indirect Assistance
2. Direct Assistance
3. Development and Support Services
• SIDBI offers various schemes of assistance, designed to meet
every need of small scale industries, under one roof.
• The unsecured bonds of SIDBI have been rated ‘AAA’ by leading
domestic rating agencies viz. The Credit Rating Information
Services of India Ltd. (CRISIL) and Credit Analysis and
Research Ltd. (CARE).
• SIDBI is ranked 23rd in terms of Assets and 24th in terms of
Capital among the top 50 Development Banks in the World
(Source: The Banker, London, June 2000)
• SIDBI is placing strong emphasis on technology development and
absorption both for modernization purposes and also for creating
new enterprises and strengthening existing enterprises in high
tech areas such as information technology.
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NFSIT has been launched by the Hon'ble Prime Minister of India, Shri
Atal Behari Vajpayee on December10,1999.
At the national level a Rs. 1000 million (US$ 22.22 million) National
Venture Capital Fund for Software and IT industry (NFSIT) has been
set up by SIDBI and is being managed by SIDBI Venture Capital Ltd.
• The SME Growth Fund (SGF) has been set up by Small Industries
Development Bank of India (SIDBI) in association with other
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leading commercial banks such as Punjab National Bank, State
Bank of India, Bank of Baroda, Bank of India, Central Bank of
India, Union Bank of India, Oriental Bank of Commerce and
Corporation Bank.
• It is a close ended 8 year fund dedicated to SME sector with an
initial corpus of Rs. 5000 million/ US$ 111.10 million.
• SME Growth Fund focuses at wide range of growth sectors, such
as life sciences, retailing, light engineering, food processing,
information technology, infrastructure related services,
healthcare, logistics and distribution, etc.
• The main objective of the fund is to invest in companies at early
stage as well as in second round financing for those with a track
record of proven technology or business model and opportunities
for growth and earnings.
• The fund would endeavor to develop international networking
and enable assisted units to attract co-investment from
international venture capitalists in subsequent rounds of
financing.
PORTFOLIO
63
EXITS :- Benchmark Softech Limited, ECAD
Technologies , ICRA Online , Parsec Technologies
Instruments of Finance
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importance in 1998 and after onwards. It was 27.54 in 2009. In
developed markets, the convertible preference share is the most
important instrument of finance in venture financing. The contribution
Redeemable Preference
Share
2%
24% Convertible Instruments
Non-convertible Debt.
58%
16%
Other Instruments
CURRENT SCENARIO
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Investment by Stage of Financing
All over the world, the trend is shifting in favor of later stage
and drifting away from seed stage and start-up stage.
66
Late stage and PIPE deals accounted for 70% of overall value of PE transactions
(PIPE: banking, pharma, auto components)
67
VENTURE CAPITAL INVESTMENT BY FINANCING STAGE IN
NUMBER OF PROJECTS: 2009 (FIRST HALF)
68
Venture Capital Investment by Financing Stage -
Average Investment (Rs. M n)
Investment by Industry
69
VENTURE CAPITAL INVESTMENT BY INDUSTRY IN INDIA IN
2008 (US $ 7.5 BILLION)
(% AGE)
70
Investments by Sector (Number of Deals)
71
Top Cities attracting PE Investments 2008
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VENTURE CAPITAL INVESTMENT IN INDIA-
IPO
5% MERGER &
ACQUISITION
16% 28%
MANAGEMENT
BUYOUT
EXIT TO
ANOTHER FUND
BUYBACK BY
28% 12% PROMOTER
TRADE SALES
4% 7%
STOCK MARKET
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Investment by Region
35%
30%
25%
20% future
15% current
10%
5%
0%
south west east north
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Investment by States
75
Year Venture Capital Deviation Deviation
Investment from
(Rs Million) 1999.5
Y.
X X 2 XY X2
1996 4646 -3.5 -7 -32522 49
1997 6948 -2.5 -5 -34740 25
1998 9876 -1.5 -3 -29628 9
1999 11258 -.5 -1 -11258 1
2000 13888 +.5 +1 +13888 1
2001 10848 +1.5 +3 +32544 9
2002 8920 +2.5 +5 +44600 25
2003 10000 +3.5 +7 +70000 49
N = 8
∑ Y = 76384 ∑ X = 0 ∑ XY = ∑ X 2
52884 = 168
Equation of the straight line trend is Y = a + bX
∑ Y 76384
a = = = 9548
N 8
∑ XY 52884
b = = = 314.78
∑ X2 168
In 2007, X will be 15
Thus estimated average venture capital investment for years 2007 is Rs.
14269.7 million
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Capital
X Y X 2 X2
X XY
1996 415 -3.5 -7 -2905 49
1997 491 -2.5 -5 -2455 25
1998 598 -1.5 -3 -1794 9
1999 685 -.5 -1 -685 1
2000 762 +.5 +1 +762 1
2001 678 +1.5 +3 +2034 9
2002 598 +2.5 +5 +2990 25
2003 691 +3.5 +7 +4837 49
N = 8
∑ Y = 4918 ∑X = 0 ∑ XY ∑ X 2
= 2784 = 168
∑ Y 4918
a = = = 614 .75
N 8
∑ XY 2784
b = = = 16.57
∑ X2 168
In 2007, X will be 15
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are all elements of a management team that venture capitalists will say
they are investing in depending up on the venture capitals however a
lock of depth in a particular area of management is not necessarily a
bar to investment. Certain venture capitalists particularly those who
invest in very early stage companies, will bring that talent to the
company from the venture capitalists itself, through the venture
capitalists network of talent or through recruiting efforts.
The preferred shares will carry the same number of votes per
share as the common shares, in almost all cases, one vote per share.
The venture capitalists as a preferred shareholder will therefore be
entitled to all notices of meetings of shareholders and to attend and
vote on any matters on which common shareholders are entitled to
vote.
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preferred shares, plus all accrued and unpaid dividends..
(viii) Retraction:
(ix) Redemption:
79
(ii) Matters which require preferred shareholder
approval:
80
VENTURE CAPITAL FUND: PRESENT SCENARIO IN WORLD
Invested deals of
($ Million) Investors
South Korea 4823.87 60 29
Japan 3067.24 84 84
Australia 3257.01 82 79
India 5400.18 203 106
Hong Kong 2650.00 106 86
China 8423.22 338 137
Singapore 1890.03 69 47
Thailand 101.45 72 72
Malaysia 41.18 21 20
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enumerate some of the major conclusions and suggestions to improve
the prospects of venture capital fund in the country. This chapter is
divided in two sections: Section 1 presents the conclusions and Section
2 explains the suggestions.
CONCLUSIONS
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India.
SUGGESTIONS
83
Guidelines for Venture Capital Investment 1995, Income tax Rules
Under Section 10 (23 FA) of the income Tax Act, and FIPB/ RBI
Approval in certain cases have been emanating contradictory signals
causing confusion to the various participants of the venture capital
market.
84
QUESTIONNAIRE
1. Are you willing to give a venture capitalist an ownership position in your business?
2. Are you willing to give a venture capitalist a seat on the board of directors?
5. As part of courting a venture capitalist, will you develop a list of issues with
special significance to your business?
6. Will you make whatever investigations are needed in order to address those
Special issues?
7. Are you willing to spend time with a venture capitalist to discuss all aspects of
your business?
85
8. Can you let go of some of your emotional involvement as the founder/owner of
your business?
9. Are you willing to make future decisions only after discussions and negotiations
with others?
86
BIBLIOGRAPHY
Books
Internet
1. www.nvca.com
2. www.ivca.com
87
3. www.indiainfoline.com
4. www.sebi.com
5. www.vcline.com
6. www.financemedia.com
88