Page 256 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 12: Merchant Banking and Venture Capital

Development and Information Company of India Ltd. (TDICI) - promoted by ICICI and UTI. The Notes
first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted
by Bank of India, Asian Development Bank and the Commonwealth Development Corporation
viz. Credit Capital Venture Fund. At the same time Gujarat Venture Finance Ltd. and APIDC
Venture Capital Ltd. were started by state level financial institutions. Sources of these funds
were the financial institutions, foreign institutional investors or pension funds and high net-
worth individuals.
The Indian venture capital (VC) market has been getting more active by the day. During the last
year or so, almost all the major global VC firms have either established an on-ground presence
in India or raised significant India-dedicated funds. In 2006, VC investment levels increased by
more than 300% to almost $7.5 billion from $2.2 billion in 2005. This quantum leap was not the
result of a low base-as 2005 was a record year in itself.
What is driving this VC investment boom? The most important fact is Indian GDP growth
coming within striking range of double-digits. Annual growth rates of 7-9% are unheard of in
mature western economies, and global investors want high returns. Furthermore, several key
sectors of the Indian economy (IT/BPO, telecom, pharma/healthcare, financial services, retail
and automotive components) that are investment targets are experiencing even higher growth
than the said levels (of 7-9%). Other key attractions include: an economy well positioned to mine
the opportunities of globalisation, an increased appetite for innovation and entrepreneurship,
well-regulated and fully functional capital markets and a spurt in consumerism powered by the
young demographic profile. Clearly, the liberalisation of the economy has also had a significant
impact, laying the foundation for a relatively stable macroeconomic environment in combination
with high growth.
However, on the regulatory side, many investors would like to see the government use the
current momentum to push forward with further deregulation. Some recent regulations, they
fear, have not been well thought through. Examples of these include the introduction of FBT on
stock options and the recent news on preference share capital requiring compliance with ECB
guidelines on interest/dividend coupon caps and end-use restrictions (that is, compliance with
external debt norms, unless the shares are fully-convertible). For the VC industry, the new end-
use restrictions are particularly harmful as funds raised via preference shares cannot be used for
general corporate purposes, funding of working capital, repayment of existing loans and
acquisition of shares and/or real-estate. At present, it is estimated that about 30% of the Indian
VC/PE investments are structured as preference share capital. Unless this gets revised, the
percentage might well come down. This is in sharp contrast with many western markets, where
an even higher and ever-increasing percentage of VC investments are structured with a layer of
preference share capital-also referred to as 'hybrid capital.



Caselet Govt Plans ` 3,000-cr Venture Capital Fund for Drug

Discovery

G overnment is willing to look at the industry's demand for a single regulatory
authority to do away with multiple regulatory bodies.

The Government is planning to set up a ` 3,000-crore venture capital fund to give a fillip
to drug discovery and strengthen the pharma infrastructure in the country. The National
Institute of Public Finance & Policy (NIPFP) is set to finalise the bid document and the
expression of interest for setting up the find will be issued this month.
Contd...

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