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Unit 3: Sources of Finance



            upgradation, etc. In November 1988, the Government of India issued the first set of guidelines  Notes
            for venture capital companies’ funds and made them eligible for capital gain concessions. In
            1995, certain new clauses and amendments were made in the guidelines. These guidelines require
            the venture capitalists to meet the requirements of different statutory bodies and this makes it
            difficult for them to operate as they do not have much flexibility in structuring investments. In
            1999, the existing guidelines were relaxed for increasing the attractiveness of the venture schemes
            and induce high net worth investors to commit their funds to ‘sunrise’ sectors particularly the
            information technology sector.
            Initially, the contribution to the funds available for venture capital investment in the country
            was  from  the  all-India  development  financial  institutions,  state  development  financial
            institutions, commercial banks  and companies in private  sector. In  the last couple of years,
            many offshore funds  have been  started in  country and the maximum contribution is  from
            foreign institutional investors. A few venture capital companies operate as both investment and
            fund management companies, while other set  up funds  and function  as asset management
            companies.
            It is hoped that the changes in the guidelines for the implementation of venture capital schemes
            in the country would encourage more funds to be set up to provide the required momentum for
            venture capital investment in India.
            Some common methods of venture capital financing are as follows:
            1.   Equity financing: The venture capital undertakings generally require funds for a longer
                 period but may not be able to provide returns to the investors during the initial stages.
                 Therefore, the venture capital finance is generally provided by way of equity share capital.
                 The equity contribution of venture capital firm does not exceed 49% of the total equity
                 capital of venture capital undertakings so that the effective control and ownership remain
                 with the entrepreneur.
            2.   Conditional loan:  A  conditional  loan is repayable in  the form  of a  royalty after  the
                 venture is able to generate sales. No interest is paid on such loans. In India venture capital
                 financiers charge royalty ranging between 2 and 15 per cent; actual rate depends on other
                 factors of the venture such as gestation period, cash flow patterns, riskiness and other
                 factors of the enterprise. Some venture capital financiers give a choice to the enterprise of
                 paying a high rate of interest (which could be well above 20 per cent) instead of royalty on
                 sales, once it becomes commercially sounds.
            3.   Income note: It is a hybrid security, which combines the features of both conventional loan
                 and conditional loan. The entrepreneur has to pay both interest and royalty on sales but at
                 substantially low rates. IDBI’s VCF provides funding equal to 80-87.50% of the projects
                 cost for commercial application of indigenous technology.
            4.   Participating debenture: Such security carries charges in three phases – in the start-up
                 phase, no interest is charged, in next stage a low rate of interest is charged up to a particular
                 level of operation, after that, a high rate of interest is required to be paid.

            Self Assessment
            Fill in the blanks:
            10.  A …………….loan is repayable in the form of a royalty after the venture is able to generate
                 sales.
            11.  ……………….is a hybrid security, which combines the features of both conventional loan
                 and conditional loan.





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