Page 53 - DMGT405_FINANCIAL%20MANAGEMENT

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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