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Indian Financial System

Notes marketing and distributing facilities, launching of product into new regions and so on.
The time scale of investment is usually one to three years and falls in medium risk category.
2. Expansion Finance: Venture capitalists perceive low risk in ventures requiring finance for
expansion purposes either by growth implying bigger factory, large warehouse, new
factories, new products or new markets or through purchase of exiting businesses. The
time frame of investment is usually from one to three years. It represents the last round of
financing before a planned exit.

3. Replacement Capital: Another aspect of financing is to provide funds for the purchase of
existing shares of owners. This may be due to a variety of reasons including personal need
of finance, conflict in the family, or need for association of a well known name. The time
scale of investment is one to three years and involve low risk.
4. Turn Arounds: Such form of venture capital financing involves medium to high risk and
a time scale of three to five years. It involves buying the control of a sick company which
requires very specialised skills. It may require rescheduling of all the company's
borrowings, change in management or even a change in ownership. A very active "hands
on" approach is required in the initial crisis period where the venture capitalists may
appoint its own chairman or nominate its directors on the board.
5. Buy Outs: It refers to the transfer of management control by creating a separate business
by separating it from their existing owners. It may be of two types:
(a) Management Buyouts (MBOs): In Management Buyouts (MBOs) venture capital
institutions provide funds to enable the current operating management/ investors
to acquire an existing product line/business. They represent an important part of
the activity of VCIs.

(b) Management Buyins (MBIs): Management Buy-ins are funds provided to enable an
outside group of manager(s) to buy an existing company. It involves three parties:
a management team, a target company and an investor (i.e. Venture capital
institution). MBIs are more risky than MBOs and hence are less popular because it is
difficult for new management to assess the actual potential of the target company.
Usually, MBIs are able to target the weaker or under-performing companies.
In nutshell, venture capital firms finance both early and later stage investments to maintain a
balance between risk and profitability. Venture capitalists evaluate technology and study
potential markets besides considering the capability of the promoter to implement the project
while undertaking early stage investments. In later stage investments, new markets and record
of the business/entrepreneur is closely examined.

12.8 Indian Venture Capital Scenario

In India the Venture Capital plays a vital role in the development and growth of innovative
entrepreneurships. Venture Capital activity in the past was possibly done by the developmental
financial institutions like IDBI, ICICI and State Financial Corporations. These institutions
promoted entities in the private sector with debt as an instrument of funding. For a long time
funds raised from public were used as a source of Venture Capital. This source however depended
a lot on the market vagaries. And with the minimum paid up capital requirements being raised
for listing at the stock exchanges, it became difficult for smaller firms with viable projects to
raise funds from public. In India, the need for Venture Capital was recognised in the 7th five
year plan and long term fiscal policy of GOI. In 1973 a committee on Development of small and
medium enterprises highlighted the need to faster VC as a source of funding new entrepreneurs
and technology. VC financing really started in India in 1988 with the formation of Technology

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