Page 236 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 16: Venture Capital

sectors of the Indian economy (IT/BPO, telecom, pharma/healthcare, financial services, retail Notes
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.

Case Study Technology Development and Information
Company of India Ltd.

DICI was incorporated in January 1988 with the support of the ICICI and the UTI.
The country's first venture fund managed by the TDICI called VECAUS ( Venture
TCapital Units Scheme) was started with an initial corpus of 20 crores and was
completely committed to 37 small and medium enterprises. The first project of the TDICI
was loan and equity to a computer software company called Kale Consultants.

Present Status: At present the TDICI is administering two UTI -mobilised funds under
VECAUS-I and II, totaling 120 crores. the 20 crores invested under the first fund, VECAUS-
I, has already yielded returns totaling 16 crores to its investors.
Some of the projects financed by the TDICI are discussed below:
MASTEK , a Mumbai based software firm, in which the TDICI invested 42 lakhs in equity
in 1989, went public just three years later, in November 1992. It showed an annual growth
of 70-80 percent in the turnover.

TEMPTATION FOODS, located in PUNE, which exports frozen vegetables and fruits, went
public in November 1992. The TDICI invested 50 lakhs in its equity.
RISHABH INSTRUMENTS of Nasik got 40 lakh from the TDICI. It manufactures a range
of meters used in power stations in collaboration with the ABB Metra Watt of Germany.
After making cash losses totaling 25 lakhs in two bad years, it turned around in 1989 and
showed an increase of over 70 percent in the turnover.

Contd...

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