3.0 CRITICAL FACTORS FOR SUCCESS OF VENTURE CAPITAL INDUSTRY

3.1 Getting it right is what this report is concerned about. The endeavor of the Committee has been to make recommendations that will facilitate, through an enabling regulatory, legal, tax and institutional environment, the creation of a pool of risk capital to finance start-up enterprises with the underlying objective of helping India achieve: a) rapid economic growth and b) integration with the global economy from a position of strength.

3.2 While making the recommendations, the Committee felt that the following factors are critical for the success of the VC industry in India:

• The regulatory, tax and legal environment should play an enabling role . This also underscores the facilitating and promotional role of regulation. Internationally, venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and operational adaptability. We need to provide regulatory simplicity and structural flexibility on the same lines. There is also the need for a level playing field between domestic and offshore venture capital investors. This has already been done for the mutual fund industry in India.

• Investment, management and exit should provide flexibility to suit the business requirements and should also be driven by global trends. Venture capital investments have typically come from high net worth individuals who have risk taking capacity. Since high risk is involved in venture financing, venture investors globally seek investment and exit on very flexible terms which provides them with certain levels of protection. Such exit should be possible through IPOs and mergers/acquisitions on a global basis and not just within India.

• There is also the need for identifying and increasing the domestic pool of funds for venture capital investment. In US, apart from high net worth individuals and angel investors, pension funds, insurance funds, mutual funds etc provide a very big source of money. The share of corporate funding is also increasing and it was as high as 25.9% in the year 1998 as compared to 2% in 1995. Corporations are also setting up their own venture capital funds. Similar avenues need to be identified in India also.

• With increasing global integration and mobility of capital it is important that Indian venture capital firms as well as venture financed enterprises be able to have opportunities for investment abroad. This would not only enhance their ability to generate better returns but also add to their experience and expertise to function successfully in a global environment. We need our enterprises to become global and create their own success stories. Therefore, automatic, transparent and flexible norms need to be created for such investments by domestic firms and enterprises.

• Venture capital should become an institutionalized industry financed and managed by successful entrepreneurs, professional and sophisticated investors. Globally, venture capitalist are not merely finance providers but are also closely involved with the investee enterprises and provide expertise by way of management and marketing support. This industry has developed its own ethos and culture. Venture capital has only one common aspect that cuts across geography i.e. it is risk capital invested by experts in the field. It is important that venture capital in India be allowed to develop via professional and institutional management.

• Infrastructure development also needs to be prioritized using government support and private management. This involves creation of technology as well as knowledge incubators for supporting innovation and ideas. R &D also needs to be promoted by government as well as other organisations.

The recommendation of the Committee are discussed and enumerated in the paragraphs hereafter.