FACTORS FOR SUCCESS OF VENTURE CAPITAL INDUSTRY
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.
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.
recommendation of the Committee are discussed and enumerated in the