Financial market and services

Financial market and services

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  Venture Capital Dr. S.Pasupathi Associate Professor of Commerce Vivekananda College Tiruvedakam West Madurai
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  Meaning: Venture Capital isLong-term risk capital to finance high technology, projects which involve risk but at the same time has strong potential for growth, Venture capitalists pool their resources including managerial abilities to assist new entrepreneurs in the early years of the project. Once the project reaches the stage of profitability, they sell their equity holdings at a high premium.
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  Some of thefeatures of venture capital financing are as under:  1.Venture capital is usually in the form of an equity participation. It may also take the form of convertible debt or long-term loan.  2.Investment is made only in high risk but high growth potential projects.  3.Venture capital is available only for commercialization of new ideas or new technologies and not for enterprises which are engaged in trading, booking, financial services, agency, liaison work or research and development.
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   4.Venture capitalistjoins the entrepreneur as a Copromoter in Projects and share the risks and rewards of the enterprise.  5.There is continuous involvement in business after making an investment by the investor.  6.Once the venture has reached the full potential, the venture capitalist disinvests his holdings either to the promoters or in the market. The basic Objective of investments is not profit but capital appreciation at the time of disinvestment.  7. Venture capital is not just injection of money but also an input needed to set up the firm, design its marketing strategy and organise and manage it.  8. Investment is usually made in small and medium-scale enterprises.
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  The objective ofventure capitalist is to sell-off the investment made by him at substantial capital gains. The disinvestment options available in developed counters are: i). Promoter’s buyback ii). Public issue iii). Sale to other venture capital funds. iv). Sale in OTC market. V). Management buyouts.
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   Venture capitalmay take various forms at different stages of the project. There are four successive stages of development of a project, viz., development of a project idea, implementation of the idea, commercial production and marketing and finally large-scale investment to exploit the economies of scale. and achieve stability. Financial Institutions and banks usually start financing the project only at the second or third stage but rarely from the first stage. But venture capitalists provide finance even from the first stage of idea formulation. The various stages in the financing of venture capital are described below:
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   (1) Developmentof an idea - seed finance: In the initial stage, venture capitalist provide seed capital for translating an idea into business proposition. At this stage, investigation is made in depth which normally takes a year or more.  (2) Implementation stage - start-up finance: When the firm is set up to manufacture a product or provide a service, start-up finance is provided by the venture capitalists. The first and second stage capital is used for full scale manufacturing and further business growth.  (3) Fledging stage - additional finance: In the third stage, the firm has made some headway and entered the stage of manufacturing a product but faces teething problems. It may not be able to generate adequate funds and so additional round of financing is provided to develop the marketing infrastructure.
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   (4) Establishmentstage - establishment finance: At this stage, the firm is established in the market and expected to expand at a ,rapid pace. It needs further financing for expansion and diversification so that it can reap economies of scale and attain stability. At the end of the establishment stage, the firm is listed on the stock exchange and at this point the venture capitalist disinvests their shareholdings through available exit routes., Before investing in small, new or young hi-tech enterprises, the venture capitalists look for percentage of key success factors of a venture capital project. They prefer projects that address these problems. An idea developed for these success factors has been presented
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   I. Advantagesto investing public  II. Advantages to promoters  Business partners  Mentoring  Alliances  III. General
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  Venture capital isavailable in four forms in India:  1. Equity participation.  2. Conventional loan.  3. Conditional loan.  4. Income notes. 1. Equity participation: Venture capital firms participate in equity through direct purchase of shares but their stake does not exceed 49 per cent. These. shares are retained by them till the assisted projects making profit. These shares are sold either to the promoter at negotiated price under buyback agreement or to the public in the secondary market at a profit.
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   2. Conventionalloan: Under this form of assistance, a lower fixed rate of interest is charged till the assisted units become commercially operational, after which the loan carries normal or higher rate of interest. The loan has to be repaid according to a predetermined schedule of repayment as per terms of loan agreement.  3. Conditional loan: Under this form of finance, an interest-free loan is provided during the implementation period but it has to pay royalty on sales. The loan has to be repaid according to a predetermined schedule as soon as the company is able to generate sales and income.
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   4. Incomenotes: It is a combination of conventional and conditional loans. Both interest and royalty are payable at much lower rates than in case of conditional loans.  At present, several venture capital firms are incorporated in India and the are promoted either by All India Financial Institutions like IDBI, ICICI, IFCI, State level financial institutions, public sector banks or promoted by foreign banks/private sector or financial institutions like Indus Venture Capital Fund.
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  Venture capital industryis at the take-off stage in India. It can play a catalytic role in the development of entrepreneurship skill that remains unexploited among the young and energetic technocrats and other professionally qualified talents. 1. Exemptions/concession for capital gains 2. Development of stock markets 3. Fiscal incentives 4. Private sector participation 5. Review the existing laws 6. Limited partnership 7. Public issue through OTCEI
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