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Venture Capital' is an important source of finance for
those small and medium-sized firms, which have very few avenues for raising
funds. Although such a business firm may possess a huge potential for
earning large profits in the future and establish itself into a larger
enterprise. But the common investors are generally unwilling to invest
their funds in them due to risk involved in these type of investments.
In order to provide financial support to such entrepreneurial talent and
business skills, the concept of venture capital emerged. In a way, venture
capital is a commitment of capital, or shareholdings, for the formation
and setting up of small scale enterprises at the early stages of their
life cycle.
Venture capitalists comprise of professionals of various
fields. They provide funds (known as Venture Capital Fund) to these firms
after carefully scrutinizing the projects. Their main aim is to earn huge
returns on their investments, but their concepts are totally different
from the traditional moneylenders. They know very well that if they may
suffer losses in some project, the others will compensate the same due
to high returns. They take active participation in the management of the
company as well as provide the expertise and qualities of a good banker,
technologist, planner and managers. Thus, the venture capitalist and the
entrepreneur literally act as partners.
The venture capital recognises different
stages of financing, namely:-
- Early stage financing - This is the
first stage financing when the firm is undertaking production and need
additional funds for selling its products. It involves seed/ initial
finance for supporting a concept or idea of an entrepreneur. The capital
is provided for product development, R&D and initial marketing.
- Expansion financing - This is the
second stage financing for working capital and expansion of a business.
It involves development financing so as to facilitate the public issue.
- Acquisition/ buyout financing - This
later stage involves:-
- Acquisition financing in order to acquire
another firm for further growth
- Management buyout financing so
as to enable the operating groups/ investors for acquiring an existing
product line or business and
- Turnaround financing in order to
revitalise and revive the sick enterprises.
In India, the venture capital funds
(VCFs) can be categorised into the following groups:-
- Those promoted by the Central Government controlled
development finance institutions, for example:-
- Those promoted by State Government controlled development
finance institutions, for example:-
- Those promoted by public banks, for example:-
- Those promoted by private sector companies, for
example:-
- Those established as an overseas venture capital
fund, for example:-
All these venture capital funds are
governed by the Securities
and Exchange Board of India (SEBI) . SEBI is the nodal agency for
registration and regulation of both domestic and overseas venture capital
funds. Accordingly, it has made the following regulations, namely, Securities
and Exchange Board of India (Venture Capital Funds) Regulations 1996
and Securities
and Exchange Board of India (Foreign Venture Capital Investors) Regulations
2000. These regulations provide broad guidelines and procedures for
establishment of venture capital funds both within India and outside it;
their management structure and set up; as well as size and investment
criteria's of the funds.
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