A PROJECT ON

“An Overview of India's "Venture Capital Financing"”

COURSE TITLE:
FINANCIAL MARKET REGULATION (LAW 463)

PROGRAM: LLB (SEMESTER 5)

BATCH: 2022-2025

SUBMITTED TO:
(Ms. Shruti Poddar)
Professor
Amity University

SUBMITTED BY:
Falak Hussain (A90856122003)
Ishika Agarwal (A90856122017)
COURSE: LLB (SEMESTER 5)
BATCH: 2022-2025
 AMITY LAW
AMITY UNIVERSITY KOLKATA
DECLARATION

We, Ishika Agarwal and Falak Hussain , student of LLB 3 years programme (2022-
2025) , hereby declare that the project work entitled “An Overview of India's
"Venture Capital Financing” submitted to the AMITY Law School, AMITY
University, KOLKATA is a record of an original work done by us under the guidance
of Ms. Shruti Poddar, teacher in subject, AMITY Law School, AMITY University,
KOLKATA.

Date: Name:
1. Falak Hussain (A90856122003)
2. Ishika Agarwal (A90856122017)

Batch : 2022 – 2025

 ACKNOWLEDGEMENT
We would specially like to thank our guide, mentor, Ms. Shruti Poddar without whose
constant support and guidance this project would have been a distant reality.
This work is an outcome of an unparalleled infrastructural support that I have
received from AMITY Law School, AMITY University, KOLKATA.
We owe our deepest gratitude to the library staff of the college.
It would never have been possible to complete this project without an untiring support
from our family, especially our parents for providing us with all the necessary
resources and opportunities.
This study also bears testimony to the active encouragement and guidance of a host of
friends and well-wishers.
ABSTRACT
Venture capital is a concept that deals with large amounts of funding for ambitious
ventures. Professionals who invest in quickly expanding businesses with the potential
to become major economic contributors give venture capital. A venture capital fund is
defined by SEBI laws as a fund that is founded in the form of a business or trust and
that increases capital in the form of money through loans, securities issuance,
donations, or by making or proposing investments that comply with these regulations.
The money so raised is accessible for high-risk financial initiatives with the
possibility of great financial return. A venture capitalist is a person or an organization
that offers investment capital and knowledge of intellectual management in addition
to funding and managing extremely inventive and promising product and service
categories. There are already a lot of institutions in India that offer venture capital
financing. Encouraging risk capital is crucial for India since it will expand the
country's high-tech industrial base and foster technological advancement. The purpose
of this study report is to shed light on the problems and difficulties that Indian venture
capital firms have when providing finance.

KEYWORDS
Capital, money, investment, company, SEBI, issues.
INTRODUCTION
Professionals who invest in quickly expanding businesses with the potential to
become major economic contributors give venture capital. As per SEBI laws, a
venture capital fund is a financial entity that is founded as a corporation or trust. It
raises cash through various sources such as loans, securities issuance, donations, and
makes or suggests investments in compliance with regulations. The money thus raised
is accessible for high-risk financial loss investments in potentially very successful
ventures. An individual or business that provides investment capital, intellectual
capital, management expertise, networking, and marketing support while funding and
operating extremely innovative and promising product and service areas is known as a
venture capitalist.
Thus, the investments made by Venture Capitalists consisting:
i. Financing new and rapidly growing projects, enterprises or companies.
ii. Buying equity and other securities.
iii. Taking high risk expecting high return on investment.
iv. Having a long frame of time period, normally of more than 5 to 6 years. •
Marketing and promotions of the product /service being offered.
Ten to fifteen people put a lot of effort into starting the organization. A networking
group called IND US Entrepreneurs, or TiE, was founded in 1992 with the goal of
uniting powerful Indians residing all throughout the country. The intention was to
unite the Indian community and support business owners who want to create riches.
TiE currently includes over 600 members and 20 locations throughout the United
States. Among the notable individuals in this group are Vinod Dham, the man behind
the Pentium Chip, Prabhu Goel, and K.B. Chandrashekhar, who oversees $200
million. Thirty percent of all Internet content traffic is carried by Exodus
Communications, a fiber optic network that hosts sites including Amazon, Yahoo, and
Hotmail.
THE PROCESS OF FINANCING VENTURE CAPITAL
Venture capital begins with funding to support technically solid, internationally
competitive, and promising businesses that have the ability to compete in international
markets with high quality and affordable costs. Due to the substantial amount of
venture capital invested in both domestic and overseas markets, the economies of
South East Asia—particularly those of Hong Kong, Singapore, South Korea,
Malaysia, and India—have grown. Venture capitalists obtain their investment funds
from a combined fund raised by private and public investors.
Together, these funds are used for equity capital, which consists of ordinary and
preference share capital. Occasionally, they are also used for subordinated debt, which
is a semi-secured investment in the firm that ranks below secured lenders and
frequently has payback obligations. These days, a venture capital deal may include
varied amounts of subordinated debt, convertible preferred equity, and common
equity. The money provided by venture capital varies according to a company's stage
of development. The following are the different stages:
1. Pre-seed: During this phase, a small sum of money is given to an entrepreneur to
help them develop and sell a prospective idea with better chances for the future.
To some extent, product development is also a part of the financed work.
2. Seed Stage: This kind of funding is given to finish product development and start
implementing basic marketing plans.
3. First Stage: Businesses receive funding to start commercial production and sales.
4. Second Stage: Working capital is supplied during the Second Stage of Financing
in order to support the company's growth in terms of expanding inventory and
accounts receivable.
5. Third Stage: Money given to a business with growing sales volume in order to
expand significantly. When the company surpasses the break-even point, this
stage is reached.
6. Later Stage Financing: This type of funding is given to a business immediately
prior to its initial public offering (IPO). Bridge financing is frequently set up to
be repaid with the money raised from an initial public offering.
Essentially, venture capitalists thoroughly examine four primary components of
venture financing. They are listed below:
i. Top Management: The company or enterprise gains a great deal of credibility
from the strength, knowledge, and cohesion of the top members of the board. The
members must be capable of accepting potentially large risks versus high returns
on venture investment, mature, experienced, and knowledgeable about business.
ii. Practical Financial Requirement and Projections: A venture capitalist needs to
have a realistic understanding of the organization's current financial situation as
well as future expectations about the size, character, and performance of the
business in terms of operating profit, operational scale, and additional expenses
for R&D-related product development.
iii. Expectation for Capital Gain: Venture capitalists demand a rate of return that is
higher than usual, typically between 30% and 40%.
The stage of the business cycle during which money are being invested affects
the rate of return as well. Higher risk and, therefore, higher return are associated
with earlier stages.
iv. Owner's Finance: The entrepreneur's or owner's financial resources, including
those contributed by friends, family, and other relatives, are crucial to boosting
the viability of the company. Venture capitalists keep a watchful eye on this
crucial avenue.

VENTURE CAPITAL FUNDING IN INDIA

In India, venture capital is essential to the establishment and expansion of creative
enterprise. In the past, state financial corporations, ICICI, IDBI, and other
developmental financial institutions may have engaged in venture capital activities.
These organizations supported private sector organizations that used debt as a source
of funding. Venture Capital came from public funds that were raised. However, it was
heavily dependent on the whims of the market. Additionally, it became more
challenging for smaller businesses with feasible projects to raise money from the
public as a result of the minimum paid up capital requirements being raised for listing
at the stock exchanges.
The Government of India's seventh five-year plan and long-term fiscal policy
acknowledged the need for venture capital. A committee on the development of small
and medium-sized businesses called attention to the necessity of accelerating venture
capital as a means of providing funds for new ventures, initiatives, and technological
advancements in 1973. In India, venture capital financing commenced in 1988 with
the establishment of Technology Development and Information Company of India
Ltd. (TDICI), which was supported by ICICI and UTI. Credit Capital Finance
Corporation (CFC) was the sponsor of the first private venture capital fund, Credit
Capital Venture Fund, which was pushed by the Commonwealth Development
Corporation, Bank of India, and Asian Development Bank. State-level financial
institutions established Gujarat Venture Finance Ltd. and APIDC Venture Capital Ltd.
concurrently. These monies came from high net worth individuals, pension funds,
overseas institutional investors, and financial institutions.
Over the past ten years, India's venture capital (VC) funding has grown dramatically,
primarily due to the nation's burgeoning startup scene in industries including
technology, e-commerce, finance, and healthcare. India has a sizable and youthful
population, high internet penetration, and rising smartphone usage, all of which have
fostered a favorable climate for entrepreneurs and attracted both domestic and foreign
venture capitalists to the nation.
Important cities like Delhi-NCR, Mumbai, and Bengaluru have developed into
important VC hotspots that support entrepreneurship and innovation. With the support
of large VC funding, Indian firms like Flipkart, Paytm, and Byju's have been able to
grow quickly and compete on a worldwide scale.
The VC ecosystem has been strengthened by government initiatives such as Startup
India and Digital India, which offer tax benefits, simplified regulatory frameworks,
and government grant access to businesses. The number of domestic venture capital
firms and angel investors has increased significantly in recent years, adding to the
global players such as Sequoia Capital, Accel, and SoftBank.
But there are still difficulties. Early-stage funding is still difficult for many firms to
obtain, and the Indian venture capital industry is known for high-risk investments that
prioritize quick growing and exit plans. Notwithstanding these difficulties, venture
capital financing is still a major factor in the growth of Indian startups.

The major venture capital financiers in India are:

a. Gujarat Venture Finance Ltd.
b. SBI Capital Venture fund.
c. PICUP. • ICICI • TDICI
d. IDBI’s Venture Capital Fund.
e. Credit Capital Venture Fund(India) ltd.
f. Cabank VC fund

DRAWBACKS OF VENTURE CAPITAL FUNDING:

In India, venture capital financing is now in an abortive stage. The industrial sector is
under tremendous pressure to increase product quality while lowering costs by
utilizing cutting-edge technology, as a result of the growing global competitiveness.
The upshot is to secure sufficient funding and the cutting-edge machinery required to
create a novel product that can flourish and expand in the current market environment.
Regretfully, India is deficient in both areas. Venture capital firms, who demand a high
and uncertain rate of return on their investments, may provide the necessary funds.
The management team of the business being financed must be solid, seasoned,
capable, and experienced, according to the financing companies. There is an
expectation of larger profits from the innovative initiative because it carries a bigger
risk. In addition, the payback time is lengthy (5 to 7 years).
Venture capital (VC) funding has noteworthy disadvantages that entrepreneurs should
carefully weigh against the potential benefits it might offer firms, like mentorship,
industry connections, and access to finance.

i. Dilution of Equity: One of the main drawbacks of venture capital investing is the
diluting of ownership. Entrepreneurs frequently give up a large chunk of their
company's stock in return for money. The founders of a startup run the risk of
losing a lot of control over the firm as it expands and goes through several rounds
of funding; they might even end up becoming minority shareholders.
ii. Loss of Control: Venture capitalists frequently demand board seats and decision-
making authority in addition to ownership dilution. They could have an impact on
hiring practices, product direction, exit strategy, and even strategic choices. For
entrepreneurs who would rather keep control over their company's direction and
day-to-day operations, this could be prohibitive.
iii. Pressure for Quick Growth: High profits in a short amount of time are usually
what venture capitalists seek. Aggressive scaling, which may not always be in
line with the company's long-term health, might result from this pressure.
 Startups may experience financial instability or operational inefficiencies as a
result of being pressured to develop faster than is viable.
iv. Exit Expectations: In general, venture capitalists (VCs) look to exit their
investments through a sale or initial public offering (IPO). This may make it more
difficult for the company to pursue other long-term objectives and may drive the
founders to prioritize an exit strategy over creating a solid, long-lasting
organization.
v. High Failure Rate: With the risks so high, hardly every firm backed by venture
capitalists succeeds. The temptation to grow rapidly and satisfy investors may
result in failure, poor management, or burnout.
Here are some additional challenges associated with venture capital financing:
i. High rate of return on investment and a skilled management team are
prerequisites.
ii. There is typically a lengthy payback period;
iii. There is uncertainty about the product's marketability.
iv. Difficulties and concerns pertaining to the manufacturing infrastructure, such as
labor availability, transportation facilities, supplier and creditor relationships,
plant location, and accessibility.
v. The group of people who might be interested in the goods and services offered.
vi. Market size;
vii. Market share of the main competitors.
viii. Financial factors such as the project's cost, return on capital employed (ROCE),
internal rate of return (IRR), total amount needed, owners' investment (the
entrepreneur's personal finances), borrowed money, mortgage loans, etc. in
relation to the capital employed.

FEASIBILITY OF VENTURE CAPITAL FINANCING

India's economy has grown remarkably during the past ten years since liberalization
began. The government is encouraging the development of entrepreneurship by
loosening restrictions on venture capital financing, which will increase the capacity
utilization of resources that are already accessible and obtained. However, from 1996
to 1998, there were only eight domestic venture capital funds registered with SEBI;
by 1999 and 2000, there were fourteen funds. Both international venture investments
and institutional interest are rising. Additionally, a number of state governments have
established venture capital funds for the IT industry in collaboration with SIDBI and
regional state financial institutions. These comprise Tamil Nadu, Delhi, Kerala,
Karnataka, and Andhra Pradesh, among others.

The Finance Ministry declared in 2000 that venture capital funds will have their tax
treatment liberalized in order to support them and create more jobs. It is anticipated
that this will significantly encourage non-resident Indians in Silicon Valley and other
locations to contribute some of their resources, expertise, and initiative to these kinds
of businesses. Graycell Ltd., a media company situated in Bangalore, received a
venture capital investment of approximately $1.7 million. In the near future, the
business would be producing and promoting consumer goods with a branded web
presence. The upcoming subjects may be regarded as venture capital forecasts for
India. Start ups and early-stage businesses with significant growth potential that are
unable to obtain traditional finance may find success with venture capital (VC)
financing. Venture capitalists offer startups not only funding but also invaluable
industry connections, industry experience, and guidance. Securing venture funding,
however, is dependent on a number of criteria.
First and foremost, entrepreneurs need to work in highly scalable industries like
fintech, biotechnology, or technology, where big returns and quick growth are
conceivable. Usually, venture investors look for businesses that have the potential to
develop at an exponential rate in the next few years in order to get a large return on
their investment.

Second, having a strong founding team and a well-written business strategy are
crucial. Because venture investors put just as much money into people as they do in
ideas, the leadership group needs to show that they are capable, experienced, and
visionary.
Obtaining venture capital funding entails certain compromises. A large amount of
stock must frequently be given up by entrepreneurs, and venture capital firms may
want a large amount of control over business choices. Furthermore, venture capital is
a high-risk type of funding because investors are picky and not all firms succeed.

a. Globally competitive human capital.

b. The existence of extensive ongoing scientific and technical research conducted by
numerous research laboratories; the second-largest pool of English-speaking
scientific and technical labor in the world.
c. The presence of a highly competitive global high technology .
d. The steps the government has made to establish policies that support investors
and business owners.
e. The SEBI's initiatives to create a robust and dynamic capital market that provides
the necessary flexibility and liquidity for investors for both entrance and
departure.

CONCLUSION

Global markets are getting more and more cutthroat. To get a competitive advantage
over other companies, businesses must operate at the highest possible level of cost,
productivity, labor efficiency, technical expertise, adaptability, and foresight. The
desire for extremely affordable, high-quality products is growing, which means that in
addition to the money required to finance new initiatives, there is a pressing need for
appropriate access to valuable human capital for guidance and monitoring.

These days, India encourages venture capital funding for fresh initiatives and creative
concepts. It also liberalizes tax laws, giving venture capitalists tax advantages.
Numerous economic sectors, including those in information technology, engineering,
pharmaceuticals, manufacturing, and other services, are ideal for venture capital
investment. Notwithstanding the current issues with the Indian industrial
infrastructure, the country waits for the fast venture capital funding industry in India.

Businesses are competing not just on price and quality in this fiercely competitive
global market, but also on speed and innovation. Businesses need to invest in state-of-
the-art technology, streamline their supply chains, and use data analytics to make
quick, well-informed decisions if they want to stay competitive. In addition to
financial resources, this calls for the availability of highly qualified personnel with the
ability to spearhead innovation, oversee intricate procedures, and spot developing
patterns.
In addition, companies need to cultivate a culture of constant innovation and
flexibility so they can quickly adjust to changes in the market, in laws, or in
technology. Because skilled leadership, technological know-how, and a strategic
vision are necessary for overcoming obstacles and seizing opportunities, human
capital is vital to this.

Additionally, cooperation and partnerships are becoming more and more important
for gaining access to resources, extending market reach, and pooling knowledge.
These can be formed through joint ventures, mergers, or strategic alliances.
Sustainability and social responsibility must also be given top priority by businesses,
since stakeholders and customers alike expect ethical behavior and openness.

In the end, companies who can successfully combine human and financial resources
with technology will be in a better position to produce value, hold onto a competitive
advantage, and prosper in the global economy.