Starting an enterprise is never easy. There are a number of parameters that contribute to its success or downfall. Experience, integrity, prudence and a clear understanding of the market are among the most sought after qualities of an entrepreneur. However, there are other factors, which lie beyond the control of the entrepreneur. Prominent among these is the timely infusion of funds. This is where the concept of venture capital comes in.
2. VENTURE CAPITAL - BRIEFING THE HISTORY AND THE CONCEPT
2.1 Venture Capital: A Brief Elucidation of the Meaning
It is in fact nearly impossible to come across one single definition of the concept. However, for the study, the definition provided by the National Venture Capital Association can be adopted. The National Venture Capital Association defines venture capital as, "Money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors." 
It can be mentioned that venture capital has developed as a result of the need to provide a 'risky finance' to new ventures based on a promising and innovative entrepreneurship. Venture capital means risk capital. It refers to capital investment, both equity and debt, which carries substantial risk and uncertainties. It is said that while the risk envisaged in such venture capital may be very high, which may even result in total loss, the returns or gains also may be very big.
2.2 History of Venture Capital: A Brief Perusal
In the absence of an organised venture capital industry until almost 1998 in India, individual investors and development financial institutions have played the role of venture capitalists. Entrepreneurs have largely depended upon private placements, public offerings and lending by financial institutions. 
In 1973, a committee on the development of small and medium-sized enterprises highlighted the need to foster venture capital as a source of funding for new entrepreneurs and technology. Thereafter, some public sector funds were established but the activity of venture capital did not gather momentum as the thrust was on high-technology projects funded on a purely financial rather than a holistic basis. Later, a study was undertaken by the World Bank to examine the possibility of developing venture capital in the private sector, based on which the Indian government took a policy initiative and announced guidelines for venture capital funds (VCFs) in 1988. However, these guidelines restricted the setting up of VCFs to the banks or the financial institutions only. Internationally, the trend favoured venture capital being supplied by smaller-scale, entrepreneurial venture financiers willing to take a high risk in the expectation of high returns, a trend that has continued in this decade.
In September 1995 the Indian government issued guidelines for overseas investments in venture capital in India. For tax exemption purposes, the Central Board of Direct Taxes (CBDT)issued guidelines. The flow of investments and foreign currency in and out of India has been governed by the Reserve Bank of India's (RBI) requirements. Furthermore, as part of its mandate to regulate and to develop the Indian capital markets, the Securities and Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations, 1996.
Pursuant to this regulatory framework some domestic VCFs were registered with SEBI. Some overseas investment also came through the Mauritius route. However, the venture capital industry is still in a nascent stage in India. 
At the same time, due to economic liberalisation and an increasingly global outlook in India, there is an increased awareness and interest of domestic as well as foreign investors in venture capital. Institutional interest is growing and foreign venture investments are also on the rise. Given the proper environment and policy support, there is undoubtedly a tremendous potential for venture capital activity in India. 
In the year 1988 the Finance Minister formally introduced the venture capital industry in his budget speech. In this direction the venture capital fund was created to be managed by IDBI in order to provide financial assistance to industrial concerns looking for commercial applications of indigenous technologies. Over the decades many Developmental Finance Institutions such as Industrial Credit and Investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI), and Industrial Finance Corporation of India Ltd (IFCI) etc have been providing financial assistance but due to their core business of lending they were denied permission for VC investing as their key business. Later on most of them have incorporated a new entity exclusively for venture capital financing. IFCI Venture Capital Funds Ltd. was originally set up by IFCI by the name of Risk Capital Foundation (RCF) in 1975 to provide institutional support to first generation professionals. But in 1988, RCF was converted into a company, Risk Capital and Technology Finance Corporation Ltd. (RCTC), and it also introduced the 'Technology Finance and Development Scheme' for commercialization of home-grown technology. Hence, to make the changes in the company's activities evident, the name was changed to IFCI Venture Capital Funds Ltd in February 2000. Again ICICI incorporated ICICI Ventures in 1988, and is the largest venture fund management company in India with aggregate funds currently under management in excess of Rs.20 billion.
3. THE ROLE OF VENTURE CAPITAL IN PROMOTING THE GROWTH OF CAPITAL MARKET
Venture capital is very different from traditional sources of financing. Venture capitalists finance innovation and ideas, which have a potential for high growth but with inherent uncertainties. This makes it a 'high-risk, high-return investment'. 
Apart from finance, venture capitalists provide networking, management and marketing support as well. In the broadest sense, therefore, venture capital connotes human as well as financial capital.
In the global venture capital industry, investors and investee firms work together closely in an enabling environment that allows entrepreneurs to focus on value creating ideas. Venture capitalists, meanwhile, drive the industry through ownership of the levers of control in return for the provision of capital, skills, information and complementary resources. This very blend of risk financing and handholding of entrepreneurs by venture capitalists creates an environment particularly suitable for knowledge and technology-based enterprises.
Scientific, technological and knowledge-based ideas, properly supported by venture capital, can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner. In various developed and developing economies, venture capital has played a significant developmental role. India, along with Israel, Taiwan and the US, is recognised for its globally competitive high technology and human capital. India's recent success story in software and IT is almost a fairy tale when considering obstacles such as inadequate infrastructure, expensive hardware, restricted access to foreign skills and capital, and limited domestic demand. It also indicates the potential India has in terms of knowledge and technology-based industry.
It can be said that India is still at a level where it has an adequate amount of knowledge in many sectors. However, given the limited infrastructure, low foreign investment and other transitional problems in India, it certainly needs policy support to move to the stage of development of ideas, and towards innovation and product development by using this knowledge. This is crucial for sustainable growth and for maintaining India's competitive edge. This will take capital and other support, which can be provided by venture capitalists.
Also, India has a vast pool of existing and on-going scientific and technical research carried out by a large number of research laboratories, including defence laboratories as well as universities and technical institutes. A suitable venture capital environment that includes incubation facilities can help a great deal in identifying and actualising some of this research into commercial production.
The development of a proper venture capital industry, particularly in the Indian context, is needed if high quality public offerings (IPOs) are to be achieved. In the present situation, an individual investor becomes a venture capitalist of a sort by financing new enterprises and undertaking unknown risks. Investors also get enticed into public offerings of unproven and at times dubious quality. This situation can be corrected by venture-backed successful enterprises accessing the capital market. This will also protect smaller investors.
Long-term Orientation: Analysing the history of venture capital industry, it can be said that there is generally a long-term orientation involved in venture capital. This obviously brings security to the entrepreneur and he gets an adequate opportunity to prove his worth.
Thus, venture capital is valuable not just because it makes risk capital available in the early stages of a project, but also because a venture capitalist brings expertise that leads to superior product development.
4. ACTIVE REGULATIONS GOVERNING VENTURE CAPITAL
India's economy may be gaining in strength, but venture capital in the country is in need of a boost. With the right regulations and policy in place, venture capitalists could help the technology industry, among others, to take off even further. And now is the right time to implement an organised environment for investment in small enterprises. 
The venture capital industry in India has been undergoing a downward trend for the past two years. In the current economic scenario in the country, it is imperative to promote innovation, enterprise and conversion of scientific technology and knowledge based business ideas into commercial activity. Venture capital caters to different areas of business such as biotechnology, pharmaceuticals and drugs, agriculture, food processing, telecommunications, services, etc. The inherent strength of India lies in its skilled and cost-competitive manpower. If adequate policy support is made available to Indian entrepreneurs, India's current development can be sustained and it is sure to pace towards the targeted 8 per cent economic growth with ease. The current atmosphere is now ripe for creating the right regulatory and policy environment for sustaining the momentum for high technology entrepreneurship. It is high time that an organized environment is created for the venture capital industry in India.
The government of India issued guidelines in September 1995 for overseas venture capital investment in India. There were three sets of regulations dealing with venture capital activity: SEBI (Venture Capital) Regulations 1996; Guidelines for Overseas Venture Capital Investments issued by Department of Economic Affairs in the Ministry of Finance in the year 1995; and CBDT's guidelines for venture capital companies issued in 1995, which were later modified in 1999. Hence, a need was felt for the consolidation of all these into one single set of regulations to provide for uniformity and remove any ambiguity in any interpretation.
Thus, based on the recommendations of the KB Chandrasekhar Committee, SEBI was made the head-regulator for Venture Capital Funds (VCFs) that provides a uniform, single window regulatory framework. SEBI also notified regulations for foreign venture capital investors. These foreign venture capital investors (FVCIs) should also be registered with SEBI.
To promote the venture capital industry in India, the Securities and Exchange Board of India (SEBI) set up an advisory committee on venture capital under the chairmanship of Dr. Ashok Lahiri, chief economic advisor, Ministry of Finance, government of India, for advising SEBI in matters relating to the development and regulation of venture capital funds in India. This committee removed some earlier restrictions and recommended measures like permitting venture capital funds to invest in real estate, removing lock-in period for shares of listed venture capital undertakings and reducing the proportion of funds raised that have to be invested in unlisted companies from 75 per cent to 66.67 per cent and so on. After the last amendment of SEBI's venture capital regulations in 2000, there were no major issues raised in the industry. Nevertheless, all regulations need to evolve to keep pace with the changing economic scenario, particularly in a dynamic industry such as venture capitalism. This committee, constituted for the said purpose, deliberated on various issues that are related to venture capital, broadly divided into three categories: operational, tax related, and foreign exchange related issues.
Currently, VCFs and FVCIs registered with SEBI cannot invest more than 25 per cent of the funds in shares at the time of IPO or in debt or debt instruments of a company in which the VCF has already invested by way of equity. VCFs and FVCIs are subjected to a lock-in period of one year and cannot exit immediately on listing of the shares. This acts as a deterrent factor, as it does not give an opportunity to VCFs to acquire shares in companies in the focus areas of the fund, and obtain early liquidity and returns to investors in the VCFs. The committee recommended that the restriction relating to the lock-in period be removed.
As per SEBI regulations, VCFs and FVCIs are required to invest at least 75 per cent of the investible funds in unlisted equity shares or equity linked instruments. This restricts the registered VCFs from investing in listed companies. It was recommended that this restriction should be reduced by bringing the amount to be invested in unlisted companies. The committee recommended a reduction on the minimum limit of investment in unlisted companies from 75 per cent to 66.67 per cent. The remaining 33.33 per cent (or less, depending on how much is invested in unlisted companies) may be invested in listed securities. The committee argues that because of the risky nature of investment in unlisted companies, as well as the time lag between investment and payback, this measure will help VC funds to protect their net asset value (NAV) during the initial period.
SEBI regulations stipulate that the VCFs and FVCIs can invest 75 per cent of the investible funds in the form of equity or equity-linked instruments. Some portion of the investible funds is allowed to be invested in debt or debt-related instruments provided the VCF or FVCI has already invested in the venture capital undertaking by way of equity. The industry sought freedom to invest in instruments that give them flexibility to invest in some kind of hybrid instruments that are optionally convertible. Equity-linked instruments, by definition, should be compulsorily convertible into equity. This deprives the VCFs of any flexibility in future investment. Therefore, the Ashok Lahiri Committee recommended that some types of hybrid instruments, which are optionally convertible into equity, may be permitted for investment within the 66.67 per cent portion of the investible funds, allocated for investment in unlisted companies.
Special Purpose Vehicles (SPVs) are independent, stand-alone entities specifically set up for the purpose of a single transaction or project. Since the SPV has its own separate legal identity, it can raise capital in its name, own assets and create a charge over them. SPVs ensure that shareholders have a liability limited to the extent of their unpaid shares. This protects the shareholders from liabilities arising from the contracts entered into by the business earlier. There are instances in which VCFs and FVCIs need to resort to innovative financing structures by creating SPVs in the form of trusts or holding companies that will issue shares on the underlying business. The committee suggested some measures to facilitate the process of setting up SPVs and their operations.
Currently, VCFs are not permitted to invest in the non-banking financial services sector. The committee recommended that given the risky nature of the business in this sector, VCFs may only be allowed to invest in NBFCs engaged in equipment leasing and hire purchase. The committee also recommended that real estate investments by VCFs and FCVIs be permitted. According to the current SEBI regulations, financing gold is not a permitted activity for VCFs and FCVIs. It has been recommended that this restriction on financing of gold be removed. At the same time, the restriction continues on financing for speculation in gold.
Other Regulatory Issues
The venture capital industry believed that SEBI registered VCFs should be permitted to invest up to a certain percentage of their corpus in overseas companies. This is expected to help the Indian VCFs to invest in offshore companies and also allows them to have global management exposure. The members of the committee resolved this issue by recommending that VCFs be allowed to invest in offshore VCUs. It was suggested that the RBI may periodically specify the overall limit for such investment, which may be monitored by the SEBI.
The committee also recommended the appointment of a custodian by each FVCI to facilitate the maintenance of records and to ensure a smooth transition when the VCU's shares get listed. Furthermore, to faciltate the overall growth of the VC industry and ensure faster flow of venture capital funds into India, SEBI may from time to time expand the definition of Venture Capital Undertaking (VCU) suitably.
The performance of VCFs is often judged based on their successful exit from the VCUs. These exit routes may take any of the following forms: initial public offer, merger or acquisition or a management buy-out. M&A is the most common route. When a foreign company acquires a VCU, the consideration is paid through cash or through issuance of securities of the foreign company. The VCFs then realise cash by sale of such foreign securities. The committee felt that a clarification should be issued on the tax issues related to these exit routes through a Central Board of Direct Taxes (CBDT) circular.
Most of the FVCIs prefer to have a wholly owned subsidiary in India to act as an advisor and for carrying out various investment and post-investment activities. FVCIs opine that the activities carried out by these subsidiary companies do not require investment of any funds. But they are compelled to lock cash into their Indian advisory subsidiaries to meet the minimum capitalization requirement. It has been recommended that wholly owned Indian subsidiaries of FVCIs registered with SEBI may be exempted from the minimum capitalisation requirements.
Venture capital can play a more innovation and development role in a developing country like India. It could help the rehabilitation of sick unit through people with ideas and turnaround management skill. A large number of small enterprises in India because sick unit even before the commencement of production of production. Venture capitalist could also be in line with the developments taking place in their parent companies.
Yet another area where can play a significant role in developing countries is the service sector including tourism, publishing, healthcare etc. they could also provide financial assistance to people coming out of the universities, technical institutes etc. who wish to start their own venture with or without high-tech content, but involving high risk. This would encourage the entrepreneurial spirit. It is not only initial funding which is need from the venture capitalists, but the should also simultaneously provide management and marketing expertise-a real critical aspect of venture capitalists, but they also simultaneously provide management and marketing expertise-a real critical aspect of venture capital in developing countries. Which can improve their effectiveness by setting up venture capital cell in R&D and other scientific generation, providing syndicated or consortium financing and acing as business incubators.
Venture capital investments in India have fallen by 34 per cent in 2002 according to the Indian Venture Capital Association (IVCA). In 2001, the decline was 4.3 per cent. The decline in the industry is surprising, given that some big ticket VC deals have taken place in the country. Ironically, individual deals have grown exponentially, ranging between $10m and $100m per investment. The reasons that can be attributed to the current declining trend in the VC industry are: the nature of the VC activity and the so called third generation VC funds - Infinity Ventures, Indian Direct Fund (IDF) and eVentures India - have started cleaning out their portfolios through strategic sales.
But 2004 is going to prove fruitful for the VC industry in India. This bright forecast came from the meeting of foreign venture capitalists in November 2003 in Hyderabad, at a global conference to explore the possibilities of financing new ventures in India. Several funds based in Europe and the US expressed their keen interest in investing in India either directly or by creating a separate India fund aimed at supporting start-ups. Silicon Valley Bank is planning to set up an office in India to support its clients willing to set up operations in India. VC firms are attracted by the stupendous performance of the country - Asia's third largest economy. According to the Indian Venture Capital Association, India received $550m in venture capital funding in 78 companies in 2002, second only to South Korea's $906m in Asia outside of Japan. Venture capital investments in the six months ending September 2003 are said to have touched $400m and are expected to touch $650m mark by the end of March 2004. India offers bright promises for ventures in areas such as IT and biotechnology. In a strategic review of the VC industry for 2004, the National Association of Software and Services Companies (NASSCOM) has observed that the Indian venture capital sector faces a challenging environment. The recommendations of the advisory group for foreign venture capital investors (FVCIs) are expected to improve the prospects of the industry and Indian entrepreneurs should be able to steer ahead in their ventures