VENTURE CAPITAL
&
PRIVATE EQUITY
INDIAN EXPERIENCE
BY G. N. BAJPAI
IMPERATIVES OF VENTURE CAPITAL (VC)
Technological progress is the key driver of economic growth
Technological progress involves:
Improvement in skills
Better capital equipment New products, processes & business methods
Technological progress in emerging economies will emerge from enterprises catch-up
Technology capacity is necessary to adopt technologies to local conditions
VC encourages technological progress via research & development
VC converts research & development into new ventures
FINANCING STAGES DURING LIFECYCLE OF INITIATIVE
VC funding is special which enterprises tap at different stages of life cycle of initiative
Seed - to prove concept Start-up - product development & market testing
First stage - commercial production Second stage - expansion to scale
Later stage - expansion of profitable enterprise
Bridge/ Mezzanine - preparation for going public
SNAPSHOT OF INDIAN VENTURE CAPITAL SCENARIO
Snapshot of Indian Venture Capital Scenario
12000
Total Invested ($ millions)
10000
10000 8000 6000 4000 2000 0 20 80 250 500
1200
1100
1050
1
9 699
7 1
9 799
8 1
9 899
9 1 99 9 2
0 00 2
0 000
1 2
0 100
2 2
0 200
3 (F c re o
t as
)
Year
SOURCE: www.nishithdesai.com/Research-Papers/VCF-Xroads.pdf
2
07 0
08
EVOLUTION OF PRIVATE EQUITY FINANCE
TOTAL FUNDS: ($M) 30 125 2847
5239
PHASE I PRE-1995 PHASE III 1998-2001 PHASE II 1995-97 PHASE IV 2002-2005
PHASE I PRE-1995 NUMBER OF FUNDS PRIMARY STAGES & SECTORS 8
PHASE II 1995-97 20
PHASE III 1998-2001 50
PHASE IV 2002-2005 75
Seed, Early stage & Development Diversified
Development Diversified
Seed, Early stage & Development Telecom & IT
Growth/ MaturityDiversified
Sources: TSJ Media, ICVA publications (various Years)
EVOLUTION OF PRIVATE EQUITY FINANCE (cont.)
3500 3000 2500 2000 1500
($m)
1000 500 0
Phase I Phase III Phase II World Bank, Overseas Government Government Institutional 25 5
Phase I Pre- 1995
Phase IV Overseas Institutional 3107 1882 250
Phase IV 2002-05
Development Growth / Maturity Seed/ Early stage
110 15
Phase II 1995-97
2168.1 21.9 657
Phase III 1998-2001
Primary Sources of Funds
Data Sources: TSJ Media, ICVA publications (various Years)
EVOLUTION OF PRIVATE EQUITY FINANCE (cont.)
Evolution of Private Equity Finance
Number of Transactions
600 500 400 300 200 100 0
Seed Stage Development stage Growth/ Maturity Stage Total Number of Transactions Phase I World Bank, Government 10 20 0 30 Phase II Government 20 45 0 65 Phase III Overseas Institutional 273 273 2 548 Phase IV Overseas Institutional 58 288 100 446
Primary Sources of Funds
Phase I Pre- 1995
Phase II 1995-97
Phase III 1998-2001
Phase IV 2002-05
Data Sources: TSJ Media, ICVA publications (various Years)
EVOLUTION OF PRIVATE EQUITY FINANCE (cont.)
Evolution of Private Equity Finance (cont.)
PhaseI Phase II Phase III Phase IV
Primary sources of Funds
World Bank, Government
Government
Overseas Institutional
Overseas Institut ional
Seed/ Early stage ($m) Number of transactions Development ($m)
5 10 25
15 20 110
657 273 2168.1
250 58 3107
Number of transactions Growth / Maturity ($m) Number of transactions
Total Number of transactions
20
45
273 21.9 2
288 1882 100 446 11.75
30 1
65 2
548 5.2
Average Investments ($m)
Sources: TSJ Media, ICVA publications (various Years)
INDIA RISK CAPITAL INVESTMENTS BY STAGE 2003-05
2005 2004 2003
Stage of Company Development
Volume
Value
Averag e Deal Size
$M
Volume
Value
Averag e Deal Size
$M
Volume
Value
Averag e Deal Size
$M
Deal s No. Early Stage ( India Based) 22
% Shar e
Amt $M
% Share
Deal s No.
% Share
Amt $ M
% Share
Deals No.
% Shar e
Amt $M
% Sha re
15.1
79
3.6
3.6
19
28.4
125.9
11.6
6.6
18
47.4
134.7
27
7.5
Early Stage
(Cross-Border) Sub-Total Early Stage Growth Stage Late Stage 6 28 24 40 4.1 19.2 16.4 27.4 71 150 332 638 3.2 6.9 15.2 29.1 11.8 5.36 13.8 16 13 15 19.4 22.4 244.9 238.4 22.5 21.9 18.8 15.9 10 4 26.3 10.5 55.8 41.9 11.2 8.4 5.6 10.5
PIPE
Buyout
49
5
33.6
3.4
763
306
34.9
14
15.6
61.2
20
29.9
477.3
43.9
23.9
4
2
10.5
5.3
184.5
82.2
37
16.5
46.1
41.1
Total
146
2189
15
67
1087
16.2
38
499.1
13.1
Report of the committee on Technology Innovation & Venture capital Govt of India Planning Commission New Delhi July 2006
VC IN INDIA
Securities & Exchange Board of India (SEBI) regulates both Domestic Venture Capital Funds & Foreign Venture Capital Investors & Registration benefits Income passes through to investors without tax when Trusts are registered under the Indian Trust Act & Venture Capital Companies FVCIs freely remit funds to India for investments in Indian venture capital undertakings (VCUs) & SEBI registered DVCFs FVCIs are exempt from both the entry & exit pricing regulations that otherwise apply to foreign investors, such as market-related pricing on disinvestment
Sale of shares by VCFs to company insiders post- listing is exempt from SEBI takeover code
VCFs automatically obtain (“QIB”) Qualified Institutional Buyer status, which is useful in participating in new security placements Exemption from one year lock-in for disinvestment post-IPO for shares purchased prior to the IPO VCFs do not get treated as promoters for purposes of IPO
WHAT IS INDIA WORKING ON?
Securities & Exchange Board of India (SEBI) to:
Obviate restriction on preferential offering Permit investment in projects/SPVs& surplus funds in bank deposits etc. Mitigate restrictions of Substantial Acquisition & Takeover Regulations
Reserve Bank of India (RBI) to:
Grant general permission under FEMA and clear inconsistencies Allow banks to value VCF investments on cost basis Allow investment in real estate
Government of India:
Revisit tax issues for greater participation Allow investments in VCF by pension funds Streamline regulations under companies act including winding up & valuation guidelines
CONTACT DETAILS
Mr. G. N. Bajpai
Chairman
Mob : 98335 64458 Email : gnbajpai@intuit-consulting.com
Add : Intuit Consulting Pvt. Ltd. Trade World, ‘B’ Wing, 7th Floor, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai – 400 013. India. +91-22-40043041-44 +91-22-40043045
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