'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:- i. Acquisition financing in order to acquire another firm for further growth ii. Management buyout financing so as to enable the operating groups/ investors for acquiring an existing product line or business and iii. 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:- ICICI Venture Funds Ltd. IFCI Venture Capital Funds Limited (IVCF) SIDBI Venture Capital Limited (SVCL) Those promoted by State Government controlled development finance institutions, for example:- Gujarat Venture Finance Limited (GVFL) Kerala Venture Capital Fund Pvt Ltd. Punjab Infotech Venture Fund Hyderabad Information Technology Venture Enterprises Limited (HITVEL) Those promoted by public banks, for example:- Canbank Venture Capital Fund SBI Capital Markets Limited Those promoted by private sector companies, for example:- IL&FS Trust Company Limited Infinity Venture India Fund Those established as an overseas venture capital fund, for example:- Walden International Investment Group SEAF India Investment & Growth Fund BTS India Private Equity Fund Limited 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. Registration of Domestic Venture Capital Funds Back Securities and Exchange Board of India (Venture Capital Funds) Regulations 1996 lays down the overall regulatory framework for the registration and operations of venture capital funds in India. As per these regulations, the term 'venture capital fund' means "a fund established in the form of a trust or a company including a body corporate and registered under these regulations which:- (i) has a dedicated pool of capital; (ii) raised in a manner specified in the regulations; and (iii) invests in accordance with the regulations". The main provisions of the SEBI (Venture Capital Funds) Regulations 1996 are:- Any company or trust or a body corporate, who is carrying or proposing to carry on any activity as a venture capital fund, shall make an application to the SEBI for grant of a certificate in Form A (as specified in the first schedule of the regulations) along with the prescribed application fees (given under second schedule). The Board may in the interest of the investors issue directions with regard to the transfer of records, documents or securities or disposal of investments relating to its activities as a venture capital fund. For the purpose of the grant of a certificate by the Board, the applicant shall have to fulfil in particular the following eligibility criteria's:- If the application is made by a company:- o Memorandum of association as has its main objective, the carrying on of the activity of a venture capital fund; o It is prohibited by its memorandum and articles of association from making an invitation to the public to subscribe to its securities; o Its director or principal officer or employee is not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant; o Its director, principal officer or employee has not at any time been convicted of any offence involving moral turpitude or any economic offence; o The applicant is a fit and proper person. if the application is made by a body corporate:- o It is set up or established under the laws of the Central or State Legislature; o The applicant is permitted to carry on the activities of a venture capital fund; o The applicant is a fit and proper person; o The directors or the trustees, as the case may be, of such body corporate have not been convicted of any offence involving moral turpitude or of any economic offence; o The directors or the trustees, as the case may be, of such body corporate are not involved in any litigation connected with the securities market which may have an adverse bearing on the business of the applicant. If the Board is satisfied that the applicant is eligible for the grant of certificate, it shall send an intimation to the applicant. On receipt of intimation, the applicant shall pay to the Board, the registration fee as specified in Second Schedule of the regulation.Thereafter, SEBI will grant the applicant the certification of registration in Form B. The certificate granted shall be subjected to the following conditions:- The venture capital fund shall abide by the provisions of the Securities and Exchange Board of India Act, 1992 and these regulations; It shall not carry on any other activity other than that of a venture capital fund; It shall forthwith inform the Board in writing if any information or particulars previously submitted to the Board are found to be false or misleading in any material particular or if there is any change in the information already submitted. If the Board is of the opinion that a certificate should not be granted, it may reject the application after giving the applicant a reasonable opportunity of being heard. The decision of the Board in this respect shall be communicated to the applicant within thirty days. On rejection, an applicant shall not carry on any activity as a venture capital fund. A venture capital fund may raise monies from any investor whether Indian, foreign or non-resident Indian by way of issue of units. However, it shall not accept an investment from any investor which is below the certain prescribed amount. All investment made or to be made by a venture capital fund shall be subjected to the following conditions, namely:- Venture capital fund shall disclose the investment strategy at the time of application for registration; It shall not invest more than 25% corpus of the fund in one venture capital undertaking; It shall not invest in the associated companies; It shall disclose the duration of life cycle of the fund, etc. No venture capital fund shall be entitled to get its units listed on any recognised stock exchange till the expiry of three years from the date of the issuance of units by it. Also, it shall not issue any document or advertisement inviting offers from the public for the subscription or purchase of any of its units. The venture capital fund shall:- (i) issue a placement memorandum which shall contain details of the terms and conditions subject to which monies are proposed to be raised from investors; or (ii) enter into contribution or subscription agreement with the investors which shall specify the terms and conditions subject to which monies are proposed to be raised. Every venture capital fund shall maintain for a period of eight years books of account, records and documents which shall give a true and fair picture of its state of affairs. It shall intimate the Board, in writing, the place where these books, records and documents are being maintained. A venture capital fund set up as a company shall be wound up in accordance with the provisions of the Companies Act, 1956 (1 of 1956). While, a venture capital fund set up as a body corporate shall be wound up in accordance with the provisions of the statute under which it is constituted. A scheme of a venture capital fund set up as a trust shall be wound up:- (i) when the period of the scheme, if any, mentioned in the placement memorandum is over; (ii) if it is in the opinion of the trustees or the trustee company, as the case may be, that the scheme shall be wound up in the interests of investors in the units; (iii) if seventy-five per cent of the investors in the scheme pass a resolution at a meeting of unitholders that the scheme be wound up; or (iv) if the Board so directs in the interests of investors. The Board, may suo motu or upon receipt of information or complaint, appoint one or more persons as inspecting or investigating officer to undertake inspection or investigation of the books of account, records and documents relating to a venture capital fund for any of the following reasons, namely:- To ensure that the books of account, records and documents are being maintained by the venture capital fund in the manner specified in these regulations; To inspect or investigate into complaints received from investors, clients or any other person, on any matter having a bearing on the activities of the venture capital fund; To ascertain whether the provisions of the Act and these regulations are being complied with by the venture capital fund; and To inspect or investigate suo motu into the affairs of a venture capital fund, in the interest of the securities market or in the interest of investors. It shall be the duty of every officer of the venture capital fund, in respect of whom an inspection or investigation has been ordered, to produce to the investigating or inspecting officer such books, accounts and other documents in his custody or control and furnish him with such statements and information as the said officer may require for the purposes of the investigation or inspection. The Board may after consideration of the investigation or inspection report and after giving reasonable opportunity of hearing to the venture capital fund or its trustees, issue such direction as it deems fit in the interest of securities market or the investors, including directions in the nature of:- Requiring a venture capital fund not to launch new schemes or raise money from investors for a particular period; Prohibiting the person concerned from disposing of any of the properties of the fund or scheme acquired in violation of these regulations; Requiring the person connected to dispose of the assets of the fund or scheme in a manner as may be specified in the directions; Requiring the person concerned to refund any money or the assets to the concerned investors along with the requisite interest or otherwise collected under the scheme; Prohibiting the person concerned from operating in the capital market or from accessing the capital market for a specified period. The Board may suspend the certificate granted to a venture capital fund where it:- (i) contravenes any of the provisions of the Securities and Exchange Board of India Act or these regulations; (ii) fails to furnish any information relating to its activity as a venture capital fund as required by the Board; (iii) furnishes to the Board information which is false or misleading in any material particular; (iv) does not submit periodic returns or reports as required by the Board; (v) does not co-operate in any enquiry, inspection or investigation conducted by the Board; and (vi) fails to resolve the complaints of investors or fails to give a satisfactory reply to the Board in this behalf. Back Venture Capital investments in India a record $928 Million in 2007: Dow Jones news Venture capitalists invested some $928 million in 80 deals for entrepreneurial companies in India during 2007, according to the Quarterly India Venture Capital Report published today by Dow Jones VentureSource. This was a whopping 166 per cent increase over the $349 million invested in 36 deals in 2006, and easily the highest total on record for the region. The report found nearly 48 per cent of all venture financing deals in India were for Information Technology (IT) companies, as 38 rounds were completed, accounting for $384 million, more than India's entire 2006 venture investment total. The most popular recipients of venture capital in the IT industry were companies in the web-heavy "information services" sector, which accounted for 22 deals and nearly $141 million in investment. Among the deals in this area was the $10 million second round for Bangalore-based Four Interactive, an online provider of local information on food, events, lifestyle, shopping and more. "Service-oriented companies in India, both in the technology fields and the non-technology areas of hotels, taxis and similar services, continue to attract investment and this is likely due to their low capital requirements as well as to the rapidly emerging nature of the broader Indian economy," said Jessica Canning, Director of Global Research for Dow Jones VentureSource. Dow Jones and Company is a News Corporation company, and a leading provider of global business news and information services. Its Consumer Media Group publishes The Wall Street Journal, Barron's, MarketWatch and the Far Eastern Economic Review. Its Enterprise Media Group includes Dow Jones Newswires, Dow Jones Factiva, Dow Jones Client Solutions, Dow Jones Indexes and Dow Jones Financial Information Services. "It takes relatively little money and little time for these kinds of companies to begin generating revenues and, because of this, Web-related and consumer and business services companies accounted for more than half of all the venture capital deals done in India in 2007,'' added Canning. According to the data, the overall business/consumer/retail industry saw 30 deals completed in 2007 and more than $346 million invested, a 92 per cent jump over the $180 million invested in 16 deals in the industry in 2006. As said, the business/consumer service area accounted for the bulk of the interest in this industry, with 22 deals and $254 million invested. India's health care industry, while still in its infancy, also saw increased investor interest in 2007 with seven completed deals and nearly $100 million invested, more than double of the $41 million invested in the prior year. "This is only the beginning for the venture capital market in India," said Canning. "In 2007, 79 per cent of all deals in India were for seed and first rounds and a lot of these companies will continue raising venture capital as they progress toward profitability and liquidity. And because the majority of investment is going to early-stage companies, we aren't seeing ballooning deal sizes like those in the US and Europe where investors are focused more on later-stage companies." In fact, the median size of a venture capital round for companies India was $9 million in 2007, up slightly from $8.7 million in 2006, but well below the $18.8 million median seen in 2005. Of all the companies in India that received venture funding in 2007, nearly 73 per cent were already generating revenues or profitable. The Quarterly India Venture Capital Report covers venture capital investment specifically, which Dow Jones VentureSource defines as growth capital made available to entrepreneurial companies in exchange for ownership in the form of private securities. These investments are often seen as shorter- term and do not include private equity investments such as leveraged buyouts or mezzanine and debt financing. VentureSource collected this data by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early-stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors.