Venture Capital in India

Venture capital in India is very recently originated in around late 1980s. The government took the lead in institutionalisation of venture capital. The government announced the venture capital guidelines in november 1988.
Institutions coming under the guidelines were entitled for tax relief on capital gains under the indian income tax act.
The venture capital was first started in USA and then in other western countries. India influenced by the prospects of venture capital, introduced it in the country. The venture capital guidelines(1988) focussed on a relatively narrow area of venture capital activity, though india has a fairly well developed network of financial institutions. The area included in this was equity oriented finance for commercialisation of relatively new technologies promoted by new enterpreneurs.
Indian venture capital firms are allowed to make investments only in India. So far 61 % of investments have been in start-ups, with seed investment is 9 %, development is 13 %, and mezzanine is 15 %. Both equity and debt instruments have been used in the Indian venture capital industry, including conventional loans and conditional loans as well as various quasi-equity instruments..
The important characteristics of venture capital are;-

1. Venture capital is basically equity finance in relatively new companies, when it is too early to go to the market;
2. It requires patience in the sense that it is a long term investment;
3. There is a substantial degree of active involvement with the promoters of the business, also may be called
as 'hands-on' management;
4. The investment is expected to provide superior returns through capital gains at the time of exit..

There is another important aspect which is that some venture capital investments expect very high returns which should more than compensate for some of the other investments whish may result in very losses. The seeking of such potentially high returns is called as 'vulture capital'.

Although Indian venture capital industry is too young to assess, bnut following points and observations can be made. These are:-

1. There are very few players currently in the field and even the few private venture capital companies have been supported to a significant extent by banks and other financial institutions.

2. The industry has a relatively narrow focus as compared to their counter parts in the developed countries. So far, financing arrangements, such as managements buy-outs, etc. have not been even considered by the Indian industry as appropriate venture investments. However the industry is still in the evolutionary face, so it may broaden up its ares of activities in futures.

3. The financing stuctures in India have initially included a strong component of loan finance,which is more similar to the Japanese and Korean, than USA and UK., models.