The position of advantage of enterprises is perceived to be created due to innovative product, process or technology limiting edge of competitors from competing with these enterprises. Ultimately, the competitive edge of venture enterprises is expected to translate into high returns for the investors.

The concept of venture capital investment in India started in the late eighties. This concept was next stage evolution of seed capital investment undertaken by Public Financial Institutions for entrepreneurship development by supporting first generation technocrat promoters. Later, a few state level financial institutions and banks also followed by setting upfunds for providing venture capital. However, the concept venture capital investments was never practiced in its purest form. Also the need and requirement thereof keeping Indian perspective in mind, was not analysed.

The concept of venture investments in India originated more as following investment concepts prevalent in advanced countries at a time when Indian finance industry and capital markets were witnessing boom phase and less because of proper perspective for its need. As a result, the framework of operation lacked substance to achieve objectives and the performance of industry remained low, resulting in low to moderate returns on investment for investors to the venture capital funds. The venture capital industry as such could hardly present its case for incentives for its promotion to the government.

Recently, realising the potential of information technology industry, the Information Technology Task Force has proposed setting up of venture funds dedicated for IT industry to avail venture fundsfor investments. But before the agenda for boosting IT industry is taken up through providing financial support by venture capital funds, it may be relevant to address to core issues and lessons learnt from past experience. Resolution of these issues highlighted in following paragraphs will go long way in giving boost to venture capital industry in India.

Raising funds for venture capital investments

In advanced countries, venture capital investments assumed relevance as additional resources were ploughed back for being risked in ventures to reap high returns after commercialisation of global scale innovative concepts. These funds are mobilised by raising small portion of pension, insurance and gratuity funds besides government. funding. In India, however, the mechanism for raising investment by venture funds is yet to be envisaged. Therefore, avenues for mobilisation of venture funds are not available.

Regulatory mechanism

The regulatory mechanism for venture capital investments inIndia is in place in the form Sebi regulations and CBDT rules, which apply for availing tax exemption in respect of income(s) by venture capital funds. The provisions of both Sebi regulations and CBDT rules are more of an exercise of requirements therein rather than an attempt in substance to boost venture capital investments.

Surprisingly, the dividing line for a venture from any other conventional enterprise is drawn on the basis of listing of securities by the enterprise. Further no specific mandate for investment in venture funds is available to large sources of funds ie, banks, insurance companies or pension funds besides which there is virtually no room for raising funds by venture funds unless promoting institutions or multilateral institutions wish to invest on its funds to be utilised at their discretion.

The provision for exemption of income tax on income of venture funds have also become redundant in effect as only Sebi registered venture funds may avail exemption in respect of income by way ofdividend and capital gains to be included in their incomes provided they have invested 20 per cent, 50 per cent and 80 per cent of monies raised in securities of companies whose shares are not listed on stock exchange. (This condition has been relaxed only recently) and investment exposure in any of the invested company does not exceed (a) 40 per cent of its equity of invested company or (b) 20 per cent of the monies raised by venture fund for investment. The tax exemption is available provided venture fund has made investments in notified industries. All the industries have been notified for investment by investments except those mentioned in schedule to the Income Tax Act. Infrastructure projects are also sought to be included for investment by venture funds.

Even, the changes proposed in the Finance Bill, 1999, in respect of provisions applicable to venture capital companies/funds and applicable from April 1999, will not make much of the difference. The income tax exemption to venture capitalcompanies/funds, will continue to be available only in respect of their dividend and capital gain income. As per existing provisions, the investment would continue to be made in domestic companies whose shares are not listed in recognised stock exchanges in India, to qualify investment as venture investment.

However, the venture capital investments would required to be restricted to the domestic companies engaged in business of (i) software; (ii) information technology ; (iii) production of basic drugs in the pharmaceutical sector; (iv) bio-technology; (v) agriculture and allied sectors; (vi) such other sectors as may be notified by the central government in this behalf, or (vii) production or manufacture of any article or substance for which patent has been granted to the National Research Laboratory or any other scientific research institution approved by the Department of Science and Technology.

The restriction of investment in specific industries to avail exemption in respect of income on investmenttherefrom, is unwarranted as innovative idea/concept cannot be restricted as domain of particular industrial sectors.

It would also be necessary to give flexibility to venture funds to invest by way of flexible performance linked financing instruments. Therefore, scope of income exempt from income tax in case of venture capital funds, would have to be broadened to accommodate income from investments other than equity.

Weak legal mechanism to enforce transparent operations

The legal mechanism in India is weak, time consuming and not punitive worth seeking remedy against entrepreneurs who do not follow financial disclosures, norms and standards in spirit. In case of doubt on authenticity transparency of records, it is difficult seek remedy from law as per predetermined terms of investment. Thus, at times, while successful entrepreneurs could get returns, venture investors failed to realise returns corresponding to success, of venture.

New Concept, innovative product, process or technologyvis-a-vis entry barrier

In India, ventrue enterprises promoted have remained limited in number in view of low level of research & development and lack of original technology work. Therefore, investments made by venture funds are limited to Ventures involving new concept, innovative product, process or technology irrespective of true perspective of entry barriers it involved. Therefore, it is important that new concept may also be examined for entry barriers and lead time for competitors to become threat for any enterprise considered for venture investments.

In India, the innovative concept were more in nature within territorial boundaries and had limited innovative life limiting potential to bring returns for enterprises.

Mechanism to evaluate upside potential of firms seeking capital

Most of the venture capital firms imbibed mind set of lender while undertaking venture investment. They lacked mechanism to evaluate upside potential of firms seeking venture investment and resorted to stereotype evaluation process which lacked flexibility vis-a-vis dealing with invested firms. Even as few firms approaching for venture investment had value, these firms failed to get value or find takers who could realise their potential for cashing by investing venture capital. So there would be need to create mechanism where intrinsic value of concept or venture capital seeker can be evaluated and groomed to become success story. Adoption of partnership and flexible approach by Venture capital firm with invested company would be highly desirable.

Besides, the orientation of the venture capital investor was of financial investor and not that of investment partner to give support for commercialisation of innovations and advantage factors invested firm possessed, to translate same into windfall returns. Further, investment managers have limited horizon and exposure to assess concept/ideas taken up for commercialisation, keeping global vision in mind besides alternatives with potential to threaten suchideas/concepts.

The perusal of foregoing lines are indication enough that venture capital investments in purest form or near thereto are yet to take off in India and existing venture capital firms can at the best be described as provider of funds to small enterprises and at times to those graduating to medium scale besides providing platform for nurturing entrepreneurs.

The objectives of promoting venture capital investments and associated high returns may not come through unless (a) avenues for raising funds by venture capital investments are envisaged (b) environment is created for inculcating entrepreneurship and transparent corporate culture (c) entrepreneurs are groomed in technical schools and provided with conducive infrastructure, (d) venture funds are made available to budding entrepreneurs lacking resources, with vision to realise dreams by putting their innovative concepts/ideas into reality. This would have to be supplemented with relevant incentives for promotion of venture funds besidesproviding identified avenues to channelise funds for investment before Venture capital industry assumes role of engine for economic growth of country.

The author is assistant general manager, Risk Capital & Technology Finance Corporation Ltd, New Delhi