VENTURE CAPITAL VENTURE CAPITAL & &

PRIVATE EQUITY PRIVATE EQUITY

INDIAN EXPERIENCEINDIAN EXPERIENCE

BY

G. N. BAJPAI

IMPERATIVES OF VENTURE CAPITAL IMPERATIVES OF VENTURE CAPITAL (VC)(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 LIFE- FINANCING STAGES DURING LIFE- CYCLE OF INITIATIVECYCLE 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 SNAPSHOT OF INDIAN VENTURE CAPITAL SCENARIOCAPITAL SCENARIO

Snapshot of Indian Venture Capital Scenario

20 80 250 5001200 1100 1050

10000

0

2000

4000

6000

8000

10000

12000

Year

Tota

l Inv

este

d ($

m

illio

ns)

SOURCE: www.nishithdesai.com/Research-Papers/VCF-Xroads.pdf

EVOLUTION OF PRIVATE EQUITY EVOLUTION OF PRIVATE EQUITY FINANCEFINANCE

PHASE I PRE-1995

PHASE II 1995-97

PHASE III 1998-2001

PHASE IV 2002-2005

NUMBER OF FUNDS

8 20 50 75

PRIMARY STAGES

& SECTORS

Seed, Early stage & Development Diversified

Development Diversified

Seed, Early stage & Development Telecom & IT

Growth/ Maturity- Diversified

TOTAL FUNDS: ($M)

30 125 2847

5239

PHASE I PRE-1995 PHASE II 1995-97

PHASE III 1998-2001 PHASE IV 2002-2005

Sources: TSJ Media, ICVA publications (various Years)

EVOLUTION OF PRIVATE EQUITY EVOLUTION OF PRIVATE EQUITY FINANCE (cont.)FINANCE (cont.)

0

500

1000

1500

2000

2500

3000

3500

($

m)

Development 25 110 2168.1 3107

Growth / Maturity 21.9 1882

Seed/ Early stage 5 15 657 250

Phase I World Bank, Government

Phase II Government

Phase III Overseas Institutional

Phase IV Overseas Institutional

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 EVOLUTION OF PRIVATE EQUITY FINANCE (cont.)FINANCE (cont.)

Evolution of Private Equity Finance

0

100

200

300

400

500

600N

um

be

r o

f T

ran

sa

ctio

ns

Seed Stage 10 20 273 58

Development stage 20 45 273 288

Growth/ Maturity Stage 0 0 2 100

Total Number of Transactions 30 65 548 446

Phase I World Bank,

Government

Phase II Government

Phase III Overseas Institutional

Phase IV Overseas Institutional

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 EVOLUTION OF PRIVATE EQUITY FINANCE (cont.)FINANCE (cont.)

Evolution of Private Equity Finance (cont.)

  PhaseI Phase II Phase III Phase IV

Primary sources of FundsWorld Bank,

GovernmentGovernment

Overseas Institutional

Overseas Institutional

Seed/ Early stage ($m) 5 15 657 250

Number of transactions 10 20 273 58

Development ($m) 25 110 2168.1 3107

Number of transactions 20 45 273 288

Growth / Maturity ($m)     21.9 1882

Number of transactions     2 100

Total Number of transactions 30 65 548 446

Average Investments ($m) 1 2 5.2 11.75

Sources: TSJ Media, ICVA publications (various Years)

INDIA RISK CAPITAL INVESTMENTS BY INDIA RISK CAPITAL INVESTMENTS BY STAGE 2003-05STAGE 2003-05

2005 2004 2003

Stage of Company Development

Volume Value Average Deal Size

Volume Value Average Deal Size

Volume Value Average Deal Size

Deals No.

% Share

Amt $ M

% Share

$ M Deals No.

% Share

Amt $ M

% Share

$ M Deals No.

% Share

Amt $ M

% Share

$ M

Early Stage

( India Based) 22 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) 6 4.1 71 3.2 11.8

Sub-Total Early Stage

28 19.2 150 6.9 5.36

Growth Stage 24 16.4 332 15.2 13.8 13 19.4 244.9 22.5 18.8 10 26.3 55.8 11.2 5.6

Late Stage 40 27.4 638 29.1 16 15 22.4 238.4 21.9 15.9 4 10.5 41.9 8.4 10.5

PIPE 49 33.6 763 34.9 15.6 20 29.9 477.3 43.9 23.9 4 10.5 184.5 37 46.1

Buyout 5 3.4 306 14 61.2 2 5.3 82.2 16.5 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 INDIAVC 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?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 DETAILSCONTACT DETAILS

Mr. G. N. BajpaiChairmanMob : 98335 64458Email : 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.

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