Academic journal article Journal of Small Business Management

The Venture Capital Industry in India [*]

Academic journal article Journal of Small Business Management

The Venture Capital Industry in India [*]

Article excerpt

Numerous academic studies have examined the venture capital industry in developed countries such as the United States (for reviews of the academic literature, see Barry 1994; Best and Mitra 1997; Amit, Brander, and Zott 1998). To date, however, academic studies have largely neglected venture capital industries in less developed countries. This study seeks to fill this gap by examining the venture capital industry in one such less developed country.

In India, while numerous banks and other financial institutions provide conventional finance to business firms, risk financing of the type and scale practiced in countries such as the United States is not yet significantly widespread. Given the conservative lending practices of the financial institutions, new entrepreneurs find it difficult to obtain project financing. There is a clear need for venture capital to finance technological investments in such areas as information technology and software, electronics and communication, biotechnology healthcare and medicine, chemicals, consumer products, and non-conventional energy (Verma 1997).

Venture capital activity in India was formalized in 1988 when the central government announced guidelines for the establishment and functioning of the industry. Venture capital companies sprang up, several sponsored by government development financial institutions. With significant economic liberalization policies introduced by the central government in 1991, more domestic and foreign venture capital companies began operations. In 1996, the central government introduced new and improved guidelines for regulating India's venture capital industry. Despite this progress, growth of the industry has been restricted by several factors, including conservative government policies, limitations on the availability of funds, and an inadequate equity market infrastructure.

Data and Methodology

This study relies on information gathered from several sources, including publications of the Indian Venture Capital Association (IVCA) for the 1993-96 period; questionnaire responses from senior officials (such as the managing director, CEO, or senior vice-president) of the seventeen organization members of IVCA; and in-depth personal interviews with top officials of five venture capital companies, including the president of IVCA.

Categories of Venture Capital Companies in India

Some major Indian venture capital companies are listed in Table 1. There are six broad categories of venture capital companies (VCCs) or venture capital funds (VCFs) in India. These include VCCs/VCFs promoted by: (1) national financial institutions; (2) state-level development financial institutions; (3) nationalized commercial banks; (4) foreign entities including banks, financial institutions, and non-resident investors; (5) domestic private sector companies; and (6) joint initiatives of domestic private sector companies, financial institutions, and foreign entities.

In our subsequent analysis, funds represented under categories (1), (2), and (3) are grouped as "government" funds, while those under categories (4), (5), and (6) are grouped as "private." Within the "government" groupings, the VCCs/VCFs in category (1) have historically received a variety of incentives and benefits from the Indian government and require separate examination.

The private and government VCFs differ regarding the scale of their investments. Private funds tend to have fewer but larger investments in later-stage ventures, which require less monitoring. (A typical investment could be for 100 million Indian Rupees [Rs.]). In contrast, government funds invest smaller amounts over a larger number of start-up and later-stage ventures (a typical investment is between Rs. 20 and Rs. 30 million). Sometimes investments requiring large funding are financed by government agencies on a syndicated basis. Lately, government funds are moving more towards larger investments to gain the benefits of reduced monitoring. …

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