Academic journal article IUP Journal of Management Research

Trends and Patterns in Venture Capital/Private Equity in India: A Review

Academic journal article IUP Journal of Management Research

Trends and Patterns in Venture Capital/Private Equity in India: A Review

Article excerpt

Introduction

The Indian economy has become important in the global context due to its nature and size. It has the potential to realize sustained high growth rates. India is among the more attractive investment destinations globally, driven by a combination of strong potential, an improving regulatory environment and favorable demographics. It now has a sizable middle class, and the population below the poverty line is also decreasing.

In di a, t he s eco nd most popul at ed count ry in t h e wor ld wi t h more than 1.24 billion people (Census, 2011), has emerged as one of the fastest growing economies in the recent years. With the projected average yearly compounded growth rate of 9%, India's GDP is likely to be US$ 1.4 tn by 2017 and US$ 2.8 tn by 2027 (Sharma and Tripathi, 2015). India is doing well in IT/ITES industry; it is still a low-cost developer and service provider.1 As India continues on its rapid growth path, several sectors of the economy such as telecom, FMCG, infrastructure and education are growing rapidly and offer significant opportunities for venture capital (IVCA Bain India Private Equity Report, 2013). It also needs to be noted that with other areas of the business and industry gett ing more and more technologyoriented, there will be requirement of adequate capital and support which can be provided by the venture capitalist.

Venture capital is a specific type of finance well-suited to the new technologybased firms. It is different from the traditional sources of finance in terms of risk undertaken, return expected and the type of enterprises involved. Earlier, venture capital was referred to as risk capital. However, as venture capital activities grew they became more formalized and started managing pools of capital. Over the years, the more generic term of 'private equity' was coined to encompass a wide variety of transactions relating to venture capital investments in companies providing high return opportunities (Christofidis and Debande, 2001). This paper examines the trends and patterns of venture capital companies' investment in India and the evolving regulatory framework permitting higher investment limits.

Literature Review

According to Indian Venture Capital Association (IVCA), "Venture capital is a type of growth capital which is provided to the emerging companies to enable them to build scale by using private equity and other management inputs and exit by going public or through strategic sale." A key aspect of venture capital financing is that it facilitates the provision of funding to the new firm despite the huge risk involved in it (Verma, 1997). Globally, venture capital industry is understood as "independently managed, dedicat ed pools of capital that focus on equit y or equity-linked investments in privately held, high-growth companies".2 The venture capitalists invest in newly established firms with a view to earning a return 10 times or more in less than five years (Dossani and Kenny, 2002). They provide more than just money; their interventions and assistance extend to several functions such as recruitment of key personnel, training to staff members and many others (Ashok, 2003).

Venture Capital/Private Equity (VCPE) has emerged as an important area of finance for academic researchers. The previous researches on Indian VCPE industry can be broadly classified into the following categories: studies that examined the evolution and the current status of the industry (Pandey, 1995 and 1998; Verma, 1997; Dossani and Kenney, 2002; and Singh and Jadeja, 2005); multi-country studies which also included India (Lockett et al., 1992; and Pandey, 1996); survey studies of VCPE industry practices in India (Mitra, 1997; Vinay, 2002 and 2005; Vinay and Kaura, 2003; and Mishra, 2004); and studies which can be considered as case studies of VCPE investments (Kulkarni and Prusty, 2007).

Dossani's (2002) review paper on venture capital in India indicated certain deficiencies such as: "entrepreneurs possess domain and cost-management skills but do not know how to develop early-stage ideas into viable businesses. …

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