Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Venture Capital: Is India losing out? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 20, 2002

    Venture Capital: Is India losing out?

    The dot-com bubble burst has forced a change in focus of Venture Capital (VC) funds in India. During FY00, the dot-com boom had attracted US $ 0.4 bn (Rs 20 bn) by way of VC funding to the Indian shores. Now two years after the melt down of the net economy VC funds have matured and shifted their attention from dot-coms that promised fantastic sales of products and services using the Internet to software companies in emerging technologies.

    In spite of the disappointment of the dot-com boom, the VC funds are still bullish about Indian startups. In fact, India was the second largest market for VC funding during the year FY02 (US $ 1.2 bn) after Japan, which saw investments to the tune of $ 1.9 bn. Compared to this, China, projected to be an emerging threat to Indian software capability, attracted only $ 39 m funding. In this article we look at the prospects of the VC industry in India. We also look at the regulatory problems faced by VC funds, which has impaired the growth of this industry.

    But before we delve deeper we must first understand what makes this industry click. VC funds would be successful only as long as there is an environment of entrepreneurship within the economy. This is the main reason why the US economy attracts more VC funding than any other country in the world. In the Indian context VCs are still bullish about their prospects in spite of the fact that Indians are not encouraged enough to become entrepreneurs.

    As in the US, technology enterprises and especially Internet related companies have attracted the predominant share of VC funding in India. Nearly 68% of the VC investments in India have been directed into IT and IT related products like business to consumer (B2C) solutions, electronic commerce (e-commerce) services and Internet related products. Other major sectors that have attracted VC funding include industrial products, biotechnology, food & food processing and pharmaceuticals.

    In FY03, the flow of VC funds into India is expected to double. This is due to the funds investing in IT enabled services (ITES) companies. The ITES segment grew by a phenomenal 70% in FY02 and is expected to clock a similar growth (64%) in FY03, according to NASSCOM. Other growth areas that could see VC investments are Internet communications infrastructure and the media sector. VC funding directed towards food processing and, the longer-gestating pharmaceutical and biotechnology sectors (where there are always more ideas than funding available for research) is also expected to grow.

    Domestic VCs are regulated by three government bodies the Securities and Exchange Board of India (SEBI), the Ministry of Finance, and the CBDT (Central Board of Direct Taxes). Foreign VC firms are under greater regulation in the form of the Foreign Investment Promotion Board (FIPB), which approves every investment, and the RBI, which approves every disinvestment. The large numbers of regulatory bodies have created numerous regulatory roadblocks in the way of the development of this industry in India. Just as the currency regime inhibits international venture capital firms from investing in India, domestic venture capital firms are not allowed to invest offshore. All these factors have led to a stunted growth of this industry.

    Currently there are restrictions on the quantum of investments that the VC can make in a particular venture. There are also restrictions on the industries that can be VC funded. Only six industries have been approved for VC investment: software, information technology, pharmaceuticals, biotechnology, agriculture and industries allied to the first five. VC funds also do not have the freedom to choose the kind of set up they are comfortable with for the new venture.

    While larger amount of foreign investment is good for the country, its flow must be regulated in order to prevent scenarios like the economic melt down of the Southeast Asian economy in 1998. The government with its strict rules had ensured that India was considerably insulated form the Southeast Asian crisis. Having said that it while checks are important adequate steps must be taken in order to facilitate VC funding.



    Equitymaster requests your view! Post a comment on "Venture Capital: Is India losing out?". Click here!


    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms