Business investors

Venture capital is a growing business of recent origin in the area of industrial financing.  The various financial institutions set up to promote industries have done commendable work.  However, these institutions do not come up to the benefit of risky ventures when they are undertaken by new or relatively unknown entrepreneurs.  They contend to give debt finance, mostly in the form of term loans to the promoters and their functioning has been more a kin to that of commercial banks.  The financial institutions have devised schemes such as seed capital scheme, risk capital fund to help new entrepreneurs. 

However, to evaluate the projects and extend financial assistance they follow the criteria such as safety, security, liquidity and profitability and not potentiality.  The capital market with its conventional financial instruments or schemes does not come much to the benefit or risky venture.  New institutions such as mutual funds, leasing and hire purchase Company?s have been established as another source of finance to industries.  These institutions also do not mitigate the problems of new entrepreneurs who undertake risky and innovative ventures.

 II. MEANING OF VENTURE CAPITAL

Venture capital is long term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth.  Venture capitalist pools their resources including managerial abilities to assist new entrepreneurs in the early years of the project.  Once the project reaches the stage of profitability, they sell their equity holdings at high premium.

 
III. SUGGESTIONS FOR THE GROWTH OF VENTURE CAPITAL FUNDS

In order to ensure of venture capital the following suggestions are offered:

a.    Exemption or concession for capital gains ? Capital gains law represents a hurdle to the success of venture capital financing.  The earnings of the funds depend primarily on the appreciation in stock values.  Further the capital gains may rise only after 3 to 4 years of investment and that the projects being in new risky areas may not even succeed.  Capital gains by corporate bodies are taxed at a much higher rate than gains of individual investors.  Taking into account the high investment risk and long gestation period this is a deterrent to the development in Venture capital funds.  The benefit of capital gains is not significant.  Hence it would be advisable that all long term capital gains earned by venture capital companies should be exempted from tax or subjected to concessional flat rate.  Further capital gains reinvested in new ventures should also be exempted from tax.

b.    Development of stock markets ? Guidelines issued by finance ministry provides for the sale of investment by way of public issue at the price to be decided on the basis of book value and earning capacity.  However, this method may not give the best available prices to venture fund as it will not be able to consider the future growth potential of the invested company. 

One of the major factors contributed to the success of venture funds in the west is development of secondary and territory stock markets.  These markets do not have listing requirements and are spread over all important cities and towns in the country.  These stock markets provide excellent disinvestment mechanism for venture funds.  Success of venture capital fund depends very much upon profitable disinvestment of the capital contributed by it.  In US and UK secondary promotion of such makers is not feasible in the prevailing circumstances as such laissez faire policy may attack persons with ulterior motives in the operation may be started at many more big cities where, say the number of stock exchanges can be increased to 50.  Further, permission to transact in unlisted venture future and investors.

c.    Fiscal incentives ? Fiscal incentives may be given in the form of lowering the rate of income tax.  It can be accomplished by: (i) Application of provisions applicable to non-corporate entities for taxing long term capital gains. (ii)An allowance to funds similar to income tax ay 20 percent of the investment in new venture which can be allowed as deduction from the income.

d.    Private sector participation ? In US and UK where the economy is dominated by private sector, development of venture fund market was possible due to very significant played sector which is often willing to put money in high risk business provided higher returns are expected.  The guidelines by finance ministry provide that non-institutional promoter?s share in the capital of venture fund cannot exceed 20 percent of total capital; further they cannot be the single largest equity holders.  The private sector, because of this provision, may not like to promote venture fund business. 

e.    Review the existing laws ? Today?s need is to review the constraints under various laws of the country and resolve the issues that could come in the way of growth of the innovating mode of financing.  The only investment available to a venture capital finance company for investment is equity shares.  This restriction should be relaxed so that a venture capital finance company can finance through preferential issues and conditional loans.  The scope of venture capital should not only be confined to start up finance but also be broadened to development finance, expansion and growth, buyouts, mergers and amalgamation.  The restriction on investment of 80% of the entire funds within a period of 3 years should be removed.

f.    Limited partnership ? The practice of limited partnership as in vogue in UK should be permitted in order to promote integration of objects between the managers and contributories for the success of venture capital projects.

g.    Public issue ? The initiative on the part of the Government in the direction would see rapid growth of a new breed of venture capital assisted entrepreneurs.

IV. PROMOTION OF VENTURE FUNDS BY PRIVATE SECTOR

a.    Private sector is in advantageous position as compared to financial institutions and banks to provide managerial support to new ventures as leading industrial houses have a pool of experienced professional managers in all fields to management viz., marketing, production and finance.
b.    The leading business houses will be able to raise funds from the investing public with relative ease.

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