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RBI vice-chief calls for speedy growth of venture capital business

There is a need to explore ways of accelerating the growth of venture capital business in India specially in the context of technology development, says Reserve Bank of India Deputy Governor Y Venugopal Reddy.

In his keynote address at the National Venture Capital Seminar organised by the Centre for Technology Development in Bangalore on Sunday, Reddy observed that the growth of venture capital business and its contribution to technology development was not up to expectations.

In this context, he strongly suggested undertaking a study of the type done by the Bank of England in 1996 on financing environment for technology-based industries through venture capital.

The Bank of England study had cited the lack of understanding of the technology by venture capital firms as a sore point of failure.

Firms that had rejected the venture capital option were concerned with loss of control, high rates of return or quick exit routes expected by venture capital firms. Other common opinions were the unwillingness of venture capital firms to provide small amounts of capital and the time taken to finalise details and funding.

Reddy, who was one of the pioneers in promoting venture capital funds in India in the late 1980s, said that venture capital financing was very different from traditional sources of investment such as lending and borrowing.

It fills a void left by the traditional financial institutions in high risk, high potential and innovative ventures. In fact, venture capital business demands skill, attitudes and systems that are very different from those of traditional financial intermediaries.

In India, major part of venture capital investments were in the form of equity issues. Of the total investment of Rs 6.7 billion in 622 projects, about 61 per cent was in the form of equity, 21 per cent was by way of convertible instruments and 6 per cent in non-convertible debt. Redeemable preference shares and other instruments of finance including temporary and bridge loans account for the balance.

Interestingly, the computer software and service industries which are growing swiftly in India, did not find support and attention from the venture capitalists and the investment was a meagre seven per cent of total venture capital investment. Investment in industrial products and machinery accounted for 29 per cent followed by 13 per cent in consumer related industry and 8 per cent in food and food processing industry.

Despite good potential, there was no regulatory framework for structuring the venture capital funds since most of the domestic funds were set up under the Indian Trust Act, 1882.

While domestic funds are required to follow SEBI guidelines, offshore funds are required to follow Reserve Bank guidelines. Further, such funds are finding exit from their existing investments very difficult and steps like company buyback will partly solve the problem.

Emphasising the need for increased flow of funds into venture capital, Reddy said that promotion of venture capital along with strong technology was key to the growth of small and medium business, productivity, employment and overall growth of the economy. This deserves a national level focus, somewhat similar to the focus given to information technology by the Planning Commission, he added.

UNI