METHODS OF VENTURE CAPITAL FINANCING IN INDIA

EQUITY CONDITIONAL LOAN CONVENTIONAL LOAN INCOME NOTE DEBENTURES

EQUITY
All Venture Capital Firms(VCF) provide equity. Their contribution may not exceed 49% of the total equity capital. The effective control and majority ownership of the firm may remain with the entrepreneur. The Venture capitalist becomes entitled to a share in the firms profits as much as he is liable for the losses. The advantage to the VCF is that it can share in the high value of the venture and make capital gains if the venture succeeds.

CONDITIONAL LOAN
This is a form of loan finance without any pre-determined repayment schedule or interest rate. A conditional loan is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans. In India , VCFs charge royalty ranging from 2% to 15% ,the actual rate depends on factors of the venture such as gestation period, cost-flow patterns, risk involved. Some VCFs give a choice to the enterprise of paying a high rate of interest(above 20%) instead of royalty on sales once it becomes commercially sound. Some funds recover only half of the loan if the venture fails.

CONVENTIONAL LOAN
Conventional loans carry lower interest initially which increases after commercial production commences. A small royalty is additionally charged to cover the interest foregone during the initial years. The repayment of the principal is based on a pre-stipulated schedule, Venture Capital Institutions usually do not insist upon mortgage/other security.

INCOME NOTES
Income notes are instruments which carry a uniform low rate of interest plus a royalty on sales. It combines the features of both conventional and conditional loan. The principle is repaid according to a stipulated schedule.

DEBENTURES
NON-CONVERTIBLE DEBENTURES These carry a fixed rate of interest. Redeemable at par/premium. Secured and can be cumulative or non-cumulative. PARTLY CONVERTIBLE DEBENTURES A convertible portion converted into equity shares at par/premium. A non-convertible portion earns interest till redemption. COUPON BONDS/DEBENTURES These can be either convertible or non-convertible with zero/no interest rate.

SECURED PREMIUM NOTES

These are secured, redeemable at premium in lumpsome/instalments, have zero interest and carry a warrant against which equity shares can be acquired.

INVESTMENT NURTURING/AFTER CARE

The enduring relationship between the VCIs and VCUs and the active role of the former in the management of the latter is termed as investment nurturing/after care. STYLES Hands-on Nurturing Hands-off Nurturing Hands-holding Nurturing

DISINVESTMENT OF VENTURE CAPITAL

DISINVESTMENT OF EQUITY INITIAL PUBLIC OFFERS SALE OF SHARES TO ENTREPRENEURS TRADE SALES SALES TO A NEW INVESTOR/TAKEOUT LIQUIDATION EXIT OF DEBENTURES

INITIAL PUBLIC OFFERING

The most common channel of disinvestment by a Venture Capital Institution is through public issue of capital of the venture capital undertakings. The merits of public issues are liquidity of investment and improved marketability , better prospects for capital gains. The promotion of the public issues would be difficult and expensive since the first generation entrepreneurs are not known in the capital markets.

SALE OF SHARES TO ENTREPRENEURS

The shares of Venture Capital Institutions may be sold to the entrepreneurs themselves who are allowed to buy their own equity The entrepreneurs can acquire the shares from VCIs through employees by forming an Employees Stock Ownership trust.

TRADE SALES
The entire company is sold to another company/third party.

LIQUIDATION
This is an involuntary exit forced on the VCI as a result of a totally failed instrument. The VCIs can use this exit method when the venture is not performing well and has reached a stage beyond recovery due to stiff competition, technology failure/obsolescene of technology, poor management.

EXIT OF DEBT INSTRUMENTS

In case of debt component of venture capital financing ,in contrast with equity component, has to normally follow the predetermined route. In case of a normal loan, the exit is possible only at the end of the period of loan.