The Journey So Far
History of Venture Capital in India dates back to early 70's when Govt of India appointed a committee laid by Late Shri R.S.Bhatt to find out the ways to meet a void in conventional financing for funding start-up companies based on absolutely new innovative technologies. Such companies either did not get any financial support or the funding was inadequate which resulted into their early mortality. The committee recommended starting of Venture Capital industry in India. In mid 80's three all India financial institutions viz IDBI, ICICI, IFCI started investing into the equity of small technological companies.
In Nov 1988, Govt of India decided to institutionalize Venture Capital Industry and announce guidelines in the parliament. Controller of Capital issues implemented these guidelines known as CCI for VC. These guidelines were very restrictive and following a very narrow definition of VC. They required Venture Capital to be invested in companies based on innovative technologies started by first generation entrepreneur. This made VC investment highly risky and unattractive. Nonetheless many private initiatives were taken. At the same time World Bank selected 6 institutions to start VC investment in India. This included TDICICI (ICICI), GVFL, Canbank Venture Capital Fund, APIDC, RCTC (now known as IFCI Venture Capital Funds Ltd.) and ILF (now known as Pathfinder).
Private equity in India as an asset class has evolved significantly over the past two decades. Starting in the late 1990s, private equity provided an alternative source of financing for local businesses accustomed to limited credit options from banks or turning to public equity markets to underwrite their growth ambitions. Today, the asset class is accepted more readily by Indian entrepreneurs as a source of strategic capital that can play a transformational role in the growth of their businesses by bringing in required new capabilities and discipline unavailable from other forms of capital.
Over the past 20 years, the industry has been a relatively stable source of capital despite many challenges, including gaining acceptance, navigating the recent weak economy, performance setbacks, and a complex regulatory environment. The industry has learned from its experience, and today it better understands the nuances of working effectively in the local environment. As the general economic sentiment in India turns positive, the country’s private equity industry has a real opportunity to regain its past vibrancy and move towards making an even greater impact on the economy.
In addition to providing stable capital, private equity has also offered ‘strategic’ capital, especially by helping their portfolio companies strengthen internal capabilities. Several relevant metrics reflect the improvements that appear to be enabled by private equity involvement. The correlation between private equity ownership and superior performance and skills compared to businesses not backed by equity back companies – even while controlling for sectors – is compelling:
Stronger job creation- Companies backed by private equity grew direct employment faster than companies not backed by private equity in a comparable period. This correlation holds true in aggregate and at a sector level.
Superior financial performance- Revenues of private equity portfolio companies grew many folds than revenues of companies not backed by private equity in a comparable period. In addition, profits were stronger. This holds true in aggregate and within each sector.
Better corporate governance and higher tax contribution- Companies backed by private equity generally improved their corporate governance. and tax contribution.
The growth in the industry is a result of our government’s validation of Alternative Investments Funds as the preferred vehicle for private capital pooling. This is ably supported by several structural and fundamental policy reforms including implementation of Goods & Services Tax (GST) and Indian Bankruptcy Code (IBC); establishment of Real Estate Regulatory Authority (RERA); allowing Real Estate Investment Trusts (REIT) and Infrastructure Investment Trust (InvIT) to raise debt capital; abolishing Foreign Investment Promotion Board (FIPB); relaxing FDI norms and recapitalising banks along with various provisions (example: to permit scheduled banks to invest up to 10 per cent of the paid-up capital in Category II AIFs); relaxing transfer pricing norms to avoid multiple taxation for offshore funds set up as multi-tier investment structures; among others.