Reason for Slow growth of Venture Capital Companies in India
Though the investments from venture capital companies help a country in many ways, there are certain areas of concern that leads for the slow growth of Venture Capital companies in India. A few are discussed below.
1. Lack of understanding of venture capital in India: A new entrepreneur with a technical know how and business knowledge will be provided with venture capital for promoting new enterprise. The venture capital companies in India should also provide managerial assistance. But they are quite content with providing financial assistance. They are totally forgetting to provide the other forms of assistance, such as managerial, technical, etc., to the borrowing concerns.
2. Sections 370 and 372 of the Indian Companies Act: The Act deal with inter company investments and inter company borrowings. These restrictions prevent venture capital companies from investing in various new companies which is one of the main reason for the slow growth in India.
3. Exit policy of Venture Capital companies: There is no proper exit policy adopted by the Indian venture capital companies which is a major concern for its slow growth. While freeing from the borrowing company, the value of the equity in which investment is made must be properly assessed.
4. Lack of training for Employees in Indian venture capital companies: The employees of venture capital company need proper training in assisting borrowing companies. They must be in a position to assess the net-worth of the borrowing company and also find out the quantum of financial assistance required by the company.
5. Unfavorable tax for Venture Capital Companies in India: The present income tax regulations are not in favor of venture capital companies. There is double taxation —
- of taxing the venture capital on its profit; and
- also the individual investor who has contributed funds to venture capital.
There is also the Capital gains tax for the venture capital company.
6. Lack of freedom for foreign venture capital companies in India: The foreign venture capital companies are not given absolute freedom in investing with Indian companies. They have to obtain clearance from Foreign Investment Promotion Board and also from RBI. There is also a ceiling on their investment in Indian companies.
7. Lack of Clarity in the valuation of equity in India: Both at the initial stage and at the middle stage, the equity value of borrowing companies has to be assessed. The valuation of the equity shares can be based on PE ratio or at the market rate. Here, there is a confusion in accepting the value of the equity by the Venture capital companies in India. Sometimes, they may not reflect the real intrinsic value of the equity.
8. Capital market support not encouraging: Shares of unlisted companies cannot be listed very easily, unless a company earns a profit for 3 consecutive years. Hence, it will be difficult to list them in the stock market. The existing conditions laid down by SEBI as well as Securities Contract Regulation Act are not in favor of venture capital companies in India.
9. Lack of competence in reviving of sick companies: There are more sick companies in India, especially among the small scale industries. They can be revived with proper financial, technical and managerial support. The existing venture capital companies in India lack competence in reviving such sick companies.
Venture capital finance, though started late in India, has certainly made its mark in the industrial progress of the country. With proper legal and regulatory support, they can be made more dynamic as a result of which we can see tremendous growth of industrial progress and also the revival of sick companies. Consequently, the problem of unemployment could also be mitigated in India.