Venture capital and Private Equity in India-Finance Topic

Research Paper in Venture capital and Private Equity in India

Project Report on Finance- Venture capital and Private Equity in India

Finance Dissertation Topic -Venture capital and Private Equity in India

Growth of the Indian Venture Capital and Private Equity industry

Over the last few years, India has become one of the leading destinations for venture capital and private equity (VCPE) investments. Though the concept of VCPE investment prevailed in the country in one form or another since the 1960s, the growth in the industry was mainly after the economic reforms in 1991. Prior to that, most of the VCPE funding was from public sector financial institutions, and was characterized by low levels of investment activity. In recent years, VCPE commitments and investments in India have grown at a rapid pace. Venture economics data indicate that during the period 1990-1999, India’s ranking was 25th out of 64 and various VCPE funds raised $945.9 million for investments in India; however, during the next decade, 2000-2009, India’s ranking rose to 13th out of 90 countries and the funds raised $16,682.5 million for investments in India. 

This represents a growth of 1,664 percent over the previous decade. The trend is even more encouraging for the most recent five-year period 2005-2009, during which India’s ranking was 10th out of 77 countries, and various funds raised $15,073.6 million for VCPE investments in India. Funds raised during 2005-2009, represented a growth rate of 837 percent as compared to funds raised over the previous five-year period 2000-2004. 

The growth rate in investments made by variousVCPEfunds has been equally strong. During the five-year period 2004-2008, the industry growth rate in India was the fastest globally and it rose to occupy the number three slot worldwide in terms of quantum of investments[1]. The amount invested by VCPE funds grew fromUS$ 1.8 billion in 2004 to US$ 22 billion in 2007 before tapering off to US$ 8.1 billion in 2008[2]. During the five-year period ending 2008, VCPE investments in India grew from 0.4 percent of GDP in 2004 to more than 1.5 percent of GDP in 2008 (Annamalai and Deshmukh, 2009). The rest of the paper is structured as follows: Section 2 indicates the objective of the paper. Section 3 provides details on the data set used for analysis and the sources of data. Section 4, which covers the results and discussion, is divided into six sub-sections. The sub-sections are in the following order: round wise analysis of investments, time of incorporation and financing stage, intervals between funding rounds, investment exits, duration of investment, and a statistical analysis of investment duration and type of exit. Section 5 provides a summary of the paper.

Objective of the paper

Research on VCPE has not been in tune with the growth seen in the industry. Past research on the Indian VCPE industry can be broadly classified into the following categories: studies that examined the evolution and the current status of the industry (Pandey, 1996, 1998; Verma, 1997; Dossani and Kenney, 2002; Singh et al., 2005); multi country studies which also included India (Lockett et al., 1992; Subhash, 2006; Ippolito,
2007); survey studies of VCPE industry practices in India (Mitra, 1997; Vinay Kumar, 2002, 2005; Vinay Kumar and Kaura, 2003; Mishra, 2004); and studies which can be considered as case studies of VCPE investments (Kulkarni and Prusty, 2007).

The objectives of this paper are as follows: first, research that has focused on the recent growth phase of the VCPE industry in India has been limited. Most of the papers that have studied the Indian industry were either before the growth phase (pre-2004) or did not cover the growth phase in full, starting from the onset of growth in 2004 until the slowdown in 2008, caused by the global financial crisis. This paper is an attempt to meet the gap in research on the recent trends in the Indian VCPE industry. Second, there have been very limited studies that looked at the lifecycle of investments, i.e. from the time of investment in the company until their exit from the investment. There have been several studies that have looked at areas related to investments such as investment decision making, structure of investments, and valuation. Similarly, there have been studies that have looked at topics related to venture exits. However, there have been limited studies that looked at the entire investment life cycle. The main contribution of this paper is to look at the investment lifecycle in its entirety. Third, this paper aims to highlight some of the lesser known features of the Indian VCPE industry such as the characteristics of the investee firm at the time of VCPE investment, the duration of VCPE investments in the firm, and the timing and mode of exit by the investors. The objective of this paper is to provide an holistic understanding of the Indian VCPE industry to enable the creation of a policy environment to sustain the growth of the industry.

Source-Journal of Indian Business Research, Vol. 3 No. 1, 2011, pp. 6-21

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