Past Reports

Recommendations

Info

would prefer if banks invest/ lend to avenues which are critical to economic development. The regulatory requirements also indicate that RBI is not very favourable in banks having exposure to VCPE funds. Evidence for this is seen in the highest risk weights assigned to the VCPE asset class, resulting in the need to aside a higher amount of the banks' own capital when investing in the asset class. It is said that RBI is proposing to increase the risk weight to 300% for investments in VCPE funds, signifying that this should not be a focus area for banks. As capital adequacy is a critical factor in determining the financial strength of a bank, this aspect is treated with much caution by the banks. Another factor that adds to the reluctance of the banks making investing in VCPE funds is the issue of provisioning. In the cases of investments in certain PE funds, provision has to be made for the entire investment amount right from the time of investment. Further, banks themselves prefer to invest/ advance funds to other sectors, as the capital adequacy requirements are much lower in these cases. For a bank, making an equity investment could be more from the perspective of developing a banking relationship in future. Given the opportunities in asset management, several banks (such as SBI, Canara Bank, ICICI Bank) also have created subsidiaries which function as GPs and raise VCPE funds from other LPs. In such instances, the banks' investment in the funds managed by them is their contribution to the fund pool as the GP. Outlook The overall goal of the banking industry is to provide direct credit rather than making equity investments. Participating in LPs carries the additional risk of liquidity. Further, as indicated by Preqin, with the uncertainty surrounding international financial regulations such as Basel III, banks are becoming increasingly conservative in allocating capital to the VCPE asset class. While RBI in India has recognized the significance of venture capital activities and the need for banks’ involvement in its financing (as seen in its various notifications and circulars from time to time), the high risk involved in such exposures has led the regulator to be stringent in its requirements. If the industry sources are to be believed, then the risk weights for investment in VCPE funds is going to further increase from the existing levels. Because of these factors, Indian Banks will continue to be cautious in the foreseeable future when making commitments to VCPE funds. • Notes 1 “Preqin Special Report: Banks as Investors in Private Equity” available at https://www.preqin.com/docs/reports/Preqin_Special_Report_Banks_as_Investors_in_Private_Equity.pdf 2 RBI - Master Circular on Lending to Priority Sector, RPCD. No. Plan. BC. 56 / 04.09.01/ 2000-2001 dated February 14, 2001 3 RBI - Master Circular on Exposure norms dated Aug 13, 2001 4 RBI- Press Release: 2005-2006/3 dated July 1, 2005 and RBI/2005-06/27- RPCD. No. Plan BC. 5 / 04.09.01/ 2005-06 dated July 1, 2005 5 RBI - “Risk Weight on Exposures to Commercial Real Estate and Venture Capital Funds raised”, RBI.No.2005-06/391- DBOD. BP.BC. 84 / 21.01.002/ 2005-06 dated May 25, 2006 6 RBI - “Prudential Guidelines - Bank’s Investment in Venture Capital Funds (VCPE funds)”, RBI /2006-2007/113- DBOD. No. BP. BC. 27/21.01.002/ 2006- 2007 dated August 23, 2006 7 RBI - “Banks’ exposure to capital markets - Rationalization of norms”, RBI/2006-2007/210 - DBOD. No. Dir. BC. 47/13.07.05/2006-2007 dated December 15, 2006 8 RBI - “Master Circular - Prudential Guidelines on Capital Adequacy and Market Discipline - Implementation of the New Capital Adequacy Framework”, RBI/2008-09/68 - DBOD.No.BP.BC. 11 /21.06.001/2008-09 dated July 1, 2008. 9 RBI - “Master Circular- Prudential Guidelines on Capital Adequacy and Market Discipline – New Capital Adequacy Framework (NCAF)”, RBI/2009-10/308 - DBOD.No.BP.BC. 73 /21.06.001/2009-10 dated February 8, 2010 10 RBI - “Master Circular - Para-banking activities”, RBI/2014-15/57 - DBOD. No.FSD.BC.01/24.01.001/2014-15 dated July 1, 2014 11 RBI - “Master Circular – Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks”, RBI/2014-15/75 - DBOD No BP.BC.20/21.04.141/2014-15 dated July 1, 2014 44
India Venture Capital and Private Equity Report 2014 By Invitation 4. The Blossoming of Start-up Ecosystem in India: Funding challenges and the role of academic incubators Ashok Jhunjhunwala, Tamaswati Ghosh, and Suma Prashant 4.1 Background The technology start-up ecosystem in India has matured immensely over the last five years. Occasional startups associated with academic institutes and universities have been known since the in 1980’s. Back then, the goal of such early efforts was enhancement of academia-industry interaction or translation of technology development efforts from academia into commercial products. Government R&D programs in defence, space, and atomic energy often supported these initiatives. In the 90’s, the entrepreneurial culture became more pronounced especially at premier academic institutions of the country such as the IIT’s though the process remained sporadic and without any structured support or direction. There was no policy to promote entrepreneurship and there were no official incubators. The pioneers amongst the faculty had converted their laboratories into some kind of incubators. As the debate on whether the educational institutes should pursue Saraswati (the Goddess of wisdom and learning) or Lakshmi (the Goddess of wealth and prosperity) was still raging, many such functioned in an informal manner and some continue to do so even now. It was only at the turn of the century, that the first cautious steps were taken towards encouraging the development of entrepreneurial culture as a possible goal for serious pursuit at academic institutions. The formal incubators started emerging over the next five years and by 2010, they were integral to many engineering and management institutes across the country. 4.2 Know your entrepreneur! Academic incubators are largely focused on first time entrepreneurs, even though at times, experienced entrepreneurs return after exiting their earlier start-ups to leverage the facilities offered in a university system. Thus most incubatees in the academic setting are just beginning to learn the ropes of entrepreneurship. There are two sets of people who leverage these incubators. One set are current students or recent graduates from either the incubator’s parent institution or nearby academic settings, who are taken in by the dream of an alternative career: entrepreneurship is now in the air, and many youngsters are of late attracted to this as a career choice. In some of the top institutes, the best students are either choosing a research career (going for higher studies) or are deciding to bet on start-ups (either setting up their company or taking a job in a start-up). Jobs in established companies are now not considered as exciting even though they provide safe and well-paying opportunities. The second set of people who are coming to these incubators are alumni (or sometimes friends of alumni), who after having a career of five to ten years in established companies are opting out and are ready to take the plunge. Even though they have not been entrepreneurs earlier, they are far more mature and have seen the industry. 4.3 …..And know your start-up! There are many kinds of start-ups and understanding them is important to see the differences in funding patterns and sources for them. Although there can be many ways in which we can differentiate start-ups, a © Indian Institute of Technology Madras 45
Page 2 and 3:
Past Reports
Page 4 and 5:
© Indian Institute of Technology M
Page 6 and 7:
India Venture Capital and Private E
Page 8 and 9: India Venture Capital and Private E
Page 20 and 21: Frequency Frequency Frequency Frequ
Page 30 and 31: Exhibit 1 Indian Insurance Companie
Page 32 and 33: In the life insurance segment, the
Page 42 and 43: Exhibit 2 Pension Funds and Univers
Page 44 and 45: PFRDA The Pension Fund Regulatory a
Page 56 and 57: RBI brought out detailed prudential
Page 66 and 67: Exhibit 4 Public markets as a sourc
Page 68 and 69: een substantial interest among non-
Page 78 and 79: Exhibit 5 Direct Investments from L
Page 92 and 93: Exhibit 6 Returns from VCPE investm
Page 94 and 95: however, accounted for only 17% of
show all

Past Reports

Create successful ePaper yourself

Delete template?

Save as template?