International – VC Dollars Double For India’s Tech Deals: Recent Government Deregulation of Financial Sector Fuels Venture Activ –

NEW DELHI, India – High-tech companies in India are cashing in, relatively speaking, that is.

Domestic and overseas venture capitalists invested $320 million in India-based tech companies last year. And while that’s just a drop in the bucket compared to the $19.9 billion VCs invested in American tech companies in 1999, it is a more than two-fold increase from the $150 million Indian tech enterprises garnered in 1998, according to India’s National Association of Software and Services Companies.

For years, the venture industry has thought of India as a place to grab engineers and programmers to help run booming technology start-ups in the United States. But as President Bill Clinton said during his recent visit to the country, Indian computer engineers and veterans of Silicon Valley are returning home – and venture dollars are following them closely behind.

The Indian government first recognized the need for a venture capital market to fuel technological innovation in 1988, the year two venture entities, Technical Development and Information Corp. of India and Gujarat Venture Finance Ltd., were created. The funds drew capital from financial institutions, foreign institutional investors, pension funds and wealthy individuals. Their impact, however, was minimal, and the venture industry remained stale for a number of years.

But the venture market in India visibly began to evolve after the deregulation of the financial sector in 1991, which opened the markets and permitted foreign investors to make any investments that would benefit the Indian economy. Prior to the deregulation, the government restricted overseas investments, accepting capital only on a case-by-case basis.

In 1996, the government regulated venture funding through the Securities and Exchange Board of India, which developed guidelines for VC funds, mitigating the bureaucracy associated with venture investing in the country. The structure and formality of the process encouraged foreign investors to enter the market.

Most recently, the Indian government, in its budget for this year revamped national rules to encourage venture capital investing by overseas firms. The country’s Finance Ministry exempted venture capital firms from getting approval from tax authorities, requiring a firm to pay a one time tax of 20% on its distributed income and making investor’s incomes tax-free.

The government also raised the Foreign Institutional Investors holding to 40%, up from the existing 30%, in an effort to encourage foreign investments. The budget also reflected a reduction in custom duty on imported equipment and hardware.

The Doors Open to Outsiders

Unlike the U.S., where early-stage venture financing dominates the landscape, most domestic venture funds in India make mezzanine-stage investments. In most other respects, however, the markets do operate similarly, where funds vary based on geographic preference, degree of involvement and source of capital. U.S.-based venture firms that invest in India include Draper International, Chase Capital Partners and Warburg Pincus Emerging Markets Fund.

The buzz has spread to other parts of the world as well. Kerry Packer, an Australian team media mogul, in late March launched KVP Ventures, a $250 million fund that will invest throughout India. The vehicle will back information technology, software, e-commerce, telecommunications, media, entertainment and biology companies.

Parker created the fund along with two local partners, Vinay Maloo, chairman of Himachal Futuristic Communications Ltd., and Ketan Parekh, a stockbroker. As is typical of most local partners, Maloo and Parekh, can offer help in securing deal flow and with understanding local culture and business practives.