History of Venture Capital in India dates back to early 70’s when Govt of India appointed a committee led 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 institutionalise Venture Capital Industry and announced 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.

At the same time World Bank organized a VC awareness seminar and selected 6 institutions to start VC investment in India. This included TDICICI (ICICI), GVFL, Canbank Venture Capital Fund, APIDC, RCTC and ILF (now known as Pathfinder). The other significant organisations in private sector were ANZ Grindlays 3i Investment Services Limited, IFB, Jardine Electra.

After the reforms were commenced in 1991, CCI guidelines were abolished and VC Industry became unregulated. In 1995, Govt of India permitted Foreign Finance companies to make investments in India and many foreign VC private equity firms entered India.

In 1996, after the lapse of around 8 years, government again announced guidelines to regulate the VC industry. These guidelines did not create a homogeneous level playing field for all the VC investors. This impeded growth of domestic VC industry. Lack of incentives also made Indian Corporate and wealthy individuals shy of VC funds. With the result VC scene in India started getting dominated by foreign equity fund.

Venture Capital for IT Sector

In 1997, IT boom in India made VC industry more significant. Due to symbiotic relationship between VC and IT industry, VC got more prominence as a major source of funding for the rapidly growing IT industry. Indian VC’s which were so far investing in all the sectors changed their focus to IT and telecom industry. The effect of venture capital on the IT Sector was that it accelerated the rate of innovation and increased the length of technology cycles causing overall economic growth.

A noteworthy point of the VC industry is that of late, its growth has been a function of the growth in the IT industry. This has been the trend in the US and also in the emerging global scenario. India is no exception. VC’s has funded many of the emerging IT Companies. During 2007 VC investments scaled $900 million (Rs3, 546 crore), according to industry reports. VCs invested more than $777 million in 57 deals in the first nine months of 2007 which is about five times the $158 million invested in the same period in 2006. ( source Reuters) .