Reasons for the slow growth of VC firms in India
1. Lack of knowledge of venture capital in India
A new entrepreneur will be provided with risk capital to promote a new company with technical know-how and business knowledge. Venture capital firms in India should also offer management funding. Nonetheless, they can have financial support. They completely forget to provide other forms of assistance, such as managerial, technical, etc., to borrowing concerns.
2. Indian Companies Act (Section 370 and 372)
The act includes contributions between companies and borrowings between companies. These restrictions prohibit risk capital firms from investing in a range of new firms, which is a significant reason for India’s slow growth.
3. Exit policy of VC firms
The venture capital firms in India do not follow a clear exit strategy that is of significant importance to their slow growth. The value of the equity in which investment is made must be evaluated appropriately while it is free of the borrowing company.
4. No training for employees
Venture capital company workers require sufficient instruction in assisting investors. They must be able to evaluate the borrower’s net worth as well as determine how much financial support a company needs.
5. Foreign VC firms are restricted
There is no utter opportunity for foreign venture capital firms to invest with fintech companies in India. The Foreign Investment Promotion Board and even RBI have to seek approval. Investment in Indian companies is also minimal.
6. Valuation of equity lacks clarity
The equity interest of borrowing companies must be measured at both the initial and the middle level. The valuation of the shares can be dependent on either the PE ratio or the market rate. The interest of the Venture Capital Companies’ equity in India is here puzzling. Often the actual intrinsic value of the equity can not be expressed.
7. Lack of support from capital market
Unlisted shares can not quickly be listed unless a business earns a profit for three consecutive years. Therefore, the list of the stock market will be difficult. Both SEBI and the Securities Contract Regulation Act currently lay down conditions that are not favorable to companies operating in India’s venture capital.
8. No revival of sick companies
More sick companies, particularly among the smaller industries, are located in India. With proper financial, technical, and managerial support, you can be reanimated. There is no ability in India’s current venture capital firms to revive these sick businesses.
9. Unfavorable tax regulations for VC firms
The laws on income tax do not support VC firms. Double taxation is present:
- to tax risk capital on its profits;
- Even the individual investor who contributed venture capital funds.
The capital gains tax is also applicable to the risk capital business.
Though it began late in India, venture capital financing marked the country’s industrial progress. As a result, the unemployment crisis in India can also be alleviated as VC firms provide work from home jobs.