Gold rush for IT venture financing

The Finance Ministry and the SEBIre also moving rapidly in facilitating the entry of venture funds by planning to amend the guidelines and easing investment restrictions. Venture funds invest in new projects and help the promoters in building such projects. They exit from the venture when the project takes off and start making profits.

The market regulator SEBI last week cleared Rs 80 crore Infinity Venture Fund promoted by a group of NRIs from Silicon Valley and their counterparts in India. This is only the beginning. SEBI expects a hostentrepreneurs, technocrats and business heads to float similar funds in the next a few months. The fact that Prime Minister AB Vajpayee himself launched SIDBI8217;s Rs 100 crore venture fund for the infotech sector has sent a message across the spectrum that the government is keen to accelerate the formation of start-up ventures using venture capital financing.

One can expect the likes of KB Chandrashekhars, Sabeer Bhatias and Kanwal Rekhis to set the Indian infotech segment on fire a la Silicon Valley. Kanwal Rekhi, co-founder of US success story Exodus Communications has already announced plans to finance at least four ventures in India.

Simultaneously, global infotech majors like Intel, Microsoft and so on are investing in Indian infotech companies in a big way. Stock markets are also agog with rumours of American On Line AOL acquiring a stake in an Indian internet company listed abroad.

Mutual funds are also not missing the action. Unit Trust of India UTI, which has investible assets of over Rs63,000 crore, has already announced the formation of venture fund for infotech sector. Four mutual funds including Sun F amp; C and Kothari Pioneer have floated schemes for investing only in infotech stocks.

8220;There is a boom in the infotech segment. We want to capitalise this so that we can maximise investor returns,8221; said an UTI official. SEBI has also pitched in with the regulator speeding up the process of framing regulations for venture funds. A SEBI panel headed by Silicon Valley fame K B Chandrashekhar has proposed a host concessions and proposals to boost the fund flow through venture capital route.

According to SEBI sources, the Finance Ministry is also in favour of speeding up the process so that India can catch the bus at least in this segment. If all goes well, venture capital funds will get single window clearance on the lines of foreign institutional investors FIIs and several restrictions on investment in India and fund use will be removed. The Sebi panel has proposed laws should be amendedso that foreign venture capital funds can be registered with the Sebi without any formalities like going through FIPB or the RBI.

8220;If the SEBI and the government implements the proposals of Chandrashekhar committee, venture capital financing will get tremendous boost in the country,8221; said a UTI official. The undue interest in the infotech segment is not without reasons. While five years ago, only two per cent of the total turnover used to come from the infotech sector but now 50-60 per cent of the turnover is accounted by infotech stocks. Ditto is the case with market capitalisation. As much as 20 per cent of the total market cap is from infotech companies. On top of this, the number of companies entering the infotech sector is growing.

Now we get only infotech projects for appraisals. This was not case earlier. Every Tom, Dick and Harry is now promoting infotech projects. The question will be: how many of them will survive? There is already a talk that one out of ten internet companies will eventuallyclose shop, said an IDBI official. What has fascinated the investors especially foreign investors is the fantastic valuations of Indian infotech stocks. Infosys stock with a face value of Rs 10 is almost Rs 10,000 on the Indian stock exchanges. However, Infosys stock is quoting at a premium of over 130 per cent on the overseas exchanges as shortage of floating stocks has driven up prices.

Simultaneously, the regulator is also planning to relax IPO initial public offerings guidelines of infotech companies. SEBI is set to relax the three-year profitability track-record for launching IPOs. 8220;This measure together with the entry of venture funds will ensure adequate fund flow to the sector. The government and the SEBI should ensure that only genuine companies raise public funds,8221; fund managers said. After the government allowed the entry of FIIs in Indian stock markets in 1992, as much as 10 billion entered the country. If the government takes suitable measures in the venture capital financing, asimilar amount is likely to come to India.