Barriers in the Current VC Industry

The legacy of publicly regulated institutional advances and a tightly controlled economy has been difficult for India to shrug off. Despite government initiatives to clear up regulatory impediments, India's bureaucratic business and "risk-averse financial systems" combine to create strong institutional barriers for funding innovation. Creative funding resources are also hindered by the corrupt reputation of the bureaucracy. Despite the committed reform and deregulation attempts of the Indian government, excessive regulations still continue to frustrate the development of VC in India.

Corporate laws remain inflexible in terms of risk sharing, control, and exit arrangements between financers and private firm management. And "even in 2001 the Indian rupee was non- convertible ," hampering VC inflows from offshore and requiring approvals from multiple agencies. ^[15] Three separate bodies continue to standardize the industry with their own regulations: SEBI, the Ministry of Finance, and the Central Board of Direct Taxes (CBDT) regulate domestic VC funds, while foreign firms have two additional regulatory controls: the Foreign Investment Promotion Board (FIPB) and the Reserve Bank of India (RBI). ^[16]

Jyoti Gupta, who is currently a professor of finance at the ESCP-EAP European Business School of Management in Paris, discusses India's historical problems of corruption and the potential for wealth creation through Indian networking.

Jyoti Gupta

Bribery is another name for political lobbying in developing countries

The concept of bribery in India is diminishing with weakening government control and increasing liberalization; thus the chances for bribery in this environment also lessen. But first, let's think of the term "bribery." In developed countries bribery is sanctified into the system of political lobbying; it is a transparent way in which people openly give money and politicians publicly take up causes because of this money.

This does not exist in developing countries, where it's considered illegal to give cash. In India, because the administration is so bureaucratic, you have to give money to make decisions, and this is corruption. The Indian government has had to accept that it has to change, and it is moving in that direction. One of the biggest reasons for this is the immense freedom of press that we have, where the press can get away even with calling the prime minister a fool. The Indian press took up the cause of exposing bribery by bringing out cases systematically. Now the politicians are terrified to do something illegal. Only then can the law follow.

Indian networking practices link innovation with VC investments

NRIs are also a successful force in the development of the Indian VC industry. There is a difference in the way Indians network from other ethnic groups. For example the VC industry in Silicon Valley is derived from the existing industry and surrounding prestigious institutes. In India we had the eminent educational facilities but the infrastructure wasn't conducive for the industry, and initial cash was not there. This cash came from the Indians abroad. This is one of the most distinguishing characteristics of Indian networking.

With two important elements in place ” NRIs equipped with international expertise on VC operations and talented Indians beginning to venture into the fields of entrepreneurship and innovation ” the special art of Indian networking has become a critical leveraging point for the development of India's VC industry. In a field where knowing the right people at the right time makes all the difference in terms of appropriate funding and support, the vast Indian network of entrepreneurs are a breeding ground for natural links between ideas and finance.