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Venture capital investment has become one of the most rapidly growing investment modes in India. The contributing factors to this growth are the recent economic and legal changes. The Indian government has provided operational and functional autonomy to institutions while at the same time closely monitoring them. Though there are several rules and regulations that lay down various procedures for the investment, the law is still investment-friendly and offers various benefits. Some tax reforms have also been introduced that are both sound and practical for both foreign and domestic investors. This paper introduces the reader to not only the positive aspect of the system but also to the weaknesses it still has to overcome. This paper also suggests that a venture capital investment manual for domestic and foreign venture capitalists may make the investment market grow faster and make the investment decisions easier.
I. Introduction
Venture capital is a term used for capital that is invested by an outsider in a small or struggling business venture. Usually the venture is a high risk business, but, at the same time, the expected returns are high as well. In a typical venture capital investment, a venture capitalist would invest in a business over a period of three to five years and exit once it has earned its return. But the growth and smooth functioning of the venture capital market depends on the total growth and smooth functioning of the country's legal system and economy.1 Therefore, to understand the venture capital market development in India, or any country for that matter, it is necessary to take a look at the legal system and the economy first.
This paper is divided in six parts. The first part describes the background of the Indian legal system and its economy, including the economic reforms introduced since the early 1990s that contributed to a rapid growth. Although many changes have been introduced to improve the overall economic environment, it is important to highlight the fact that there are still many areas that demand attention. The second part of the paper explores the major modes of investment in India, including venture capital. The third part discusses the development of venture capital investment, in particular, and the market conditions in which venture...