Venture
Capital
Accounting and Finance
Concepts
Introduction & Growth of Venture Capital in
India
Financing Pattern under Venture Capital
Legal Aspects and Guidelines for Venture
Capital
Leasing & Types of Leases
Evaluation of Leasing – Option Vs. Borrowing
Hire Purchase Vs. Leasing
Accounting and Finance
Venture Capital
It is a type of private equity investing that
involves investment in earlier-stage
businesses that require capital. In return, the
investor will receive an equity stake in the
business in the form of shares.
Accounting and Finance
Growth of Venture Capital in
India
Venture capital activity in India from January to November
2024 has surged to US surged to US$ 16.77 billion across 888
deals, reflecting a robust 14.1 per cent increase in value and a
21.8 per cent rise in deal count compared to the same period in
2023, according to figures gathered by the India Brand Equity
Foundation (IBEF).
Accounting and Finance
Growth of Venture Capital in
India
Source: Statista Market Insights
Accounting and Finance
Structure
• The market consists of three segments:
• The Seed Stage market refers to capital financing at the earliest phase of
a startup's development.
• The Early-Stage market refers to capital financing at the next stage after
seed stage.
• The Later Stage market refers to capital financing at the expansion stage
of businesses.
Financing Pattern under
Venture Capital
• Pre-seed/accelerator-stage capital
• Helps to develop an idea.
• Seed-stage capital
• Helps an entrepreneur to develop their idea into an early-stage
product.
• Early-stage capital
• Helps to set up initial operation and basic production.
• Expansion Stage
• Additional funding can be put towards developing new products,
growing into other markets, and maybe even purchasing competing
startups.
• Later-stage capital
• The venture capital provided after the business generates revenues but
before an initial public offering (IPO).
Accounting and Finance
Legal Aspects and Guidelines
• Venture Capital in India governs by the SEBI[8] Act, 1992 and SEBI
(Venture Capital Fund) Regulations, 1996. According to which, any
company or trust proposing to carry on activity of a Venture Capital
Fund[9] shall get a grant of certificate from SEBI[10].
• Overseas venture capital investments are subject to the Government of
India Guidelines for Overseas Venture Capital Investment in India dated
September 20, 1995.
• For tax exemptions purposes venture capital funds also need to comply
with the Income Tax Rules made under Section 10(23FA) of the Income
Tax Act 1961.
Accounting and Finance
Regulatory Framework
• Securities and Exchange Board of India (Alternative Investment Funds)
Regulations, 2012)
• Registration and regulatory obligations for AIFs
• Investment restrictions and compliance requirements
• Structure and governance of funds
• Disclosures to investors and SEBI
• Reserve Bank of India (RBI)
• Foreign Direct Investment (FDI) Guidelines: VC funds with foreign investors must adhere to FDI
regulations issued by the RBI. FDI is allowed in most sectors, but certain sectors have restrictions
(e.g., defense, retail).
• External Commercial Borrowing (ECB) Guidelines: If a VC fund raises money through loans or
external borrowings, the RBI guidelines on ECB will apply.
Accounting and Finance
Leasing
Accounting and Finance
Leasing
A contractual
arrangement calling for
the user (referred to as
the lessee) to pay the
owner (referred to as the
lessor) for the use of an
asset.
Accounting and Finance
Types of Leases
Type of Lease
Finance Lease
Operating Lease
Leveraged Lease
Meaning
A lease where you basically own
the asset.
Renting property for a specific
period.
Getting a loan to lease an asset.
Lease with the goal of
transferring ownership.
Selling property and then leasing
Sale and Leaseback
it back.
Paying for the entire leased
Complete & Non-Pay-Out
property.
Conveyance Lease
Accounting and Finance
Types of Leases
Type of Lease
Specialized
Service
Net & Non-Net
Lease
Sales Aid Lease
Cross Border
Lease
Tax Oriented
Lease
Import Lease
International
Lease
Accounting and Finance
Meaning
Lease with customized personal attention.
Paying/not paying for maintenance costs.
A lease linked to a marketing alliance.
Leasing across national borders.
A lease that counts as a tax benefit.
Leasing imported equipment.
Leasing involving participants from
different countries.
Evaluation of Leasing
• Present Value Method
• The present value of lease payments is contrasted to the present value of
the costs associated with acquiring an asset through outright purchase via
a loan.
• Cost of Capital Method
• The rate of cost of capital is determined for installment payments and
subsequently compared to the cost of capital of other available sources
of finance, including retained earnings, fresh equity capital issues,
debentures, and term loans.
• Bower-Herringer-Williamson Method
• The financial and tax aspects of lease financing are considered
separately.
Accounting and Finance
Option Vs. Borrowing
• Option: An "option" is a financial instrument
that gives you the right, but not the
obligation, to buy or sell an underlying asset
(like a stock) at a predetermined price within
a certain time frame. There are two main types:
• Call Option: Right to buy the asset.
• Put Option: Right to sell the asset.
• Borrowing
• Borrowing refers to obtaining funds or assets from a
lender with the agreement to repay the amount with
interest over a specified period.
• It can take many forms, such as personal loans,
mortgages, margin loans, or corporate bonds.
Accounting and Finance
Option Vs. Borrowing
Feature
Option
Borrowing
Right (no
Obligation to repay borrowed
Nature
obligation) to
funds
buy/sell an asset
Limited to the
Higher risk (failure to repay
Risk
premium paid
leads to penalties)
Premium to acquire
Cost
Interest payments on the loan
the option
Yes, with less
Yes, but with increased
Leverage
initial capital
financial risk
Has an expiration
Usually doesn't have an
Expiration
date
expiration date
You can choose
Flexibilit
You are obligated to repay
whether or not to
y
the full loan
exercise the option
Accounting and FinanceHedging,
Hire Purchase Vs. Leasing
Feature
Ownership
Hire Purchase (HP)
Leasing
Ownership is transferred after final Ownership remains with the lessor
payment
throughout the term
Initial Payment Deposit is required at the start
Regular fixed payments, higher than
leasing
Full ownership after payments are
End of Agreement
complete
Monthly Payments
Deposit may or may not be required;
often lower initial cost
Regular payments, typically lower
than HP
Asset is returned to the lessor or
purchased in some cases
Short- to medium-term (typically 1–5
years)
Generally, no interest on the lease
itself, but fees may apply
Duration
Long-term (usually a few years)
Interest
Interest is charged on the full
price of the asset
Flexibility
Less flexible; the buyer is
More flexible; options to return or
committed to completing the payments buy the asset at the end
Maintenance
Buyer may be responsible for
maintenance
Lessor may cover maintenance (in
some cases)
Final Payment
Buyer owns the asset once paid off
No ownership unless an option to
purchase is available
Accounting and Finance