XVI   The  Annexures

 

Annexures-1

 

Government of India
Ministry of Chemicals and Fertilizers
Department of Chemicals and Petrochemicals

No.5(1)/98-PI.I                                                                                                     New Delhi, the 18th/31st March, 1999

 

MEMORANDUM

It has been decided to constitute a Pharmaceutical Research & Development Committee with a view to recommend measures to strengthen the research and development capability of the pharmaceutical industry in the country and to identify the support required by Indian pharmaceutical companies to undertaken domestic R&D. Accordingly, the following Committee is constituted.

  1. The terms of reference of the Committee are as follows:-

  • To appraise the current status of R&D in the Indian pharmaceutical sector and to suggest measures to boost it in the context of drug price control regime and changes in laws on Intellectual Property Rights.

  • To suggest new and innovative fiscal and non-fiscal measures for boosting R&D in pharmaceutical sector, and

  • To suggest mechanisms for establishing organic linkages between private sector and government organisations/ laboratories/ universities with a view to synchronising and synergising national R&D efforts in pharmaceuticals.

  1. The Committee will liase closely with the Drug Price Control Review Committee.

  2. The Committee will widely consult different interest groups, industry associations, consumers and other organisations / bodies.

  3. The Committee shall submit its report within three months**.

 

 

Sd/-

(S.K. SOOD)

Joint Secretary to the Government of India

*Shri B.K. Raijada was nominated after the death of Dr. Parvinder Signh on 03 July, 1999.

**The term was subsequently extended upto 15th November, 1999.

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Annexure – 2

 The committee interacted with the following Stakeholders

Dr.Manju Sharma  

Secretary

Deptt. Of Biotechnology, New Delhi

Prof. V.S. Ramamurthy   

Secretary

D. S.T., New Delhi

Dr. M.M. Sharma      

Professor

UDCT, Mumbai

Shri. Ashwini Kumar   

DCGI MOH FW

New Delhi

Dr. C.L. Kaul      

Director

NIPER, Chandigarh

Dr. S.N. Kaul,               

Adviser

Deptt. Economic Affairs, New Delhi

Prof. B.N. Dhawan                  

Ex-Director

C. D. R. I., Lucknow

Dr. K.M.Parikh       

Managing Director

M/s Zandu Pharmaceutical Ltd.,Mumbai

Dr. H. F. Khorakiwala   

CMD

M/s Wockhardt Ltd., Mumbai

Dr. Dinesh S.Patel                  

Vice-Chairman

Themis Chemicals Ltd., Mumbai

Prof. G. Padmanaban          

Honorary Professor

Indian Institute of Science, Bangalore

Prof. D. Balasubramanian   

Director of Research Eye Research Foundation, Hyderabad

Dr. D.R. Rao        

Managing Director

Neuland Labs Ltd.,  Hyderabad

Prof V.M. Kulkarni     

Professor

UDCT, Mumbai

Shri Nilesh Gupta    

Director

Lupin Labs Ltd., Mumbai

Dr. V.P. Kamboj       

Emeritus Scientist

C.D.R.I., Lucknow

Dr. Gopakumar G. Nair    

President

I.D.M.A., Mumbai

Prof. S.S. Handa                

Director

Regional Research Lab, Jammu

V.C. Nannapaneni  

C M D.

NATCO Pharma Ltd., Hyderabad

Dr. Sukh Dev                     

Visiting Professor

Delhi University,Delhi

Dr.M.D. Nair       

Consultant

Chennai.

Dr. Nitya Nand              

Ex-Director

C.D.R.I., Lucknow

Dr. D.B. Gupta                         

CMD

Lupin Labs. Mumbai

Shri R.D. Joshi          

Secretary-General

O.P.P.I., Mumbai

Prof. Goverdhan Mehta    

Director

Indian Institute of Science,  Bangalore

Prof. R. R. Chaudhury    

Emeritus Scientist

N. I..Immunology, New Delhi

Dr. Anand Puranik       

C M.D

Shree Dhootapapeshwar Ltd, Mumbai

Dr. S.A. Dahanukar                

Prof.&Head

Seth GS Medical College, Mumbai

Prof.. K Jayaraman       

Dean of Technology

Anna University, Chennai

Shri Rajiv I. Modi         

President

Cadila Pharmaceuticals, Mumabi

Dr. Krishna Ella         

MD

Bharat Biotech Ltd., Hyderabad

Shri N.R. Subba Ram     

Consultant

Chennai

Dr. (Mrs).V. Muthuswamy   

DDG (BMS)

ICMR, New Delhi

Ms.Rama Naidu    

Director

CII, New Delhi

Dr. S. K. Sharma     

Advisor

Deptt. Of ISM, New Delhi

Maj.Gen.V.K. Sareen    

CMD

IDPL, Rishikesh

Shri Manubhai Shah    

Managing Trustee

Consumer Research Society, Ahemadabad

Dr. S.K. Basu          

Director

N. I. Immunology, New Delhi

Dr. A. N. Bhaduri           

Emeritus Scientist

I.I.C.B., Calcutta

Dr. P.M. Bhargava    

Consultant

Anveshna Services, Hyderabad

Dr. P. Das Gupta        

Ex DCGI

MOHFW, New Delhi

Dr. Asis Datta       

Vice Chancellor

JNU, New Delhi

Dr. S.P. Jurani    

Vice President

Themis Chemicals Ltd., Mumbai

Dr. (Mrs). Indira Nath

Emeritus Scientist

AIIMS, New Delhi

Dr. Pankaj Patel    

MD

Cadila Pharmaceuticals, Mumbai

Dr. M R Samuel    

Sr. Vice President

Cadila Health Care, Mumabi

Shri A. Srinivasa Rao

Exc.Vice President

NATCO Pharma, Hyderabad

Prof. P.N. Tandon    

Emeritus Professor

AIIMS, New Delhi

Dr. A.B. Vaidya       

Research Director

SPARC, Mumbai

Dr.S. Varadarajan    

Ex- President

INSA, New Delhi

Dr. J.M. Khanna      

Sr. Vice President

Ranbaxy Laboratories Ltd., New Delhi

Smt. Shobha Koshi

Director

MOHFW, New Delhi

Prof. S. Ranganathan  

Scientist Emeritus

I. I. C. T., Hyderabad

Dr. Venketshwarulu  

President

Dr. Reddy’ Labs. ,Hyderabad

Shri Y. K. Hameed   

Chairman

Cipla Ltd., Mumbai

Dr. A.V. Rama Rao  

M.D

AVRA, Laboratories, Hyderabad

Dr. Amit Sen Gupta  

Social Scientist

Delhi Science Forum, New Delhi

Shri S.Sriniwasan     

Managing Trustee

LOCOST, Baroda

Dr. Shruti Khanna    

Director

LOCOST, Baroda

Dr. Vishwas Rane    

Consultant

Arogya Dakshata Mandal, Pune

Shri Raj Bahadur    

President

Consumer Guidance Society, Mumbai

Shri Ram Khanna    

President

Consumer Council, New Delhi

Dr. S.C. Pakrashi  

Emeritus Scientist

University of Calcutta, Calcutta

Brig. SVS Choudhary  

Chairman

Int. Development Centre, New Delhi

Shri Sunil Dadhe  

Deputy Secretary

Dept. of C & P.C., New Delhi

Dr. O.P. Aggarwal   

Sr. Scientist

CSIR., New Delhi

Dr D.Y. Rao         

Scientist

CSIR., New Delhi

Shri K.M. Kaul        

Project Officer

Dept. of C & P.C., New Delhi

Mr Homi Khusrokan       

Prseident

OPPI .,Mumbai

Dr H.R.Bhojwani   

Advisor

CSIR, New Delhi

Dr. R.K.Agarwal    

Chairman

Natural Remedies Pvt Ltd., Bangalore

Dr. G.C.Burman     

Chairman & M.D.

Dabur India Ltd., Sahibabad

Dr Dilip Chenoy  

Sr. Director

CII, New Delhi

Shre Omkar Goswami    

Advisor

CII, New Delhi

Dr M.K.Chouhan   

C.M.D.

M.I. and Marketing Services, Mumabi

Dr Raganathan Darshan  

Scientist

IICT, Hyderabad

Dr Tarun Das               

Secretary

General CII, New Delhi

Dr Chaitanya Dutta       

Director

Torrent Pharmaceuticals, Gandhi Nagar

Dr. P. Ganguly               

Director

Hindustan Lever Ltd, Mumbai

Dr Lalita                         

Joint M.D

COO ICICI Ltd ,Mumbai

Dr N.H. Israni                 

President

IDMA, Mumbai

Dr Krishana Ella             

CMD

Bharat Biotech ,Hyderabad

Shre B.K.Keayla            

Secy -General

N W Group on Patent Laws, New Delhi

Shri N.N.Khanna            

Special Secretary

Ministry of Commerce, New Delhi

Professor R.Kumar         

 

Dept of Chemical Eng. Indian Institute of Science Bangalore

Dr Bansi Lal                   

President

Quest Insitute of Life Sciences,Mumbai

Dr. K.K.Maheshwari       

Technical Director

USV Ltd., Mumbai

Dr N.N. Mehrotra            

Scientist

CDRI, Lucknow

Dr. T.S. Murli                 

Senior Manager

Arya Vaidya Sala, Kotlakal

Dr. P.K. Varier               

Chief Physican & MD.

Arya Vaidya Sala, Kotlakal

Dr K.M.Parekh               

M.D.

Zandu Pharamceutical Ltd., Dept of Chemical Eng. Indian Institute of Science Mumbai

Dr L.V.Prasad                

President

Eye Research Institute, Hyderabad

Prof. S.Ramasesham     

Editor

Current Science Raman Research Institute, Bangalore

Dr Varaprasad Reddy    

M.D.

Shanta Biotechnics Pvt Ltd,Hyderabad

Dr N.N.Rege                   

Associate Professor

Seth G.S. Medical College, Mumbai

Prof. S.D. Seth               

Ex Professor

ICMR. New Delhi

Brig. SVS Chowdhury    

(Retd) Chairman

IDC. New Delhi

Dr. N.H. Israni                

President

IDMA. Mumabi

Dr. (Mrs.) K. Jayaraman

Director

CBT Anna University of Technology, Chennai

Dr. V.P Kamboj              

Emeritus Scientist

CDRI, Lucknow

Dr. MV Kumar                

President

TTK Pharma, Chennai

Dr. K.K.G Menon            

Consultant

Palmcrest, Mumbai

Dr. Gopakumar G. Nair  

President  

IDMA, Mumbai

Dr, MD.D Nair

Consultant

Sagarika, Chennai

Shri S.B.V. Nannapaneni

CMD

Hyderabad

Dr. Vaidya Balendu Prakash

Chief Physician

Dehradoon

 

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Annexure-3

 

No.12025/13/99-PI-II
Government of India
Ministry of Chemicals and Fertilizers
Department of Chemicals & Petrochemicals
Pharmaceutical Research and Development Committee

Shashtri Bhavan, New Delhi
Dated the May 14, 1999

 

Sub: Pharmaceutical Research & Development Committee.

In the first meeting of the Pharmaceutical Research and Development Committee held on April 26, 1999 under the Chairmanship of Dr. R.A. Mashelkar, Director General, CSIR. It was decided to form two Sub-Groups relating to IPR related issues and identification of areas of R&D in the country. Accordingly, the following two Sub-Groups are hereby constituted, with the approval of Chairman of the Committee.

  1. Sub-GROUP ON IPR

1. Shri Ashok Chawlla, JS(P)                     

-

Chairman
2. Shri B.K. Raizada, Sr. Vice Presient
    M/s Ranbaxy Ltd.

-

Member
3. Shri N.R. Subba Ram, Head, IPMD
    Chennai

-

Member
4. Shri Sunil Dadhe, DS(PI)                       

-

Convenor

 

  1. Sub-GROUP on Identification of areas of R&D in pharma sector

1. Dr. C.M. Gupta, Director, CDRI         

-

Chairman
2. Shri Venkateshwarulu, Director      
    M/s Reddy's Labs.

-

Member
3. Dr. J.M. Khanna, Sr. Vice President     M/s Ranbaxy Ltd.

-

Member
4. Shri K.M. Kaul, PO(PI)                       

-

Member
5. Dr. O.P. Agarwal                   
Joint Adviser, CSIR

-

Convenor

 

Both the Sub-Groups are requested to submit draft papers on the respective subjects by 31st May, 1999 and make a presentation of the same in the meeting of the Pharmaceutical R&D Committee scheduled to be held on June 3, 1999.

 

SD/-
(S.M. JHARWAL)
OSD

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Annexure-4

 Drug Regulatory Framework - need for stengthening of Central Drug Regulatory Agency

 It is the basic responsibility of the Government to ensure that drugs to be used by the public meet the established standards of quality, safety, bioavailability and efficacy. 

 In India the import, manufacture, sale and distribution of drugs and cosmetics in India is regulated under the Drugs and Cosmetics Act 1940, and Rules 1945 made thereunder, (hereinafter referred to as the Act and the Rules) respectively.  Standards of identity, purity, freedom from toxicity and strength in respect of every medicine and related products used for diagnosis, prophylaxis and treatment of diseases in human beings or animals have to be specified. Under the Act, distinct statutory functions and responsibilities have been assigned to Central and State Govts. The Central Drug Standards Control Organisation (CDSCO) Dte. General of Health Services, Ministry of Health & FW is entrusted with the enforcement of regulatory responsibility at the Govt. of India level. Some of the important activities of the CDSCO includes direct interface with R&D activities in pharmasector at National and International level and are discussed below from the point of view of providing an efficient regulatory framework. The fast-changing scenario in drug-related fields requires the CDSCO to become a vibrant and dynamic organisation.

 Quality control and Good Manufacture Practices (GMPs)

 The pharmaceutical industry in India has made remarkable progress over the years.  India is manufacturing most of its requirements of drugs and is also in a position to export a significant quantity of medicines of internationally acceptable quality to many countries including those of the developed world. The quality of drugs has to be closely monitored so that drugs of doubtful quality are not manufactured.

 The Rules provide in Schedule ‘M’ the Good Manufacturing Practices (GMPs) which a manufacturer is obliged to follow.  A drug is of acceptable quality under the Act not only if it meets the finished product specifications but also more importantly if it is manufactured in a plant complying with GMPs. The responsibility for enforcement of GMPs in respect of most drugs rests with the state drug control authorities but the level of enforcement and competence of auditing personnel does not appear to be uniform among states. In view of the serious problems encountered with certain categories of drugs like blood and blood products, large volume parenterals (LVPs), vaccines, etc, joint inspections are required to be carried out under Rule 68A of the Rules  by inspectors of the CDSCO and the concerned State Government before a licence for the manufacture of the notified drugs can be granted or renewed by the Central Licence Approving Authority (CLAA) appointed by the Central Government under the Act.  This list is expected to be enlarged as other specialised items like medical devices including transfusion sets, sterile syringes, etc. are notified in this category. Even for this remedy the infrastructural support has to keep pace with the work demand.

 Though the Drugs Controllers of the states are empowered to licence the manufacture and sale of drugs in their respective states under the Act, the DCG(I) in order to ensure uniform implementation of Rules, is enjoined with the responsibility of coordinating their activities and decisions under the Drugs and Cosmetics Act through the Drugs Consultative Committee (DCC).  In addition, the Drugs Technical Advisory Board (DTAB), a statutory body under the Act, is required to advise the Central Govt. and State Govt. on technical matter arising out of the administration of the Act.

 For a manufacturer intending to export drugs, a GMP certificate under the WHO Certification Scheme on the quality of pharmaceutical products moving in international commerce is the generaly accepted. The WHO Certification Scheme is a mechanism by which the importing country is in a position to ascertain whether it has been manufactured in accordance with internationally accepted GMPs. These certificates are issued after joint inspections by teams from the Central and State Governments. Many importing countries, however, lay down their own stringent procedures of inspection and approval of the plant, facilities, manpower, procedures, etc. before a drug manufactured by the applicant is allowed to be imported.  We may consider to introduce similar procedures in respect of import of drugs into India to safeguard the health of the citizens and to have level playing.

 With the growth of the pharmaceutical industry, there has been considerable impetus to research and development activity on drugs.  A number of medicines are now exported.  This requires proper regulation so that safety, efficacy and quality issues are attended to in a globally accepted manner.  This has become all the more important with the coming into existence of the International Conference on Harmonization of Technical Requirements of Pharmaceuticals for Health Use, commonly known as the International Conference on Harmonization (ICH), which promotes scientific and technical aspects of registration of pharmaceutical products.

 Registration of drugs

 Most countries of the world, including developing ones, have a well-organised system of registration of  drugs permitted to be imported or manufactured.  Thus, master files of products are submitted for evaluation by the regulatory agencies.  It is only after the furnished data has been found adequate that the product is registered in the country.  No such centralised system exists in India. There is need for checking this deficiency by introduction of the registration procedures which will also help in elimination of irrational/sub therapeutic products. Adequate  machinery has to be created in the CDSCO for the purpose.

 Quality control and registration of herbal drugs:

 A number of countries including Germany, France, Canada, USA, China, etc. are registering standardised plant extracts of proven clinical efficacy and safety obtained from natural sources as herbal drugs or dietary supplements.  Inspite of the fact that India has a vast resource of drugs of natural origin, we are unable to exploit the vast world market because we have an unsatisfactory system of their quality control and registration.  On account of the importance of herbal drugs and TSMs in India, it may be necessary to create a separate division in CDSCO to regulate the quality of such drugs, and to provide proper focus on all related aspects. A system of registration of TSMs with acceptable standards of quality control and GMP’s need to be put in position.

 Approval for new drugs

 A new drug is defined in Rule 122 of the Rules as :
 (a)   a new substance of chemical, biological or biotechnological origin in bulk or as a prepared dosage form,
(b)   a drug already approved by the licensing authority which is now proposed to be marketed with modified or new claims,
(c)   a fixed-dose combination (FDC) of two or more drugs, individually approved earlier for certain claims, which are proposed to be combined in a fixed ratio,
(d)   all vaccines.
 
As the range of products which are classified as new drugs is wide and practically all pervading, we need expertise in specific areas of specialisation to evaluate the proposals is necessary.

 Schedule ‘Y’ to the Rules specifies the requirements and guidelines on clinical trials for import and manufacture of new drugs.  It is a set of comprehensive procedures the primary objective of which is to safeguard the well-being of patients. Thus there is need for a proper regulatory and marketing environment which encourages investment on research and development towards discovery of innovative medicines and promotes their expeditious introduction. The present set-up of CDSCO has not kept pace with the increasing demands of multi disciplinary drug evaluation needs. Applications submitted to the DCG(I) for permission for clinical trials in respect of new drug applications (NDA) and abbreviated new drug applications (ANDA) are often referred to outside agencies like the Indian Council of Medical Research (ICMR) and the Department of Biotechnology, Government of India (DBT) for review.  This arrangement often leaves very little control with regard to the time runs.  In order that the applicant is enabled to complete the investigations in the shortest possible time, it is imperative that adequate infrastructure for fast track clearances is created in the CDSCO.  The DCG(I) should have under his direct supervision a number of divisions/departments with officers and support staff adequate and competent for the job.  Each division/department may avail of the expertise drawn from various organisations but the responsibility and accountability for the decisions and their timeliness must rest on the shoulders of the DCG(I) and/or the divisional or departmental heads. It has to be clearly understood that authority and responsibility must go hand in hand.  This will be possible only if the right systems, expertise and infrastructure are created.

 The process of evaluation and review of applications of new drugs needs close collaboration with many organisations which may include the following:

 ¨      Universities, hospitals and health care experts:  For evaluating clinical trial data and other relevant information.

¨    Industry and industrial associations:  For assistance in evaluation of data of new drugs.

¨    Professional bodies:  For clarifications on relevant professional issues affecting the quality of drugs.

¨    Central and state government agencies:  For obtaining views of these agencies on matters relating to introduction of a new drug.

¨    Consumers and consumer organisations:  For inputs from the consumer angle.

¨   Foreign governments and international organisations:  This may include the US FDA, WHO, etc. with a view to harmonising the requirements with the international standards of quality of drugs.

 Thus there should be chemists/pharmaceutical technologists/chemical engineers to review areas connected with manufacture, in-process control, packaging, stability, purity, and similar parameters of the product.  Biotechnology-based and genetically-engineered drugs are getting introduced with greater frequency.  Many of these are proteinous molecules and need to be delivered by invasive/non-invasive routes requiring non-conventional delivery systems.  We, therefore, need to associate experts in these areas in the evaluation process.  Pharmacologists/toxicologists should be there to evaluate the short term and long terms effects, including teratogenic and carcinogenic effects, in laboratory animals.  To evaluate the therapeutic effects and adverse drug reactions of a new drug, physicians must be associated in the review process.  There should also be adequate number of competent regulatory experts to ensure that not only the requirements of the Act are taken care of effectively but also to guard against the possibility of an over-zealous approach and overshooting the mark.  Many drugs have serious bioavailability problems.  Thus there should be bio-pharmaceutical scientists available to evaluate data on the rate and extent to which the active medicament in the preparation is actually available to the body as well as on the distribution, metabolism and excretion of the drug molecule.  As the applications submitted are expected to contain considerable data statistically analysed by the applicants, statisticians capable of evaluating the design of statistical tests performed and the validity of statistical analyses would also be necessary.  Association of microbiologists will also be necessary for evaluation of information in case of applications for anti-microbial drugs.  Similarly, persons with specialised knowledge in specific areas may have to be brought in for evaluation of the data presented by the applicant.  For instance, veterinary vaccines and other veterinary products may have to be evaluated by veterinarians; blood and blood products would need help from blood transfusion experts and haematologists; radiopharmaceuticals will need expert evaluation by nuclear scientists. In this age of specialisations and super-specialisations, there will always be need for taking help from experts in a particular field if we wish to achieve excellence.

 The clinical trial centre and Bioequivalence laboratories also need to be audited from time to time.

 India has accepted the responsibilities under the WTO regime.  With the Government of India approving the EMR route for implementing provisions of the new patent regime, applications for marketing approval will start being received.  CDSCO must get ready to meet the situation well in time by creating adequate infrastructure for the critical role it will have to play as a regulatory authority for development of the pharmaceutical sector.

 Pharmacovigilence activities which includes. Post marketing suveillence, Adverse Drug Reaction Monitoring etc. is also a critical function of Drug Regulatory Agency. For this, a participative system involving Medical Community, Pharmacists and the Industry needs to be developed. This area appear to have remain neglected.

 

Provision of charging fees from applicants for drug evaluation activities also needs to be introduced. This ammount can be utilised to meet the expenses incurred in utilising the services of external experts.

 Continuing education and training

 We need to review the continuing education programmes so that all categories of staff from the Grade A officers down to the technical assistants get opportunities to upgrade their knowledge by suitable in-service training courses.  This is particularly important because pharmaceutical sciences and technology are amongst the areas of fastest growth and development. Benefits from investment  in this activity will  be intangible in  the initial stages but  the improvement in the quality of work will ultimately give a sense of satisfaction.  It is common practice in regulatory agencies abroad and by pharmaceutical manufacturers of good standing to organise regular training and continuing education programmes for their staff.

 Infrastructure creation

 It would thus be seen that CDSCO, needs to be given an independent it status as available to National Drug Regulatory agencies  in most countries. This agencies is required to carry out multifarious functions but expertise in technical, administrative and vigilance functions is not sufficient. Full-time experts must be there with CDSCO for timely evaluation of the papers submitted by the parties.

 The committee therefore recommends:-

 (I)         To create adequate infrastructure for efficient management of various activities listed above

(II)        To reorganise the CDSCO in such a manner that it is in a position to provide effective regulatory safeguards to ensure that the patient is protected from the hazards to health by poor quality and counterfeit medicines by comprehensive regulatory procedures and effective inspection and enforcement arrangements.

(III)               To ensure uniform standards of drug productions as well as the regulatory systems throughout the country.

(IV)            To provide adequate autonomy to manage the various activities in accordance with the requirements of the Act and the mandates of the Ministry.

 

 

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Annexure - 5

Financing Knowledge-Based Corporate Growth
How to Galvanise Venture Capital Funds in India

 

 


M

 

ICROSOFT, INTEL, NETSCAPE, YAHOO!, SUN MICROSYSTEMS, POLAROID, XEROX, FEDERAL EXPRESS.  All these companies were financed in their early stages through venture capital.  In the last decade, literally tens of thousands of US technological companies have enjoyed the support of venture capital funds.  In 1997 alone, venture capital funds in the United States invested $11.4 billion – or Rs.40,700 crore at the existing exchange rate – in 1,848 companies belonging to nascent industries with high growth potential.  These funds have constantly appraised new entrepreneurs, shared start-up risks, and helped many of these companies to grow to a point where they became large enough to independently access the capital market.

       The US is, of course, the global core of venture capital.  Compared to it, the UK looks small.  Even so, since 1983, over 16,500 British companies have received support from venture capital funds.   Despite higher risks of failure – the raison d`etre of  venture capital is to back high risk-high reward projects – British funds have come out trumps.   A study conducted by the British Venture Capital Association and Coopers & Lybrand showed that, for the period 1990-91 to 1994-95:

  ¨      The sales of venture capital backed companies grew at 34 per cent per year – five     
       times faster than the FT-SE100.  Investments increased by 28 per cent, and    
        exports by 29 per cent per year.
 
 ¨   Almost 90 per cent of these companies felt that their venture capital backers
        provided more than just money.  They helped in the growth process.

        Contrast this with India.  Every serious policy-maker says that the future of coporate India lies in the growth of knowledge-based industries.  Yet, in 1997, there were only 20 venture capital companies whose total fund size was Rs.2,560 crore --- or 6 per cent of the US corpus for the same year.   Most entrepreneurs don’t know what are venture capital funds, how they can be assessed, how they are financed and managed, and how investors recoup their investment.  Venture capital in India has miles to go before it reaps its full potential.  But to do so, the government must create the policy environment for fostering this vitally needed financing instrument of growth.

 

Objective

   ¨ Create a fiscal and regulatory package that removes all serious hurdles to the   growth of venture
      capital in India.

   ¨ Promote such funds as key engines for growth in technologically intensive, knowledge-based  
      industries.
  
¨  Use venture capital as a vehicle for engineering a rapid growth of dynamic small and medium 
       enterprises (SMEs) – companies that have the flexibility to rapidly get on to the knowledge curve
       and create 21st century products, processes  and services.

What is a venture capital fund?

 Venture capital funds(VCF) have many personalities.  They can provide seed capital in unproven ideas, products or start-ups.  They can also be an important source of funds for companies who are too young to raise capital through conventional routes such as term loans or public offers.  The instruments used also vary – straightforward equity, quasi-equity (e.g. preference shares or convertible debentures), subordinated debt with varying swap and call options, and other financing derivatives.

         There are, however, two common characteristics of venture capital.  These are:

  1.  Venture capital invariably focuses on ‘high risk-high return’ firms – those which develop products, processes and services that are technologically and R&D intensive, which run a fairly high risk of either product or market failure, but which, if they succeeed, can fetch far higher returns than conventional industries.  VCFs that don’t meet this criterion are more in the nartue of private equity funds – investing in unlisted companies, but not necessarily technologically risky one.  Despite careful due diligence, the international track record for VCFs show that of 10 projects  five fail three are moderately successful, and two are spectacular successes.  The rewards from the two great successes compensate for the cost of five failures, and earn the company sizeable overall profits.

 Hit rates: the case of Kleiner Perkins

 Kleiner Perkins (KP) is one of USA’s most successful venture capital companies involved in the Silicon Calley.  Operating from Palo Alto, California, some of KP’s successes are Sun, Netscape, America Online, Amazon.com, Excite, @Home.  Its funds are considered successful enough to attract investors like Andy Grove (Intel), Jim Barksdale (Netscape), John Chambers(Cisco) and Scott Mcnealy (Sun).

Here is KP’s hit ratio:

 

Companies

KP’s investment

Year

Current Value

Multiple

 

($ mill)

 

($ mill)

 

Home

6.4

1995

559

87

Netscape

5

1995

398

80

Amazon

8

1996

352

44

Excite

3

1994

218

73

  

wpe2.jpg (7361 bytes)  

Fortune, 26 Oct 98

 

2)    Exit.  Once a firm has succeeded, the VCF collects its returns and finally exits from the project.  The timing of exit varies, depending upon the speed of success, the state of the capital market and other such factors.  So, too, does the method of exit: IPOs, private placement, swaps or   others.  But, exit is a must.

 Issue 1: VCF can’t be treated worse than mutual funds

 By their very nature, VCFs take far mor risks to develop nascent industries and fledging companies than mutual  funds (MFs).   A capital-scare country that is committed to the growth of potentially dynamic SMEs should reward this additional risk-taking by allowing appropriate low-risk hedging facilities and by conferring compensatory fiscal benefits.  Yet, the Government of India does exactly the reverse for VCFs  vis-a-vis MFs.  The chart below demonstrates this in no uncertain terms.

 

 

Items                                             

                                                                          

Mutual Funds

Venture Capital Funds

Basic anomaly                                    

 

Equity investments are in listed companies in the secondary capitl market – greater liquidity with lower risk.

Equity investments in unlisted manufacturing companies – far lesser liquidity with much higher risk.

Permissible portfolio

 

Much greater freedom.  MFs can invest in equity of listed companies, corporate debt (debentures and deposits), bonds, and up to 25 per cent in money market instruments.  There are no restrictions on the type of industry or activity of the target companies.

Only unlisted manufacturing companies, plus electricity generation and distribution, telecom services and computer software.  No service sector companies are allowed.  No debt instruments are allowed.  No money market instruments are allowed.

 

Income tax anomalies(own income)

10(23)D of the Income Tax Act.

. Off-shore MFs incorporated in Mauritius. Totally tax exempt

.  Domestic funds such as UTI. Totally tax exempt

.  All other domestic MFs.  Also totally tax exempt under 10(23)(1)D.  This is so even if these MFs park their fund in bank deposits.

10(23)F of the Income Tax Act.

.  Taxed at maximum marginal rate, except for long term capital gains

 

Investing instruments

 

All securities permitted:ordinary and preference shares, convertible and non-convertible debentures, other corporate debt instruments, bonds government securities and money market instruments.

. 10(23)F only allows for edquity in venture capital undertakings i.e. ordinary and preference shares

. Disallows investment in convertible preference shares, or fully/partly convertible debentures.

Investing tinetable

 

None

Rule 2D of the Income Tax Rules states that the investment ofa VCF in unlisted securities should be.

.  At least 20% in year 1

.  At least 50% in year 2

.  At least 80% in year 3

 

 

Recommendations

 Since (i) VCFs take more risk than MFs, and (ii) play a key role to promote the growth of technologically intensive SMEs that cannot access traditional capital markets, VCFs cannot be treated worse than MFs. These  should be treated better.  Therefore, modify section 10(23)F and Rule 2D to

1.    Allow VCFs to invest in quasi-equity such as partly or fully convertible debentures and          convertible preference shares of the target companies.

2.    Allow VCFs to invest up to 20% of the fund in specified debt instruments,    such as
      government securities, and bonds issued by corporates, banks and public financial
      institutions.  This hedges against the higher risk of  failures.

3.    Allow up to 10% of a fund’s corpus to be invested in listed securities.       
This creates better cash flows for VCFs,.

4.    Allow VCFs to invest in the service sector.  Electronic media, internet,   publishing,  health related services, mid-range hotels and tourism will be attractive growth prospects.

5.    Extend the same tax exemption for MFs under section 10(23)D to VCFs.

6.    Amend the year-to-year investment timetable.  Instead, specify only the terminal year target of investment in unlisted securities, and peg that at 70% of the VCFs corpus.

 In the US, pension funds alone account for 45% of the corpus of VCFs; and, along with insurance companies, over 50%.  These are long term investors.  They can stay with a VCF and take longer views on risk than short term portfolio investors.  In India, FIIs account for 52% of the corpus.  By their nature, FIIs have shorter time horizons.  This forces Indian VCFs to do one to two things: either to concentrate on lower risk ventures and avoid funding start-ups (which goes against the spirit of venture capital), or to float new funds partly to redeem earlier dues

Recommendation

Indian insurance companies (LIC, GIC and its four subsidiaries) as well as the various employee provident fund and pension schemes should be allowed to invest up to 5% of their funds in VCFs.  This is purely an enabling provision.

 

Issue 4: Who regulates?

 VCFs in India suffer from serious regulatory lacunae.  Most of the domestic funds have been set up under the Indian Trust Act, 1882.  Offshore VCFs are typically set up through the Mauritius route.  Domestic funds have to follow SEBI guidelines.  Offshore funds follow RBI guidelines.  Both type of VCFs pursue the same activity.  Yet, there is no common regulation.

 

Recommendation

All VCFs operating in India – be they domestic or registered offshore –should be  regulated by SEBI.  To do so, however, SEBI must have a full-fledged venture capital division with a permanent divisional chief and adequate staff.

 Issue 5: Limited partnerships and ‘pass-through’

 In most parts of the world, VCFs are established and settled under the framework of ‘Limited Partnership’.  This allows for ‘pass-through’, which makes a VCF more attractive to investors than otherwise.   In essence, VCFs pass-through their losses in the initial years of the fund to their investors, or limited liability partners.  Therefore, investors to a VCF can setoff the their share of the funds’s losses in the early period against profits in the later years.  This tax flexibility makes it more attractive for individual as well as corporate investors – the more so when such investments carry high intrinsic risk.

 

Recommendation

Provisions of the Indian Trust Act 1988 should be modified to accommodate limited partnership and pass-through in line with the Venture Capital Trust Act of the UK.  This will definitely attract larger investments to VCFs, especialy from body corporates.

 Issue 6: Trunaround funds

 The govenment should also seriously consider giving special fiscal incentives to dedicated turnaround VCFs.  These funds will target only sick companies, whose net worth has been eroded by accumulated losses.  The companies could be under BIFR  or, for non-manufacturing, non-industrial enterprises, outside BIFR.  Such funds would purchase controlling interest in such  companies, take over the management, and attempt successful turnarounds, after which they would exit by selling to a good bidder.  In extreme cases, they could even buy enough to de-list the company and then make an IPO when the firm has successfully tuned around.  This is, in principle, similar to the leveraged buy-out route that has been frequently used in the USA.

        Finally, it must recognised that VCFs take more risk, play a more active role in the management of the companies where they invest, and are key drivers to the grwoth of technologically intensive knowledge-based companies.  If we accept that the future of corporate India lies in such companies, then it follows that VCFs must be encouraged in a big way.

 

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