MODULE 5

VENTURE CAPITAL,
MICROFINANCE AND CREDIT
RATING
 VENTURE CAPITAL
• Venture Capital has emerged as a new financial method
of financing during the 20th century. Venture capital is the
capital provided by firms of professionals who invest
alongside management in young, rapidly growing or
changing companies that have the potential for high
growth.
• Venture capital is a form of equity financing especially
designed for funding high risk and high reward projects.
• There is a common perception that venture capital is a
means of financing high technology projects. However,
venture capital is investment of long term finance made
in:
1. Ventures promoted by technically or professionally
qualified but unproven entrepreneurs, or
2. Ventures seeking to harness commercially unproven
technology, or
3. High risk ventures.
• The term ‘venture capital’ represents financial investment
in a highly risky project with the objective of earning a
high rate of return.
• There is a significant scope for venture capital companies
in our country because of increasing emergence of
technocrat entrepreneurs who lack capital to be risked
• A young, high tech company that is in the early stage of
financing and is not yet ready to make a public offer of
securities may seek venture capital.
• High risk capital is provided by venture capital funds in the
form of long-term equity finance with the hope of earning
a high rate of return primarily in the form of capital gain.
• Thus, a venture capitalist (VC) may provide the seed
capital for unproven ideas, products, technology oriented
or start up firms. The venture capitalists may also invest in
a firm that is unable to raise finance through the
conventional means.
 Features Of VENTURE CAPITAL
• High Degrees of Risk Venture capital represents
financial investment in a highly risky project with the
objective of earning a high rate of return.
• Equity Participation Venture capital financing. is,
invariably, an actual or potential equity participation
wherein the objective of venture capitalist is to make
capital gain by selling the shares once the firm becomes
profitable.
• Long Term Investment Venture capital financing is a
long term investment. It generally takes a long period to
encash the investment in securities made by the venture
capitalists.
• Participation in Management In addition to providing
capital, venture capital funds take an active interest in the
management of the assisted firms.
• Achieve Social Objectives venture capital projects
generate employment, and balanced regional growth
indirectly due to setting up of successful new business.
• Investment is liquid A venture capital is not subject to
repayment on demand as with an overdraft or following a
loan repayment schedule. The investment is realised only
when the company is sold or achieves a stock market
listing. It is lost when the company goes into liquidation.
 ORIGIN AND THE CURRENT INDIAN
SCENARIO
• Originated in USA in 1950s when the capital magnets like
Rockfeller Group financed the new technology
companies.
• The concept became popular during 1960’s and 1970’s
when several private enterprises started financing highly
risky and highly rewarding projects.
• The American Research and Development was formed as
the first venture organisation which financed over 100
companies and made profit over 35 times its investment.
Since then venture capital has grown’ vastly in USA, UK,
Europe and Japan and has been an important
contribution in the economic development of these
countries.
• VC in India was known since nineties era. It is now that it
has successfully emerged for all the business firms that
take up risky projects and have high growth prospects as
well. VC in India is provided as risk capital in the forms of
shares, seed capital and other similar means.
• In 1988, ICICI emerge as a venture capital provider with
unit trust of India. And now, there are a number of venture
capital institutes in India.
• Apart from Indian investors, international companies too
have settled in India as a financial institute providing
investments to large business firms.
• The investors offering venture capital financing in
India are mainly targeting sectors like technology,
software, enterprise software, consumer internet, online
retail, healthcare, energy, advertising, real estate,
infrastructure, etc. With the surge of activity in the VC
industry of India, there is definitely a lot of scope for new
start ups.
• But today, the scenario is quite different. Venture capital
financing in India is open to all provided they find a unique
business idea with a growing market, an efficient
management team, an innovative business model
• The success of Flipkart is no more new story and is
largely because of venture capital that the firm has
managed to raise. In less than 7 years, the firm has
earned revenue of over $1 billion.
• Venture capital financing in India not only comes with
capital but also with guidance and mentor ship and of
course, the strong network that is a must for every
business to reach the ultimate point of success.
 PRIVATE EQUITY
• A private equity investor is an individual or entity that
invests capital into a private company (i.e. firms not
traded on a public exchange) in exchange for equity
interest in that business.
• Private equity is medium to long-term finance provided in
return for an equity stake in potentially high growth
unquoted companies.
• If you are looking to start up, expand, buy into a business,
buy out a division of your parent company, private equity
could help you to do this.
• PE firm also called LBO firm, buyout firm or financial
sponsor.
• Obtaining private equity is very different from raising debt
or a loan from a lender, such as a bank. Lenders have a
legal right to interest on a loan and repayment of the
capital, irrespective of your success or failure. Private
equity is invested in exchange for a stake in your
company and, as shareholders, the investors’ returns are
dependent on the growth and profitability of your
business.
• Private equity and investment banking both raise capital
for investing purposes but do so in very different ways.
• Both private equity and investment banking aim toward
the same goal, but from opposite directions. Private
equity firms collect high-net-worth funds and look for
investments in other businesses. Investment banks find
businesses and then go into the capital markets looking
for ways to raise money from the investment crowd.
 Microfinance
• Finance that is provided to unemployed or low income
people or groups.
• The provision of small loans to poor people to help them
engage in productive activities or grow very small
businesses. The term may also include a broader range of
services, including credit, savings and insurance.
• Microcredit is the extension of very small loans to those in
poverty designed to spur entrepreneurship.
• Microfinance is provided for the people who do not qualify
for the banking system.
• Majority of the microfinance clients are women
NGO:

Any organization working for a social, cultural, economic,

educational or religions cause is termed as a Non
Government Organizations (NGOs). It is a voluntary
organization established to undertake social
intermediation (like organizing SHGs of micro
entrepreneurs, etc). NGOs are the promoters of the
concept of SHGs. NGOs are also the key players in
micro finance sector. NGOs can be formed under various
legal identities.
Microfinance NGO
• A micro finance NGO is a voluntary organization,
registered either under the Societies Registration Act,
Indian Trusts Act or the Companies Act. They act as
facilitators or financial intermediary between SHGs and
bank in process of credit delivery.
SHG
• A Self Help Group (SHG) is a registered or unregistered
group of 10-20 members who have the same social and
economic background and have voluntarily coming
together to save small amounts regularly to a common
fund and to meet their emergency needs / requirements
on mutual help basis. The members of the group may be
women / men or a composition of both men and women.
The members of the SHG meet regularly. They know each
other and they have a group leader. They have a common
savings bank account in any Nationalised Banks or
Regional Rural Banks. The members of the SHG follow
common rules and procedures for working together.
 Future
of micro finance.
• The microfinance industry has seen tremendous growth over
the past five years.
• It has witnessed rapid evolution with regulatory reforms to
regulate product, pricing and protection of customer interest.
• The growth of regulated NBFC MFIs - a special class of RBI
regulated entities carrying out microfinance, the formation of
the first ever Self-Regulatory Organizations (SROs) of the RBI,
Aadhar based lending by NBFC MFIs and transformation of
some of the entities into universal and small finance banks.
• Today, with over 45 million end clients with a loan
outstanding of over Rs 1 lakh crore across the private
JLG (Joint Liability Group) and the public SHG (Self Help
Group) programmes, employing over 120,000 people
across 10000 branches in 28 states of India, it is a key
force for financial inclusion in the country. However, this
level of progress is still lower than 25% of the demand
across India and indicates the future potential for growth.
 CREDIT RATING
• An investor in search of profitable investment avenues
has recourse to various sources of information, such as
offer documents of the issuer(s), research reports of
market intermediaries, media reports etc.
• In addition, he can also base the investment decisions on
the grading offered by credit rating agencies.
• Rating, usually expressed in alphabetical or alphanumeric
symbols, is a simple and easily understood tool enabling
the investor to differentiate between debt instruments on
the basis of their underlying credit quality.
• Credit rating establishes a link between risk and return.
Thus, provide a yard stick against which to measure the
risk inherent in an instrument.
• An investor uses the rating to assess the risk level and
compares the offered rate of return with his expected rate
of return (for the particular level of risk) to optimise his
risk-return trade off.
• And also Credit Rating is concerned with pre-estimating
the repayment capacity and ability of borrower for a
particular debt planned to be raised.
 Meaning and Definition of Credit Rating
• Credit Rating is the evaluation of the credit worthiness of
an instrument of a company based on perceived overall
risk of a company’s business and financial profile as well
as structural consideration.
• Credit rating establishes a link between risk and return.
An investor or any other interested person uses the rating
to assess the risk level and compares the offered rate of
return with his expected rate of return.
• It facilitates the investors in taking a decision whether to
go for an investment or not. The agency, which performs
the credit rating is called the Credit Rating Agency.
• Credit Rating Agencies in India:

CRISIL(Credit Rating Information Services of India Ltd)

ICRA (Information and Credit Rating Services Ltd)
CARE (Credit Analysis and Research Ltd)
 Rating Agencies
Credit Rating Information Services of India Limited
(CRISIL)

CRISIL headquartered at Mumbai is India’s largest and

first credit rating agency; and one of the global leader in
research, ratings and risk and policy advisory services. It is
one of the top credit rating agencies in India which has won
many prestigious awards in the credit rating category and
had assessed more than 61000 entities.
• CRISIL is India’s leading rating, research, risk and policy
advisory company, and is the fourth largest in the world. It
was incorporated in 1987 and was promoted by Industrial
Credit and Investment Corporation of India Ltd. (ICICI)
and Unit Trust of India (UTI).
• It commenced its operations of rating in 1987-88. CRISIL
has its association with internationally recognized rating
agency Standard and Poor’s (S&P) since 1996. CRISIL‟s
majority shareholder is Standard and Poor’s which is a
subsidiary of The McGrawHill Companies. The latter is
the world’s foremost provider of independent credit
ratings, indices, risk evaluation, investment research and
data.
• CRISIL has been recognized by SEBI under the
Securities & Exchange Board of India (Credit Rating
Agencies). Rating and Risk Assessment, Infrastructure
Advisory, and Business Research.
• CRISIL’s services include credit ratings and risk
assessment; research on India’s economy, industries and
companies; financial research and outsourcing; fund
services; risk management and infrastructure advisory
services.
• Through its IPO Grading, CRISIL has also established a
presence in the equity research domain. It provides all
these services through its different subsidiaries.
• CRISIL provides rating and risk assessment services to
manufacturing companies, banks, non banking financial
companies, and financial institutions, housing finance
companies, municipal bodies and companies in the
infrastructure sector.
• It rates long term instruments such as debentures, bonds,
preference shares, structured obligations, fixed deposits,
commercial paper and short term deposits.
• It makes credit assessments of various entities including
state governments and subsidiaries and joint ventures of
multinationals.
• It also assigns ratings of financial strength to insurance
companies.
 ICRA Limited
(Investment Information and Credit Rating Agency)
• ICRA limited a joint venture between Moody’s Investors
and various financial services companies, is a part of
ICRA group which was founded in1991. It is a Credit
rating agency listed on the National Stock Exchange and
Bombay Stock Exchange.
• ICRA promoted by IFCI was incorporated on Jan 16, 1991
and launched its services on August 31,1991.
• IFCI holds 26% of share capital in ICRA, the other share
holders are the Unit Trust of India(UTI) banks, LIC, GIC,
EXIM Bank, HDFC Ltd., and ILFS Ltd.,
• In order to bring international experience and practices to
the Indian capital markets, the ICRA has entered into an
MOU with Moody’s Investors services to provide, through
its company Financial Programmes Inc (FPI), credit
education, risk management software, credit research and
consulting services to banks, Financial / Investment
institutions, financial services companies and mutual
funds in India.
• In order to enable investors to take informed decisions on
investing in mutual funds, ICRA has launched rating
services for debt funds and Indian mutual funds. Similarly
it has launched grading services for entities involved in
the construction projects including contractors,
consultants, project owners and the project themselves
• In 2001, ICRA launched corporate governance rating with
a focus on corporate organization’s business practices
and quality of disclosure standards with respect to the
requirements of regulators and interests of financial
stakeholders. The grading system developed by ICRA for
real estate developers helps buyers of property to assess
the risks associated with the developer’s ability to deliver
in accordance with the terms and conditions.
• ICRA has also launched a grading scheme for healthcare
institutions as well as maritime training institutes in India.
The NSIC-ICRA performance and credit rating scheme
provides a boost to the development of small scale
enterprises in India. The grading of initial public offering
aims at facilitating the assessment of equity issues
offered to the public.
 CARE
(Credit Analysis & Research Ltd)

• CARE was incorporated in April 1993 as a credit rating

information and advisory services company. It is a credit
rating and information services company promoted by the
Industrial Development Bank of India (IDBI) jointly with
financial institutions, public / private sector banks and
private finance companies. It offers a wide range of
products and services in the field of credit information and
equity research.
• In January 1994, CARE commenced publication of
CAREVIEW, quarterly Journal of CARE ratings. In
addition to the rationale of all accepted ratings.
CAREVIEW often carries special features of interest to
issues of debt instruments, investors and other market
players. CARE has 14 shareholders.
• CARE currently offers the services such as rating
services, advisory services, information services and
equity research services.
• CARE ratings are recognized by Government of India,
Reserve Bank of India and Stock Exchange Board of
India.
• The rating coverage extends to industrial companies,
public utilities, financial institutions, infrastructure projects,
special purpose vehicles, state government and municipal
bodies.
• CARE rates all types of instruments like commercial
papers, fixed deposits and bonds.
• CARE’s information and advisory service group prepares
credit reports on specific requests from banks or business
partners.
• Apart from rating services, CARE provides advisory
services such as project advisory services and financial
restructuring services.
• CARE also prepares confidential reports for companies,
which may be useful in taking decisions with regard to
financial options, joint ventures, acquisitions and
collaborations.
• CARE conducts sector studies, which may be useful to
industry participants, financial intermediaries and financial
analysts.
• CARE helps banks and non-banking finance companies
to set up or modify their credit appraisal system.
 Fitch India Limited
• Duff and Phelps Credit Rating India Private Ltd was the
first joint venture rating company promoted by JM
Financials, Alliance Group and the international rating
agency Duff and Phelps.
• Established in 1995, Duff and Phelps offered a wide
range of services including rating services and advisory
services.
• With the acquisition of Duff and Phelps Credit company in
April 2000 by Fitch Ratings, Duff and Phelps Rating India
Private Limited became Fitch India Limited.
• Fitch introduced a ratings scale to meet the growing
demand for independent analysis of financial securities.
• Fitch was one of the rating agency that were first declared
as nationally recognized statistical rating organizations by
the Securities and Exchange Commission in 1975.
• Fitch has 49 offices worldwide with the coverage of more
than 3,000 financial institutions, more than 1,200
corporate issuers.
• The company has over 8,600 structured finance
transactions and also maintains surveillance of more than
1,200 European structured finance transactions and 200
Asian structured finance transactions.
• Fitch India analysis have access to Fitch internationals
large global information network. The credit rating of Fitch
apply to a variety of entities and issues including
government structured financing, and corporations, debts,
preferred stock, bank loans and counter parties, as well
as the financial strength of insurance companies and
financial guarantors.
 ONICRA
(Onida Individual Credit Rating Agency of India)

• ONICRA Credit Rating Agency is a Credit and

Performance Rating company based in Gurgaon and
founded in 1993. ONICRA is among the top10 credit
rating agencies in India offering smart and innovative
solutions like risk assessment, analytical solutions and
ratings to MSMEs, corporate and individuals.
• Onida Credit rating agency of India Ltd., has pioneered
individual credit rating services in India. It was
incorporated in October 1993 for providing the services of
individual credit rating and information services for the
first time in India. It has developed over the years the
methodology to assess the financial risks in respect of
various types of transactions related to individuals and
small and medium enterprises.
• ONICRA is presently operating at commercial scale. It
provides pre and post disbursement and activation
solutions so as to bridge the gap between the principals
and their customer. It also serves clients in auto finance,
consumer finance, credit card issues and cellular phones
service providers.
 Brickwork Ratings India Pvt Limited

• Brickworks Rating India Pvt Ltd was founded in 2007 by

group of professionals to provide rating of public issues
and others to help investors take information decisions.
The services provided by Brickwork are issuer rating,
short term rating, long term rating, IPO rating, fixed
deposit rating, mutual fund rating, SME rating, bank loan
rating, facility rating, insurance company rating, corporate
governance rating, real estate project rating. In addition,
Brickworks provides training and research services.
• Brickworks assign two types of credit ratings- one to the
issuers and the other to specific debt issues or other
financial obligations. The rating of issuer, which is called
“Brickworks counterparty credit rating”, reflects the current
opinion about an issuer’s overall capacity to fulfill its
financial obligations. The other type of rating is the rating
of issues, mainly the debt issues. Four types of analysis
were made on debt issues namely business analysis,
industry analysis, financial analysis and management
analysis.
 SMERA
SME Rating Agency of India Limited
• The SME Rating Agency of India Limited, popularly known
as SMERA, is a joint venture started by Small Industrial
Development Bank of India (SIDBI), Dun & Brandstreet
Information Services India Private Limited (D& B) and
several leading banks in India.
• SMERA is the country’s first rating agency that focuses
primarily on small and medium enterprises(SME) in India.
The main objective of rating SMEs is to facilitate greater
and easier flow of credit to SMEs from the banking sector.
• It has its registered and Head Office in Mumbai, currently
operating from 13 locations spread across the country.
• SMERA makes two types of analysis- business risk
analysis and financial analysis. It takes into consideration
the overall financial as well as non financial performance
of SME in its rating process. Financial performance is
assessed by ratio analysis and important ratios
considered as profitability ratios, growth ratios, gearing
ratios and liquidity ratios among others. Management
experience, qualifications, customer and supplier base
are also considered to assess non-financial performance.
• SMERA commenced its operations in 2005 as an
exclusive credit rating agency for Micro, Small and
Medium Enterprises (MSME) sector in the country.
• Within a span of 8 years, SMERA has assigned ratings to
over 27154 MSMEs in India.
• SMERA is registered with the Securities and Exchange
Board of India (SEBI) as a Credit Rating Agency (6th in
India).
• SMERA is also empanelled as an approved rating agency
by the National Small Industries Corporation Ltd. (NSIC)
under the “Performance & Credit Rating Scheme for
Small Industries”, approved by the Ministry of Small Scale
Industries,Government of India
• SMERA has achieved the reputation of providing
comprehensive, transparent and reliable ratings, thus
providing comfort and confidence to lenders and investors
alike in decision making. SMERA ratings have gained
wide acceptability and are now an integral part of the risk
assessment process within the lending and investing
community.