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               Securities and Exchange Board of India

10.3U.S. Small Business Investment Company (SBIC) Program

10.3.1The SBIC Program, administered by the U.S. Small Business Administration (SBA) is the largest government support program for venture capital in the world, and is a model to be considered, perhaps with modification, by other nations that want to stimulate venture capital investment.  In 40 years of operation, SBICs have invested over S21 billion in nearly 120,000 financings to U.S. small businesses, including such successes as Intel Corporation, Apple Computer, Federal Express and America Online.

10.3.2The SBIC does not distinguish between types of businesses, although investments in buyouts, real estate, and oil exploration are prohibited.  In 1998, the SBIC invested $3.4 billion in 3,470 ventures, approximately 40 percent by number and 20 percent by dollar value of all venture capital financings.  Over half that amount was given over to businesses three years old or younger.  Companies such as Apple, America Online, Intel and Sun stand as some of the SBIC’s more famous past financings, but the lesson of its success lies in successfully financing thousand of small, unknown firms.

10.3.4The basic objective of the program is to attract and supplement private capital for venture capital funds (SBICs), managed by private investment managers, that invest in small companies that would not otherwise be able to raise capital from purely private sources.  Many require amounts of capital greater than that available from individuals, but less than the minimum required by private venture capital firms.  In this program, SBA licenses, regulates, and agrees to provide two thirds of the total capital of an SBIC with the remaining one third provided as equity by private investors such as insurance companies, foundations, endowments, wealthy individuals and pension plans.  The SBICs are organised and are operated just like private venture capital funds, with all investment decisions made by the private fund manager.

10.3.5SBICs agree to abide by SBA regulations, primarily to make only direct investments in companies small enough to meet required standards.  Except for the exclusion of a few industries, investments are not targeted by SBA.  Capital supplied by SBA requires a rate of return much lower than that expected by the fund as a whole.  Any excess flows to the private investors and fund managers, increasing or “leveraging” their returns.

10.3.6SBA funds are provided either through 10 year loans (“debentures”) or preferred limited partnership equity investments (“participating securities”).  Debentures require current payment of interest and are used by SBICs that make loans with equity rights or features.  Participating securities, which have no current cash payment obligation, are used by SBICs that make equity investments in small

Report of K B Chandrasekhar Committee on Venture Capital39

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