Canara to induct ally in venture capital arm

Bangalore-based Canara Bank is considering selling a stake in its venture capital subsidiary, Canbank Venture Funds, which manages a corpus of Rs 117 crore. It has also firmed up plans to float a Rs 250 crore fund to invest in small and medium enterprises (SMEs).

The need for roping in a partner arises from twin considerations of expanding venture capital business to meet the growing SME demand for risk capital and to address the constraints arising out of the Reserve Bank of India's (RBI) prudential norms which restrict investments by banks in venture capital funds.

The RBI treats investments by banks in venture capital (VC)as exposure to the capital market. The equity markets are classified as one of the three sensitive sectors for banks' investments, with real estate and commodities being the other two.

The bank has to assess implications of the RBI regulations on its contributions to the VC corpus and its capital base, according to M B N Rao, chairman and managing director. ''We have received queries from (prospective) investors. The bank could sell a part of its stake in venture capital firm to a partner, who would collaborate to scale up operations".

RBI has capped banks' exposure to capital markets at 40 per cent of their consolidated net worth. Within this ceiling, direct investments in shares, convertible bonds and debentures, equity-oriented mutual funds and VC Funds are limited to 20 per cent.

Rao said the bank has decided to focus on the venture capital business after stabilising its mutual fund business (where Rabobank is a partner) and initiating life insurance business jointly with Hongkong and Shanghai Banking Corporation and Oriental Bank of Commerce.

N Ramani, managing director of Canbank Venture Capital, said "though the norms are in place, the returns on venture capital investments are quite good". The SME sector has seen a substantial jump in credit flow. In addition to loans, these enterprises also need risk capital, which could be accessed from venture firms.

Canbank VC Fund manages a Rs 100 crore Bharat Nirman Fund, investing in emerging business such as IT/BPO and biotechnology. Canara Bank, Vijaya Bank and Andhra Bank are core contributors to the corpus. The fund has already invested about 75 per cent of its corpus and expects to invest the remaining money by March 2008. Canbank Venture provided Rs 74.43 crore of risk capital to 84 SMEs in 2006-07.

"We are working on plans to float another Rs 250 crore fund. It will be a domestic fund targetting investments of Rs 12-16 crore. We have to develop information memorandum and tie-up contributors (investors). The fund is expected to be operational next year," Ramani added.