GENERAL MEASURES RECOMMENDED BY THE DEPARTMENT OF ELECTRONICS TO REMOVE BOTTLENECKS IN THE GROWTH OF VENTURE CAPITAL FUND INDUSTRY
i) Section 10(23D) of Income Tax Act applicable to Mutual Fund should be extended to incoude Venture Capital Funds to bring them at par with Mutual Funds.
ii) To permit investment to be made in "Equity, Quasi-Equity and Loans which are part of the financial stucture" in place of the present dispensation which only permits investments in Equity to be eligible for benefit under Section 10(23F) of the Income Tax Act. The term "Computer Software" should be replaced by 'IT Products including IT Software and IT Services' in the explanation of the term 'Venture Capital Undertaking' appearing below Section 10(23F).
iii) Rule 2(d) of the Income Tax Act, 1962 should be modified to remove present time-bound investment schedules. It should be replaced by 'VCFs should invest 80% of the corpus in 4 years'.
iv) SEBI Guidelines should be changed to permit Mutual Funds to invest 5% of the corpus in Venture Capital Funds.
v) OTCEI should be revitalised to help small companies raise money from the public and also help Venture Capital Funds make an exit from the smaller companies.
vi) Facilitate exit by the Venture Capital Funds from the healthy companies through Buy-back of shares by the companies by introducing a Companies Bill.
vii) The present legislation may be replaced with a new "Limited Partnership Act" on the lines adopted in UK to facilitate formation of Venture Capital Funds.
viii) 50% of the funds invested by an investor into a VCF should be made tax-exempt.
ix) Rules under Indian Provident Fund Act should be changed to allow them to invest a small percentage, say 5% of the corpus, in the VCFs. Insurance companies which are also starting in the Private Sector should be asked to support Venture Capitals by making investments in VCFs.
x) For introduction of Limited Partnership Act for the regulatory framework for structuring of VCFs the following provisions are made:
Investors to Venture Capital fund and Managers constitute a partnership which is of limited life. Investors to the fund are called Limited Partners and Managers who manage the fund are called General Partners. General Partners, besides receiving a salary from management fee also get percentage of the Profit. Limited Partners are investors to the fund and their liability on account of investments being made by the fund is limited to the extent of their investment in the fund.