VIII.
OTHER BANKING ISSUES
A number of other
banking issues have to be addressed for possible
inclusion in the final set of policy recommendations. A
list of these are given below:
1. ESOP
for Hardware
A
large hardware company engages in:
Hardware
Manufacturing
System
Integration
Hardware
Design Services
Hardware
Support Services
Software
Services
Test
and Repair
• Majority of people
currently engaged in hardware are re-employable in
software.
• All Hardware
related activities can be/already exported
• Integrated H/W
companies should qualify for ESOP, not linked to GDR
2. Bank
Guarantee/LUT
Though the condition of
Bank Guarantee for duty free imports has been deleted
from both the EPCG and Advance License Scheme vide para
4.19 of Exim Policy there is a provision for such
Guarantees to be given to customs. It is recommended that
the Bank Guarantee should be waived for quality
manufacturer and exporters with a proven track record.
For others, a legally valid undertaking for the guarantee
amount shall be given.
In accordance with Para
7.15 (b)(i) of the hand book of Procedures, manufacturer
exporters and units holding ISO 9000 series certificates
are permitted to execute LUT in lieu of Bank Guarantee.
However, there is no corresponding notification in this
regard from the Ministry of Finance and as such the above
facility of LUT is not applicable to the manufacturer-
exporters and the units holding ISO 9000 certification.
Ministry of Finance may issue necessary notification in
this regard.
3.
Working Capital
(i) As
the traditional method of asset-based funding of
working capital would not meet the adequate and
timely requirements of fund of the Hardware export
sector, a differential and flexible approach shall be
adopted by giving special dispensation towards
working capital requirements of this sector in view
of the unique nature of the industry. Accordingly,
RBI shall issue by 2 October 1998 new guidelines with
regard to working capital requirements for the IT
Hardware and related services sector which would be
based on simple criteria such as turnover. Banks
shall be advised to give 25 per cent of the contract
value for 18 months, with the first six months as
term loan(without collaterals) and from the 7th month
onwards annualized Cash Flow Statements shall be
accepted instead of collaterals.
(ii)
From an amount of Rs.200 crores of working capital
for the Hardware industry during 1998-99, the amount
shall be increased to Rs.500 crores by the year 2000
subject to the broad criteria of pro-rata increase
for the prospective requirements 24 months ahead as
compared to the actuals of the current requirements
at any given time. A system will be put in place
which would enable substantial increase in working
capital provided by the banks.
(iii)
IT Hardware products and related IT industry shall be
treated as a Priority Sector by banks for the next
five years. This would help to meet the requirements
of IT Hardware and related service exports, and also
the IT industry and applications within the country.
Major banks will be advised to create specialised IT
financing cells in important branches, where IT units
are sufficiently large in number. Performance in this
dimension will be monitored by the Ministry of
Finance.
4.
Venture Capital
On the basis of the
proposals made by the Indian Venture Capital
Association(IVCA) the following policy guidelines are
recommended:
(i)
The banks shall be allowed to invest in the form of
equity in dedicated venture capital funds meant for
IT industry as part of the 5 per cent of increment in
deposits currently allowed for shares.
(ii)
Banks like IDBI and SBI shall set up joint ventures
with Indian or foreign companies for setting up at
least two different venture capital dedicated funds
of a corpus of not less than Rs.50 crores each to
cater to the credit need of the Hardware industry.
(iii)
Venture capitalists shall be allowed to set off
losses in one invested company and profit in another
invested company during the block years for the
purpose of income tax.
(iv)
In the absence of any incentive it is extremely
difficult for domestic venture funds to raise money.
Initially the funds were raised either from
multilateral agencies like the World Bank or
all-India Financial Institutions. In the US and other
developed countries, Pension Funds and insurance
companies invest in the venture capital funds. During
1997-98, the corpus mobilised by the VCFs was in
excess of US $10 Billion. In India too, Government
could consider asking the Pension Funds, Insurance
Companies and Mutual Funds to invest a small
percentage of their corpus to VCFs with proven track
record, which would go a long way in providing a
boost to the domestic venture capital industry, which
would ultimately help IT companies.
(v)
There is a great anomaly in the treatment among VCFs
and offshore funds. While offshore funds (which
mainly cater to existing large companies) do not pay
any tax, domestic funds which provide equity
assistance to small and medium enterprises have to
pay maximum marginal tax. Even among domestic funds,
funds settled up by UTI are totally tax-exempt.
Mutual Funds participate in the secondary capital
market, whereas VCFs fill the void by providing
promoters equity and nurturing the companies in their
formative stage. VCFs take far more risk. It is
anomalous that VCFs are required to pay maximum
marginal tax, while incomes of Mutual Funds are
totally tax-exempt under Section 10(23) D.
Section 10(23)F of the Act
as it presently stands requires that investments are made
by VCC/VCF only in equity of Venture Capital
Undertakings. This is highly restrictive in the present
economic milieu.
Normally, venture capital
investments are made in startup undertakings based on
innovative technology/concepts/products/markets or
services, or in small to medium-scale companies which
have established their technology/market, but do not
possess the funds to finance growth. None of these
companies can raise money through the public markets.
Such entrepreneurs require a package of financial
assistance in the form of equity or convertible
instruments. This financial package has to be structured,
specifically keeping in view, the future profitability,
cash flows, requirement of funds, and such other factors
which lead to enhancement of wealth of the company
/shareholders.
Venture capital firms
carry out substantial financial engineering to provide
enough flexibility to meet the requirements of investee
companies, which vary from case to case. Throughout the
world, convertible instruments such as convertible
preference shares, convertible debentures and
fully/partly convertible are used more frequently than
equity alone. SEBI has taken this into account, and
therefore, SEBI definition permits investment in equity
and equity-like instruments.
(vi).
Section 10(23)F and the allied rules and circulars
envisage that the benefits of Section 10(23)F are
available only if VCC/VCF provide assistance to VCUs
engaged in the manufacturing sector. Service sector
barring 'computer software. has not been made open to
the VCC/VCF. Due to liberalisation and globalisation,
the service sector will play an increasingly
important role. In the IT sector, Hardware design and
related services have to be treated on par with
manufacturing and included as an eligible area for VC
investments.
The following areas should
be considered eligible for exemption under section
10(23)F of the Act for venture capital investment:
(a)
Data communications and related services
(b)
Computer hardware-related services
(c) IT
Project consultancy, design and testing services
(vii)
Rule 2D of the Income Tax Rules, 1962, stipulates
that investment in unlisted securities should be as
per the following schedules:
(a) At least
twenty percent in the initial year,
(b) At least fifty
percent in the second year and
(c) At least
eighty percent in the third year.
The percentages are
reckoned on the funds raised. The foregoing schedule for
completing investments in a major handicap given the fact
that VC investments typically take some time to
consummate. It is, therefore, urged that the schedule for
completing investments be dropped and only an overall cap
of eighty percent be retained. Further, a time period of
three years should commence from the end of the financial
year in which an application in form 56A is made.
Additionally, computation of the eighty percent limit
will be on the basis of gross original investment.
Disinvestment made by the Fund should not be taken into
account, because it would generally not be possible to
reinvest the funds thus received on disinvestment, on
account of the fact that the close-ended funds have a
pre-determined short life span.
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