9th June 1998

3.1 Working Capital Requirement for the Software Industry

i) Special guidelines are to be framed in consultation with the RBI, Indian Banks Association, EXIM Bank, ECGC to evolve a framework for adoption by the banks for funding the working capital needs of the software industry. These guidelines need to be framed expeditiously.

ii) In addition, State Financial Corporations sanction working capital term loans which are available only to running units. A dispensation from State Financial Corporations and banks towards the requirement of running software units may be of help. Further, banks should also consider working capital as a term loan as is done by the State Financial Corporations.

iii) Reserve Bank of India should immediately formulate and announce guidelines for providing working capital to software companies, specifically mentioning that collaterals are not required. Instead, banks should give working capital against approved cash flow statements.

iv) A special working capital fund of Rs. 5,000 crore be devised by a pool of banks for exclusive use by software companies.

3.2 Venture Capital Requirement for the Software Industry

i) Government of India may establish an IT Venture Capital Fund and each State also may do the same to encourage multiple start ups by enterprising and qualifying people in Software business. They should give low interest bearing loans and investing in equity of start ups.

ii) Government to announce special concessions for venture capital funds and allow a level playing field both to Indian and overseas venture capital funds. These special concessions can be given in the form of Income Tax concessions, wherein a venture capitalist is allowed to set off losses in one invested company against profits in another invested company, during a particular year.

iii) The Software Industry had projected a need of venture capital of US $ 500 million in the next five years which would in turn, generate exports of around US $ 14 billion per annum.

3.3 Marketing Fund

Special schemes to provide marketing funds to the software companies in the form of 50% grant should be initiated, similar to the EMF Scheme implemented by EXIM Bank.

3.4 FERA Issues

i) There is a need to simplify procedures by modifying FERA and Companies Act for acquiring companies abroad/setting up of operations abroad.

ii) Changes in FERA Act have to be made for allowing Electronic Commerce.

3.5 Depreciation

i) In the Budget 1998-99, under the Income Tax Act 100% depreciation in the first year itself must be provided for any investment made in IT. This would automatically encourage leasing activities. A Rs. 40,000 computer can be then leased for Rs. 400 per month. Such developments will make the computers more easily affordable.

ii) Allow 100% depreciation within first year of purchase of IT equipment like PCs, Printers, Modems, CDROMs, Routers, Servers, Switches, LAN, MAN, WAN, etc.

3.6 Sweat Equity

The National Association of Software and Service Companies (NASSCOM) estimates that the Indian Software Industry requires atleast $ 500 million of venture capital by 2002, which in turn, will boost software product development. By this time, the apex organisation expects the software sector to grow from $ 2.7 billion (1997-98) to $ 14 billion.

Introduction of the concept of 'Sweat Equity' would be crucial for the achievement of the above said target for venture capital. Sweat equity sees to it that people who set up companies get value for their intellectual capital. Such a value is reflected in the price they pay for the purchase of a number of equity shares.

For facilitating sweat equity, the issue of shares at 'par value' should be done away with. Currently, shares can be issued in denominations of Rs. 10 or Rs. 100. In the event of no par value, it would be helpful to reward an entrepreneur by offering sweat equity at a differential pricing.

An Amendment in the proposed Company Law Bill needs to be looked into by Department of Company Affairs so as to facilitate issue of Sweat equity in the Indian context.

Section 75(1)(b) does allow shares to be given for consideration other than cash. However, it does not clearly and specifically mention that shares can be allotted to promoters/directors/employees for any value addition to the company. The explanation merely states that 'shares may be issued to the promoters or other technocrats for acquiring the intellectual rights, expertise or patents and for services to promoters by the company'. In the concept of 'Sweat Equity' being proposed transfer of the intellectual property may not take place necessarily. More over, Section 75 (1)(c) restricts the maximum rate of discount at 10%.

Therefore, it is very difficult to provide 'Sweat Equity' under this Section. Even if 'Sweat Equity' is given under this provision, it is limited as well as follows a cumbersome procedure. It is therefore, suggested that the following clauses may be inserted in the Companies Bill:

A new definition No. (66) may be added after definition No. (65) in Clause 2 as under:

"(66) Sweat Equity means equity allotted to promoters, Directors or employees for providing any intellectual property or value addition to the Company.

Suggested Section to issue 'Sweat Equity':

In Clause (65) after Sub-Section (1) (b), following clauses are suggested to be inserted as Clause (1)(c) and thereafter the present Clause (1)(c) may be re-numbered as Clause (1)(d):

(1)(c). Any computer software company whether listed or unlisted, engaged in the development of software, may allot Sweat Equity provided that: -

i) Issue of such equity shall be limited to 33.33% of the paid up capital of the company.

ii) Issue of such equity shall be approved by the members of the company by a special resolution.

iii) Proper disclosures have been made of allotment of such equity in the annual accounts in the year in which it is so allotted.

3.7 Software Export: FI & Banks Priority

i) Computer Software Industry shall be treated as priority industry by Financial Institutions and Banks.

ii) Capital Finance for Software/Capitalizing Software Purchase shall be allowed.

iii) Bank guarantee should be waived off for quality manufacturers and exporters with a proven track record.

3.8 ADR/GDR, Stock listing & Dual Listing

i) Dollar Stock Options linked to ADR/GDR for employees of the Software.

Ministry of Finance, in consultation with SEBI, has considered the proposal for ADR/GDR linked to Dollar Stock Option scheme for software companies. A Policy on this issue was recently announced for promotion of software exports by Indian companies.

ii) Dual listing of the Indian Software Companies.

Dual listing of the Indian Software companies in India and issue of ADRs or overseas stock listing should be permitted. Indian software companies can be allowed to issue two classes of shares, one relating to listing and trading in India and the second class of shares relate only to overseas listing.

iii) Options like Acquisitions, Mergers, leveraged buyouts, building brand equity and overseas listing should be made procedurally simple with time bound clearance by the Government.

iv) Two way fundability for ADRs should be allowed for software companies subject to the condition that it does not adversely affect capital convertibility beyond whatever is already existing as per Indian laws.

v) Non-listed Indian software companies (on Indian Stock Exchange) should be allowed ADRs and overseas stock listing.

3.9 National Software Development Board

Rolling-fund; Part Soft loan, Part grant