BANKS / RBI / FERA / INVESTMENT RELATED ISSUES
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.
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
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
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.
i) There is a need to
simplify procedures by modifying FERA and Companies
Act for acquiring companies abroad/setting up of
ii) Changes in FERA
Act have to be made for allowing Electronic Commerce.
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
ii) Allow 100%
depreciation within first year of purchase of IT
equipment like PCs, Printers, Modems, CDROMs,
Routers, Servers, Switches, LAN, MAN, WAN, etc.
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:
definition No. (66) may be added after definition No.
(65) in Clause 2 as under:
Equity means equity allotted to promoters, Directors
or employees for providing any intellectual property
or value addition to the Company.
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)(c). Any computer
software company whether listed or unlisted, engaged
in the development of software, may allot Sweat
Equity provided that: -
Issue of such equity shall be limited to 33.33%
of the paid up capital of the company.
Issue of such equity shall be approved by the
members of the company by a special resolution.
Proper disclosures have been made of allotment of
such equity in the annual accounts in the year in
which it is so allotted.
Software Export: FI & Banks Priority
Computer Software Industry shall be treated as
priority industry by Financial Institutions and
Capital Finance for Software/Capitalizing Software
Purchase shall be allowed.
Bank guarantee should be waived off for quality
manufacturers and exporters with a proven track
ADR/GDR, Stock listing & Dual Listing
i) Dollar Stock
Options linked to ADR/GDR for employees of the
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
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.
National Software Development Board
Soft loan, Part grant