Minutes of the meetings
under the
Chairmanship of Finance Secretary


Minutes of the meetings
of the
Sub-Committee of the National Task Force
on Information Technology and Software Development held

under the
Chairmanship of Finance Secretary on
26.6.1998 at 1 1.00 AM and on 27.6.1998 at 10.00 AM

At the outset, Finance Secretary explained the background of the meeting and called upon all the participants to participate freely and frankly in the deliberations. Each item of the agenda relating to banking and FERA was thus taken up for discussion.

I. Banking Related Issues

2. The Committee noted that traditional method of asset-based funding of working capital would not meet the adequate and timely requirements of fund of the software sector. It requires differential and flexible approach by giving special dispensation towards working capital requirement of this sector in view of unique nature of the industry.

3. Accordingly, the Committee recommended to request RBI to issue new guidelines with regard to working capital requirements for the software and information technology industries which would be based on simple criteria such as turnover. Emphasis should be on not insisting on collateral by banks. The guidelines would be proposed in consultation with Chairman, IBA.

4. Major banks will be advised to create specialised IT financing cells in important branches, where IT software and services units are sufficiently large in number. Performance in this dimension will be monitored by the Ministry of Finance.

5. Committee decided to recommend to FM that IT software and services industry should be treated as priority sector by banks for the next five years. This would help to meet the requirement of.IT software and services exports, and also the IT industry and applications within the country. It was noted that treating IT industry as priority sector was not anomalous because priority sector is not exclusively for weaker section. All small scale industry is treated as priority sector even today and small scale entrepreneurs are not in the economically weaker section.

6. Against the present estimate of Rs.400 crores of working capital for the industry, it was felt that it needed to be increased to around Rs.1200 crores by the year 2000. FS felt that quantitative targeting is not appropriate but system should be put in place which would enable substantial increase in working capital provided by the banks.

7. Sub-Committee decided to recommend that banks be allowed to invest in the form of equity in dedicated venture capital funds as part of the 5% of increment in deposits currently allowed for shares.

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II. Overseas Investment (FERA) Issues

8. The Sub-Committee recommended a blanket approval for overseas investment for acquisition of software/IT companies across the board for software exporters with previous three years cumulative actual export realisation in excess of US $25 million to be given up to 50% or US $25 million, whichever is lower, out of the cumulative actual export earning of the previous three years. This is subject to submission of a certificate of software industry by appropriate authority.

9. For FERA approvals beyond this limit, RBI would set up a mechanism for expeditious processing of applications from this sector.

10. NASSCOM pointed out that for overseas ventures, the present dispensation allows the capitalisation of goods only and not services. It was suggested that goods and services both should be allowed and RBI will accordingly notify it in consultation with Commerce Ministry.

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III. Electronic Commerce Issues

11. The Sub-Committee then took up issues relating to use of International Credit Cards abroad for a variety of purposes. The representatives of NASSCOM submitted a memorandum to RBI. RBI representatives advised that NASSCOM officials should separately meet RBI officials in Mumbai and that RBI would incorporate all feasible suggestions by way of a circular.

12. Amongst other issues, NASSCOM representative pointed out the difficulty in making advance payment by billing credit cards. Such advance payment is a prerequisite for downloading the software from Internet. FS suggested RBI to resolve this issue before 3dJuly 1998.

13. NASSCOM representative pointed out that the present allowable limit of 70% of the contract amount for expenditure abroad does not provide flexibility for utilisation for the purpose of general corporate objectives or for business growth purposes. After discussion, FS suggested to recommend to RBI to permit IT exporters to freely spend upto 5% of the export proceeds abroad (out of the total 70%) for miscellaneous/sundry purposes to give full flexibility. In addition NASSCOM could indicate items which should be specifically permissible.

14. On the issues relating to Domain name, Internet Domain registration etc., NASSCOM will submit list of all such issues and RBI will issue the necessary clarificatory circular instructions to these at the earliest (say 3d July 1998).

15. The Committee considered and recommended that RBI will issue revised EEFC guidelines to eliminate restrictions on staggered remittance, second and higher generation subsidiaries and also to allow 20% of the EEFC balances for the use on the followings :

i] Advance remittances for downloading software (say upto US $1 lakh per transaction.

ii] Purchase of equipment and related expenditure.

iii] Miscellaneous expenses not detailed in EEFC guidelines (say upto 5%) of EEFC balances.

16. It is also recommended for consideration that such EEFC accounts be permitted for making payments from offshore branches of Indian banks directly.

IV. Reporting Requirements

17. NASSCOM pointed out the problem of the present complicated softtech form prescribed by RBI. CGM, RBI stated that this form was being simplified. NASSCOM / WIPRO officials were advised that they will associate with RBI for simplifying the form and RBI would obtain approval of the revised form within a week.

V. Venture Capital

18. After discussion at length, the Sub-Committee recommended that Banks/FIs like ICICI, IDBI, UTI and SBI will set up joint ventures with Indian or foreign companies for setting up of at least four different venture capital dedicated funds of a corpus of not less than Rs.50 crores each to cater the credit need of the industry. Such venture capitalists may be allowed to set off losses in one invested company and profit in another invested company during the block of years for the purpose of income tax.

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