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June 5, 1998


'Indian software needs $500 m VC by 2002'

Email this story to a friend. The National Association of Software and Service Companies estimates the Indian software industry requires at least $500 million of venture capital by 2002, which in turn would boost software product development.

By that time, the apex organisation expects the software sector to grow from $2.7 billion (1997-98) to $14 billion.

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Dewang Mehta, executive director, NASSCOM, has said that India has 16.7 per cent market share in global customised software market at present and a meagre 0.01 per cent software product market.

"NASSCOM expects the Indian software industry to have a 23 per cent market share in the customisable software segment and a 5 per cent share in the product market, by the end of the Ninth Plan,'' he said.

While the Union Budget has not come out with any clear statements on issues such as venture capital or an IT fund, Mehta feels such measures would take shape in the soon-to-come national IT policy.

The national taskforce on informatics policy, made up of government and industry representatives, including NASSCOM, would be coming out with its recommendations within 90 days.

He said the introduction of the concept of "sweat equity'' would be crucial for the achievement of the target for venture capital.

Mehta said the allowing of dollar-denominated employee stock options, linked to ADRs and GDRs in the Budget, is a positive step. Apart from being a strong incentive, this will also do away with the discrimination between employees of a company working in India and those located overseas. One has to note that dollar-denominated options to Indian employees working in the Indian subsidiaries of a US parent, is already permitted and such options have been offered lately by some companies whose parents are listed in stock exchanges in the US, he pointed out.

He said that 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,'' said Mehta.

For instance, if a company is being capitalised with 5 million shares, the promoter (entrepreneur) who has sweat equity can come in with 2.5 million shares at Re 1 and the financier can come in with 2.5 million shares at Rs 10 each.

The issued capital would be 5 million shares with a total amount received being Rs 27.5 million. "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,'' said Mehta.

Saurabh Srivastava, president of NASSCOM and managing director of IIS Infotech Limited, said that the aim of the national taskforce is to recommend to the government and apprise it of the norms available in countries such as in the US for encouraging entrepreneurs.

"We want to recreate such practices here both for traditional and non-traditional funding for software. For instance, the par value of shares is a phenomenon unique to our country. In countries such as the US, you can come out with an IPO in any denomination,'' he said.

"While some venture capital funds have come up in the country in a small way such as the US-based Draper Fund, Gujarat Venture Capital Fund, The Indus Entrepreneurs, for venture capital to come into the country in a big way you need a good policy framework. We are talking to the SEBI on issues such as removal of the par value, lock-in period of the options, the percentage of the paid-up capital that can be offered as incentives and pricing.''

NASSCOM also has recommended the following amendments to the Companies Bill 1997:

* A new definition is proposed which says that sweat equity means equity allotted to promoters, directors or employees for providing any value addition to the company.

* Any software company engaged in software development may allot sweat equity provided that issue of such equity shall be limited to 33.33 per cent of the paid-up capital of the company. The members of the company must approve the issue. Proper disclosure norms must be maintained. The shares must rank pari passu with the other shares of the company and they must not be transferable for a period decided by the board of directors.

Mehta said that the Department of Company Affairs earlier felt that sweat equity can be as per provision of Section 75 of the Companies Act. "But it was found that this section was not adequate for issuing sweat equity,'' he said.

- Compiled from the Indian media

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