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August 25, 1997


Indian software needs $500 million venture capital

For the software industry in India to reach an annual turnover of $6 billion or Rs 200 billion by 2000, it requires at least $500 million of venture capital funds and a minimum of Rs 30 billion of working capital funds," according to Dewang Mehta, executive director, National Association of Software and Services Companies.

He said in order to fulfil this need, Nasscom is in constant dialogue with the government on possible changes in policy and introduction of other such measures to make such funds available to the software industry.

In India, the working capital for the software industry is available through scheduled banks. The Reserve Bank of India vide circular IECD No PMS 204/27C-87/88 dated August 26, 1988, had issued guidelines to the banks for providing working capital loans.

Unfortunately, the guidelines have not been adequate nor have many banks taken them seriously.

Elaborating on the financial needs of the industry, Mehta said, "In the case of software companies, the financial needs are mainly for initial capital investment towards building infrastructure and working capital loans."

He added that "The initial capital investment needs can be funded by banks by means of a term loan not exceeding five years. At this stage, banks should not insist on security and margin, the assets created out of these loans can be held as collateral security."

Nasscom has made certain recommendations that are expected to make the working capital availability easier and hassle-free for the software units. This is one of the most critical issues for the growth of this industry in India.

However, as far as financing through the banking system is concerned, the insistence of banks on personal guarantees for all forms of borrowings has been a disincentive to growth, Mehta added.

The recommendations:

  • The individual banks should set up a special group to look into financing activity of software industry with separate allocation of funds for this activity. The group should contain experts from the industry who can guide the banks on financing software companies.
  • For working capital requirement, companies should be required to submit a cash-flow statement, showing the fund gap over the year and the banks should fund such fund gaps by means of working capital either in the form of an overdraft or a cash credit limit.
  • The orders procured from overseas customers can be filed with the bank from time to time. A charge can be created on the final assets of the company. However, no collateral should be insisted upon.
  • As the software industry is export-oriented, the working capital loan shall be in the form of revolving packing credit, on a running account basis, in foreign currency at a concessional rate.
  • Small start-up companies should be provided the concessional rate of interest as applicable to SSI and with equity support by SFCs, SIDBI etc. A separate equity fund for small companies should be established.
  • In case of product companies, the government should incorporate the provisions of sweat equity in the Companies Act to make venture capital a reality in India.

- Compiled from the Indian media

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