The suggestion came up at the meeting between the department of electronics (DoE) and representatives of venture capital funds in Delhi on Monday to find ways and means to achieve the high growth target set for the software industry by the government. DoE will take up the matter with the finance ministry along with some other measures suggested by the venture capital funds to speed up funding of the software sector.

The finance ministry is likely move the required changes fast as the government has identified the software industry as its gold mine for earning forex revenues in the coming years. It has also set up a high-powered task force on information technology and software development,headed by planning commission deputy chairman Jaswant Singh to facilitate growth in the sector.

Change in the rule relating to the issue of shares at par was also one of the recommendations made by the Shankar Acharya committee set up to suggest ways and means to revive the capital market.

The government has targeted export earnings of $9 billion through software export by the end of the ninth five-year plan. Sweat equity is the chief funding mechanism for start-up technology companies in the US because when these companies start out the only asset they have is the promoters' technical skill in their area of business. But it has failed to take off in India due to the rule on at-par value of shares.

The high technology companies' promoters' shortage of capital is met by a venture capital fund, which agrees to fund the entire project but holds only a part of the equity. The rest of the equity will be held by the promoters. But instead of bringing in funds, their contribution to the equity will be in termsof their sweat and skill.

For structuring such an equity arrangement, it is necessary that the company should be able to issue shares to its promoters at a discounted price to that issued to the venture capital funds. The rule that shares have to be issued at par value hinders participation by promoters in the equity of the company through sweat equity.

At the meeting with the DoE, the venture capital funds also highlighted the difficulties faced by them to exit from a venture due to the small size of the companies. The only exit route available at present for the venture capital funds is an initial public offer (IPO) after four or five years of participating in the equity of the company. But due to the small capital size of these companies, they are unable to find an exit route through the major stock exchanges of the country.

The minimum paid-up capital requirement for listing at the national and Mumbai stock exchanges is Rs 10 crore, which is very large by the standards of the software industry,while OTCEI, meant for small cap companies, has failed to bring in investors. This has constrained the venture funds from financing small companies, whereas the biggest growth in the software sector is expected from these small cap companies.