In a discussion note on ``Promotion of Venture Capital Funds,'' the PHD Chamber of Commerce and Industry (PHDCCI) has identified information technology, biotechnology, agri-business and automobile components for creation of such sector specific VCFs.

The large profit making banks in India should be encouraged by the government to participate in such VCFs by providing adequate tax regime, legal infrastructure and disinvestment option, the note suggested.

The legal framework for the success of these funds should include tax incentives, including tax breaks and exemptions on net income received from the investment in a venture capital institution or on net capital gains upon dissolution of the institution.

It should also allow the use of capital losses to offset ordinaryincome of capital gains. This way goverment can create the right macroeconomic environment for successful development of VCFs, the chamber said.

The existing anomaly in tax treatment between VCFs and offshore VCFs should be regularised. The VCFs in India are mostly registered under the Trust Act, 1882, whereas world-wide VCFs are registered under limited partnership act. The government should provide the correct legal framework for development of VCFs, the note added.

The VCFs provide the alternative financing option to the productive sector of the economy. The smaller and the relatively younger companies in the high technology sector find it difficult to obtain finance from conventional sources.

The silicon valley experience in United States shows how VCFS have been successfully helping the IT sector. This experience can be successfully implemented in India, the PHDCCI said.

World-wide financial support by banks and government institutions have played a key role in successfully development of VCFs.Mutual funds, banks and insurance companies should be encouraged to play a key role in developing these funds, the note added.

Over the last few years Indian banks have been affected by large surplus funds and lack of avenues for investing these funds.In India, VCFs provide the ideal way to invest these surplus funds and productively utilise the large intellectual capital that India possesses, the chamber note said.