FE: Are you satisfied with the measures relating to the venture capital industry regarding changes in the prescribed authority and removal of lock-in period in Finance Bill, 1999?

Let us get one fact clear. The proposed Section 10(23FA) of the Income Tax Act is impractical and ideally needs to be scrapped. Venture Capital industry should be covered under Section 10(23G). The least that needs to be done is ensure that Section 10(23FA) guidelines for approval of venture capital funds bythe central government are simple, efficient in implementation and allow for tax exemption, if a venture capital fund/company has the objective of investing new equity into companies. Prior to the Finance Bill, 1999, four provisos had to be met before a venture capital fund or company could avail of tax benefits. Additional requirement was the compliance with prescribed guidelines. The removal of lock-in period is a welcome step.

The benefit of long term capital gains tax was available to every investor in equity including the portfolio investor if the period of holding exceeds 12 months. The only exception was the venture capital industry for which the period of holding had to be minimum 36 months. What was the logic? The lock in period should never have been applicable and thankfully will not be applicable for investment made from April 1999.

The ceiling of five per cent investment (tax exemption is denied if a venture capital company/fund invests more than five per cent of its corpus in one company)was another major problem. The investment ceiling is the prerogative of the fund manager. The low ceiling of five per cent may make sense for portfolio investment but none whatsoever for venture capital. Under Section 10(23FA), venture capital fund/company may have to apply for tax exemption every year (the approval can be for a maximum period of three years). No investor will commit funds if the tax exemption can be withdrawn after a year. Based on the objective of the fund/company, a blanket approval should be provided. The tax exemption was denied to a VCC/VCF if it took up more than 40 per cent of the equity in one company. This clearly showed lack of understanding of the industry. I will give an example. If, in the case of a follow-on investment, where the other shareholders are not able to come up with the money and as a result, the stake of the fund/company exceeds 40 per cent, the tax exemption is not available. The exemption is not available if the investment is made in a listed company. I thinkexceptions should be made. In other words, the benefit should be available so long as the investment is made directly in the company and not in the market.

One more restriction is on the business in which investment can be made. The investment can be made in bulk drugs but not in formulations. It should be left to the fund manager to decide as to in which industry the investment should be made.

FE: Sweat equity is now permitted. Will it make things easier for VCCs/VCFs. Will the VCCs/VCFs fund the entrepreneur by issuing the sweat equity?

Sweat equity is basically a payment in equity which was not prohibited. The amendment makes thing easier. However, the restriction under the stock option scheme of only 200 shares per employee does not make much sense.

FE: What do you think will be the impact of the proposed move to allow up to 40 per cent FDI in banks?

Increasing the ceiling to 40 per cent from 20 per cent currently allowed for technical partners is a good move. Post Fera,multilateral agencies are not included for calculating the ceiling. The bare minimum ceiling should be one share more than 25 per cent equity otherwise, the foreign partner will not be a meaningful partner. In some sectors what has happened is that by virtue of an agreement between the promoters, the Indian partner is a sleeping partner till he is bought out. Giving the stake to an Indian party is treated as entry cost and little else. Insurance, as an when opened up will be no different.

FE: What is your general perception of the budget?

Allowing 100 per cent Modvat is a very welcome step. The industry has been given protection by raising the cost of imports. The tariff reduction started in 1991 was the single largest factor responsible for improving the efficiency, productivity and the quality. Instead of duty hike, I would have liked a bold reduction of excise duties to enlarge and deepen product market. The excise duty has been hiked on commercial vehicles. Every truck creates employment(direct and indirect) for 12 persons. Even the duty on ambulances have been hiked. This needs to be corrected. One issue on which no credit has been given to the government is the thrust given to education. The attempt to duplicate the success of the Congress government in MP is a remarkable step and needs to be appreciated. The benefit under Section 80G (donations) should be increased to 100 per cent up to a maximum of 50 per cent of income for donation in cash. Admittedly, even today, the misuse is rampant but the same applies to excise. The right way to go about is to improve implementation.