The long-awaited approval to set up this new instrument of funding for IT start-ups was taken by the Cabinet Committee of Economic Affairs on Tuesday.

According to a press statement, the government will contribute Rs 30 crore from the Plan budget of the department of electronics in suitable instalments. The fund will be nucleated by the Small Industries Development Bank of India. The balance money will come from the Industrial Development Bank of India, Industrial and Finance Corporation of India. About Rs 10 crore is expected to be private sector contribution.

The setting up of the fund will particularly benefit the software and other IT units in the small-scale sector. Many such companies find it difficult to get funds through regular channels such as banks. Globally, the presence of an effective venture capital funding mechanism has been an important part of growth ofthe software industry.

With venture capital, these companies can also look forward to hand-holding and mentoring from investors. This follows the RBI move announcing a set of guidelines in August last for working capital needs of the IT industry.

Indian software industry has achieved very high growth in last five years, registering an annual growth rate of over 50 per cent. Software exports from the country were Rs 6,500 crore during 1997-98 and are slated to cross Rs 11,500 crore by the end of the present fiscal year.

The move to set up the fund has been welcomed by the National Association of Software and Service Companies (Nasscom). Welcoming the announcement, Nasscom president Dewang Mehta said the decision has met one of the major recommendations of the national IT task force. It was one of the 108 recommendations presented by the task force in its first report to the government.

According to a Nasscom survey, the software-driven IT industry will require about Rs 2,100 crore of venture capitalfund in the next five years.