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Govt seed capital to fund VCs for IT start-ups

Fakir Chand in Bangalore

The Union ministry of communications and information technology is all set to provide seed capital to venture capitalists and bright entrepreneurs for setting up IT start-ups, with an equity stake below 26 per cent.

IT ministry secretary Rajeeva Ratna Shah told rediff.com in Bangalore on Wednesday that a seed capital of Rs 10 crore (Rs 100 million) had already been set up to enable prospective VCs and techies float information technology or biotechnology start-ups.

"Though the seed capital is already in place, the ministry is of the view that the government should only play an incubating role in bringing the VCs and entrepreneurs together with minority stake to take care of the risk averse factor in such new ventures," Shah stated.

Citing the problems faced by the government-sponsored VC funds such as the Rs 100-crore (Rs 1 billion) Sidbi fund in attracting private VCs and IT professionals in expanding the technology base in the country, Shah said there had been a re-thinking on the whole issue of venture funding.

"Government sponsored funds should help speed VC funds with more than 50 per cent ownership so that investment decisions are not subject to official decision-making," Shah asserted.

Elaborating the new strategy, Shah said though venture funding was risk averse, the ministry would be willing to fund ventures up to 30-40 per cent initially but dilute its stake to below 26 per cent so as to make it a win-win situation for the VCs and promoters.

"We have decided to redirect the fund and apply in a manner, which will not be on an individual project appraisal or approval basis.

"The government-making decision can never be venturesome due to accountability and risk-averse factors. Venture capital funding requires path breaking investment and risk-bearing decision.

"We are creating a new paradigm for accelerating the growth of the knowledge industry and enable entrepreneurs to move up the value chain such as product and IPR (intellectual propriety regime) domains," Shah added.

Earlier, delivering the keynote address at the one-day TiE conference, being organised as part of the ongoing Bangalore IT.Com 2002 exposition, Shah said the government had urged public sector banks and financial institutions to draw guidelines to finance IT or biotech companies without insisting on physical collaterals.

"At a bankers' meeting in Hyderabad on October 24, I have told the Reserve Bank of India Governor, and executives of the public sector banks and financial institutions they must recognize that IT and ITES (Information Technology Enabled Services) would be the growth engines of the Indian economy in this decade.

In view of the healthy liquidity with banks and FIs, Shah said they must have a mechanism to assess the human or intellectual capital of the knowledge industry and factor the potential of financing them without seeking physical collaterals.

"The large financial players should realise that the Indian IT/ITES industry is projected to generate $50 billion export revenue and create about 4 million jobs from 2008 onwards.

According to the Nasscom-McKinsey study, the IT export revenue is alone set to constitute around 33 per cent of the GDP as against 7 per cent in the fiscal year 2001-02.

Secondly, with a record growth of 67 per cent in fiscal 2001-92, the Indian ITES industry has taken off in flying colours. The sunrise industry is estimated to generate about $20 billion revenue a year in the next 6 years, with 5 business process exceeding $1 billion each," Shah claimed.

Shah also disclosed that the IT ministry has told the banks to fine tune their project appraisal methods and investment decisions to provide investment and working capital to the IT/ITES industry without insisting on physical collaterals, but assessing their intellectual assets.

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