The Securities and Exchange Board of India (SEBI) is meeting this Friday to discuss ways to facilitate foreign venture capital investments into the country's fledging knowledge-based economy.
The agenda is likely to include the elimination of double taxation on venture capital funds and the harmonization of rules governing foreign investments.
DR Mehta, chairman of the securities market regulator, told delegates at a capital market conference in Calcutta this week that changes in the Venture Capital Fund (VCF) rules are needed to help "put India on the path of becoming hi-tech".
"If 40% of projects in Silicon Valley could be funded by VCFs, then why the same could not be done in India?" he asks.
Mehta hopes the changes can help draw in the much-needed foreign venture capital to bridge the gap between lending available from banks and the growing appetite of start-up firms in the new economy.
Leveraging on its booming information technology industry, India wants to replicate the same level of success in other areas such as biotechnology, pharmaceuticals and drugs, and telecommunications.
A committee on venture capital has been formed to look at ways to draw in offshore money. Chaired by KB Chandrasekhar, chairman of internet hosting company Exodus Communications in the US, the committee estimates around $10 billion of venture capital could roll in from overseas in three to five years if investment-friendly rules are in place.
Currently, venture capital activities are governed by three sets of rules under different government departments. SEBI hopes the rules can be streamlined into one, with itself being the main regulator.
The department also is hoping to scrap the double taxation on venture capital funds. Presently, taxes are levied against VCF investors as well as on the earnings of the companies they invest in. SEBI argues this tax structure should be reformed along the line of mutual funds where tax exemption is applicable at pool level.
On cutting red tapes, it is suggested that VCFs should be able to make investment or disinvestments without having to obtain an approval from the Reserve Bank of India, as is currently the case.
In developed countries, more than half of venture capital funding comes from pension funds, mutual funds, insurance funds and banks.