According to an official announcement, the lock in period of three years from the date of acquisition of equity shares before transfer was being dispensed with.

It was further pointed out that the scope of permissible activities for venture capital undertakings has been expanded to include the business of developing, maintaining and operating any infrastructure facility. The infrastructure facility has been defined to mean road, highway, bridge, airport, port, rail system, water supply project, irrigation project, sanitation and sewerage system or any other public facility of a similar nature as may be notified by the Central Board of Direct Taxes (CBDT).

The government has also decided that the stipulation of investment of 20 per cent, 50 per cent and 80 per cent over a period of three years by the venture capital undertaking underrule 2D of the Income Tax Rules would be dispensed with.

Under the Income Tax Act, income by way of dividends or long term capital gains of a venture capital fund or a venture capital company from investments made by way of equity shares in a venture capital undertaking, is exempted from tax. The government has relaxed the prescribed conditions by amendment of section 10(23F) of the Income Tax Act 1961 by the Finance (No 2) Act 1998 with effect from April 1, 1999 (assessment year 1999-2000 and onward) and amendment rule 2D of the Income Tax Rules 1962 vide notification S.O. No. 1079 dated December 16, 1998 with effect from April 1, 1999.

However, the industry views the announced relaxations as a half way measure because the contradictions between the CBDT's guidelines for venture capital companies and SEBI's guidelines have not been completely resolved. The relaxation for investments in infrastructure companies does not happen to be in accordance with SEBI guidelines. But the other relaxations pertainingto loosening of lock-in period and investment norms are in line with SEBI's guidelines.

Investments by venture capital companies in other forms than equity are allowed by SEBI but income from these investments are taxed by the income tax authorities. Industry had been hopeful of getting an exemption on this count. The income tax authorities allow exemption on dividend income but do not allow exemptions on interest income.

Venture capital companies have been clamouring for a long time that investments in export companies and BIFR companies be allowed and that such investments should qualify for tax deductions but this too has not been allowed. Also the guideline allowing venture capital companies to invest in "service sectors" is not clear. While investments in software companies is allowed, guidelines for investments in other service sector areas as hotels has not been specified.