The institution will not set up the proposed fund -- dedicated to the information technology industry -- and instead continue to finance venture capital through the existing venture capital scheme, sources said.

The IDBI board has not approved the proposal for setting up the exclusive venture capital fund at a time when the institution's 11-year old venture capital scheme does not have many takers from the IT sector. "IDBI can extend venture capital finance without setting up the dedicated fund. There is no logic in floating of the fund at this point of time," a source close to the IDBI board said.

Both the Reserve Bank of India as well as the department of electronics (DoE) have been very keen on flotation of the fund. The uniongovernment has, in fact, issued a gazette notification on this subject based on a recommendation of the prime minister's information technology task force that financial institutions float venture capital funds to help finance software ventures.

The original IDBI plan was to float a wholly-owned subsidiary for investment in the information technology sector. According to the plan, the Rs 50-crore fund would have continued as a scheme with IDBI until an asset management company (AMC) is set up which was slated to take on the venture capital scheme in its books.

IDBI has sanctioned over Rs 225 crore and disbursed over Rs 125 crore through its venture capital scheme since 1987. The IT sector accounts for about Rs 50 crore of the total sanctions. In fiscal 1998, the scheme sanctioned over Rs 60 crore.

"When there is an existing scheme for venture capital financing, the IDBI board does not see any logic of floating a dedicated fund for the purpose. It will merely end up duplicating the same function,"sources said.

The IDBI venture capital scheme funds projects to commercialise indigenous technologies and adaptation of imported technologies to wider domestic applications. The objective of the proposed venture capital fund was to "encourage innovative articles and services which involve more than normal commercial risk and have the potential to offer commensurate returns."

Venture capital funds traditionally invest in high-risk ventures -- with high returns -- in high tech industries like electronics and software.

The prime minister's task force has set a $50-billion target in software exports by 2008. To fund these exports a huge amount of capital will be required which is why the prime minister's technology task force has recommended that financial institutions should float venture capital funds to help finance software ventures.