‘Fund of Funds’ for start-ups takes off

After almost a year since the Union Cabinet gave its green signal, the Centre’s ambitious ₹10,000-crore ‘Fund of Funds’ (FFS) for financing start-ups over a nine-year period is finally off to a roaring start.

In the first few weeks of April 2017, venture capital funds (VCFs) have lapped up the entire ₹1,100 crore that had collected in the fund’s kitty over the last two years following a change in some stringent guidelines that were not allowing them to take funds from the FFS earlier , a government official. “The DIPP now wants the Finance Ministry to increase its allocation for the FFS this year from the prescribed annual ₹1,100 crore to a higher amount to compensate for the lower allocations in the past two years,” the official said, adding that it may demand a total of ₹2,200 crore.

Stiff guideline

The main reason why the FFS had not taken off was a particular guideline which said that if a VCF was given some amount, say ₹20 crore, from the FFS, and it had a total corpus of ₹100 crore, it would have to invest the entire corpus, which includes the ₹80 crore it raised from other sources, in start-ups.

“It was not proper to force them to put their entire money only in start-ups, which are high risk ventures.

“They need to be allowed to spread their risks by also offering part of their corpus to low risk areas. That is why the guidelines were changed,” the official said.

As per the new guidelines, if a VCF with a corpus of ₹100 crore is given ₹20 crore from the FFS, it will have to invest twice that amount, which in this case would be ₹40 crore, in start-ups, and the remaining ₹60 crore can be invested in other low-risk ventures.

“The VCFs thought that it was a reasonable demand as in this case their obligation towards start-ups equals the government’s and they are also able to balance their risk by putting the rest of the fund in safer ventures,” the official said.

The Union Budget announced this February did not make any allocation for the FFS as the funds allocated earlier had not been used.

Talks with FinMin

“Now that all the funds have been given to VCFs, we can get our yearly allocation in the Supplementary Budget. We have already intimated the Finance Ministry and will hold detailed discussions soon,” the official said.

The Union Cabinet last June had approved the proposal to establish a FFS with a total corpus of ₹10,000 crore, with contribution spread over the 14th and 15th Finance Commission cycles based on progress of implementation and availability of funds.

It was decided that the FFS shall contribute to the corpus of Alternative Investment Funds (such as VCFs) for investing in equity and equity-linked instruments of various start-ups at early stage, seed stage and growth stages.

The FFS is being managed and operated by the Small Industries Development Bank of India.

                                                      Press Information Bureau
Government of India
Cabinet
22-June-2016 16:02 IST

Establishment of Fund of Funds for funding support to Start-ups

The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has approved the establishment of “Fund of Funds for Startups” (FFS) at Small Industries Development Bank of India (SIDBI) for contribution to various Alternative Investment Funds (AIF), registered with Securities and Exchange Board of India (SEBI) which would extend funding support to Startups. This is in line with the Start up India Action Plan unveiled by Government in January 2016.

The corpus of FFS is Rs.10,000 crore which shall be built up over the 14th and 15th Finance Commission cycles subject to progress of the scheme and availability of funds. An amount of Rs.500 crore has already been provided to the corpus of FFS in 2015-16 and Rs.600 crore earmarked in the 2016-17. The Fund is expected to generate employment for 18 lakh persons on full deployment.

Further provisions will be made as grant assistance through Gross Budgetary Support by Department of Industrial Policy and Promotion (DIPP) which will monitor and review performance in line with the Start up India Action Plan.

The FFS emanates from the Start up India Action Plan, an initiative of Department of Industrial Policy & Promotion (DIPP). The expertise of SIDBI would be utilized to manage the day to day operations of the FFS. The monitoring and review of performance would be linked to the implementation of the Start Up Action Plan to enable execution as per timelines and milestones.

A corpus of Rs. 10,000 crore could potentially be the nucleus for catalyzing Rs. 60,000 crore of equity investment and twice as much debt investment. This would provide a stable and predictable source of funding for Start up enterprises and thereby facilitate large scale job creation.

Background:

Accelerating innovation driven entrepreneurship and business creation through Start-ups is crucial for large-scale employment generation. An expert committee on Venture Capital (VC) has opined that “India has the potential to build about 2500 highly scalable businesses in the next 10 years, and given the probability of entrepreneurial success that means 10000 Start ups will need to be spawned to get 2500 large scale businesses”.

Start-ups face several challenges – limited availability of domestic risk capital, constraints of conventional bank finance, information asymmetry and lack of hand holding support from credible agencies. A large majority of the successful Start-ups have been funded by foreign venture funds and many of them are locating outside the country to receive such funding.

A dedicated fund for carrying out Fund of Funds operations would address these issues and enable flow of assistance to innovative Start ups through their journey to becoming full fledged business entities. This would encompass support at seed stage, early stage and growth stage. Government contribution to the target corpus of the individual Fund as an investor would encourage greater participation of private capital and thus help leverage mobilization of larger resources.

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