DIPP's clarity about allocation of Start-up Fund of funds

DIPP's clarity about allocation of Start-up Fund of funds

Posted by P. Charitha on March 7th 2017

The government is changing certain rules for the fund of funds announced last year to make it more attractive for venture funds to invest, and start-ups could see a dramatic rise in fund flow.
In a recent interview to Financial Express, Mr. Ramesh Abhishek, Secretary, Department of Industrial Policy and Promotion (DIPP) spoke about how the government is working out a mechanism to replace the Foreign Investment Promotion Board (FIPB) and that administrative departments should ideally get to approve FDI proposals. He also spoke about how the funds from the fund of funds, (corpus of Rs.10, 000 crore, to start-ups) will be released and allocated to start ups.
It’s important to note that this fund of funds will be covered in two finance commission cycles (through 2025). So roughly, it comes to around Rs1, 100 crore per year. In the first year (2016-17), Rs600 crore is being given to SIDBI which is to manage it. So far, SIDBI have committed Rs129 crore. 
The government isn’t funding any start-up directly. It is a fund of funds. We are taking equities in other funds which are selecting start-ups (for investments).
There is an Investment Committee that recommends and SIDBI decides on putting in money. Until now, the venture capital (VC) funds (that put in money, along with SIDBI, to set up the fund of funds) are mandated to invest the money only in start-ups. Market participants told us that the investors are not ready to put all their money in start-ups (SIDBI usually contributes around 15% of the fund and the rest comes from VC funds). 
So what we now propose is that whatever is the contribution of SIDBI to the fund, at least double of that amount must go to start-ups (from that fund). So if we invest, say Rs600 crore in a fund, at least Rs200 crore must go to start-ups ( to cut risks, the rest can go to firms that are at a more mature stage).
So SIDBI has already selected about 15 funds with a corpus of Rs6,800 crore, and they are ready to commit and sanction if this new rule is implemented.
Moreover, we have asked SIDBI to take up to 35% of equity in a fund. Currently, it offers funds (in lieu of equity) to the tune of only 15-20%. We have suggested that SIDBI give more funds because other investors are finding it difficult to arrange so much of funds from the market.
Market participants have told us that SIDBI’s processes are too long, so we have asked it to fast-track its processes. 


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