It was on January 16, 2016 that the Indian Prime Minister announced the Start-Up India programme that got the entire startup world gushing with hope. The Rs 10,000 crore Fund of Funds (FoF) was the centrepiece of the announcement. Allocated to the Small Industries Development Bank of India (SIDBI) by the Reserve Bank of India, the capital had to be invested in Indian startups through a way of providing them soft loans, equity and other risk capital.
The SIDBI set a goal to sanction the Rs 10,000 crore capital till 2025. But, unfortunately, till date, only Rs 600 crore of these Rs 10,000 crore have been sanctioned this year and a even a meagre sum of Rs 5.66 crore has reached just one new venture. According to industry experts, two of the major reasons for the poor performance of the fund is poorly drafted policies and the evergreen bureaucratic delays.
A recent Right To Information (RTI) filed by Business Standard newspaper has revealed, that so far Kae Capital is the only venture that has actually invested in a startup under the FoF.
Last month, we had reported how the SIDBI had finally pledged Rs 110 crore from the 2016 announced Rs 10,000-crore ‘fund of funds’ for startups, to four venture capital funds, namely Orios Venture Partners Fund II, Kae Capital, and two little known funds, Saha Trust and Kitven Fund III. Out of the 110 crores committed by SIDBI, 50 crore have been given to Orios Venture Partners Fund II, 45 crore to Kae Capital, 10 crore to Saha Trust and 5 crore to Kitven Fund III. Till date, Kae Capital is the only venture that has got Rs 5.66 crore of the Rs 45 crore committed to them.
It is important to note here that the Rs.10,000 crore ‘fund of funds’ is just a reiteration, rather a repackaging of the July 2014 budget proposal by Finance minister Arun Jaitley where he set aside Rs.10,000 crore for startups. The FoF just provides a little clarity on how it will be structured and managed. Earlier, we had reported that the much ambitious Rs 10,000 crore startup fund announced by the Modi government in financial budget of year 2014 was still lying unused as no one is clear which government department is responsible for managing the scheme. Later the responsibility was given to SIDBI by the RBI.
What is Funds of Funds?
Fund of Funds scheme was announced by the Indian Prime Minister Narendra Modi when he unveiled the Start-Up India action plan more than a year ago in the Indian Capital. Under the scheme, the government pledged that it would not be investing directly into Indian startups but instead contribute a part of the money an investor or Venture Capitalist raises to invest in the startups.
What Is SIDBI’s Responsibility With FoF?
1) SIDBI has been bestowed upon the responsibility to operate the fund.
2) The organisation has to contribute up to 35 percent in a fund that aims to invest in startups in India.
3) This means, if a VC is aiming to raise a Rs. 100 crore fund, SIDBI will have to pump up Rs. 35 crore and the rest will have to raised from some other external sources.
4) An amount of Rs 500 crore was provided to the corpus in the financial year 2015-16 and then another Rs. 600 crore in the financial year 2016-17.
5) According to the government, the Rs. 10,000 crore corpus has the potential of catalysing Rs. 60,000 crore of equity investment and almost twice as much debt investment.
Why the Delay?
1) According to feedback received from several investors, SIDBI is too repetitive and bureaucratic.
2) Investors are only allowed to invest in DIPP certified startups.
3) Investors aren’t allowed to take part in the follow-up rounds of a startup, which at the end of the day results in diluting their stake.
4) While SIDBI said that it will be contributing 35 percent to a fund raised by a VC, in reality, it is only shelling out about 15-20 percent.
5) SIDBI isn’t willing to handover a formal letter of commitment so that funds can go to the market and raise the remaining amount of money they need.
Startups find it hard to get past the red tape
According to feedback received, the process between the request and the approval involves repetition of some procedures which results in unnecessary delays. But SIDBI is firm that the process is all necessary and natural.
According to a statement given by SIDBI Deputy Managing Director Ajay Kumar Kapur to ET, “When VCIC recommends a fund generally it could be at a very preliminary stage and the Funds go to the market with a comfort that in principle approval from SIDBI is available and often even the Private Placement Memorandum [PPM] may not be there. Since it takes considerable time to complete the documentation, thereafter, including filing PPM with SEBI, getting their approval, and securing at least 25% of the corpus of the Fund, based on past experience it is seen that New Funds could take around 9 months time from putting together the Fund Idea to complete the above steps and start investing.”
However, the DIPP, which is the nodal agency for the Startup India Action Plan, has recently said that based on the feedback received, the procedure is now being shortened as much as possible.
Regulations delay the money supply
The Indian government is infamous for its non-punctual ways, but with the new government at centre, people were hopeful that this will change. But, Alas, they were wrong.
The Modi government has till date only sanctioned Rs. 600 crore to SIDBI. Out of this, only Rs. 100 crore has been verbally conveyed till now. And SIDBI has given a go-ahead to a meagre Rs 129 crore to various Alternate Investment Funds (AIFs).
The money disbursal has been halted because the investors have a raised a demand for a regulatory change. According to a particular guideline in the FoF, the money which is raised as part of the fund will only be invested in DIPP-certified startups. This particular condition makes investors prone to more risk than they’re used to. In fact, several VCs too aren’t particularly happy with this condition.
Further, investors are only allowed to invest in startups that haven’t been in business for more than five years and have a turnover of not more than Rs 25 crore. This means, if a particular startup does incredibly well for itself and churns out a turnover of more than Rs. 25 crore, the VC will not be allowed to invest further in a follow-up round.
Investors aren’t really happy with all the restrictions as they think investing in startups approved by the government is hugely limiting.
SIDBI is keeping its purse strings tight
As the funding crunch continues its run from 2016 to 2017, investors feel that it is high time that SIDBI fulfills its commitment of contributing 35 percent of the share. Currently, SIDBI is only contributing 15 percent of the fund requirement but the upper limit for government’s participation is set at 35 percent.
Approval without backing
The funding environment present in India currently can be considered a particular harsh one. Thus, when an investor receives a final approval from SIDBI after undergoing a rigorous vetting process, it expects the SIDBI to give them a letter that will help them in raising the remaining money faster. However, here’s the catch. An investor, who has been given a commitment letter from SIDBI, isn’t allowed to parade to the market and tell fellow investors that SIDBI has decided to invest in the fund.
However, SIDBI has rubbished these claims and said that it has already issued commitment letters to some of the investors and only a few are left as of date. However, it has also added that SIDBI isn’t responsible for helping the investors raise funds from other sources.
DIPP has set March 2017 as the deadline for disbursal of the approved Rs 600 crore funds. It aims to increase this figure by up to Rs 1,000 crore next year. Let’s see if the DIPP is able to meet this deadline.