Norms tweaked, ‘Fund of Funds’ for start-ups takes off

Amiti Sen New Delhi | Updated on January 15, 2018


DIPP to ask FinMin to release this year’s money plus past dues

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 told BusinessLine. “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.

Published on April 30, 2017

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