Cabinet approves proposal to set up Fund of Fund for Start-ups

The union cabinet today approved the proposal with regard to the Fund of Funds of Start-ups (FFS), which was established in June last year with a corpus of Rs1,000 crore.

A meeting of the union cabinet chaired by Prime Minister Narendra Modi on Wednesday approved the creation of Alternate Investment Funds (AIFs) supported by the FFS, which will invest at least twice the amount of contribution received from FFS in qualifying start-ups.

Further, if the amount committed for a start-up in whole has not been released before a start-up ceases to be so, the balance funding can continue thereafter.

It was also decided that operating expenses for carrying out due diligence, legal and technical appraisal, convening meeting of Venture Capital Investment Committee etc would be met out of the FFS to the extent of 0.50 per cent of the commitments made to AIFs and outstanding. This will be debited to the fund at the beginning of each half year, ie, 1 April and 1 October.

The union cabinet at its meeting on 22 June 2016 had approved the proposal to establish a Fund of Funds for Start-ups (FFS) with a total corpus of Rs10,000 crore, with contribution spread over the 14th andd 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 (AIFs) 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 Small Industries Development Bank of India (SIDBI).  FFS contributes to Sebi-registered Alternative Investment Funds (AIFs) that may go up to a maximum of 35 per cent of the corpus of the AIF concerned.

The cabinet had, on 22 Juke 2016, decided that the corpus of Fund of Funds along with counterpart funds raised by the AIFs in which FFS takes equity would be invested entirely in start-ups.

It has been pointed out during its interactions with various stakeholders that investors in the AIFs would prefer that the portfolio of AIFs is adequately diversified to manage the investment risks appropriately and if the entire pool of funds of the AIF is invested in start-ups, it poses unacceptable risks to the investors of such AIFs.

The other issues raised by stakeholders were that the process of funding of start-ups by AIFs is long drawn which starts from pitching by a start-up, commitment by the AIF and then release of funds in tranches.

Thus it is possible that before release of the final instalment the turnover of the start-up crosses Rs25 crore but it still needs funds to meet its growth requirements. Besides, start-ups need access to funds through various stages of their life cycle, viz, early stage, seed stage and growth stage.

SIDBI has pointed out that the present provisions do not provide for SIDBI to get compensated for activities done post sanction to AIFs.