Doubling of SIDBI Fund of Funds Operations Focusing MSME and Startups

In its 7th meeting on the February 11, 2017 VCIC examined requests from 11 fund managers and cleared for sanction requests from 9 Funds aggregating ₹ 300 crores. It is evident that there is a significant upsurge in the fund of funds operations if seen from the number of funds supported by SIDBI during the current FY. During FY 15 and 16 sanctions were made to 11 funds (Rs. 314 crores) and 16 funds (Rs. 607 crores) respectively while the number during the current FY has already crossed ₹ 1112 crores to 30 funds.

It may be recalled that the government had announced establishment of ₹ 10,000 crore fund of funds to support AIFs who invest in Startups. This money will be released spread over two finance commission cycles (14th and 15th viz. till 2025) based on progress under the Scheme. An amount of ₹ 500 crore has been released so far to SIDBI which is managing the programme. It may added that SIDBI is also operating various other fund of fund programmes invsting in MSMEs and Startups viz. India Aspiration Fund [IAF] launched formally by Hon’ble Finance Minister in August 2015, ASPIRE Fund focused on agri and rural enterprises launched by Hon’ble Minister for MSME last year and ₹ 200 crore on behalf of LIC. SIDBI as manager of these Funds has constituted with the consent of the Government, a Venture Capital Investment Committee [VCIC] which includes external experts viz. Mohandas Pai, Sanjeev Bikchandani, Saurabh Srivastava, H.K.Mittal, Prof. Vaidyanathan, Kiran Karnik.

Out of the those cleared earlier by VCIC, SIDBI has so far accorded formal sanction, for an aggregate contribution of ₹ 1619.25 crores after undertaking detailed appraisal and due diligence (including ₹ 1580 crore under IAF/FFS and ₹ 39.50 crores under ASPIRE). Operations under IAF and FFS are complimentary as both target startups and the exact coverage depends on the status of compliance to the guidelines under these funds at the time of signing of the contribution agreements. FFS initially focussed on motivating AIFs to float schemes which will invest in startups alone. With difficulties expressed by the industry in this regard, the government is re-examining the issue. With the modification proposed, coverage under FFS is expected to stand at around ₹ 600 crore in respect of 15 AIFs by March 31, 2016.

These programmes are serving the objectives with which these funds were formed. For example under IAF based on the drawals of ₹ 177 crores made, the investments by the supported funds are reported to be in 124 MSMEs/Startups for an aggregate support of ₹ 452 crores. Thanks to the rise in AIFs supported under the above programmes, there is significant investment happening in startups as well, with current year expected to close with around 150 startups receiving ₹ 588 crore. This is expected to grow fast in the next year as investments by AIFs supported pickup. The investment in startups by the 15 funds as aforesaid is likely to investment approximately ₹ 187 crores in startups by March end.

The story of IAF and FFS is in line with the industry trend. AIFs have a long investment / divestment cycle of 7-10 years with investments beginning a good 6-9 months (or longer) after an AIF gets its approval from SIDBI and scales gradually thereafter. It is expected that the investment in startups by the Funds supported under FFS may cross ₹ 1200 crores over next twelve months as they raise the balance contribution from other investors and pick up the pace of investing.