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Start-up India Seed Fund Scheme – Promoting the Start-up Ecosystem In India

The Central Government recently notified ‘Start-up India Seed Fund Scheme’ (“FUND SCHEME”) to promote the growth and development of Indian start-ups disseminating approximately INR 945,00,00,000. (to be effective from April 1, 2021 for the period of four years). The objective of the FUND SCHEME is to establish a structure that provide monetary benefits to eligible start-ups for proof of concept, prototype development, product trials, market entry and commercialization.


Eligible Start-ups:


For the Start-ups to be eligible to apply under the FUND SCHEME it shall/ must be:


a) Incorporated not more than 2 years ago at the time of application and recognized by DPIIT;


b) Must have a business idea to develop a product or a service with market fit, viable commercialization, and scope of scaling;


c) Should be using technology in its core product or service, or business model, or distribution model, or methodology to solve the problem being targeted;


Please note that reference would be given to startups creating innovative solutions in sectors such as social impact, waste management, water management, financial inclusion, education, agriculture, food processing, biotechnology, healthcare, energy, mobility, defence, space, railways, oil and gas, textiles, etc.;


d) Start-up should not have received more than Rs 10 lakh of monetary support under any other Central or State Government scheme (this does not include prize money from competitions and grand challenges, subsidized working space, founder monthly allowance, access to labs, or access to prototyping facility);


e) Must have a shareholding by Indian promoters (at least 51% at the time of application to incubator for the scheme, as per Companies Act, 2013 and SEBI Regulations, 2018) and


f) Any start-up will not receive seed support more than once each as per provisions of guidelines.


Intention behind the FUND SCHEME

The intention behind drafting the FUND SCHEME to address the primary obstacle faced by upcoming startups, which is the lack of access to adequate capital particularly at the product trial/ proof of concept stage. The FUND SCHEME is just one in a series of measures being implemented by the government to strengthen the start-up ecosystem in India, for example, the recent union budget extended the eligibility period for start-ups to March 31, 2022 to avail the tax exemption under Section 80-IAC of the Income Tax Act, 1961.


Adding on to the initiative, the Social Alpha and Small Industries Development Bank of India undertook to establish the Swavalamban Divyangjan Assistive Tech Market Access fund to offer financial grants to incubated start-ups operating in the assistive technology sector. It also entered into a memorandum of understanding with the National Stock Exchange to discuss potential arrangements for providing a debt capital platform to micro, small and medium enterprises.


The implementation of such measures is of utmost importance given the prevailing market scenario where it is difficult for most start-ups to raise capital particularly in light of the slowdown caused by the pandemic. Thus, accordingly, the enforcement of the FUND SCHEME comes at the most opportune time for the start-up ecosystem in India.


Benefits under the FUND SCHEME:


1. Establishment of an Experts Advisory Committee (EAC) – The FUND SCHEME envisages the establishment of an EAC which will oversee the implementation and management of the FUND SCHEME. The primary responsibility of the EAC will be to assess and select incubators (who fall within the eligibility criteria specified in the FUND SCHEME) with the objective of granting seed funds. After the incubators have been selected, the EAC will supervise the process of dissemination of the seed funds to the selected incubators. The seed fund will be disbursed by the EAC to the incubators on the condition that certain targets relating to the utilization of the funds are met. In addition, the EAC is also expected to ensure that the incubators are on the right track in relation to achieving the milestone-based objectives as set by the EAC.


2. Assistance to Incubators – The EAC shall disseminate INR 5,00,00,000 (Indian Rupees Five Crores) to the selected incubators over a series of milestone-based installments (as determined by the EAC). The installments will only be disbursed to the incubators upon submission of proof to the EAC that the milestones have been accomplished. In excess of the seed fund, the incubator will also be provided with a management fee (5% of the total commitment granted to the selected incubator) which is to be utilized for the operational expenditure incurred by the incubators in conducting due diligence and shortlisting Start-ups. The seed fund grant provided to the incubator is to be used in full, within three years from the date of receipt of the first installment by the incubator.


3. Incubator Seed Management Committee (ISMC) – The selected incubators that are participating in the FUND SCHEME will need to establish an ISMC. The ISMC is an organ that will assess and shortlist suitable Start-ups for the provision of seed support. The ISMC shall consist of a nominee from the incubator who will act as chairman; representative from the State Government’s Nodal Team; representative of a venture capital fund or angel network; a domain expert from the industry; a domain expert from an academic; two successful entrepreneurs and any other relevant stakeholder as deemed appropriated by the incubator.


4. Disbursement of Seed Funds to Start-ups – The incubators may onward disburse the seed fund to the Start-ups selected by the ISMC in the following manner: (i) Up to INR 20,00,000 (Indian Rupees Twenty Lakhs) (milestone based payments) as grant for validation of proof of concept, or prototype development, or product trials; (ii) Up to INR 50,00,000 (Indian Rupees Fifty Lakhs) of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments. There also seems to be an express prohibition on the Start-ups to use the seed fund for any purpose for which it has not been granted for.


The amount disbursed by the incubator to the Start-up shall not exceed 20% of the total grant provided to the incubator. Apart from monetary assistance, the incubators shall also equip the Start-ups with the physical infrastructure and equipment required to develop, research and test product prototypes and offer networking opportunities to the Start-ups by providing a marketing platform for the Start-ups to display the products developed to potential investors.


5. Indicators of Successful Implementation – The parameters for measuring the success of the Startups as assessed by the incubator will include progress of proof of concept; progress of prototype development; progress of product development; progress of field trials; progress of market launch; quantum of loan, angel or venture capital funding raised; jobs created by the Start-up; turnover of the Start-up and any other parameter as established by the incubator. The status of progress under each of the above-mentioned parameters will be relayed from the Start-up to the incubator and subsequently to the EAC. The incubator will also prepare a report on return on investment for each Start-up and submit the same to EAC.


The FUND SCHEME has been structured to operate as a greased machine with each component (the EAC, the incubator and the Start-ups) playing a pivotal role in the holistic game plan. The efficiency of the sector agnostic scheme in attaining its objective of bolstering the start-up sector will entirely depend on how well the respective organs functions in synchronization.


The primary issue with FUND SCHEME is that there exists ambiguity with respect to several facets of the implementation of the FUND SCHEME. For instance, one of the eligibility criteria for Start-ups as established by the FUND SCHEME is that the “Start-up must have a business idea to develop a product or a service with market fit, viable commercialization and scope of scaling.” However, the FUND SCHEME does not establish the thresholds for what is to be considered as “market fit” or “viable commercialization.” This is indicative of a larger problem with the FUND SCHEME which is that a lot of discretionary power is wielded by the EAC and the incubators in shortlisting “suitable” incubators and Start-ups respectively.

Similarly, the milestone thresholds to monitor progress will be established solely at the discretion of the EAC. If the milestones are set too high, this will make attainment of the objectives impracticable and block future disbursements of the seed fund to the incubators, and accordingly the Start-ups – thereby throwing a wrench in the works.


At the moment, the initiatives being ushered in by FUND SCHEME should be welcomed, however, the success of the FUND SCHEME will depend entirely on the administration and operation of the EAC, the incubator and the Start-ups which is yet to be seen.


Please feel free to get in touch if you have any doubts or need clarifications or assistance for the above.

We wish you luck for your business. Happy Working!


Regards,

AYTA Business Consultants | connect@ayta.in | +91 70246 21120

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