The government finally decided on Wednesday to alter its Fund of Funds (FFS) for startups to ensure better utilization of the provided resources.
An initial corpus of Rs 1,000 crore was set up, but the tough rules had made their disbursal difficult. Realizing the difficult situations it created for startups, it is now decided to allow Alternate Investment Funds (AIFs) supported by FFS to invest at least twice the amount of contribution received from FFS in qualified startups.
As per the source, the government also said the operating expenses for carrying out due diligence, legal and technical appraisal, convening meeting of Venture Capital Investment Committee, would be met out of the FFS with a cap of 0.5% of the commitments.
Last June, the cabinet had cleared a Rs 10,000 crore FFS, which is to contribute to the corpus of AIFs for investing in equity and equity-linked instruments of startups. The fund, being managed and run by Sidbi, contributes to Sebi-registered AIFs, with contributions going up to 35% of the corpus of AIF.
It was decided that Fund of Funds corpus and the money raised by the AIF would be invested entirely in startups. AIFs want a diversified portfolio to spread the risk and the current stipulation was proving to be a stumbling block. This has prompted the government to change the rules. The other issues raised by stakeholders were that the process of funding of startups by AIFs is long drawn.
So, it is possible that before the release of the final tranche, the turnover of the startup crosses Rs 25 crore but it may still need funds for growth.