Fund of Funds for Startups

Fund of Funds for Startups

Fund of Funds for Startups

Government of India (GoI) created access to a large capital of funds for startups in India, through the scheme “Fund of Funds for Startups” to create a nation of job creators than job seekers.

Startup India

The GoI initiated Startup India to support and boost the startups for economic and innovative developments in India. Startup India is a part of the Industrial Promotion scheme provided by the Department of Promotion of Industry and Internal Trade (DPIIT). DPIIT has targeted to release Rs.10,000 crore for Startups through SEBI registered Alternative Investment Funds (AIF) for the scheme, fund of funds for startups. Startups that are approved by the Implementing Agencies will receive the funds from the Small Industries Development Bank of India (SIDBI).

Fund of Funds for Startups

Fund of Funds is a multi-manager investment fund that helps the startups by reducing the risk of investing in bonds, stocks and other types of securities. The fund of funds can be domestic or international. The scheme allows the startups to be registered with DPIIT for tax benefits, easier compliance, IPR fast-tracking and self-certification on labour laws.

Eligible criteria to be recognised by DPIIT for startups

  • The existence of the company should not exceed more than 10 years from the date of incorporation
  • The company should be incorporated as a Private limited or LLP or a registered partnership firm
  • The turnover of the company should be below Rs.100 crore for any financial years of its corporation
  • The company should not have been formed by splitting or restructuring of an existing firm
  • The start-up should focus on development and innovation in manufacturing products or services driven by technology or intellectual property

This scheme focuses on two main areas: (i) Developments and (ii) Providing solutions to problem areas of setting startups in India.

Objectives of the Scheme

  • To create sustainable economic growth
  • To generate large scale employment opportunities
  • To empower Startups through innovation and design
  • To minimise the risk of investing in other types of securities

GoI created action plans to address the problem areas of startups and for an effective outcome of the scheme. They are:

  • Simplification and handholding
  • Funding support and Incentives
  • Industry-academia partnership and incubation

Features of this Scheme

  • The startups shall be exempt from the income tax for three years under the section 80-IAC of the Income Act, 1961
  • A total of Rs.10,000 crore will be funded by the GoI
  • Exemption from the taxation of a capital gain on the sale of shares
  • The startups could get repayment of up to 80% on filing application for a patent
  • Self-certification under 9 labour laws
  • Registration and documentation through the mobile application
  • Simplified process in the filing of patent
  • Equal opportunities for both startups and existing enterprises

Eligibility Criteria for the Scheme

  • The start-up should be less than five years old, and the income tax must be incorporated on or after 1st of April 2016
  • The start-up should be registered as a Private Limited Company, LLP or partnership firm
  • The turnover of the start-up should be less than Rs.25 crore
  • The start-up should focus on development and innovation in manufacturing products or services driven by technology or intellectual property
  • The start-up should not have been formed by splitting or restructuring of an existing firm
  • The start-up should have obtained a certificate of eligible business from an inter-ministerial board recommended by a recognised incubator/VC
  • Registered with DIPPT

Process and Stages of the Scheme

Step 1: The start-up registers with Startup India

Step 2: The startup checks if it meets the required criteria of the scheme

Step 3: The startup checks if it meets the required guidelines of SEBI for AIFs

Step 4: Applies for the scheme in two stages:

  • Stage 1: The eligible AIF should make a formal presentation to the SIDBI appointed Venture Capital Investment Committee (VCIC).
  • Stage 2: An application should be submitted by the AIFs to SIDBI, referring to the executive committee of the board for sanction of the scheme.

Step 5: Upon sanction, a letter of approval is being issued, and a contribution agreement is signed with the AIFs.

Allotment of Funds for the Scheme

  • 15% of the funds are provided by the SIDBI
  • 85% of the funds from other investors

Types of Startups approved for the Scheme

  • Safe and Smart Cities and Smart Villages
  • MSME sectors which are focused on increasing efficiency and new solutions for the cluster-based approach
  • Iron, Steel, Aluminium, Coal, Power sectors
  • Internet of Things and Wearable Technologies
  • Web and Mobile Technology
  • Social Mobility Analytics and Cloud (SMAC)
  • Financial Technologies with a focus on financial inclusion and mobile commerce (m-commerce).
  • Healthcare Technology
  • Social Innovation for empowering citizens
  • Emerging industries such as Defence, Automotive, Agro Processing, ESDM and Biotechnology
  • Renewable Energy
  • Category I of AIFs under the section 3(4)(a) of SEBI
  • Category II of AIFs under section 3(4)(b) of SEBI
  • Category III of AIFs under section 3(4)(c) of SEBI

Total number of startups financed under FFS (according to the Ministry of Commerce) (year-wise)

Financial YearNo. of Startups given financial assistance under FFS
FY – 2016-1762
FY – 2017-1858
FY – 2018-1998
FY – 2019-20 (As on June 13, 2019)31

Documents Required for the Scheme

  1. The startup should acquire any one of the following letter of recommendation or support in the format specified by DPIIT
    • A letter on the innovative nature of business by an incubator recognised by the GoI
    • A letter on the innovative nature of business by an incubator established in a post-graduate college in India
    • A letter of support by an incubator which has acquired a project related to this scheme or any scheme that promotes innovation
    • A letter from an Incubation fund or Angel fund or Private fund or Accelerator with not less than 20% in equity (should be registered with SEBI)
    • A letter from GoI or state government as a part of promoting innovation
    • A filed and published patent in the journal of Indian Patent Office
  2. Certificate of incorporation/registration of the company
  3. Certification from the Inter-Ministerial Board (IMB) or the DPIIT

Registration Procedure

  • Register the startup with Startup India
  • Upload the letter of recommendation/support in the PDF format
  • Upload the certificate of incorporation of the company
  • Description of the company in the space provided
  • Option to avail tax exemption (the company can choose to apply or skip)
  • Choose to provide Self-certification (9 labour laws)

On completing the registration process, the user will get a recognition number, and the certificate of recognition will be issued after examining all the documents. Then, the distribution of funds will take place as per the guidelines.

Addendum

Simplification and handholding

  • To simplify the process of legal norms of Public Procurement for Start-ups
  • Mobile App and Portal for better access and filing documents
  • Startup India Hub
  • Legal support and faster exit

Funding Support and Incentives

  • Providing access of INR 10,000 crore
  • Credit Guarantee Fund for Startups
  • Tax Exemption on Capital Gains
  • Tax Exemption to Startups for 3 years
  • Tax Exemption on Investments above Fair Market Value
  • Organizing Startup Fests for Showcasing Innovation and Providing a Collaboration Platform

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Post by Arnold Thomas

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