The government will use the fund to stand guarantee for loans given to startups. The fund was announced by Prime Minister Narendra Modi as part of the Startup India action plan in January 2016.
Accessing capital is one of the primary challenges faced by startups. The fund managed by the DIPP has a corpus of Rs 2,000 crore and will enable greater financial support to startups.
“We have finalised the details of how the fund has to be managed. A cabinet note will be moved soon,” a senior government official said. Only startups recognised and certified by the DIPP can access the credit guarantee fund. So far, the industry department has recognised 2,865 applicants and 60 of them have been approved for a tax holiday.
It has spelt out provisions that allow startups to raise money from overseas from venture capital funds and others through instruments such as convertible notes.
The startups will have to obtain government approval in sectors where FDI is not under automatic route to issue convertible notes. The government recently broadened the definition of startups to include “scalability of business model with potential of employment generation or wealth creation.”
ET View: Create An Ecosystem
The move may make sense given lacklustre credit off-take, but we need to setup an ecosystem to fund startups. Banks may not have necessary risk appetite or may lack domain expertise. Instead, we need to encourage angel investors to come up forearly-stage funding, with I-T and other incentives. It is true that since June, 2016, CBDT has notified tax exemptions for resident angel investors funding startups. But reports say onerous conditions need to be met and only 2-5% of startups qualify. This must change.,