Start-ups require corpus fund for execution of their idea at early stages. Since banks normally provide secured loans, start-ups are left with the only option of raising funds from venture capitalists or the angel investors. Many start-ups in India face the problem of corpus funds in the early stages for developing their ideas. In order to overcome this capital inadequacy, Government of India has floated a new fund called Start-up India Seed Fund Scheme (SISFS), which primarily focuses on providing financial assistance to start-ups for proof of concept, prototype development, product trials, market entry and commercialization. The SISFS will be implemented from April 01, 2021. To provide seed funding to eligible startups, a corpus of Rs. 945 crores will be distributed over the next 4 years to the eligible start-ups via eligible incubators across India. The scheme is expected to support about 3600 start-ups.
Eligibility for start-ups: Under the SISFS, the following start-ups will be eligible: (i) those recognized by DPIIT & incorporated not more than 2 years ago at the time of application; (ii) those with a business idea to develop a product or a service with market fit, viable commercialization and scope of scaling; (iii) those using technology in its core product or service, or business model, or distribution model, or methodology to solve the problem being targeted; (iv) those 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.); (v) those who have not received more than INR 10 lakh of monetary support under any other central or state government scheme; and (vi) those with at least 51% shareholding by Indian promoters.
Eligibility for incubators: Under the SISFS, the following incubators will be eligible: (i) Must be a legal entity - society, trust, private limited company or a statutory body; (ii) Must be operational for at least two years on the date of application; (iii) Must have facilities to seat at least 25 individuals; (iv) Must have at least 5 start-ups undergoing incubation physically on the date of application; (v) Must have a full-time CEO, supported by a capable team in finance, legal and human resources functions; (vi) Should not be disbursing seed fund to incubatees using funding from any third-party private entity; and (vii) Must have been assisted by central/state government(s) and if not so, then it must be operational for at least three years with at least 10 separate start-ups undergoing incubation in the incubator physically on the date of application and must present audited annual reports for the last 2 years. The Experts Advisory Committee (EAC) can suggest any additional criteria. Online applications will be invited from incubators across India to participate in the scheme on https://www.startupindia.gov.in or any other platform specifically designated for the purpose.
EAC: EAC will be constituted for the overall execution and monitoring of the SISFS by the Department for Promotion of Industry and Internal Trade. EAC will evaluate and select incubators for allotment of seed funds, monitor progress, and take all necessary measures for efficient utilization of funds towards attainment of objectives of SISFS.
Selection Process: Incubator Seed Management Committee (ISMC) will be constituted by incubators, which shall consist of experts who can assess and select start-ups for seed fund support. Start-ups will be selected through an open, transparent and fair process. The incubator will shortlist the applicants based on their evaluation. ISMC will evaluate applicants based on their submissions and presentations and select start-ups for seed funding within 45 days of receipt of application. All the applicants will be able to track the progress of their application on the Start-up India portal on a real-time basis. Rejected applicant will be given an option of applying afresh.
Guidelines for disbursements of seed fund: Seed fund to an eligible start-up shall be disbursed by the incubator as follows:
- Up to INR 20 lakhs as grant for validation of proof of concept, or prototype development, or product trials. The grant shall be disbursed in milestone based installments. These milestones can be related to development of prototype, product testing, building a product ready for market launch, etc.
- Up to INR 50 lakhs of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments. Seed fund shall strictly not be used by start-ups for creation of any facilities and shall be utilized for the purpose it has been granted for.
- For start-ups being supported through convertible debentures, or debt, or debt linked instruments, funds shall be provided at a rate of interest of not more than prevailing repo rate. The tenure should be fixed at the time of sanctioning the loan by the incubator, which shall be not more than 60 months (5 years). A moratorium of up to 12 months may be provided for the start-ups. Because of the early stage of the start-ups, this shall be unsecured and no guarantee from promoter or third-party will be required.
- Legal agreement shall be executed by the incubator with the selected start-ups before the release of the first installment. The incubators shall ensure that the necessary terms and conditions, including milestones, related to the seed fund are clearly detailed in the agreement.
- Subsequent disbursement will be linked to the achievement of previously specified milestones as per agreement between the start-up and incubator.
- Start-ups will receive the funds in their company bank accounts.
- For grants, the first installment to any selected start-up shall be released not more than 60 days from receipt of application from the start-up. The start-up shall submit the interim progress update and utilisation certificate to initiate the release of subsequent installment of grant.
- Start-up shall submit final report and audited utilisation certificate at the end of the project duration. For failed ventures, the entrepreneur will share his/her learnings and the reasons for failure in the report and submit this along with the utilisation certificate for the fund amount.
- The incubator or any of its staff members shall not charge any fee in cash or in kind from applicants or beneficiaries under the scheme for any process of selection, disbursement, incubation, or monitoring.
- A grievance cell shall be set up at DPIIT for the scheme to address issues of applicants, such as delayed evaluation of applications, delayed disbursements by incubators, etc.
Utilization of Funds: Project-specific Trust and Retention Account shall be maintained by the incubator with any nationalized bank. Funds shall be released into the start-up's account through milestone-based installments. Proceeds received from the beneficiary start-up can be used for further funding in start-ups as per guidelines of this scheme. Each incubator shall report the funds sanctioned, received, and disbursed to each start-up for each financial year. Further, incubators will also be required to submit detailed report on status of utilization of funds and audited expenditure for each financial year.
Progress Monitoring: EAC will review the progress of the scheme with the incubators selected under the SISFS. The incubators will have to provide the reports as may be directed by the EAC for objective evaluation. In case of poor performance of any selected incubator, EAC may decide to discontinue seed fund support to the incubator and take further action as may be required. Also, appropriate legal action will be taken against the selected incubator in case it uses the grant for purposes other than those for which it has been awarded.
The SISFS will provide the much-needed thrust to the Make in India initiative. It will also give the required visibility to the start-ups for securing subsequent round of funding from the angel investors, bankers, financial institutions or venture capitalists. This scheme will help the fund requirements of start-ups at early stages and to gain momentum.
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