A major proposal presented in Arun Jaitley’s budget that was cheered by many was the move to set aside Rs10,000 crore for startups and the credit-starved micro, small and medium enterprises (MSMEs).
But the finance minister did not go into the details of how this fund would be managed or deployed. In the weeks since the budget, there has been little clarity either, apart from newspaper reports about the government vetting some agencies to administer the fund.
The government should act swiftly on this. Else, it will go the same way such allocations in the past have played out—they have gone nowhere. These instances serve as rich examples of what not to do this time around.
In the budget of 2012-13, finance minister Pranab Mukherjee had allocated Rs5,000 crore for more or less the same purpose. “In order to enhance availability of equity to MSME sector, I propose to set up a Rs5,000 crore India Opportunities Venture Fund with SIDBI (Small Industries Development Bank of India).”
The startup ecosystem is still clueless about what happened to that fund. “I don’t know if the Rs5,000 crore even came into the ecosystem. Budget allocation is one thing, but it’s the execution that is important,” said Padmaja Ruparel, president of the Indian Angel Network.
So how was the execution of the last fund carried out? The SIDBI balance sheet points out that it had deposits from banks worth Rs500 crore under the MSME India Opportunity Venture Fund as of March 2013. Currently, SIDBI has deployed Rs280 crore from the fund. The money was deployed into 100 companies, according to a SIDBI official who asked not to be named. These were loans and not equity investments. A SIDBI spokesperson did not return calls or respond to emails requesting comment.
The money lent by commercial banks to SIDBI was administered by the Reserve Bank of India’s priority sector lending policies. All commercial banks are required by the central bank to set aside a portion of their lending for the so-called priority sector, which are typically credit-starved sectors of the economy, such as rural enterprises and agriculture. The RBI asked banks to allocate shortfalls in their priority sector lending targets to SIDBI’s MSME India Opportunity Venture Fund. In the first round of allotment, SIDBI was to receive Rs2,000 crore out of the Rs5,000 crore promised in the budget. Of this, only Rs500 crore was received by SIDBI. The rest was to be received after 75% of this money was deployed.
But this allocation was made in the form of three year loans to SIDBI, and if SIDBI was to invest in equity, it would have a longer tenure than that and SIDBI would have to repay the amount to the banks from its own balance sheet. “There was a maturity mismatch. The money would have to be returned to the banks before the investment could mature in the companies, which is why there was a problem with that fund,” another SIDBI official said. The bank officials asked to remain unnamed as they are not authorized to speak with the media.
In the budget of 2008-09, the government had announced a fund of Rs2,000 crore with SIDBI for risk capital financing. This was called the Risk Capital Fund. Unlike what happened in the case of the India Opportunity Venture Fund, SIDBI had a time period of seven years to deploy the Risk Capital Fund. By the end of FY12, Rs1,193 crore was invested out of that fund. This amount was deployed in both equity and quasi-equity investments. These investments were made both directly by SIDBI and through other venture capital funds.
“There are innumerable slips between what is announced and what is executed,” said Ravi Kiran, co-founder of startup accelerator VentureNursery. “While SIDBI is supposed to be the nodal body for MSMEs, we interact with startups every day and they seem to find it difficult to even get information on how exactly they can get funded by SIDBI.”
The experience of the past makes it amply clear what needs fixing if the startups and MSMEs are to genuinely benefit from the budget’s well-intentioned announcement. All that is now needed is coordinated action.This article is a part of Quartz India. For more, follow this link.