Shocking Shortfall in Funds Of Funds: Reports Parliamentary Committee

A Parliamentary Committee report has pointed that there is a major shortfall in budgetary allocation by as much as Rs 453.50 crore for the year 2023-24 under the Fund of Funds for Startups and Startup India Seed Fund Scheme.

Swati Dayal
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The government is constantly making efforts and announcements to boost India’s Startup sector which already is at a boom currently. But with the enormous growth potential that Indian Startups have, has the government helped them enough? At a time when the youth-driven Startup sector is riding the wave of success, can the government afford to fall short in budgetary allocation for the sector against the demand made?

Was Enough Budget Allocated for The Startup Seed Fund Schemes? 

The Parliamentary Standing Committee on Commerce has pointed out that there is a major shortfall in budgetary allocation for the year 2023-24 under the Fund of Funds for Startups (FFS) and Startup India Seed Fund Scheme (SISFS). 

The Department related Parliamentary Standing Committee on Commerce has submitted its report to the Rajya Sabha on Demands for Grants of the Department for Promotion of Industry and Internal Trade. 

In the report, the committee observed that there has been a considerable shortfall in budgetary allocation of Rs. 8200.63 crores for the year 2023-24 as against the demand of Rs. 9787.44 crores made by DPIIT. 

“The Committee was informed that against the proposed requirement of Rs. 9787.44 crores for BE 2023-24, an allocation of Rs. 8200.63 crores has been made to the Department,” the standing committee report said.

The allocations under the Fund of Funds for Startups (FFS) scheme and the Startup India Seed Fund Scheme (SISFS) witnesses a major shortfall by as much as Rs 453.50 crore.

Also Read: Gujarat Witnesses 160% Jump in Startup Registration in last 2 years 

Which Startup Seed Funds Are Facing Shortfall?

The Committee report took note that the major shortfalls are under the Fund of Funds for Startups (FFS) and the Startup India Seed Fund Scheme (SISFS).

Apart from these, the other schemes which saw shortfall were the Credit Guarantee Fund, North Eastern Industrial Development Scheme (NEIDS), 2017, Industrial Development of UT of Jammu and Kashmir, Industrial Development Scheme for the States of Himachal Pradesh (HP) & Uttarakhand, 2017 and Footwear, Leather and Accessories Development Programme (FLADP).

The Parliamentary Committee recommended the Department to monitor these Schemes closely and if required, engage the Ministry of Finance for additional allocation to ensure smooth implementation of Schemes and projects. 

The Standing Committee has clearly recommended the department to ensure that the implementation of the Schemes is not affected due to “paucity of funds”.

The Demand Vs Allocation of Budget for Startup Scheme in India

The DPIIT has demanded for Rs 1800 crore to be allocated under Fund of Funds Scheme for the startups but an allocation of merely Rs 1470.00 crore was made, a shortfall of Rs 330 crore.

While under the Startup India Seed Fund Scheme, an allocation of Rs 160.00 crore was made against the demand of Rs 283.50 crore.

Also Read: How To Invest in Startups? How Much Wealth To Invest in a Startup?

What Are Government's Seed Fund Schemes?

The flagship Schemes namely, Fund of Funds for Startups (FFS), Startup India Seed Fund Scheme (SISFS) and Credit Guarantee Scheme for Startups (CGSS) are supporting startups at various stages of their business cycle to enable startups to graduate to a level where they will be able to raise investments from angel investors or venture capitalists or seek loans from commercial banks or financial institutions. 

What is The Fund of Funds Scheme (FFS)?

The Fund of Funds for Startups (FFS) Scheme was approved and established in 2016 with a corpus of Rs 10,000 crore. Under FFS, the Scheme does not directly invest in startups, instead provides capital to SEBI-registered AIFs, known as daughter funds, who in turn invest money in growing Indian startups through equity and equity-linked instruments. 

Small Industries Development Bank of India (SIDBI) has been given the mandate of operating this Fund through the selection of suitable daughter funds and overseeing the disbursal of committed capital. AIFs supported under FFS must invest at least 2 times the amount committed under FFS in startups.

What is Startup India Seed Fund Scheme (SISFS)?

The Scheme aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialization. Rs. 945 crore has been sanctioned under the SISFS Scheme for period of 4 years starting from 2021-22. Under SISFS, as per provisions of the Scheme, the Government has constituted an Experts Advisory Committee (EAC) which is responsible for the overall execution and monitoring of the SISFS. The EAC evaluates and selects incubators for allocation of funds under the Scheme. The selected incubators thereon shortlist the startups based on certain parameters outlined in Scheme guidelines.

Also Read: How To Raise Seed Funding For Your Startup?

How Successful Are Startup Funding Schemes in India?

The Parliament was recently informed that the Centre’s Fund of Funds for Startups (FFS) committed Rs 7,980 crore to 99 alternative investment funds (AIFs) till December 31, 2022, the government informed the Parliament. Of the total amount committed, Rs 3,400 crore was disbursed to 72 AIFs, which in turn made investments worth Rs 14,077 crore in 791 startups.

Karnataka, Maharashtra, Delhi, Haryana and Tamil Nadu are among the top states benefiting from this scheme.

Recently in a media interview, Sivasubramanian Ramann, Chairman and Managing Director, SIDBI said that the initial returns seen under the Fund of Funds scheme are very impressive. 

“It's probably 3.2X or 2.8X depending on what calculations you made but it's pretty impressive. Our understanding is that, at the end of a 10-year journey, somewhere in 2026, we probably will end up seeing something like Rs 20,000 crore coming back to us from the initial investment of Rs 10,000 crore, which we are sure we'll get fully drawn down in the next couple of years,” he told Money Control.

Meanwhile, Under the SISFS, Rs. 477.25 crore has been approved to 133 incubators of which Rs. 211.63 crore has been disbursed as on 31st December 2022

Why Are Indian Startup Seed Funds Underutilised? 

The Parliamentary Panel report took note of the fact that that the Department maintained a high budgetary utilisation of nearly 100 per cent during the last 4 years. 

The Committee, however, expressed its concern on the low utilisation in 2022-23 as 37.82 per cent of the budget remained unutilised with barely 2 months remaining in the current financial year. 

Pointing this, the Committee recommended the Department to avoid rush of expenditure towards the end of the financial year and ensure that the budgetary allocation are utilised in a timely and efficient manner.

‘Avoid Parking Of Large Amount Of Funds Under Various Heads

The Parliamentary Committee report highlighted the reduction of Rs. 1622.99 crore between Budgetary Estimate (BE) 2022-23 and Revised Estimate (RE) 2022-23. 

“On enquiring about the same, the Department informed that the reduction in allocation was due to decline in demands for budgetary support under Goods and Services Tax Regime and Startup India Seed Fund Scheme at revised stage,” the report said. 

The Committee also observed that the budget allocation had again increased by Rs. 1475.62 crore in BE 2023-24 after witnessing sharp reduction in RE 2022-23. 

DPIIT said that the enhancement in allocation was due to the requirement of additional funds for Schemes like National Industrial Corridor Development and Implementation Trust (NICDIT), Fund of Funds, Credit Guarantee Fund for Startups, Footwear, Leather and Accessories Development Programme (FLADP), North East Industrial Development Scheme (NEIDS), 2017 and North East Industrial and Investment Promotion Policy (NEIIPP). 

Also Read: DPIIT Launches Capacity Building Programme For Incubators ⁠⁠⁠⁠⁠⁠⁠

The Committee asked the DPIIT to be more far-sighted in estimating the budgetary requirement under various heads at the time of formulating budgetary proposal. This will avoid parking of large amount of funds under various heads and ensure more effective utilisation of funds. 

Further, it would also help avoid sharp reduction in allocation under various heads at RE stage. 

The Committee also recommends the Department to utilise increased allocation of Rs. 1475.62 crore in BE 2023-24 efficiently and in a timely manner. The Committee is hopeful that such increased allocation will spur industrial growth especially in the target regions and sectors, the Parliamentary Panel report said.

The mandates of the schemes clearly define how important they are throughout the lifecycle of a startup right from ideation level to expansion level. Under-allocation and underutilization of budgets under these schemes can hit the fund-starved startups at the grassroot level.  

Implementation of idea, vision and schemes all need budget. The Start-up India Vision 2024 can be met only if the startups are left to innovate and do business rather that struggle for the funds due to lack of budgetary allocation vis-à-vis the demand under the flagship schemes available for them.