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 1^stof 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 Year	No. of Startups given financial assistance under FFS
FY – 2016-17	62
FY – 2017-18	58
FY – 2018-19	98
FY – 2019-20 (As on June 13, 2019)	31

Documents Required for the Scheme

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
Certificate of incorporation/registration of the company
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