BS READS: What Rs 50,000-crore MSME Fund can learn from its start-up sister

The proposed MSME fund-of-funds will be on the lines of the ongoing start-up fund-of-funds scheme launched in 2015 with a corpus for Rs 10,000 crore
The lockdown enforced across India on March 24 to prevent the spread of coronavirus put several small firms out of business and cast a cloud over the future of many others. But heads turned when a start-up stalwart spoke about it.

“If Covid-19 lockdown had happened in my childhood, my father's small business would have failed and I would have grown up in poverty instead of a middle-class household,” Flipkart co-founder Sachin Bansal wrote in a Twitter post on May 12.

If COVID lockdowns had happened in my childhood, my father's small business would have failed and I would have grown in poverty instead of a middle class household. (1/2)

Sachin Bansal (@_sachinbansal) May 12, 2020

“I wouldn't have managed to achieve a fraction of what I did without that enabling environment. THIS is actually happening to lakhs of kids today,” said the 38-year-old entrepreneur, who attended Indian Institute of Technology, Delhi (IIT-D) and went on found India’s most valuable start-up.

Amid a glut of analysis and economic commentary, Bansal’s tweets stood out for their genuineness and his sense of perturbation.

With nearly zero sales since mid-March, small businesses have been hit very hard. And the outlook remains grim: The World Bank has estimated that India’s gross domestic product (GDP) will shrink 3.2 per cent in FY21. While the big boys might absorb some of the blow — by restructuring or call upon their investors for a bailout — the general feeling is that a large number of small businesses will perish.


  • Near-zero sales
  • Unable to repay loans or pay salaries to workers
  • Lack of fresh credit
  • Unable to meet rigorous compliance for GST, other filings
  • Logistics, supply chain severely hit

The Indian government came to their rescue on May 12 and announced the much-needed stimulus — the ‘Atmanirbhar Bharat Abhiyan’ package — under which Rs 20 trillion is to be pumped into various new and existing government schemes for supporting lower-income-group workers and farmers, besides micro, small and medium enterprises (MSMEs), mainly through easy financing.

The Rs 20-trillion figure, close to 10 per cent of India’s gross domestic product (GDP), made headlines. For the MSME sector, the highlight was the announcement of a Rs 50,000-crore fund-of-funds to infuse equity into these enterprises, revive them and ultimately help them list on stock exchanges.


  • Rs 3-trillion credit guarantee for banks and NBFCs providing collateral-free loans to MSMEs
  • Rs 4,000 crore towards subordinate debt to support stressed MSMEs
  • Rs 10,000-crore govt corpus in Rs 50,000-crore Fund of Funds for equity infusion in MSMEs
  • Rs 2,500-crore EPF support for business and workers for 3 months
  • Reduced EPF contribution for business and workers for 3 months
  • Rs 50,000 crore to cover 25 per cent reduction in TDS/TCS rate

“We will revive stressed MSMEs that have closed down or are being counted by banks as NPAs (non-performing assets) and make them viable again,” said Road Transport and Highways Minister Nitin Gadkari and the Union Cabinet approved the scheme on July 1. The government also expanded the MSME definition to make more firms eligible for the benefits. “It will revive 200,000 MSMEs”, Gadkari said.

Will the Rs 50 ,000-crore MSME fund-of-funds achieve its stated goal? According to half a dozen bankers and a Business Standard analysis of a similar government-operated fund-of-funds, the new fund might fall short. Even as details are being hammered out — who will manage the fund and the criteria of picking firms to invest in, among other things — a broad consensus seems to be that the fund could fail on two accounts.

Firstly, the structure of the fund envisages contribution by other investors as well — venture capitalists (VC), for example — but MSMEs are not a viable asset class for VCs to invest in. These companies do not offer the upsides that technology or technology-enabled businesses do, and that is one reason why there are no MSME-focused VCs, according to market participants.

And secondly, even if the fund gets off the ground, the actual investment will not take place for six-eight months. By that time, most distressed small firms would have closed down.

Fund structure

According to the Cabinet notification, the government has proposed to contribute Rs 10,000 crore to the MSME fund; the remaining Rs 40,000 crore has to come from other investors, referred to as daughter funds. Essentially, the government will invest the money in other VC funds in tranches and ultimately build a corpus of Rs 50,000 crore.

One ministerial agency (or more) will manage the Rs 10,000-crore corpus. The said agency will also create objectives and eligibility conditions for investors to draw money from this pool. These details have not yet been made public.

“Which are these VCs you propose to invest in,” asks Kunal Khattar, founder of Delhi-based VC AdvantEdge. “All investors I am aware of focus on tech and tech-enabled companies or consumer businesses. In my opinion, the bulk of MSMEs are lifestyle businesses — retail, small manufacturing, etc — which VCs do not find attractive.”

MSMEs are different from start-ups. While the latter typically have negligible tangible assets and offer internet-based services, the former could be small home-based cottage industries or large-scale distributors typically relying on working capital and term loans to run their businesses.

Two communication officers in the MSME ministry did not respond to a detailed questionnaire sent over email and multiple calls.

From wholesalers in Mumbai’s Crawford Marker to jeweller merchants in Delhi’s Chandni Chowk and auto ancillary makers in Gujarat’s automotive belt, India has about 63 million MSMEs. According to the Indian Industries Association (IIA), they contribute 30 per cent to India’s GDP and employ close to 110 million people.

Over 70 per cent of these MSMEs might be planning to trim their workforce, says a recent survey by the 46,000-member All India Manufacturers’ Organisation (AIMO), underscoring the need for urgent financial support.

“Getting people (VCs) interested to fund MSMEs will be a big challenge,” says a senior banker who until recently was a high-ranking official at Small Industries Development Bank of India (Sidbi). “It does not make any sense,” he adds.

Start-up fund-of-funds

The proposed MSME fund-of-funds will be on the lines of the ongoing start-up fund-of-funds scheme launched in 2015 with a corpus for Rs 10,000 crore. A year later, the government had handed the reins of the fund over to Sidbi and instituted an investment committee to put the capital into Indian VCs. The government, on an ongoing basis, is to release Rs 500-700 crore annually for this.

Five years on, while the start-up fund has spurred some activity in the domestic VC ecosystem, the allocation from the fund has been slow and mired in bureaucratic hurdles, three investors concur.

The process for sanction of funds takes months, or more. But an even bigger problem is that sanctions are typically contingent on the VC raising funds from other investors.

For instance, if a VC with a Rs 100-crore targeted fund approaches Sidbi for a contribution of Rs 20 crore (20 per cent) and gets an approval, Sidbi could, in some cases, wait for the VC to raise the remaining Rs 80 crore before releasing the committed Rs 20 crore, says a Bengaluru-based investor closely involved with the bank. “Sidbi has made the fund-of-funds structure very convoluted,” says this investor. “It wants to be ‘last in, first-out’, does not allow tranche drawdown, and takes a long time to disburse the money. So, the investor’s hands are tied. If I get a good deal, I don’t have the money to invest,” the investor explains.

In a vision document dated January 16, 2016, the government said “the fund (will have) an initial corpus of Rs 2,500 crore and a total corpus of Rs 10,000 crore over a period four years (Rs 2,500 crore per year).”

However, according to the latest data from Sidbi, only Rs 3,798 crore has been committed to date, and Rs 1,025 crore drawn — that is significantly lower than the aim. A former member of the Sidbi investment committee alleged that the bank was holding back funds it had already committed. “Sidbi’s arrears are around Rs 1,000 crore,” said the person.

The slow pace of commitment and disbursement has hampered VCs’ deal-making activity, say sources. Given that deal-making is a time-sensitive process, the many conditions by Sidbi affect VCs’ ability to write quick cheques, they say.

Sidbi did not reply to a set of questions sent by Business Standard. A representative said the official could not make time due to multiple engagements, particularly “the implementation of a recently announced scheme for street vendors”.


  • Commitments made: 3,798 crore
  • Funds sanctioned money: 53
  • Money invested in start-ups: 3,582
  • Start-ups supported: 338

The criticism, however, does not go so far as to say the scheme has failed. About 53 funds, including those run by Blume, Stellaris, and Chiratae, have raised money from Sidbi and in turn committed Rs 3,582 crore to start-ups, data show.

“When we started our own fund, we did not go to Sidbi because we were not sure,” says Alok Goyal, co-founder of Stellaris Partners, an early-stage VC that set up shop in 2017. “There is a general impression that we have of the government. But of the limited partnerships (LPs) we got for our first fund, Sidbi was the fastest.”

“I don’t think I know of any country with a successful market where the government, in its sovereign capacity, is not an investor. And to that extent, I see, if we go 10 years forward and look back, we will find that Sidbi’s contribution as an LP in the ecosystem will be one of the most significant steps,” says Goyal.

The way ahead

The government will soon unveil a strategy to make MSME investing more lucrative, say sources. “We have been trying to convince the government to get the fund managed through another agency — one with better understanding of the ecosystem, such as Invest India or the Department for Promotion of Industry and Internal Trade (DPIIT),” says the Bengaluru-based investor quoted earlier.

“If not Sidbi, the fund manager could be SBI Capital or the MSME ministry,” says the former Sidbi official mentioned above.

Former Infosys board member T V Mohandas Pai, now also a start-up investor, proposes a hybrid structure instead of pure equity investing. “The best way to do this is — whenever an MSME takes a term loan for expansion and has a good track record, the government must put in 20 per cent of the loan as cumulative preference shares.”

“This fund can invest in preferred shares for 10-year redemption, up to 20 per cent of the project cost. It will be equity, and the return could be paid over a period of time,” says Pai.

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