IFCI launches Venture Capital Fund for SC Entrepreneurs but 15% return clause a damper
Updated: Dec 26, 2015 03:38:01pm
New Delhi, Dec 26 (KNN) Government has launched a new Fund to provide venture / Equity capital to entrepreneurs belonging to Scheduled Castes. To be implemented through IFCI, the Fund would provide both equity and loan to both new and existing entrepreneurs to meet their fund requirements.
While the equity and equity linked investments will be up to 75% of the project cost of a new enterprise or total corpus / net worth of an existing enterprise as the case may be, the balance amount has to come from the entrepreneur. The eligibility for an enterprise for the special fund is that SCs should hold at least 60% of the stake.
However, the condition of at least 15% return on the fund invested as equity over the tenure of 6 year is a tall order because it will need at least 20% Internal Rate of Return (IRR), a near impossible task for at least manufacturing enterprises, particularly when the scheme agrees for a gestation period of 24 months which will naturally not be profit generating.
The Fund also proposes equity linked loans whose tentative costs have been kept at 10%, a reasonable demand, if compared with the current interest charged by the Banks from MSMEs.
Already quite a few type of venture capital are in operation by the Government agencies, the largest being that of SIDBI. However, progress of financing by these schemes is tardy due to risk averseness of the Government agencies. Risk appetite is the key feature of any VC funds and globally, they provide highest return to the investors even when failure rate of the start-ups supported are more than 50%.
With their strict guidelines and fixed performance norm, the fund managers of Government venture funds prefer to be conservative in financing new ventures and this way often leave the golden geese. Recently an idea have been floated to invest Government funds in private VC funds, which appears to be a more pragmatic approach as then the money will be with experienced risk investors who can identify the golden goose fairly well. The approach will also satisfy the Government auditors as these funds will be able to go through elaborate due diligence as required under Government financial norms.
We hope as an experienced development Banker IFCI will be more successful in administering the new fund. (KNN/DB)
While the equity and equity linked investments will be up to 75% of the project cost of a new enterprise or total corpus / net worth of an existing enterprise as the case may be, the balance amount has to come from the entrepreneur. The eligibility for an enterprise for the special fund is that SCs should hold at least 60% of the stake.
However, the condition of at least 15% return on the fund invested as equity over the tenure of 6 year is a tall order because it will need at least 20% Internal Rate of Return (IRR), a near impossible task for at least manufacturing enterprises, particularly when the scheme agrees for a gestation period of 24 months which will naturally not be profit generating.
The Fund also proposes equity linked loans whose tentative costs have been kept at 10%, a reasonable demand, if compared with the current interest charged by the Banks from MSMEs.
Already quite a few type of venture capital are in operation by the Government agencies, the largest being that of SIDBI. However, progress of financing by these schemes is tardy due to risk averseness of the Government agencies. Risk appetite is the key feature of any VC funds and globally, they provide highest return to the investors even when failure rate of the start-ups supported are more than 50%.
With their strict guidelines and fixed performance norm, the fund managers of Government venture funds prefer to be conservative in financing new ventures and this way often leave the golden geese. Recently an idea have been floated to invest Government funds in private VC funds, which appears to be a more pragmatic approach as then the money will be with experienced risk investors who can identify the golden goose fairly well. The approach will also satisfy the Government auditors as these funds will be able to go through elaborate due diligence as required under Government financial norms.
We hope as an experienced development Banker IFCI will be more successful in administering the new fund. (KNN/DB)
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