What is Startup India Seed Fund Scheme?

Startup India Seed Fund Scheme

The reason why many startups fail is that there is not easy availability of capital at starting stage for them. Seeing this capital need of startups, ‘Start Up India Seed Fund’ scheme has been launched by the Union Minister for Commerce and Industry. The aim of scheme is to offer financial support to the startups for proof of concept, prototype development, product trials, market entry and commercialization.

The Seed Fund will be disbursed to through eligible incubators to eligible startups in India.

Startup India Fund Scheme – Key Highlights

  • The scheme will provide Rs 945 crores to startups in the country in the next four years.
  • The scheme is expected to support over 3,600 startups with the help of 300 incubators.
  • The scheme expects to create robust startup ecosystem in the nation’s Tier-2 and Tier-3 cities. The main reason behind it is that these cities suffer from capital inadequacy.
  • The seed funding will support transformative business ideas leading to employment generation.

Eligibility Criteria for Startups

To be eligible for seed funding a startup must follow these conditions among others.

  • A startup must be recognized by DPIIT and shall not be incorporated more than 2 years ago at the time of application
  • Startup must have a business idea for product development or a service with market fit, viable commercialization, and scope of scaling.
  • Startup must make use of technology in its core product or service, or distribution model, or business model, or methodology to solve the problem being targeted.
  • The Seed Funding will give preference to startups creating innovative solutions in sectors like waste management, social impact, food processing, water management, biotechnology, education, financial inclusion, agriculture, energy, healthcare, defence, mobility, textiles, railways, space, oil and gas, etc.
  • Startup applying for seed funding must not have have received more than Rs 10 lakh of monetary support through any Central or State Government scheme.
  • In the startup, the shareholding by Indian promoters should be at least 51% at the time of application to incubator for the scheme, as per Companies Act, 2013 and SEBI (ICDR) Regulations, 2018.

Eligibility Criteria for Incubators

  • Incubator must be a legal entity: which means, a Private Limited company registered under the Companies Act 1956 or the Companies Act 2013, or a society registered under the Societies Registration Act 1860, or a A Trust registered under the Indian Trusts Act 1882, or A statutory body created through an Act of legislature
  • Incubator must be operational for at least 2 years on the date of application to the scheme.
  • Incubator should have at least 5 startups undergoing incubation physically on the date of application.
  • Incubator should have facilities to seat at least 25 individuals.
  • Incubator should have a full-time Chief Executive Officer (CEO), experienced in entrepreneurship and business development, supported by a dedicated team responsible for mentoring startups in testing and validating ideas, as well as helping in legal, finance and human resources functions.
  • Incubator must not disburse seed fund to incubatees with the help of funding from any third-party private entity.
  • Incubator should have been assisted by Central/State Government(s). If it is not, the Incubator must be operational for at least 3 years, must have at least 10 separate startups undergoing incubation in the incubator physically on the date of application and must present audited annual reports for the last 2 years.
  • Any additional criteria for incubators will be decided by the Experts Advisory Committee (EAC).

Seed Fund Disbursement

The funds under the Startup India Seed Fund scheme will be disbursed in following ways:

  • Up to Rs. 20 Lakhs to be given as grant for validation of Proof of Concept, or prototype development, or product trials.
  • The grant must be disbursed in milestone based installments. These milestones can be related to prototype development, product testing, building product for market launch, etc.
  • Up to Rs. 50 Lakhs to be granted to startups for
    scaling up through convertible debentures or debt or debt-linked instruments; for market entry, or commercialization.
  • Seed fund must be used by startups for creation of any facilities and must be utilized for the purpose for which it has been granted.
  • An incubator shall not give more than 20% of the total grant given to it to an start-up.
  • Rate of interest (as defined under GFR) on unutilized funds available with incubator would also be taken into account and adjusted at the time of next release by DPIIT.

Reference: https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/Guidelines%20for%20Startup%20India%20Seed%20Fund%20Scheme.pdf

Bottom Line

It was in February 2021, when the Government of India (GoI) announced that a SISFS will be established by April 2021. This decision was inline with Atma Nirbhar Bharat campaign which was launched in May 2020. Indian Startup Seed Fund Scheme has been launched and the Experts Advisory Committee (EAC) is the body responsible for reviewing the progress of the scheme with the selected Incubators. Under the scheme, incubators will be required to provide the reports as may be directed by the EAC for objective evaluation.

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