Fund of Funds for small businesses hits Sebi hurdle
The government's ~50,000-crore Fund of Funds (FOF) scheme for small businesses has hit a hurdle as the Securities and Exchange Board of India (Sebi) has questioned the existing structure of the scheme. According to the market regulator, it does not comply with the current regulatory framework.
The scheme, announced in May 2020 as a part of the Aatmanirbhar Bharat package, calls for state-owned National Small Industries Corporation (NSIC) to set up a special purpose vehicle (SPV) under the scheme and register it with Sebi. The regulator asked the government to review its compliance requirements, a senior government official told Business Standard.
Also named the Self-reliant India (SRI) Fund, in the form of FOF, it will provide equity funding support to micro, small and medium enterprises (MSMES) that have the potential to grow, but are grappling with inadequate availability of capital.
The move will help such small businesses get listed on the domestic bourses as well.
Towards this, the government will set up a ~10,000 crore fund, which will raise more funds to finance equity infusion of about ~50,000 crore into small businesses. The fund will be operated through a mother and a few daughter funds. The mother fund will be anchored by an SPV with 100 per cent equity from NSIC.
The SPV, which is NSIC Venture Capital Fund, in this case, has to apply to the markets regulator for registering the mother fund as an alternative investment fund (AIF) to provide growth capital to businesses. An FOF is an AIF which invests in another AIF.
“The mother fund will be unfettered and invest in downstream daughter funds, which may be category I/II AIFS, registered with the Sebi. These, in turn, will be investing in MSME units. The mother fund will have daughter funds empanelled with it. The empanelled daughter funds will have to raise funds from outside sources,” said the scheme’s guidelines.
The MSME ministry had earlier planned to launch the scheme by the end of this month.
“While the pandemic has already delayed the plan, the launch of the scheme was planned for the end of June. There will be some more delay now as there are certain compliance-related issues with Sebi," the official cited above said.
"We will look into Sebi's queries and send our response soon,” the official said, adding that the entity will then be registered with Sebi.
As far as the investment strategy is concerned, the focus will be on small businesses that cater to manufacturing and services as they continue to struggle with funding requirements. Venture capital and private equity firms often have a bias towards technology-driven industries.
Sanjay Aggarwal, president, PHD Chamber of Commerce and Industry, told Business Standard that in the current situation of continuing pressure on liquidity of MSMES, it is all the more necessary that this Fund of Funds scheme be operationalised urgently.
“While the scheme’s initiative is laudable, it is also recommended that the funding support under this scheme be provided to MSMES directly by the government's implementing organisation or the SPV established for this purpose with non-discretionary and non-discriminatory criteria of selection of beneficiaries,” Aggarwal said.