Business Standard: June, 2014
Mumbai: The government, with the help of the capital market regulator, is planning to set up a first of its kind co-investment fund to fund small and medium enterprises (SMEs), considered the backbone of the Indian economy.
According to sources, the fund will have an initial corpus of Rs 5,000 crore and anchored by two state-owned financial institutions — insurance behemoth Life Insurance Corporation (LIC) and Small Industries Development Bank of India (Sidbi), an institution set up to provide funding for SMEs.
The fund will be modelled around similar investment vehicles set up in developed nations like Germany and Austria, to address financing challenges to start-ups, especially in the high growth sectors like technology.
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People with direct knowledge of the development said the Securities and Exchange Board of India (Sebi) is in the process of finalising a framework for the co-investment fund and the announcement could be part of the Budget speech.
“Sebi has sent across the final budget proposal for a co-investment fund that is going to augment the capital requirement for SME,” said a source.
A co-investment fund makes an minority investment in a venture alongside a main financial sponsor. Such investments are typically made to meet additional capital needs.
The proposal to set up a SME co-investment fund follows recent measures such as separate SME exchanges and the institutional trading platform (ITP), jointly taken by the finance ministry and Sebi in the past couple of years.
The Sebi framework may allow the co-investment fund to invest in an SME during its initial public offer (IPO) or even a company which lists directly through the ITP route, said a person privy to the development.
ITP is a mechanism that alllows an SME to list directly without an IPO.
The rationale for setting up co-investment funds is to tackle the financing difficulties of start-ups with high growth potential at the seed and early stages.
The proposal to set up such a fund was first mooted during the previous Union Budget. The current finance minister Arun Jaitley will take a final call.
Experts said the fund could make a significant difference to SME funding, especially start-ups in high growth sectors like information technology.
The move could also give a fillip to the SME listing platform, launched in 2012.
Currently, about 60 small companies are listed on the SME exchanges of the BSE and the National Stock Exchange.
Earlier, this week Sebi chairman U K Sinha said exchanges and the regulator were taking pro-active steps to ensure adequate funding to SMEs through the equities market.
“Sebi, along with exchanges and Sidbi, would be meeting SMEs in the hinterlands to make access to the market and capital easier for them,” he said.