With a budget of Rs. 945.00 crore, the Department of Promotion of Industry and Internal Trade (DPIIT) has launched the Startup India Seed Fund Scheme (SISFS), which intends to help companies with proof of concept, prototype development, product testing, market entrance, and commercialization.
This would allow these firms to progress to the point where they might seek funding from angel investors or venture capitalists, as well as get loans from commercial banks or financial institutions.
In the next four years, the Startup India Seed Fund Scheme will help an estimated 3,600 entrepreneurs through 300 incubators. The Seed Fund will be distributed to qualifying entrepreneurs through incubators throughout India.
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Need of Startup India Seed Fund Scheme
- Having easy access to financing is critical for entrepreneurs in the early phases of their business’s development.
- Startups can only get funding from angel investors and venture capital companies when they have shown their concept. Similarly, banks only lend to applicants who have assets to back up their claims.
- Seed capital is critical for firms with new ideas to undergo proof of concept trials.
Purpose of Startup India Seed Fund Scheme
- The Startup India Seed Fund Scheme (SISFS) intends to help entrepreneurs with proof of concept, prototype development, product testing, market entrance, and commercialization.
- This would allow these firms to progress to the point where they might seek funding from angel investors or venture capitalists, as well as get loans from commercial banks or financial institutions.
- In the seed and ‘Proof of Concept’ development stages, the Indian startup ecosystem suffers from a lack of finance. For businesses with strong company concepts, the funding necessary at this point might be a make or break issue.
Also read: What is Startup India Scheme?
Eligibility Criteria for Startups
The following are the requirements for a startup to be eligible to apply for the Startup India Seed Fund Scheme:
- A startup that has been recognised by DPIIT and has been in existence for less than two years at the time of application.
- A startup must have a business plan for a product or service that is market-fit, commercially feasible, and scalable.
- The startup’s fundamental product or service, business strategy, distribution mechanism, or technique should all use technology to solve the problem being addressed.
- Startups developing innovative solutions in areas such as social impact, waste management, water management, financial inclusion, education, agriculture, food processing, biotechnology, healthcare, energy, mobility, defence, space, railways, oil and gas, textiles, and others would be given priority.
- No other Central or State Government plan should have provided more than Rs 10 lakh in financial assistance to the startup. This does not include prize money from contests and grand challenges, subsidised office space, a monthly stipend for the entrepreneur, access to labs, or access to a prototyping facility.
- According to the Companies Act of 2013 and the SEBI (ICDR) Regulations of 2018, Indian promoters must own at least 51 percent of the company at the time of application to the incubator for the scheme.
Eligibility Criteria for Incubator
The following are the requirements for an incubator to be eligible to apply for the Startup India Seed Fund:
- The incubator must be a legally recognised entity:
- a) A society registered under the Societies Registration Act 1860, or b) A trust registered under the Indian Trusts Act 1882, or c) A private limited company registered under the Companies Act 1956 or the Companies Act 2013, or d) A statutory body established by legislation.
- At the time of application to the plan, the incubator should have been active for at least two years.
- The incubator must be able to accommodate at least 25 people.
- At the time of application, the incubator must have at least 5 businesses in the process of being incubated.
- The incubator must have a full-time Chief Executive Officer with experience in company development and entrepreneurship, as well as a skilled staff to assist startups in areas such as idea testing and validation, as well as finance, legal, and human resources.
- The incubator should not disburse seed funds to incubatees using funds from any private third-party company.
- The incubator must have received funding from the federal or state government (s)
- If the incubator has not received any assistance from the federal or state governments:
- a) For at least three years, the incubator must be operating.
- b) At least 10 unique companies must be incubated in the incubator physically on the date of application.
- c) Audited yearly reports for the previous two years must be presented.
- Any other criterion that the Experts Advisory Committee may decide on (EAC).
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Guidelines for Disbursement of Seed Fund to Startups by Incubators
- Startup India Seed Fund to an eligible startup by the incubator shall be disbursed as follows:
(a) A grant of up to Rs. 20 lakhs for proof of concept, prototype development, or product trials validation. The award will be paid out in stages dependent on milestones. These milestones can be connected to prototype creation, product testing, and preparing a product for market launch, among other things.
(b) Investment of up to Rs. 50 lakhs in convertible debentures, loans, or debt-linked instruments for market entrance, commercialisation, or scaling up.
(c) The seed capital may not be used by startups to build any facilities; instead, it must be used for the purpose for which it was provided.
- Grants to startups must account for no more than 20% of an incubator’s overall funding. DPIIT would also take into consideration and alter the rate of interest (as specified by GFR) on unutilized funds available with the incubator at the time of the next release.
- Funds should be granted at a rate of interest not above the prevailing repo rate for startups funded by convertible debentures, debt, or debt-linked instruments. The term of the loan should be determined by the incubator when the loan is approved, and it should not exceed 60 months (5 years). For the startups, a 12-month ban might be imposed. Because the businesses are still in their early stages, this will be unsecured, and no assurance from the promoter or a third party would be required.
- Before the first tranche is released, the incubator must sign a formal agreement with the shortlisted startups. The incubators must ensure that the agreement contains all of the relevant terms and circumstances, including milestones, relating to the Seed Fund.
- Following then, as per the agreement between the startup and the incubator, subsequent payout would be related to the completion of previously-specified milestones.
- The monies will be deposited into the startup’s bank accounts.
- The first tranche of a grant to any selected company must be released within 60 days after receipt of the business’s application. To begin the disbursement of the next payment of grant funds, the company must submit an intermediate progress update and a utilisation certificate.
- At the conclusion of the project, the startup must present a final report as well as an audited usage certificate. In the case of a failed endeavour, the entrepreneur will document his or her lessons learned and the reasons for failure in a report that will be submitted with the utilisation certificate for the money amount.
- For any procedure of selection, distribution, incubation, or monitoring, the incubator or any of its staff members shall not collect any fee in cash or in kind from applicants or beneficiaries under the plan.
- For the plan, a grievance cell will be established at DPIIT to resolve complaints raised by applicants, such as delayed application evaluations, delayed incubator payouts, and so on.