The bottom of funds for startups (SBB) was introduced in 2016, due to the contribution to various alternative investment funds (AIF) registered with the capital market regulator Sebi. SBB, managed by the state-controlled Small Industries Development Bank of India (SIDBI), has invested more than Rs 9400 crore in 86 AIFs (the regulatory term for PE and VC funds).
In a letter dated April 29, 2022, SIDBI told AIFs it would allow “accelerated withdrawals” of the money pledged by SBB while fund managers achieve an internal rate of return in excess of the hurdle rate — the minimum return that a fund it must stamp before profits can be shared between the investors and the fund manager.
“These are concrete steps to ensure that SBB’s investments in eligible Indian SBBs can be on better trading terms in terms of management fees, reported interest for qualified and performing fund managers, while also extending greater flexibility to fund managers to their times to day-to-day operations. SIDBI Managed FFS has been one of the most important national institutional investors in Indian VC funds and the liberalization of many burdensome terms existing in the investment agreements will help to align those terms with those prevailing globally, “said Tejas Chitlangia, Senior Partner, IC Universal Legal.
As AIFs often take a long time to mobilize capital from other investors, a faster withdrawal of the money committed by the SBB will not hinder the ability of the AIFs to conclude agreements.
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The “carry” or profit sharing (once the fund’s IRR exceeds the hurdle rate) is typically in the 80:20 ratio, with 20% going to the manager. The FFS is now ready to pass 25% of the incremental returns (in addition to the new IRR) if the IRR exceeds 25%. The carry rate would be 30% (of the incremental return) if the fund achieves an IRR above 30%.
SBB, as per the SIDBI letter the funds, will consider paying a higher management fee after having an overview of the total expenses, and if a fund is led by women, it focuses on startups led by women , focuses on priority areas, agro-rural sector, financial inclusion, and is committed to investing in connection centers 2 and 3.
The FFS is also open to investing in funds above Rs 1000 crore corpus as long as the investment manager of a fund is a national entity, the key persons or managers have managed funds for which SIDBI has committed in the past and the exposure is limited to the same level applicable for a fund with a corpus of Rs 1000 crore.
“The accelerated withdrawal would help funds still in fundraising mode, to improve distribution. The option to separate the carry based on IRR is very well calibrated. Option design can readily sophisticate fund managers who have insights into expected return profiles to deliberately trade their preferences. The policy increases overall transparency and strengthens support for the industry, especially for first-time fund managers, ”said Richie Sancheti, founder of Richie Sancheti Associates.
SIDBI would be more lenient to funds for unintentional errors. So far, the financial institution would cancel its commitment and ask a fund to return its contribution if a fund manager provides misleading information or violates terms and conditions and fails to resolve issues within a month. According to the letter, “When considering the invocation of the clause or the triggering of its consequences, the following procedure can be followed: violations of a technical / involuntary / modular nature, or where the problems can be appropriately resolved between the fund / GI and SIDBI on the basis of mutual agreement must not be intensified and can be closed at the level of SIDBI “.