Next Orbit-led consortium to mainly have Indian firms as equity holders

Indian Semiconductor Manufacturing Corporation (ISMC), a consortium led by Mumbai-based fund, Next Orbit Ventures, has submitted a proposal to the government to set up a fab plant with the capacity to manufacture 40,000 wafers a month. The plant will focus primarily on exports for the next 5-10 years.  

The consortium will consist of only Indian companies, with one of them taking a 20-30 per cent stake. (The name of this company cannot be divulged because of non-disclosure agreements, ISMC said.) The only exception will be Tower Semiconductor, an Israeli fab company, which, sources say, will pick up a 10-15 per cent stake. Tower is being acquired by Intel, and will provide production-grade technology for manufacturing 65 nanometre analog chips (followed by 45nm analog chips) in the plant.  

Says Ajay Jalan, founder and managing director of Next Orbit Ventures Fund, “Apart from Tower, the rest of the partners are Indian companies, with one of them taking a substantial 20-30 per cent exposure. The company will be run by a world-class professional semiconductor team, reporting to the board of directors appointed by investors and our fund. Both equity and debt requirements have been closed.”

ISMC will invest $3 billion and will be a key beneficiary of the tweak in the government’s semiconductor incentive scheme undertaken a few days ago, whereby it will now receive a subsidy of 50 per cent of the investment tag, as against 40 per cent earlier).

ISMC also has signed a memorandum of understanding (MOU) to set up the plant in Karnataka and has been offered incentives, including free land and capital subsidy of 20 per cent, says Jalan. As a result, investors have to fork out only 30 per cent of the cost of the project. “We will fund half through equity and the rest through debt from banks,” Jalan adds.

Explaining the reason for the focus on exports, Jalan says, “For the initial 5-10 years, most of the capacity will be exported, as India does not have chip design companies as of now. The design-led incentive scheme of the government will create meaningful chip design companies in the future. Tower will also buy 50 per cent of the capacity.”

Fab plants usually do not sell their products to the end customers, but sell to chip design players like Qualcomm or Mediatek, which, in turn, sell them to the end-users like mobile device companies.

India currently has only a few chip design companies with very minimal revenues. However, the government’s semiconductor policy has offered financial incentives for them to get scale.

Companies like Qualcomm, amongst others, get their chips designed and manufactured by large foundries in Taiwan for the entire world, providing them with volume advantages. In the absence of enough fab plants in the country, they cannot shift their capacity to India.

ISMC is the third player which has submitted a proposal to set up a chip plant in the country. The others are IGSS, a Singapore based consortium, which will manufacture similar capacity as the ISMC, as well as analog chips, and the Vedanta-Foxconn joint-venture which recently signed an MOU with the Gujarat government to set up a plant which will make 28 nanometer chips. 

According to industry estimates, the semiconductor market in India is likely to swell to around $65 billion by 2026. If the entire demand were to be met from India (which does not happen in any country), it would require investments of $200 billion or as many as 10-15 fabs. However, even China makes only 30-40 per cent of its chip requirements and imports the rest. 

India has earmarked $10 billion for semiconductor incentives across various areas, but the government has said that it is open to increasing that number, if needed.