Sidbi plans to rope in Indian IT firms for VC Fund

As a step to enhance flow of risk capital to Micro, Small and medium enterprises in IT sector, Small Industries Development Bank of India plans to collaborate with Indian IT firms to form a venture fund.

This initiative will be partly funded from Indian Opportunities Fund (IOF) with corpus of Rs 5,000 crore announced by the government in budget for 2012-13, said Sushil Muhnot, chairman and managing director of SIDBI.

Many Indian information technology companies with strong networth can join to float VC fund in collaboration with IOF. This fund will provide risk capital SMEs in this sector. Muhnot, however, did not elaborate on size and timeline for proposed IT fund.

While SMEs are the building blocks of our economy, they rely primarily on loans from banks and informal sources (family, friends etc.) to raise capital.

Many Indian companies from SME space have ventured or venturing abroad for new market, to gain technology and expertise. Such expansion and scaling needs capital support. SIDBI chief said IOF would also be used to form a corpus fund to support acquisitions abroad by Indian SMEs and growth.

The IOF support is not just limited to giving funds to unlisted space. Taking SMEs to primary market to raise funds is also part of game plan.

Muhnot said some of IOF funds may be deployed as contribution in Initial Public Offering by SMEs. The two SME exchanges have been launched in Mumbai to enable these enterprises greater access to finance.

The funding for IOF will come from commercial banks to the extent of their short fall in their priority sector lending targets. Banks would give seven year loans carrying 7 per cent lending rate to SIDBI. This money would form corpus of India Opportunities Fund.

SIDBI official said this new kind of arrangement for funding support (equity). While repayment to lenders is over specific tenure, the returns on money deployed into venture funds for onward investments are not. It is subject to performance and returns from companies that get capital form venture funds.

It would create mismatch in earnings and repayment obligations. SIDBI would pay-off lenders from its balance sheet. It is talking with World Bank for expertise to manage mismatches.