$1-bn India Venture Opportunities Fund remains non-starter

The government’s hopes to improve access to risk capital for micro, small and medium enterprises (MSME) remain a dream, as the Rs 5,000-crore ($1 bn) Indian Venture Opportunities Fund (IVOF) has failed to take off.

The fund was mooted in Budget 2012-13 by the then finance minister Pranab Mukherjee. MSMEs rely primarily on loans from banks and informal sources to raise capital. IVOF is managed by the Small Industries Development Bank of India (Sidbi).

Bankers said the fund had received just about Rs 500 crore. Of this, Rs 340 crore has been invested. This includes Rs 140 crore investment in subordinated debt of companies.

The fund faces the challenge of asset-liability mismatch and reservations from the Reserve Bank of India (RBI) about using depositors’ money for risk capital (investments in equity), said an executive with a public sector bank.

The money for IVOF was to come from commercial banks to the extent of the shortfall in their priority sector lending targets. Banks are to give three-year loans to Sidbi. This money would form the corpus of the IVOF.

According to a Sidbi official, this is a new kind of arrangement for funding support (equity). The repayment to banks is over a specific tenure, while the returns on the money deployed into venture funds for onward investments are not. It is subject to performance and returns from companies that get capital from venture funds.

This would create asset-liability mismatch in earnings and repayment obligations. Sidbi would pay off the lenders from its balance sheet. It had spoken to the World Bank for expertise in managing the mismatches.

Besides the challenge of raising money, RBI also has reservations about it. RBI is wary of allowing the use of depositors’ money for equity investments. These are investments without any guarantee about returns. The exposure to equity is always treated as a sensitive sector.