Centre open to buying stake in semiconductor design startups: ISM CEO

ISM CEO Amitesh Kumar Sinha says the government will match private investment in eligible semiconductor startups without seeking management control, helping attract venture capital

The government is open to the idea of buying an equity stake in semiconductor design startups that qualify for incentives under the second phase of the India Semiconductor Mission (ISM) to help instil the necessary confidence for venture capital firms to invest in these startups, the chief executive officer of ISM, Amitesh Kumar Sinha, said.

 

Sinha, an additional secretary in the Ministry of Electronics and Information Technology, said that although the government will take an equity stake, it is neither seeking a seat on the management board nor does it intend to remain invested in the startup forever. Edited excerpts:

 

What are the learnings from the first phase of ISM that will shape the second phase's policy and framework?

 

One of the first learnings from ISM 1.0 that will be implemented in the second phase is the inclusion of the needs of all the ministries across the government. Several ministries had given their requirements for indigenously designed chips for both strategic and commercial applications. We have discussed that with all stakeholders and have come to the conclusion that while it is difficult to replace all old products that are working in these ministries, going ahead we can have newer building blocks in the form of semiconductor chips.

 

These have been divided into different buckets of compute, radio frequency, memory, power and sensor chips based on the needs of the respective ministries. If we can make chips in these segments, we can make any device on top of them. That is the learning we had, and we have implemented it in ISM 2.0.

 

The government has also said that it will take an equity stake in design and other startups that are successful applicants under ISM 2.0. How will that work?

 

That is also a learning we had from the first phase. While most startups in this sector receive initial funding from venture capitalists, angel investors and others, that funding dries up when they need to scale up. Most such startups perish in what we call their "valley of death", and that valley is extremely wide for deep-tech startups in the semiconductor space.

 

To help them tide over this funding crunch, we have decided that while we give them grants, we will also take some equity in the startup, provided that market-oriented companies, venture capitalists or other investors also invest in the company. The government will match the investment made by such VC funds or investors on a like-for-like and stage-by-stage basis.

 

So, if a startup raises some funds from a VC fund during a pre-stage round, we will match them. Similarly, if they need more funds and seek additional VC funding in subsequent rounds, we will continue matching them as and when they need them. There is no cap either on the funds or on how much stake we can purchase.

 

Does that also mean that the government will take more than 50 per cent stake in these startups or get a seat on the company's management board?

 

No, we are not interested in getting any management seat. We will leave the running of the company's affairs to the respective entrepreneurs. The possibility of the government buying more than 50 per cent stake also does not arise because some equity stake will be with the VC fund, some with the promoters and some with other stakeholders.

 

What will the government's exit strategy be from these startups?

 

We will support these startups till their revenue stage, and once they start earning and are relatively stabilised, the government can think of an exit. We will also discuss the company's comfort. We also want to avoid setting a bar for ourselves that requires a compulsory exit within a certain number of years.

 

The idea of waiting until the startup reaches its revenue stage is to instil confidence in the VC ecosystem that the company they are investing in is doing serious work, since the government is also supporting it.

 

Most startups will be happy to buy back the government's share once they reach their revenue stage, as it will also signal to the wider VC ecosystem that the promoter believes in the startup's long-term prospects.

 

What is the larger goal of the government opting for an equity stake or royalty-based funding in the case of larger companies?

 

We want to ensure that a startup from the country becomes a global player to reckon with, even if it is with government support. Even if these startups want to later sell to a larger foreign player, we are not interfering with that. Whatever the company's market valuation at that stage, the government will exit based on the right valuation of its equity stake.

 

Our belief is that most such entrepreneurs will return to the semiconductor space, whether in design or manufacturing, with the proceeds from selling their startup.

 

How big is the corpus for this plan?

 

The corpus is sufficient. What one has to also understand is that the various categories of funding that we have mentioned under ISM 2.0 are fungible. So, if more money is required, it can be transferred from one segment to another.

 

What will be the eligibility for the royalty part of the incentives that the government has mentioned in ISM 2.0?

 

The scope has been widened for eligible companies, and the royalty part is for the bigger companies that have the necessary cash to infuse and set up new semiconductor design firms. So, whatever investment the company makes, the government will match it with an expectation that once the revenue starts flowing in, the return will be one-and-a-half times the total investment made by us.

 

We have also expanded it to include companies owned by Overseas Citizens of India (OCIs), as there are a lot of semiconductor design firms owned by persons of Indian origin who are interested in setting up units in India.

 

There is a lot of talent in Silicon Valley, and many of them want to contribute back to the country. If the government can facilitate their return, many of them have expressed their willingness to come back to India.

 

Will there be an option for some of the foreign companies that have already been designing chips in India to tie up with some Indian firm and apply for these incentives?

 

Yes, there will be. But the norms that we will set out on the ownership that an Indian company or an OCI will need to have will have to be maintained. So, for an OCI to participate, they need to have more than 50 per cent stake in the company. Similarly, if Indian companies are tying up with foreign companies, where they feel there will be an advantage in terms of direct intellectual property of the chip design process or otherwise, they can join hands.

 

The second phase has also cut down incentives for setting up silicon chip fabrication units or display units, and even packaging units. Why is that?

 

Our strategy has always been to develop the complete ecosystem to give confidence to the global chip fabrication or chip packaging companies. Earlier, we were giving higher incentives because there was no ecosystem. We had to convince companies that India can develop a semiconductor ecosystem. That was the difficulty level.

 

Now that we have developed an ecosystem where we have approved 12 projects under Phase 1 and three have already started commercial production, convincing global companies is no longer that difficult.

 

Apart from that, state governments are also chipping in with their share of incentives for these units, and there is healthy competition between the states.