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Mumbai: The Small Industries Development Bank of India (Sidbi) is developing an internal model to rate venture capital (VC) funds before investing in them through its fund of funds, a top official said. The idea is to ensure transparency, efficiency and lower subjectivity in making investing choices. A fund of funds, like the one Sidbi has, invests in other funds, rather than buying individual stocks or bonds. As part of its Startup India Action Plan, the government set up a 10,000 crore fund of funds within Sidbi in 2016, to be deployed over the 14th and 15th Finance Commission cycles.

“Earlier, we used to appraise the funds and there was an element of subjectivity," Mohammad Mustafa, chairman and managing director of Sidbi, said in an interview. “We are now introducing an internal rating model which will score the VC funds on the basis of various criteria like management quality, performance of the fund, their focus etc. If the firms are able to cross the threshold score, they will be eligible to receive funding under the fund of funds scheme," Mustafa said.

This will introduce predictability in the deployment process and the VC funds will be able to know if they are eligible to get money under the fund of funds scheme or not, Mustafa added.

So far, an approximate sum of 1,500 crore has been deployed under the fund of funds scheme. “The total deployment is likely to touch 3,500 crore by the end of the current fiscal," Mustafa said. Under the scheme, category I and II alternative investment funds (AIFs) are eligible to receive contribution from Sidbi. The funds are then required to invest at least twice the amount of contribution received.

Even as the development finance institution (DFI) is actively looking to back India’s startup ecosystem, it is also sharpening its focus on the social sector through the rating model.

Asked if a separate social impact fund is being planned, Mustafa said: “There is a lot of scope under the scheme (fund of funds) for allocation towards the social sector. While working on the rating tool, we will also be taking the deployment mechanism to the next level by deciding allocations for social impact funds, maiden fund raises and older venture capital firms."

According to data provided by Sidbi, it has backed eight social impact funds, committing around 365 crore from its fund of funds. Aavishkaar Bharat Fund, Omnivore Partners India Fund II, Samridhi Fund and Menterra Social Impact Fund are some of the funds which have received funding from Sidbi.

The financial institution is also revamping its asset reconstruction company (ARC), India SME Asset Reconstruction Company. “We are restructuring the entire ARC. There has hardly been any activity there and it has been performing at a sub-optimal level. There was no clear focus so far," he said. The firm has hired Deloitte India as a consultant to assist with the restructuring.

“The consultant has already submitted its study and has suggested moving from a pure play asset reconstruction model to asset management model. As per the plan, we will also be opening up the business for expertise from outside Sidbi. The proposal has been put forth for approval for other shareholders. Once approved, the plan will be implemented," Mustafa said.

He added that a decision will be taken by the shareholders if a distressed asset fund will be set up as part of the restructuring process.

Shareholders of Sidbi’s ARC include Bank of Baroda, United Bank of India, Punjab National Bank, Dena Bank, Corporation Bank, Life Insurance Corp. of India and UCO Bank.

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