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Opinion | How to fund innovation in the time of coronavirus

  • Sebi can create special categories and give targeted incentives to attract private capital in the country’s fight against covid-19
  • Covid-19 has already killed more than 100,000 people globally and is expected to impact our way of life for years to come

The term ‘paradigm shift’ has never been more relevant than it is today. The phrase, coined by American philosopher Thomas Kuhn, represents “a great and important change in the way something is done or thought about". The coronavirus or covid-19 pandemic has already killed more than 100,000 people globally and is expected to impact our way of life for years to come. However, like every dark cloud, this one has a silver lining too.

Since a paradigm shift leads to profound changes in several basic assumptions, it creates an opportunity to spur innovation in many spheres of life. The coronavirus pandemic has the potential to usher in a new era for the human race by catalysing a step jump in technological and social innovation.

Historically, pandemics have always sparked a wave of innovation. The Great Plague of 1665 was instrumental in shaping the modern society, led to the invention of clocks and spawned the birth of modern medicine. It has been said that Sir Isaac Newton made significant discoveries, including gravity, while confined at his family estate during the pandemic. Similarly, the Boston smallpox outbreak of 1721 led to the development of the first vaccine.

More recently, the SARS outbreak of 2002-03 saw the development of innovative infection control practices (which are being used now) and helped the growth of e-commerce in affected countries.

The coronavirus pandemic is no different. Several innovations have already sprung up around the world, from new designs for ventilators and masks to 3-D printed hands-free door openers. Back home, India’s science and technology institutions have stepped up to the plate. The Defence Research and Development Organisation recently introduced a full-body disinfection chamber and a full face mask to protect medical personnel. The Indian Institute of Technology (IIT) Bombay has developed the app ‘Corontine’ to track quarantine violations and a portable sanitizer which uses ultraviolet light.

While scientists and engineers are at the forefront of technological innovation, finance plays a critical role in sustaining and scaling it. Investors ensure that scarce capital is allocated only to efficient and scalable innovations. In India, government units like the Department of Science and Technology (DST) have played a key role in funding the development of new technologies.

In response to the pandemic, the Modi government has launched the ‘Covid-19 Solution Challenge’ and DST’s National Innovation Fund has announced the ‘Challenge Covid-19 Competition’. Historically, private institutional investors like venture capitalists have largely refrained from investing in nascent technologies in India and usually invest only when a technology is mature enough to commercialise and scale. However, in these times of overextended government budgets, it is critical to channelize more private money into coronavirus-related innovations.

Some promising initiatives have sprung up. The Action Covid-19 Team, a 100-crore fund created by leading startup founders, investors and advisors, aims to seed over 50 initiatives with grants of up to 1 crore each. The Marico Innovation Foundation plans to give 2.5 crore in prizes to innovative solutions in med-tech.

While these initiatives will definitely create impact, especially in the short term, significantly larger quantum of capital needs to flow into ventures, products and services which address the coronavirus paradigm shift. It is essential to move beyond philanthrophy-based initiatives to a more formal regulatory framework for attracting large-scale investments into a wide range of innovations which will help our society adjust to the ‘new normal’.

One tool available to the Securities and Exchange Board of India (Sebi) is the Alternative Investment Funds (AIFs) Regulations. Introduced in 2012, they provide a regulatory framework for all AIFs: private equity, venture capital, angel investors and hedge funds. Sebi’s AIF regulations created three categories of AIFs based on the nature of their investments: Category I is for funds which invest in startups, social ventures, SMEs and infrastructure. Category II is a residual category meant for multi-sector funds which do not fit into category I or category III. Category III is for hedge funds which employ complex trading strategies.

Section 3(4)(a) of AIF regulations empowers the securities market regulator to create a new sub-category within category I for funds which invest in “sectors or areas which the government or regulators consider as socially or economically desirable". To join the fight against the pandemic, Sebi can use this provision to create two new sub-categories within category I AIFs: ‘coronavirus’, for funds investing in innovations specific to the ongoing coronavirus pandemic and ‘pandemics’, for funds focused on improving India’s capabilities to handle long-term challenges and future pandemics.

Once the new sub-categories are in place, special incentives like tax breaks, no cap on foreign contributions, lower minimum investment and fast-track registration can be provided to attract capital. The government can also seed some of these funds using money from Startup India’s 10,000 crore fund-of-funds (managed by SIDBI) and the PM-CARES fund, among others.

India needs all-hands-on-deck to beat the coronavirus pandemic and handle several challenges which our society and economy will face over the long term. This is a once-in-a-lifetime opportunity for India to emerge as a global leader in innovation, especially when it comes to managing pandemics. Supportive and timely regulations can ensure a steady supply of capital to the frontline workers and innovators who will eventually win this great war for us.

The author is an assistant professor of Finance at the Shailesh J. Mehta School of Management, IIT Bombay

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