Big deal: India to foster $4.5bn in investments

The country is exploring the option of letting foreign defence companies invest in domestic venture capital funds as part of their offset obligations.

India, which only last month revealed its ambitions to raise a $1.5bn fund of funds, is reinforcing its VC ambitions plans to stimulate Rs300bn ($4.5bn) in investments from foreign defence companies, the Economic Times reported on Friday.

The concept is aimed at defence companies selling technology to India.

The idea is being floated by the country's ministry of defence, which hopes to convince these businesses to invest in the fund as part of their offset obligations. In the case of India, the rule is that, for any contract worth more than $298m, the company needs to source at least a third of the value from domestic component manufacturers.

The ministry is not going as far as letting corporates use VC funds to make up that whole amount, however, and is proposing a 25% limit. Perhaps more importantly, though, only the dividends will be repatriable for the company.

The funds, which would target small and micro-sized enterprises and businesses conducting defence research, would need to be cleared by the Defence Ministry and register with local regulator the Securities and Exchange Board of India, the same as all other vehicles.

The initiative is expected to reach its target size of Rs300bn within five years.

It is not the first time that India is launching an effort to specifically target the defence industry. However, neither of the two previous attempts ended up securing clearance from the ministry. India has reportedly been in talks with private equity firm Blackstone Group and venture capital firm Sequoia Capital to research best practices internationally.

The endeavours are partly due to the fact that defence companies have been unable to meet the offset requirements – in fact, they have been fined a total of more than $35m for failing to comply with the regulation over the past few years. The vendors have invested only about half the $1.3bn that they were legally bound to provide.

India is, of course, no stranger to setting up funds. In less than a year, the country has set up the aforementioned $1.5bn fund of funds, which followed a $150m investment in 30 VC funds from Small Industries Development Bank of India (SIDBI) in May 2016, a combined $120m in support for startups based in West Bengal and Maharashtra announced by SIDBI in January and a $300m India Aspiration Fund, revealed in September 2015.

The government note, obtained by the Economic Times, read that the idea "is to enable small and micro-sized enterprises to access funds in order to receive technology and contribute to the growth of Indian defence manufacturing and exports, hitherto perceived to be constrained by lack of access to funds".

See more from this Government Report: India

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