The government is set to become a venture-style investor in semiconductor startups under India Semiconductor Mission (ISM) 2.0, matching investments made by private venture capital (VC) firms in a bid to bridge one of the biggest funding gaps in the country’s chip design ecosystem.
The framework, which marks a significant departure from the grant-based approach adopted under the first phase of the semiconductor mission, is expected to be notified in the next few weeks.
Under the new co-investment model, semiconductor design startups that successfully develop a proof of concept and secure funding from a private VC will become eligible for matching government investment. Instead of limiting support to grants and subsidised access to electronic design automation (EDA) software, as was the case under Semicon 1.0, the government will invest alongside private investors on similar commercial terms, sharing the investment risk while leaving operational control with founders and venture capital firms.
De-Risking Deep-Tech Capital
Officials said the objective is to unlock private capital for India’s nascent chip design ecosystem by reducing the financing risks associated with deep-tech ventures. Semiconductor startups typically require significantly higher capital than conventional technology companies and face long development cycles before generating revenues, making it difficult to attract follow-on funding despite developing viable products.
The government also hopes the framework will reduce the likelihood of promising Indian chip design firms being acquired prematurely because of funding constraints. As companies mature and begin generating revenues, they will have the option of buying back the government’s stake, allowing the goverment to exit its investment while enabling the companies to remain Indian-owned. Officials said the government’s objective is to create globally competitive semiconductor companies rather than maximise financial returns on its investments.
Apart from equity participation, the design programme will continue to provide grants for proof-of-concept development and access to costly EDA tools. It also introduces a royalty-based funding mechanism under which eligible companies can repay government support through a share of future revenues instead of diluting equity, providing startups with greater flexibility in raising growth capital.
Expanding Fiscal Subsidies
The co-investment model forms part of the broader Rs 1.27 lakh crore Semicon 2.0 programme approved by the Union Cabinet on Wednesday to deepen India’s semiconductor ecosystem. Besides chip design, the scheme substantially expands fiscal support across the value chain. Manufacturers of semiconductor equipment, specialty materials, chemicals and industrial gases will be eligible for 30% capital support, while silicon fabrication plants will receive 40% fiscal assistance.
Compound semiconductor and other fabrication facilities will qualify for 35% support, as will advanced assembly, testing, marking and packaging (ATMP) and outsourced semiconductor assembly and test (OSAT) projects, while conventional packaging facilities will receive 25% assistance. Research and development projects and talent development initiatives will receive up to 75% support through Centre-state participation, underscoring the government’s focus on building indigenous capabilities across the semiconductor value chain.