Credit Guarantee Scheme for Startups (CGSS) — DPIIT Guidelines

Clause 2 states the objective plainly: to provide guarantee up to a specified limit against credit instruments extended by Member Institutions to finance eligible startups, so as to provide the much-needed collateral-free debt funding to startups. The guarantee is issued by the Credit Guarantee Fund for Startups (CGFS), a trust managed by the Board of NCGTC — the National Credit Guarantee Trustee Company Limited, set up by the Government on 28 March 2014 under the Companies Act 1956 to act as trustee for the Government's various credit guarantee funds (clauses 3-i, 3-ii).

What Can Be Guaranteed

Clause 10 lists the instruments: venture debt, working capital, subordinated debt / mezzanine debt, debentures, optionally convertible debt, and other fund-based as well as non-fund-based facilities which have crystallised as a debt obligation. Pure equity is outside the scheme — the cover attaches to debt.

What Happens When Optionally Convertible Debt Converts

On conversion of optionally convertible debt to equity, partially or fully, the borrower's debt obligation and the guarantee both stand reduced to the extent of the conversion. The MI must take prior permission from the Fund or Trustee, which may be given conditionally or at a pre-closure premium, or the conversion may be treated as a cash inflow at final settlement of claims (clause 10-ii).

The Borrower (clause 4)

The Lender (clause 5)

• •Scheduled Commercial Banks and Financial Institutions.
• •RBI-registered NBFCs with a rating of BBB or above from an RBI-accredited external credit rating agency, and a minimum net worth of ₹100 crore. If an NBFC is later downgraded below BBB, it becomes ineligible for further guarantee cover until it is upgraded back.
• •SEBI-registered Alternative Investment Funds (AIFs).

Clause 9 splits the scheme in two. Transaction-based cover is taken by a lending institution on a single eligible borrower. Umbrella-based cover is taken by an investing institution for a group of eligible borrowers, and is built around a Venture Debt Fund — a debt fund registered under SEBI's AIF regulations — and its Pooled Investment in Startups (PIS), meaning cumulative investments in DPIIT-recognised startups over the life of the fund (clauses 3-vii, 3-viii, 3-xii, 3-xiii).

How Losses Are Computed Under the Umbrella Format

Losses are defined as the aggregate of principal investments of written-off assets together with three months' accrued interest from the date of default. Where an asset is partially written off, only the principal portion written off, plus three months' accrued interest on it from the date of default, is counted (clause 12).

Transaction-based — Annual Guarantee Fee (clause 8)

The fee is charged on the disbursement or outstanding amount — on the sanction amount in the case of working capital and non-fund based facilities — as on the date of application for guarantee cover, and is paid upfront within 30 days of the Credit Guarantee Demand Advice Note (CGDAN). Subsequent AGFs are computed on the outstanding at the beginning of the financial year, plus additional disbursements during the year on a pro-rata basis. The guarantee start date is the date the fee is credited to the Trust's bank account. Renewal fee is due within 30 days, i.e. on or before 30 April, each year (8-i to 8-vi).

Umbrella-based — Annual Commitment Charge (clause 8)

• •ACC of 0.15% p.a. of the proposed Pooled Investment in Startups, upfront within 30 days of the CGDAN. If the actual pooled investment exceeds what was proposed, the balance charge is payable.
• •One-time guarantee fee of 1% of the Pooled Investment, payable at the time of invocation of the guarantee claim or admission of the claim file.
• •If no claim is made: a guarantee closure charge of 0.25% of the Pooled Investment, within 30 days of the date of closure of the VDF.
• •ACC is computed for full years across the life of the VDF, including the first and last years, irrespective of the actual dates of commencement and closure — no pro-rata is envisaged for those years. ACCs remitted are non-refundable.
• •Delay beyond the stipulated period attracts penal charges of 4% above the prevailing Repo Rate until final payment.

1. 1Cover commences — and the lock-in starts: Guarantee cover begins on the date the fee reaches the Trust's account. A lock-in period of 12 months from the date of commencement of guarantee cover applies, during which no invocation can be made (3-ix, 13-ii, 13-iv).
2. 2The account turns NPA: The guarantee must have been in force at the time the account turned NPA (13-i), the amount due must be unpaid, and the dues classified as NPA by the MI (13-iii). No claim lies if the loss arose from actions or decisions contrary to, or in contravention of, the Trust's guidelines.
3. 3Recall and initiate recovery — before lodging: Prior to lodging, the MI must ensure the facility has been recalled and recovery proceedings initiated under due process of law — via IBC (requiring admission of notice and appointment of an IRP), SARFAESI (action under Section 13(4), taking recourse to one or more of the four measures), DRT (application lodged), or another process the Trustee considers suitable. For umbrella cover, arbitration is also listed (13-vi-a, 13-v-a).
4. 4The invocation window: The MI may invoke within a maximum of 12 months from the date of NPA where the NPA falls after the lock-in; or within two years of the lock-in where the NPA falls within the lock-in period (13-vi).
5. 5Settlement — 75% within 60 days: For transaction-based cover, the Trust pays 75% of the guaranteed amount within 60 days of an eligible claim, subject to it being in order and complete. Delay beyond 30 days carries interest to the MI at the prevailing Repo Rate. For umbrella cover, the Trust pays 100% within 60 days as full and final claim (13-vi-c, 13-v-f).
6. 6The balance 25%, and discharge: The remaining 25% is paid on conclusion of recovery proceedings by the MI, or on write-off of the borrower's unpaid dues. On a claim being paid, the Trust is deemed discharged from all its liabilities on the guarantee in respect of that borrower (13-vi-c).

One Time Settlement

An OTS is permitted to an MI only after one year of the account turning NPA, and at a haircut of 20% below the existing guarantee cover (clause 13-vii).

• •No subrogation. The Trust shall not exercise any subrogation rights. Recovery of dues, including takeover and sale of assets, rests entirely with the MI, which holds lien on assets created out of the facility on its own behalf and on behalf of the Trust (14-i).
• •Quarterly remittance. Every amount recovered in a financial quarter and due to the Trust must be paid within 30 days of the end of that quarter. Delay beyond 30 days from the stipulated date carries interest to the Trust at 4% above the prevailing Repo Rate for the period outstanding (14-ii).
• •Three-year tail. Remittance of post-claim recoveries by the MI to the guarantor is restricted to a maximum of 3 years after settlement of the final claim, after which the account is closed in the books of the Trust (14-iii).
• •Deemed appropriation. Where a borrower owes several distinct and separate debts to the MI and pays towards any one or more of them, such payments are deemed to have been appropriated to the guaranteed debt in respect of which a claim has been preferred and paid — irrespective of the manner of appropriation indicated by the borrower or of how the MI actually applied them (14-iv).
• •Upside netting (umbrella). Any upside earnings from equity-linked instruments are netted out of the settlement amount, or refunded to the Trust as and when booked by the MI (13-v-g).
• •Claw-back with penal interest. The MI must refund the claim with penal interest at 4% p.a. over the Repo Rate where the Trust recalls it on account of deficiencies in appraisal, renewal, follow-up or conduct of the loan, where the claim was lodged more than once, or where the MI suppressed material information at settlement. Penal interest runs from the date of initial release to the date of refund (13-v-h).

Management Committee (clause 15)

Constituted by DPIIT to oversee the Trust's affairs and provide policy guidance. It is fully empowered to revise the types of guarantee products, extent of coverage, eligible instruments, coverage amount and loss calculation, guarantee fee, claim settlement and invocation, leverage ratio limits, any other thematic parameter, and MI eligibility. Composition: Secretary, DPIIT (Chairperson); AS & Financial Advisor, DPIIT; AS / JS (Startups), DPIIT; Joint Secretary, Department of Financial Services; and the CEO of NCGTC as Member Secretary, plus ecosystem experts nominated by the Secretary, DPIIT. The MC may also remove or add MIs from the list on review of performance, and may prescribe additional criteria such as AUM, track record and capital adequacy.

Risk Evaluation Committee (clause 16)

Also constituted by DPIIT, reporting to the MC, and holding an arm's-length relationship with the Trustee to address conflict of interest. Members are drawn from rating agencies, retired bankers, venture debt specialists and credit guarantee experts.

The NPA-linked Risk Premium on MIs (clause 18-i)

For transaction-based guarantees, the MI must submit a Management Certificate as at 31 March each year, showing cumulative outstanding and outstanding NPAs under its startup assistance scheme, within 3 months of the close of the financial year. Failing that, no guarantee cover is extended for fresh accounts. Where outstanding NPAs as a ratio of outstanding under the scheme exceed the thresholds below, an additional risk premium applies prospectively on future guarantee covers:

Other Monitoring and Reporting

• •A surveillance mechanism for investments into Venture Debt Funds from countries sharing a land border with India, and an early-stage evaluation mechanism to ensure the scheme's targets are met (clause 17).
• •Under umbrella cover, the VDF submits portfolio performance updates quarterly (19-iv).
• •The Trust or Trustee may inspect or call for copies of the books of account and records of the MI and of any borrower, through its own officers or an appointed person; every officer or employee of the MI or the borrower in a position to do so must make those records available (19-iii).
• •Umbrella cover carries entry conditions of its own: the VDF must be in fund-raising stage with Final Close not declared, its investment period not expired, and no NPAs (accounts over 90 days in default) in the existing portfolio — such accounts are kept out of the guaranteed portfolio. Cover is restricted to investments in startups; losses on non-startup investments are not claimable. If the corpus is enhanced through a green shoe option, charges are recomputed on the enhanced corpus from the date of exercise (18-iii).