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Chip industry pushes back as govt plans market-linked DLI 2.0 sops
As the government readies the second phase of its Design-Linked Incentive (DLI) scheme for semiconductors, differences have emerged between policymakers and industry over how public money should be deployed to back chip design companies, a senior government official said.
At the heart of the debate is the shift in DLI 2.0 from a reimbursement-based model to a pari-passu funding structure, where the government and the beneficiary invest side-by-side.
Under DLI 1.0, companies were required to first spend their own money and then claim up to 50% reimbursement from the government, with the support capped at Rs 15 crore per applicant. In DLI 2.0, the proposal is to move to a joint funding mechanism: for every rupee put in by a company's investors, the government would put in an equal amount.
Industry, however, wants the government to put money upfront without insisting on matching private capital, irrespective of the company's size.
According to the official, this demand raises fundamental questions about commercial viability.
“If a company says it has a breakthrough product that will create a unicorn, but cannot convince even one customer or investor to put in 50 paise for a one-rupee project, why should the government believe it and put 50% upfront,” the official asked. “If you cannot generate even half the cost from the market, then either the idea is not working, or it is not what you are claiming.”
The government's concern, the official added, is that unconditional upfront funding could be misused, with companies free to shut down after taking public money. The pari-passu model, in contrast, forces a basic market validation before taxpayer funds are committed.
A second major flashpoint is the removal of the Rs 15 crore cap that existed in DLI 1.0. The government is proposing to open DLI 2.0 to projects of any size, even those requiring investments running into thousands of crores.
"The government's answer is to let venture capital and private investors do the evaluation for larger companies,” the official said.
“The government does not want to decide whether a large or global-scale company is good or bad. That is not our capability,” the official said. “VCs are putting in their own money. Let them evaluate. Whatever cheque they write, on whatever terms, the government will write the same cheque on the same terms.”
Another contentious issue relates to what happens when a DLI-backed company is acquired by a foreign firm. Industry has objected to a clause requiring companies to repay three times the government support if the intellectual property (IP) moves out of India through a sale to a non-Indian entity.
"The government's position is that public funds are meant to create Indian-owned IP. If that IP is later sold abroad, the state should be compensated for the risk it took," the official explained.
If the acquiring entity is Indian, or if the company remains under Indian ownership, including through an Indian subsidiary owned by resident Indians, no such repayment would be required, the official clarified.
The push to include large players in DLI 2.0 is driven by the economics of advanced semiconductors. While developing chips at older nodes such as 28 nanometres may cost $20 million to $25 million, cutting-edge nodes like 4 nm or 2 nm may require investments of $750 million or more, well beyond the reach of most startups, the official said.
“India has never done this before,” the official said. “Someone has to take the plunge. Just like the support to Tata for a Rs 91,000 crore semiconductor fab (of which 70% is central and state government subsidy, which) was meant to show that India is willing to back big, risky bets.”
DLI 2.0 is expected to be significantly larger than its predecessor, with officials indicating an outlay of around Rs 5,000 crore, nearly five times DLI 1.0.
"There will be much larger companies that will be part of that (DLI 2.0). Today, it is only startups, and MSMEs," said E Magesh, director-general of the Centre for Development of Advanced Computing, the implementing agency of the scheme.
Asked why the government has now decided to allow large companies, Magesh told ET: "First of all, there was no support for the startups. Now, we have covered that (with DLI 1.0). So, in the next version, we will have more support for both startups and for the established industries."
The co-funding is basically to prove the seriousness of the startup, he said.
DLI 2.0 would focus on backing chips for consumer electronics, networking, etc., he said. “Basically, start with the import substitution and then have new tech."
A semiconductor startup executive who is planning to apply under DLI 2.0 told ET: "What is the maximum risk of a semicon company? It's in the first stage when you get the first chip out, the proof-of-concept (POC). The POC chip is the biggest challenge."
"A VC will ask you 200 questions on whether you can even build that chip. So, to build that chip, it will cost anywhere between $3 million and $5 million,” the executive said. "Once you've crossed over and have a prototype, to get the rest of the money is easier,” he added.
"Why would I come to DLI if my biggest risk is raising that first $10 million? They got the contour wrong. I accept that the government doesn't just want to give away free money. But the scheme necessitates me to raise external capital," he explained.
There are only five or six VC funds that are active in the semicon space, he said, adding: “That is why the government should bring in the first capital."
"Very few startups have the capacity to put in the $3 million-$4 million risk capital,” the executive said. “But the DLI 1.0 is indirectly saying, risk is yours, if you take the risk and get that money, I'll give you Rs 15 crore. You're going to get a reimbursement subsidy. So, you need to de-risk the risk taker first for somebody to step in," he said.
Another startup executive said the government has been inundated with so many conflicting views from MNCs, foreign VCs and Indian origin foreigners.
The entire discussion around fabless companies required to show strong enough business case to attract private capital is bit premature, he said.
Whether industry and government can align on the scheme's final contours will determine how effectively India builds a domestic chip design ecosystem, without, as policymakers stress, writing blank cheques.
Source: EconomicTimes
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