In a bid to nurture and promote innovation among startups, the Reserve Bank of India (RBI) has finally ready to allocate around INR 2,000 Cr. in 2015-16 to a startup focused fund.

Earlier in July last, Finance Minister Arun Jaitley had proposed a INR 10,000 Cr. startup fund during budget presentation but RBI was unwilling to extend the fund period beyond three years.

According to the report, a seven-year fund-of-funds will be carved out of the INR 10,000 Cr. allocation and managed by a nodal bank. The money will be deployed to investment firms that apply for it. The government also has plans to allot a part of the approved INR 10,000 Cr. allocation to venture debt.

The person familiar with the development said, “The fund will operate in a co-investing model, whereby VC funds will have to put in 70-90% of the investment and take 20-30% from the nodal bank. The percentage of the government’s contribution is yet to be decided.”

Small Industries Development Bank of India (SIDBI) and ICICI Bank are the contenders to be named as the nodal bank where the RBI ‘loaned’ startup fund will be parked, he added.

There are reports that SIDBI was being consulted by the government on setting up the startup fund. It currently manages about 60 investments in VC funds.

This fund will also help in restricting the flight of startups overseas as it is more likely to include a clause allowing venture funds drawing from it to invest the money only in India-registered startups. At present, several new startups are opting to register in Singapore or the US to take advantage of easier regulations there. During 2014, India’s VC and Angel investor community, which invested an alltime high of $2.1 Bn in Indian startups.

However, this logjam between the Finance Ministry and RBI over the contentious issue of the periodicity of startup fund has created a paralysis kind of situation and wasted almost a crucial year which will also hamper the startup ecosystem in India. Now, as RBI is finally in action, we have to wait and watch what kind of benefit startups will get from this fund.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.