India rewrites its chip playbook: cash grants swapped for equity stakes

India’s approach to funding its semiconductor startups is changing shape. The Union cabinet has approved Semicon 2.0, a Rs 1,27,500 crore scheme that expands the country’s chip strategy beyond fabrication and assembly plants, replacing one-time grants with a model built on milestone-linked funding and direct government equity investment alongside venture capital firms.

The redesign responds directly to a gap exposed by the earlier Design Linked Incentive (DLI) scheme. India Semiconductor Mission (ISM) chief executive Amitesh Kumar Sinha told TOI that while many DLI-backed startups successfully developed chip designs and proof-of-concepts, a large share of them could not raise the hundreds of crores needed to carry those designs through product qualification, commercialisation and large-scale deployment.

“Semiconductor startups need patient capital. Unlike software companies, they require substantial investments before they can bring products to market,” Sinha said, adding that capital needs become very large right after the design stage — precisely where traditional startup funding models tend to fall short.

The new scheme addresses that with a phased structure: startups will receive seed capital first, then significantly larger investments once they hit predefined technical and commercial milestones. An internal committee is finalising the exact contours of the programme.

Importantly, Sinha said the Centre plans to act as a passive investor rather than a controlling one. Its equity stake will generally stay below 50%, it will not take board seats, and it will stay out of day-to-day management, leaving founders in charge. Founders will eventually have the option to buy back the government’s stake, and companies will remain free to raise outside capital or pursue acquisitions at any stage.

“We will exit at the prevailing valuation, recover our investment and reinvest that capital into the next generation of semiconductor startups,” Sinha said, describing the government’s role as building the ecosystem rather than seeking a return.

The shift places India alongside a growing number of governments experimenting with equity-based support for strategically important technology firms rather than relying solely on grants — including the US, where the Trump administration converted a portion of Intel’s CHIPS Act grants into a passive 9.9% stake without taking management control.

[Wikimedia Commons/by Kevin CW Lu]