Why India Is Betting On Chip Design Startups With ₹1.25 Lakh Cr ISM 2.0

More than four years after the launch of the Semicon India Programme, the Indian government is looking at a new course for the India Semiconductor Mission (ISM).

After the Cabinet approval for a ₹1.25 Lakh Cr budget for the programme, Semicon 2.0 is now ready for rollout, but there’s a major difference this time around. 

While the first leg of the programme focused on semiconductor manufacturing as a whole, the focus has shifted towards electronics systems design as a segment where Indian startups can find their niche. And this time around, the government is showing its conviction with a grant-plus-equity model. –

The first phase of the mission focused largely on grant-based funding to startups, subsidised Electronic Design Automation (EDA) tools and design infrastructure, but now the focus is on chip design rather than full scale manufacturing of semiconductors. 

Although the government has approved the broad contours of ISM 2.0, detailed operational guidelines are yet to be released, which means startups currently have several questions around eligibility, investment terms and implementation. 

But before we get there, it’s important to understand why this shift in focus has come about. 

Why India Is Changing Semiconductor Course

It may surprise some to know that India has long been recognised as a global semiconductor design hub. Startups like Mindgrove Technologies, NetraSemi, iVP Semi, Saankhya Labs, Morphing Machines, InCore Semiconductors, and BigEndian Semiconductors have bagged funding in recent years and capitalised on years of R&D to launch new designs.  

According to industry estimates, more than 20% of the world’s semiconductor design engineers are based in India, with global companies including Qualcomm, NVIDIA, AMD, Intel, Texas Instruments, Synopsys and MediaTek operating large engineering centres in Bengaluru, Hyderabad, Delhi NCR and Chennai.

However, while Indian engineers have helped design some of the world’s most advanced chips, very few globally competitive Indian fabless semiconductor companies have emerged. One of the biggest constraints has been access to capital.

Unlike software startups that can iterate products quickly, semiconductor companies spend years building intellectual property before generating revenue. Tape-out costs alone can run into millions of dollars, while EDA tool licences and IP procurement significantly increase capital requirements.

Industry participants say ISM 2.0 acknowledges this financing gap by moving beyond a reimbursement-based grant system toward a model where the government can participate alongside private investors.

While detailed guidelines are awaited, the government would continue providing grants to semiconductor startups while also taking equity stakes in them to encourage greater participation from venture capital funds and other private investors. 

Amitesh Sinha, the CEO of ISM, told Business Standard that government investment would match private investment on a like-for-like and stage-by-stage basis. He also said there would be no cap on either the amount it could invest or the size of the equity stake it could acquire.

Ajay Krishnan, vice president, ESDM at Karnataka Digital Economy Mission (KDEM), said the results of ISM 1.0 demonstrated that grants and access to EDA tools alone were insufficient to build globally competitive product companies.

The government intends to act as a financial co-investor rather than a controlling shareholder, without seeking board seats or operational control.  

“The Indian government is signalling a shift toward catalytic capital via passive, pari-passu co-investment. Such an approach will also lead to, with a high degree of probability, financial gains, which can be re-invested by the government in more projects,” said Krishnan.

Raja Manickam, founder and CEO of iVP Semi, believes this approach better aligns public and private capital, and added that combining grants with equity is a better approach than a pure grant model. “If a startup is able to raise capital from venture investors, the government can match that investment on the same commercial terms. That reduces government risk while encouraging more private investment,” he said.

He added that government equity should remain modest and function like any other financial investor, rather than introducing additional oversight beyond what private investors would require.

Explaining The DLI Scheme

The Design Linked Incentive (DLI) Scheme, launched under ISM 1.0, was India’s first dedicated programme to support semiconductor design companies. It provided financial incentives for design, reimbursement support for product development, and subsidised access to EDA tools and chip fabrication. 

Since its launch in 2022, the programme has committed the support of ₹234 Cr for the chip design projects from 22 companies with a total project cost of ₹690 Cr.

Several startups have benefited from the programme, using the support to move from concept to commercial chip development.

Mindgrove cofounder and CEO Shashwath T R said the company’s V2600 SoC was supported under DLI 1.0 (with a ₹15 Cr support) and that milestone-linked support under ISM 2.0 could better match the longer development cycles associated with semiconductor products.

Industry executives say DLI successfully identified technically capable startups but offered relatively small grants compared to the capital ultimately required to commercialise semiconductor products.

According to iVP Semi’s Manickam, the first phase helped identify promising companies and ISM 2.0 should now provide significantly larger investments. He expects ticket sizes to range between ₹50 Cr to ₹100 Cr in the equity-led funding model, which will help semicon design companies build globally relevant and competitive designs.

The Unanswered Questions

Despite broad industry support and optimism around ISM 2.0, much of the implementation remains unclear. This has been a weak point of previous deeptech-centric policies. 

Founders are still waiting to understand whether existing DLI beneficiaries will automatically qualify under the new programme, what milestones startups must achieve before becoming eligible, whether government investments will be linked to successful tape-outs or fundraising rounds, and how much capital has been earmarked specifically for fabless chip companies. 

Questions also remain around the future of ChipIN and support for reusable IP procurement, an industry player said on the condition of anonymity.

Another challenge relates to timing.

KDEM’s Krishnan noted that semiconductor startups often require bridge funding between venture capital rounds, whereas the proposed matching-investment model assumes funding rounds occur predictably. He suggested that operational guidelines should allow startups to access milestone-based bridge funding or interim capital tied to product development progress.

Whether government equity ultimately becomes an advantage will depend almost entirely on how it is structured.

Chetan Mehta, founding partner at AUM Ventures, said government participation can strengthen investor confidence if it functions as passive, long-term capital that helps de-risk an otherwise capital-intensive business.

However, investors could become cautious if government ownership introduces uncertainty around future fundraising, acquisitions, technology partnerships or international expansion.

He said the biggest concern for investors would be shareholder rights that create uncertainty around future financing, commercial decisions or exits. “Broad veto rights over fundraising, board appointments, technology partnerships, acquisitions or international expansion could make subsequent investors cautious,” Mehta added. 

Undefined restrictions on IP licensing or overseas commercial engagement could also limit a startup’s global competitiveness. 

Industry observers also added that semiconductor acquisitions already undergo heightened scrutiny globally because of national security considerations. Transparent rules governing government ownership would therefore be critical in ensuring investors can appropriately price any additional risks.

All said, the move to equity-plus-grant model reflects the government’s growing willingness to become an equity investor in strategic deeptech areas, rather than limiting itself to grants or subsidies. The skin-in-the-game approach can spur large private investments as well. 

An ET report showed that the central government was considering taking a 1-2% strategic stake in the Bengaluru-based Sarvam AI by offering extended GPU and compute support under the IndiaAI Mission. 

With ISM 2.0, India looks to move from being the world’s chip design back office to creating globally recognised semiconductor companies of its own. Its success may hinge on whether government capital can pull in private investment without crowding out entrepreneurial agility, which is a big worry for deeptech companies when engaging with the government. 

[Edited by Nikhil Subramaniam]

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