Incubator seed fund management: committees and tranches

Winning a seed fund grant is the easy part for an incubator. Running it means selecting startups, choosing instruments, releasing money against milestones, chasing repayments and accounting for every rupee to the ministry that gave it.

This guide sets out how that works under the Startup India Seed Fund Scheme and DST's NIDHI seed support, with AIM's rules for comparison. For eligibility and the application itself, see our guide to how incubators apply to SISFS.

What does an incubator manage under a seed fund scheme?

The incubator manages a pool of public money it must pass to startups, not spend on itself. It selects startups, chooses the instrument, releases funds in tranches, recovers loans and reports utilisation. Schemes pay for this work through a management fee or the incubator's own grant, never from the seed money.

The SISFS guidelines give an incubator up to Rs 5 crore in three or more milestone-based instalments, plus a management fee of 5% for selection, due diligence and monitoring. Neither may be spent on facilities.

Rule	SISFS	NIDHI seed support
Pool per incubator	Up to Rs 5 crore	Up to Rs 1000 lakh, in 2 to 5 rounds of up to Rs 500 lakh
Per startup	Rs 20 lakh grant, Rs 50 lakh debt or convertible	Up to Rs 100 lakh in exceptional cases
Instruments	Grant, convertible debentures, debt	Soft loan, equity, equity-linked
Bank account	Trust and Retention Account, nationalised bank	Separate savings account
Time to use	Three years from first instalment	About 2 to 3 years per round

SISFS releases the first instalment of up to 40% of the commitment. The incubator asks for the next when cash in hand falls below 10%, and DPIIT releases it within 30 days of proof of milestones. If less than 50% is used within two years, drawdowns stop and unused money returns with interest.

DST's NIDHI seed support guidelines of May 2021 note that incubators have typically invested Rs 10 to 25 lakh per startup. AIM's Atal Incubation Centre guidelines add a twist: seed grant money can be used only after the centre raises an equal amount from non-government sources, and each investment must use both in equal proportion.

Who sits on the seed fund investment committee?

Both schemes require a committee of outsiders and insiders. Under SISFS it is the Incubator Seed Management Committee, chaired by the incubator's nominee, with a state startup representative, an investor, two domain experts and two successful entrepreneurs. DPIIT's expert committee approves its members.

DST suggests a similar NIDHI seed support committee: the head of the incubator as chair, a bank or VC representative, domain experts from industry and academia, a chamber of commerce representative, an entrepreneur or alumnus, a DST observer, and the incubator CEO as member secretary.

Run it like an investment committee: a written memo for each startup, recorded votes, and members stepping out where they have a conflict. Our guide to how investment committees decide covers memo format.

Should an incubator give a grant, debt or equity?

Under SISFS the stage decides: grants of up to Rs 20 lakh for proof of concept, prototypes and trials, and up to Rs 50 lakh as debt or convertibles for market entry and scale. No more than 20% of the incubator's total grant may go out as grants, so most of the pool must be debt-like.

SISFS debt carries interest of no more than the prevailing repo rate, a tenure of up to 60 months fixed at sanction, and a moratorium of up to 12 months. It is unsecured, with no promoter or third-party guarantee.

NIDHI seed support allows soft loans, equity or equity-linked instruments, with soft loans also at no more than the repo rate. Repayment should ideally end with the incubation stay but can stretch to three to five years. If you take equity, see our guide to how much equity incubators take.

How should milestone tranches work?

Sign the agreement first, then pay against proof. Both schemes require a legal agreement with each startup before the first instalment, with milestones, repayment terms and default terms written in. Later tranches follow only when the startup shows the previous milestone was met and the money was used as planned.

Under SISFS, the first grant instalment must reach the startup within 60 days of its application, into the company's bank account. For each later instalment the startup submits a progress update and a utilisation certificate; at the end it files a final report and an audited utilisation certificate.

A startup that fails still files that report, explaining what it learnt and why it failed. Our guide to startup milestone tracking covers how to set milestones that can be proved.

Seed money is public money in transit. Every rupee needs a committee minute, a milestone and a certificate behind it.

What records and accounts does a seed fund need?

Keep the seed money in its own account, report every startup's sanction and disbursement each financial year, and file audited utilisation statements on time. Track each startup's outcomes too, because both schemes judge the incubator on what the money produced, not only on whether it was spent.

• SISFS: a project-specific Trust and Retention Account; yearly reports of funds sanctioned, received and disbursed per startup; audited expenditure; outcomes such as funding raised, jobs and turnover sent to Startup India dashboards and presented quarterly; return on investment per startup.
• NIDHI: a separate savings account; a utilisation certificate and audited statement every year; separate books for repayments; interest earned on unused DST grant shown in the certificate and deposited in Bharatkosh every year.

What happens to repayments and defaults?

Repayments go back into the pool for new startups, never into the incubator's running costs. SISFS lets incubators reinvest principal, interest and profits, but money not reinvested for three years goes back to DPIIT. NIDHI seed support says recovered repayments fund the next round of incubatees only.

Under NIDHI seed support, defaults go to the committee and to DST. The committee may relax repayment terms case by case, with written reasons reported to DST. If an incubator closes, unused seed money is refunded to Bharatkosh, and it should exit its investments or hand the portfolio to another willing incubator.

These rules change between rounds, so read the version in your sanction letter. For agreement terms on repayment and exit, take legal advice.

Questions

How does an incubator manage SISFS seed money?

It holds the money in a dedicated Trust and Retention Account with a nationalised bank, selects startups through its Incubator Seed Management Committee, signs an agreement with each, and releases money against milestones. It reports funds sanctioned, received and disbursed per startup each year, with audited expenditure, and tracks funding raised, jobs and turnover.

What instruments can an incubator use for seed funding?

Under SISFS, up to Rs 20 lakh as a grant for proof of concept, prototypes or trials, and up to Rs 50 lakh as convertible debentures, debt or debt-linked instruments for market entry. DST's NIDHI seed support allows soft loans, equity or equity-linked instruments, decided by the incubator's committee.

What happens if a startup cannot repay a seed loan?

Under DST's NIDHI seed support guidelines, defaults must be reported to the incubator's seed support committee and to DST, and the committee may relax repayment terms case by case with written reasons. SISFS loans are unsecured with no promoter guarantee, so recovery depends on the agreement terms.

Can an incubator charge startups for seed funding?

Not under SISFS. The guidelines bar the incubator and its staff from charging any fee, in cash or kind, for selection, disbursement, incubation or monitoring under the scheme. The incubator's costs are covered instead by a management fee of 5% of the seed fund grant.

Sources: DPIIT, Guidelines for Startup India Seed Fund Scheme · DST, NIDHI Seed Support Program guidelines, May 2021 · DST NIDHI, Seed Support Program page (last updated 9 Sep 2025) · Atal Innovation Mission, Guidelines for Atal Incubation Centres, Nov 2023

For more on running an incubator in India, read the MyStartupValley blog or see MyStartupValley for incubators.