Pragati Venture and Incubator Fund to invest Rs 250 Crore in India’s Poorest States

CDC will invest this money through it’s newly launched Pragati Venture and Incubator Fund

CDC Group plc, the UK’s development finance institution (DFI), last week announced a new US$ 50 million (Rs 250 Crore) investment in the first-ever equity investment fund to focus on the very poorest parts of India.  CDC is an anchor investor in the Pragati Venture and Incubator Fund (Pragati) and has played a significant role in getting the fund started.

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As a growth capital fund, Pragati will invest and play an active role in developing companies  across  multiple  sectors  including  healthcare, ancillary  infrastructure services,  ancillary  oil  and  gas  services,  manufacturing  and education. 

These companies will be at a stage where they require professional management and processes in order to grow. CDC’s capital will therefore be used to improve financial systems, address operational issues and recruit more employees.

The impact of CDC’s investment will not only be increased employment, but also the generation of taxes and other financial revenues to the local governments as well as yielding  improvements to  the  business  environment.

For  example, through the promotion of a fund manager like Pragati CDC hopes to attract other players into these markets in the medium-term.

Commenting on the investment Anubha Shrivastava, CDC Managing Director, Asia said: “CDC is making a significant investment in Pragati because it is a truly pioneering venture with the potential to bring economic development to the very poorest states of India. Several  years ago CDC was among the first investors in private equity funds in India, and as the mainstream market is now better served by capital it is right that our focus turns to states where there is little history of private equity investment. The fund is clearly addressing a  significant gap in the Indian market and we are excited about its potential impact.”

Pragati Venture and Incubator Fund

Founded and led by Narayanan Shadagopan, a successful investment banker with a career  in New York and London, Pragati will focus on the eight poorest states of India: Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Rajasthan, Orissa and West Bengal.  These states are home to some 421 million people who are  defined  as   ‘multi-dimensionally  poor’  by  the  Oxford  Poverty  and  Human Development Index.  This  is more than the 26 poorest African countries combined (410 million).

Historically, the eight poorest states have been under-invested by both Indian and foreign investors. For example, only 4% of private equity investments have gone into the Northern  and Eastern states in India.  This is a market failure that Pragati will address by making investments in the range of US$5m to US$15m.

The gulf in development between the India’s poor states and the rest of the country is stark:

•     Bihar has an electrification rate of just 10% in rural areas, compared to the national  household  average  of  56%  in  2000.  Also, only  4%  of  the  rural population has access to tap water, significantly lower than the 64% in the state of Maharashtra;

•     Uttar Pradesh, the most populous state in India with a population of 193 million  has a literacy rate of 56%, far lower than the national average of 65.4%. This means that there are over a 100m illiterate people in UttarPradesh alone; and

•    In Jharkhand the per capita credit to deposit ratio in Jharkhand ratio stands at approximately 32%.

The unskilled population, lack of finance and poor infrastructure reinforces investors’ reluctance to put capital into these states. Compounding this is the lack of a proper regulatory framework for a positive business environment.  In 2009 an IFC report on doing business in India ranked the main cities of Madhya Pradesh (Indore), Uttar Pradesh (Noida) and Bihar (Patna) in the bottom half of the table, at respectively 11th, 12th and 14th out of the 17 cities covered.

Corruption is also an obstacle for the local governments to address in order to improve the investment climate in the poorest states. According to a corruption study on India done  by  Transparency International in 2005, Bihar was ranked the most corrupt state in India. Orissa, Uttar Pradesh and Madhya Pradesh were ranked 9th, 10th and 18th respectively, out of 20 states covered.

In spite of the difficulties faced by investors, CDC is confident that Pragati will yield positive financial and developmental returns over the investment period.  As a DFI CDC’s role is to lead the way for other investors and demonstrate that risks can be successfully managed  and businesses can be helped to grow and flourish in a responsible and sustainable fashion.

The commitment to Pragati demonstrates how CDC’s new investments are directed to where capital is most needed in sub-Saharan Africa and South Asia.  CDC has played a  significant role in the formation of this pioneering fund, having worked to build up a team and structure the fund, as well as providing ongoing feedback and introducing potential investors.

Related News : CDC to invest $50m in India’s poorest states – Guardian UK

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