Maharashtra’s billion-rupee defence fund created surprise winners—can the boom hold?

But instead of exhilaration, Shende remembers feeling dread. His company, barely known outside Pune’s industrial circles, had neither the working capital to finance such an ambitious order nor the collateral to persuade a bank to lend.

“I met more than 50 investors,” he recalls. “Family offices, venture capitalists, even a few high-net-worth individuals. No one was willing to give us the valuation we deserved or lend us money. And I wasn’t going to part with a big stake in my company just to survive.”

Shende’s predicament was not unusual. Across Maharashtra, dozens of small and medium-sized enterprises faced the same paradox: technically capable, sitting on orders from credible state-owned defence companies, yet unable to execute because they lacked capital. Banks demanded collateral, often personal property. Venture capitalists demanded equity at valuations founders considered insulting. And payments from defence clients came slowly, creating cash-flow mismatches that could cripple even the most promising companies. This was the invisible shackle hobbling India’s defence small and medium-sized enterprises (SME) sector—the inability to scale when opportunity knocked, and the unwillingness of conventional financiers to take long-term bets.

It was against this backdrop that an unusual experiment began in 2016. When Devendra Fadnavis became chief minister of Maharashtra, his principal secretary, Praveen Pardeshi, and the Maharashtra Industrial Development Corporation’s chief, P. Anbalagan, floated an idea that seemed almost audacious for a state bureaucracy: why not create a fund specifically to back SMEs in the defence and aerospace sector?

Taking the AIF route

Maharashtra had long been a centre for defence production. Ten of the country’s 41 ordnance factories dot its landscape. Mazagon Dock Shipbuilders, one of the navy’s most important suppliers, is headquartered in Mumbai. Yet, the small private companies orbiting this ecosystem were perennially starved of capital. If the state could step in and fill that gap, it might seed a generation of defence manufacturers just as New Delhi was pushing for local production.

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The ambition was clear, but so were the risks: governments often announce bold funds only for them to wither in red tape, under-investment, or political interference.

The timing was not accidental. The central government was tightening import restrictions and encouraging indigenisation under its Make in India and Atmanirbhar Bharat campaigns. Foreign defence vendors were being nudged to set up local manufacturing as part of offset requirements. Every state, from Uttar Pradesh to Tamil Nadu, was jockeying to attract investment. Maharashtra, with its established base, had a head start—if only it could ensure that the money actually reached deserving companies rather than politically connected ones.

There was just one problem: the state could not, by law, lend money to private organizations or take equity stakes in them. Nor did it have the expertise to act as a merchant banker. The solution was to partner with IDBI Capital Markets, a state-owned financial institution with the regulatory and financial knowhow. Together they designed what became the Maharashtra Defence and Aerospace Fund, a registered Alternative Investment Fund (AIF) launched in 2018 with an initial corpus of ₹366 crore, pooled from the state’s industrial development corporation ( ₹300 crore), other government funds, and IDBI Capital itself ( ₹30 crore).

The Maharashtra Defence and Aerospace Fund, a registered alternative investment fund, launched in 2018 with an initial corpus of ₹366 crore.

On paper, it looked like another government initiative destined for obscurity. In practice, it turned into something transformative. Though the fund’s rollout was delayed by the pandemic, it began investing in late 2020. Over the next five years, it deployed more than ₹450 crore across 28 companies, thanks to recycling returns from early exits. By September 2025, 11 investments had been fully exited, three partially, and four firms had gone public. Together, those four companies commanded a market valuation of over ₹7,000 crore as of 22 September.

An investee company executive, who did not wish to be named, said that IDBI Capital works on an internal rate of return (IRR), which represents the expected annual return on an investment, at 20-25% for its investments and offers the first right of refusal to promoters in case of an exit.

The fund invested in Rappid Valves, a manufacturer of marine valves, in October 2023, at a valuation of ₹3.68 crore; the company is currently valued at ₹156 crore, which translates into a return of 42.39x. In the case of Shree Refrigeration, it invested at a valuation of ₹151 crore in December 2020; the current market value of the company is ₹880 crore, a nearly six-fold return.

Still, headline valuations can deflect from underlying realities—SMEs remain vulnerable to demand shocks, defence procurement delays, and regulatory bottlenecks that no fund alone can fix.

The intent for the government to fund startups is, however, not unique. In February, the finance minister announced an outlay of ₹10,000 crore for startups to be funded through the Small Industries Development Bank of India (Sidbi). The money would go into a fund of funds floated by Sidbi, and would then be distributed to various venture capital funds.

Sidbi Venture Capital, a fully owned arm of the bank, has a few funds that were sponsored by state governments but most focussed on social development goals such as employment and skills. Sidbi also had a fund in collaboration with the West Bengal government to invest in small enterprises but a report by the state government listed only four investments worth ₹25 crore made by the fund. In addition, the venture capital arm has startup funds for Assam and Tripura, but they are in the early stages of their investment cycles.

Says an executive of the Maharashtra Chamber of Commerce, who did not wish to be named: “What differed in the Maharashtra fund was that they were willing to cut large cheque sizes—up to ₹30 crore. That set apart the defence and aerospace fund.”

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What made the fund distinctive was not just where it invested, but how. IDBI Capital’s team, led by banker Amey Belorkar, knew conventional loans were a non-starter for SMEs already struggling with debt-to-equity ratios. So his team designed a quasi-equity instrument: optionally convertible preference shares. These gave companies immediate access to cash without interest payments, while giving the fund the option to convert into equity later. Promoters could also buy back the shares at an agreed internal rate of return. The structure was flexible, patient, and crucially, non-predatory—a rarity in Indian finance.

Spawning success

For entrepreneurs such as Shende, the instrument was a lifeline. With support from the fund, Shree Refrigeration executed its order, expanded revenue more than fourfold, and later bought back part of the fund’s stake.

For TechEra, a defence electronics company hit hard by the pandemic, the fund’s capital made the difference between stagnation and recovery. The company stabilized, diversified its customer base, and is now preparing for a public offering.

Paras Defence & Space Technologies, another early beneficiary, went public in 2021 and is now valued at over ₹6,000 crore, making it the crown jewel of the fund’s portfolio. Paras got a crucial ₹30 crore from the fund in August 2020, a year before its IPO, to execute a large order from the army. The company, which fabricates electronic and electromagnetic solutions, saw its revenue increase from ₹183 crore in FY22 to ₹365 crore in FY25.

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Success stories like these are compelling, though they also raise the question of concentration: how many SMEs outside this small cluster—defence—are still waiting for their chance?

Mint reached out to Maharashtra government officials with queries but is yet to get a response.

Ganesh Suryawanshi, an IIT alumnus who founded Combat Robotics in 2015 to make unmanned ground mobility units for defence applications, has a similar tale to tell. After knocking on many doors, a chance introduction through IIT Bombay’s incubation centre finally connected him to the fund.

“I knocked on every conceivable door for funds only to be told at the end of my presentation that they would have given me money if the focus of my company wasn’t defence. The perception among investors was that defence orders have long gestation periods and payment cycles,” says Suryawanshi.

The fund’s intervention allowed Combat Robotics to bridge that credibility gap.

Drawing in investors

To be sure, the idea of financial support was first discussed in 2016, but it wasn’t until 2018 that the fund became operational. Two issues had to be resolved: the government had neither the expertise nor the appetite to directly lend, and support had to be kept at arm’s length to prevent interference.

“Our primary aim was to just provide working capital so that the companies could get through with their growing order book size,” says Pardeshi.

Our aim was to provide working capital so that companies could get through with their growing order book.
— Praveen Pardeshi

As details were worked out, it was clear the impact would be greater if the money nudged promoters toward growth rather than mere survival. Belorkar had joined IDBI Capital in early 2018, with the prior experience of managing a social-sector fund at Sidbi. It was then that the optionally convertible preference shares (OCPS) route was conceived. The fund would qualify as an AIF under Sebi laws, but only companies with confirmed defence orders and at least 80% of their revenue from defence could apply.

Vetting was done by Belorkar’s team, while the final investment had to be ratified by a board headed by a state bureaucrat—a structure that offered legitimacy, but also a potential chokepoint if political priorities shifted.

These successes caught the attention of seasoned market investors. Ashish Kacholia, known for spotting mid-cap growth stories, bought into eight of the fund’s companies. He is a shareholder in Paras, and Shree Refrigeration’s IPO was touted as a “Kacholia investee company.”

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Though characteristically tight-lipped, he called the fund’s managers “great investors”, an endorsement that carried weight in financial circles. His involvement also signalled to others that these once-overlooked SMEs were credible plays.

But such endorsements can be fickle; Maharashtra’s challenge will be to sustain investor confidence beyond a few star names.

Unlike private venture funds that chase exponential returns, the Maharashtra fund was content with steady outcomes. Its mandate was not just financial but developmental: to broaden the state’s manufacturing footprint. For SME promoters, this mattered enormously. They no longer had to fear losing control of their companies to aggressive investors. “We were not fretting over our equity stake in the company,” Shende says, “and that was a big distraction off our shoulders.”

The fund also played a role beyond money. As a state-backed entity, it had access to policymakers and institutional buyers. It introduced SMEs to potential customers, advised them on governance, and guided some toward IPO readiness. Nimesh Desai of TechEra credits the fund with opening doors that had previously been shut: “They helped us not only with capital, but with strategy, governance, and IPO readiness—none of which was even on the table four years ago.”

Edging ahead of the pack

Maharashtra’s early move with its fund gave it a unique edge over other states setting up defence plays. Soon after Atom Alloys won a national award from the Government of India in the safety and security category, Belorkar’s team moved in to fund them. Atom had developed a drone, fire and explosion resistant fuel storage and transportation system that has use cases across the defence forces.

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Today, IDBI’s Belorkar says states such as Uttar Pradesh and Tamil Nadu regularly ask his team how to replicate the model. Whether they can do so without Maharashtra’s mix of timing, political backing, and institutional luck remains to be seen. Both states have already prioritized defence manufacturing, demarcating land corridors to establish new factories.

For Maharashtra’s own officials, the results have been unexpectedly gratifying. A senior industries ministry official, who didn’t want to be identified, admits the government did not anticipate the scale of success. “It is clear that there are a whole bunch of small and medium companies that just need a small push to start thriving on their own,” he says. “The modalities of enlarging the scope of investment are being worked out.”

As the tenure of the Defence and Aerospace Fund comes to a close (in October 2025), IDBI Capital will continue to manage exits. But the state has already signalled its intent to go further. A new Emerging Technologies Trust, seeded with ₹300 crore, has been registered to support companies in areas such as artificial intelligence. Once a co-investor is identified, the trust, too, will be converted into an AIF.

Flash in the pan?

Yet Maharashtra’s track record offers reason for caution. Shortly after the Defence Fund was created, the state announced another AIF—the Maharashtra Technology and Innovation Fund—in August 2022. This was supposed to be a ₹200 crore vehicle, with the Maharashtra State Innovation Society (MSIS) contributing ₹100 crore, IDBI Capital investing ₹10 crore, and other institutions putting in the rest. Two years on, the fund has not taken off, because MSIS never brought in its share, said people involved in the vehicle.

Shortly after the Defence Fund was created, the state announced another AIF—the Maharashtra Technology and Innovation Fund. Two years on, the fund has not taken off.

Incidentally, Anbalagan, one of the architects of the Defence Fund, is now the industry secretary. He did not respond to Mint’s queries on MSIS, or the technology fund not taking off.

The contrast is telling: one fund flourished under unusually committed bureaucrats and a clear policy push, while another stalled before it could even deploy capital.

Perhaps mindful of this, the state has chosen to fund the new Emerging Technologies Trust directly through the industries department, to speed things up. Anbalagan as the industry secretary brings continuity. But it also underlines a deeper structural weakness: Maharashtra’s experiments depend heavily on individual champions, not institutional reliability. Without them, bold announcements risk slipping into the familiar pattern of underfunded schemes and losing momentum.

The challenge for Maharashtra, and other states rushing to emulate it, will be to prove this is not a one-off success dependent on a handful of visionary bureaucrats and unusually patient financiers. Indeed, the real test will come when the political leadership changes, when global capital cycles turn, and when the next batch of SMEs demand their chance at the table. Will the state still back them, or will these experiments fade into the long list of well-meaning but short-lived interventions?

For every success story the Maharashtra Defence and Aerospace Fund helped script, there remain scores of SMEs outside the fund’s orbit—small outfits with orders, ambition, and ideas, but no access to funding.

Maharashtra’s experience so far shows that with the right scaffolding—not just capital, but credibility and connections—such companies can deliver. If it is unable to repeat this success and scale up, Maharashtra’s Defence Fund risks being remembered as a rare bright spot rather than as a replicable model.