In the 1990s, the San Francisco Bay Area looked more Indian than American. Despite being a baseball stronghold, large crowds often turned up to watch Indian-origin engineers play cricket.

“Even the teams were named ‘Malleswaram’ and ‘Jayanagar’ (popular Bengaluru neighbourhoods),” said Sanjay Palsamudram, the chief executive of chip-design-service firm 7Rays Semiconductors, recalling his US days.

Those engineers built the foundation of the chip and software ecosystem in the US then. Three decades later, as this diaspora returns with dreams and plans of building semiconductor ventures in their homeland, it is running into a sticky wicket.

To qualify for India’s flagship design-linked incentive (DLI) scheme, they must first prove how Indian they actually are.

The Rs 1,000 crore programme, launched in 2021 to strengthen the domestic chip-design ecosystem, requires its beneficiaries to be majority-owned by Indians. And that’s proving to be counterintuitive for an otherwise burgeoning sector. Instead of filtering for the best, the scheme deters some of the most promising companies from participating at all.

“There’s been a strong reluctance among our Indian diaspora [to apply for DLI],” said Raja Manickam P, founder of Chennai-based fabless startup iVP Semiconductors.

Contrast it with the performance-linked incentive (PLI) scheme for the electronics-manufacturing sector, which was open to anyone but Chinese firms. It attracted heavyweights like Samsung, Foxconn, and Tata Electronics, resulting in visible scale and expansion.

The DLI, meanwhile, has struggled to gain traction. In its first phase, the government managed to onboard only 24 startups, against its original target of 100. The government even cut its FY26 budgeted corpus in half to Rs 105 crore.

As India prepares to roll out the second phase—aiming to, at the very least, doublePIBUnion Minister Shri Ashwini Vaishnaw interacts with Semiconductor Chip Design Companies approved under the DLI Scheme the number of beneficiaries—the sector is caught in a paradox.

On one hand, the very founders it hopes to attract—ones with decades of experience in Silicon Valley and armed with networks and capital—are finding themselves ineligible. On the other, companies backed by foreign venture capital are shut out before they even begin.

The scheme is effectively deterring the next generation of chip-design startups with more guardrails than one.

© The Ken