The Insurance Regulatory and Development Authority of India (IRDAI) has tweaked its policy allowing insurance companies to invest in alternative investment funds (AIF) which are classified as fund of funds (FoF), according to a notification on April 05.
The startup ecosystem has welcomed this move by the IRDAI as the FoF remains a critical funding source for startups. A “fund of funds” is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This type of investing is often referred to as multi-manager investment.
This notification was an update to a 2016 policy which stated that insurers can invest in Category I and II AIF (within SEBI Regulations) but are not allowed to invest in AIFs, which comprise fund of funds and leverage funds.
AIFs put money in sectors that are not traditional (for example, equities or fixed income). AIFs and industry stakeholders have welcomed the move as it will offer more capital to startups in India.
According to the IRDAI circular, insurers cannot invest in AIFs which undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted by the Securities and Exchange Board of India (SEBI). Insurers can only invest in FoF that comply with the requirement of Section 278 of the Insurance Act, 1938. Further, as in case of the 2016 regulation the new circular also states that insurers cannot invest in an AIF, which in turn has exposure to a FoF, in which the Insurer has taken an exposure. They also cannot invest in AIFs that fund overseas companies.
Recent Efforts To Boost AIF Investments
Securities and Exchange Board of India (SEBI) classifies AIFs under three broad categories- Category I, Category II and Category III. Typically investments in real estate funds, private equity funds (PE funds), funds for distressed assets and others, are registered as Category II AIFs.
AIFs are generally set up in the form of a trust. They include private equity, venture capital, hedge funds, and angel funds. Indians, including non-resident Indians (NRI), persons of Indian origin (PIO), and overseas citizens of India (OCI), are eligible to invest in AIFs subject to eligibility criteria.
To establish an AIF, an Indian company or a limited liability partnership is incorporated which acts as the investment manager to the fund. Separately, a sponsor is also identified, who is one of the investors in the body.
On March 15 this year, the finance ministry through a notification allowed domestic private provident funds to invest upto 5% of their surplus in AIFs.This development means that private provident funds, superannuation funds and gratuity funds will now be able to participate in the venture capital (VC) investment ecosystem. However, they can only invest in AIFs which have a minimum corpus of INR 100 Cr.
The Department for Promotion of Industry and Internal Trade (DPIIT) has been in talks with the IRDAI since last year to help boost investments in startups. Last year, it was reported that the government was in talks with a global pension fund and IRDAI to float a $2 Bn AIF.
Recently the Parliamentary Standing Committee on Finance, while noting that Indian startups must end their reliance on foreign investments for growth, called for an expansion of the Small Industries Development Bank of India (SIDBI) Fund-of-Funds vehicle to enable it to function as an anchor investor.
The panel’s recommendations come amid a persistent anti-China sentiment in India, following geopolitical tension along the border. Since then, the government has banned hundreds of Chinese mobile applications and told ecommerce platforms to list ‘country of origin’ for all products listed on their website, besides ramping up its Atmanirbhar Bharat pitch.