The Insurance Regulatory and Development Authority of India’s (Irdai) move comes as a major fillip to scores of startups looking for alternative modes of financing, other than foreign private equity and venture capital funds. It will also allow Indian insurance companies to widen their portfolios from conservative avenues of investment such as government bonds and public infrastructure projects.
However, insurers are not allowed to invest in fund of funds that invest in overseas companies, Irdai said in a circular, modifying regulations for insurance firms investing in alternative investment funds (AIFs) approved by the Securities and Exchange Board of India.
The existing guideline, which reads “no investment is permitted in AIFs which are of fund of funds and leverage funds” has now been amended to “no investment is permitted into AIFs which undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted under Sebi (Alternative Investment Funds) Regulations, 2012”.
The insurers have also been restricted to make investments in AIFs where they may already have an exposure.
ET was the first to report on July 8, 2020 that the government was planning to allow insurance companies to invest in fund of funds focussed on startups.
Insurers looking to make such investments now have to obtain a compliance certificate issued by a concurrent auditor every quarter, as per the new Irdai circular.
“The FoF system is the perfect vehicle in terms of diversification for Indian institutional capital,” said Siddharth Pai, founding partner at 3one4 Capital and co-chair at the Regulatory Affairs Committee of the Indian Private Equity & Venture Capital Association (IVCA).
The annual premium flows of insurers are larger than the entire Indian AIF universe, he said. “This move will help accelerate the quantum of rupee capital going into Indian startups.”
Pai, however, wondered whether insurance companies could invest into AIFs with overseas investments, if the amount they invested into the AIF did not form part of the overseas investment. “The inflection point for any startup ecosystem is when domestic institutional capital is allowed to start investing into the local ecosystem. This move by the Irdai and the move by PFRDA (Pension Fund Regulatory and Development Authority) last month show the government’s intent to accelerate institutional rupee funding to startups, which will help in economic growth and job creation,” he said.
“This allows insurance companies to derisk their exposure. However, such capital from insurance companies cannot be utilised by an AIF to make investments outside India and this is a matter that still needs discussion,” said Ashley Menezes, partner at ChrysCapital Advisors and chair, Regulatory Affairs Committee, at the IVCA.
Insurance companies in India cumulatively managed Rs 38.4 lakh crore in fiscal 2019, as per Irdai data.
As per current rules, insurers investing through AIFs are not allowed to park their funds in FoFs.
The bulk of their investable assets is mandated to be parked in government securities, approved categories of equity investments and in housing or infrastructure-based investments. The law also allows a small portion of the investment in ‘other’ categories of investment including Sebi-approved AIFs.
Caps for such AIF investments for life insurance companies are based on whether they are term, group or unit-linked premium pools. Insurers are also permitted to invest in Sebi-approved Category 1 & 2 AIFs that include infrastructure funds, SME funds, social venture funds and venture capital funds with caps on investable assets.
Investments to AIFs are permitted with a 3% exposure cap for term and unit-link assets; for general insurers there is a 5% cap.
As per the Irdai annual report for FY19, for life insurers 66.6% of the traditional (protection) funds are invested in government and state securities. The rest 33.4% is invested in infrastructure projects and approved categories of investments including AIFs. More than 94% of ULIP (unit-linked insurance plan) funds are invested in approved investments with the rest in AIFs.
For general insurers, 51.6% assets are invested in government bonds and low-yielding loans to states, while about 45% is invested in approved investment categories and about 3.7% in AIFs.