Money & Banking

IRDAI allows insurers to invest in Fund-of-Funds

K R Srivats New Delhi | Updated on April 10, 2021

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Move to accelerate the flow of rupee capital into Indian Startups, say private equity players

In a major boost to private equity industry, the Insurance Regulatory and Development Authority of India (IRDAI) has now allowed insurance companies to invest in Fund-of-Funds (FoF) that invest within the country. This move is expected to open more capital raising options for the startup ecosystem in India, fulfilling a longstanding industry demand.

The latest move by the IRDAI comes on the heels of the recent decision of the government to allow domestic private retirement funds to invest upto 5 per cent of their surplus in AIFs.

While insurers can now directly invest in FoF on the lines of their making direct investments in Alternate Investment Funds (AIFs), they are barred from investing in FoFs that invest in overseas companies or funds with overseas exposure, according to a IRDAI circular modifying the guidelines for investment in AIFs. The insurance regulator has also barred insurers from investing in AIFs in which insurer has taken an exposure.

IRDAI has also mandated insurers to obtain a quarterly certificate from a concurrent auditor about their compliance with these conditions and file it along with their quarterly periodical returns.

FoF is an AIF that invests in another AIF. An AIF is basically a vehicle established for the purpose of raising capital from a number of investors with an aim to invest these funds into assets to generate favourable returns.

In its 2017 Master circular, IRDAI had stipulated that no investment will be permitted in AIFs, which are FoFs and leverage funds.

However, now the IRDAI has said that the insurer shall invest only into FoFs which comply with the requirement of Section 27E of the Insurance Act 1938. Section 27E stipulates that no insurer can directly or indirectly invest outside India the funds of the policyholder.

Siddharth Pai, Founding Partner and CFO at 3one4 Capital, Co-Chair at Regulatory Affairs Committee, IVCA said, “IRDAI has fully embraced the Atmanirbhar movement through this new move that allows Insurance Companies to invest into FoFs. This move by the IRDAI and the move by PFRDA last month shows the government's intent to accelerate institutional rupee funding to startups, which will help in economic growth and job creation.”

The inflection point for any startup ecosystem is when domestic institutional capital is allowed to start investing into the local ecosystem."

Ashley Menezes, Partner and COO, ChrysCapital Advisors, LLP & Chair, Regulatory Affairs Committee, IVCA said, “It is a huge win for the private equity industry that insurance companies are now permitted to make investments into funds of funds as well, similar to them making a direct investment in an AIF. This allows insurance companies to derisk their exposure. However, such capital from insurance companies cannot be utilized by an AIF to make investments outside India and this is a matter that still needs discussion.”

Published on April 10, 2021

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