IRDAI must review prohibition on investment in AIF investment overseas

While the Insurance Regulatory and Development Authority of India's (IRDAI) decision to permit insurer’s investments in startups fund of funds is a good move, it needs to review the prohibition on investment in AIFs investing overseas.

According to experts, IRDA should revisit this blanket prohibition in light of the fact that market regulator SEBI permits AIFs to invest up to 25 per cent of the investible funds in overseas securities.

Under applicable insurance laws, an insurance company cannot directly or indirectly invest outside India, and hence IRDA whilst permitting insurer’s investments in FoF has prohibited investment by such an FoF in any AIFs investing overseas.

“However, IRDA should revisit this blanket prohibition in light of the fact that whilst SEBI permits AIFs to invest upto 25 per cent of the investible funds in overseas securities, at the same time SEBI also allows the AIF managers to excuse an investor from participating in any underlying investments, if such participation is not legally permitted for the concerned investor. Hence as long as an AIF can ensure that the monies invested by insurance companies do not even have an indirect overseas investment exposure, the insurer’s direct/indirect participation in such AIFs should be permitted,” said Tejash Chitlangi, Sr. Partner IC Universal Legal Advocates & Solicitors.

In a new notification on Friday, IRDA has allowed insurance companies to make their investments in FoF, subject to the condition that these investments are not made into overseas companies. The government has set up a Fund of Funds for startups with a corpus of ₹10,000 crore. The Small Industries Development Bank of India (SIDBI) is the operating agency for the FFS.

In March, the Government had issued a notification allowing private retirement funds to park five per cent of their investible surplus into AIFs. It stated that non-government provident funds, superannuation funds, and gratuity funds to invest in units issued by Category I and Category II AIFs, subject to certain conditions.

Ashley Menezes, Partner and COO, ChrysCapital Advisors, LLP & Chair, Regulatory Affairs Committee, IVCA said the move by IRDA 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.”

Siddharth Pai, Founding Partner and CFO at 3one4 Capital, Co-Chair at Regulatory Affairs Committee,Indian Private Equity and Venture Capital Association (IVCA) said the FOF system is the perfect vehicle in terms of diversification for Indian Institutional Capital and the inability of Insurance Companies, whose annual premium flows is orders of magnitude larger than the entire Indian AIF universe.

“One question that still needs to be answered is whether Insurance companies can invest into AIFs with overseas investments, provided that the amount invested by the Insurance Company into the AIF will 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 last month shows the government’s intent to accelerate institutional rupee funding to startups, which will help in economic growth and job creation.” Pai said.

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