Various government agencies like the Department for Promotion of Industry and Internal Trade (DPIIT) and industry regulators including the Insurance Regulatory and Development Authority of India (Irda) and Securities and Exchange Board of India (Sebi) are planning to allow state-run insurers and pension funds to invest in fund-of-funds, a startup backed by the government.
This has been planned considering the demand for the creation of large pools of domestic capital following changes in India’s foreign direct investment norms in order to stop Chinese funding into the country’s startup ecosystem.
A source person said, “There is a critical need to replace that anticipated shortfall in capital. The government needs to get Indian investors to start investing. There is now a clarion call to start relying more on India’s domestic financial institutions, or domestic pools of capital and ensure they participate in a significant manner. Otherwise, actions don’t follow the words”.
According to multiple sources, “A meeting was held between the stakeholders about two weeks ago to discuss the creation of alternative investment strategies, such as setting up AIF-registered sister funds that will allow insurance companies to invest in multiple fund-of-funds that are being set up and backed by the government”.
A government official said, “Statistically, it has been proven that there’s not that much risk, but soon after the Covid-19 pandemic broke out, the discussions went on a back-burner. We have restarted talks with the Irda, and have asked them to figure out risk mitigation measures, and other possibilities”.
The official added, “We can ask insurance firms to invest 1% of the overall premiums they receive from the public in a year or 1% of the investment the public makes in provident funds over a 12-month period, and this can then, maybe, be invested in AIFs that back startups”.
Presently, the country’s law permits risk capital players to invest only a small portion in ‘other’ categories that include Sebi-approved AIFs but disallows them to invest in any fund-of-funds, foreign incorporated entities or in any unlisted company directly.
Recently, representations from both general and life insurance companies have requested the government to ease the norms, allowing them to invest in startups relevant to the broader insurance ecosystem.
The CEO of a Private sector insurer said, “The regulations are guided by some element of conservatism as between shareholders’ dividends and policyholders’ money, the regulator’s priority is to protect the latter. However, there have been ongoing discussions between IRDAI and insurers on the feasibility of allowing investments in some of these companies in dire need of capital due to the ongoing Covid-19 crisis.”
One of the sources commented, “There are global pension funds and insurance companies that are investing in local AIFs and startups, and yet the Indian players continue to miss out. If foreign pension funds and insurance companies are comfortable investing in India, why aren’t Indian insurance companies doing the same”?