Govt allows private domestic pension funds to invest upto 5% of surplus in certain AIFs

The Finance Ministry has allowed domestic private provident funds to invest upto 5% of their surplus in Alternative Investment Funds (AIFs) that back venture capital funds, SME Funds, social venture funds and infrastructure funds, among others. 

These funds will only be allowed to invest in companies incorporated in India, the government said in a gazette notification on Tuesday. The move is expected to offer more capital to startups in India who have been asking for private Indian pension funds to be able to invest in AIFs, in addition to foreign pension funds that are already allowed to do so. 

An Alternative Investment Fund is essentially any fund established or incorporated in India which is a privately pooled investment vehicle and collects funds for investing it, according to a defined investment policy for the benefit of its investors. 

“This will not only enhance domestic funding for startups considerably, but also increase returns to pension fund subscribers,” Anil Agrawal, Joint Secretary at the Department for Promotion of Industry and Internal Trade, said in a tweet. 

The funds can only invest in AIFs with a minimum corpus of Rs 100 crore. The exposure to a single AIF should not exceed 10% of the particular AIF’s total size. However, this limit will not apply to a government-sponsored AIF. For Category II AIFs, at least 51% of the funds of such an AIF should be invested in either of the infrastructure, SME, venture capital or social welfare entities, the notification said. 

The sponsor of an AIF should not be the promoter in the pension fund, and AIFs can not be managed by an investment manager who is directly or indirectly managed by that pension fund. 

A senior official at the Employees’ Provident Fund Organisation (EPFO), which manages more than Rs 12 lakh crore of retirement savings, told the Economic Times that this could be a risky investment avenue and the organisation will have to seek approval from the EPFO’s board of trustees before investing in AIFs.